I strongly recommend this interview with Robert Brenner as a must read for understanding the current crisis. It’s really chockfull of important insights.
Robert P. Brenner is director of the Center for Social Theory and Comparative History at UCLA and is interviewed by Seongjin Jeong is professor of economics at Gyeongsang National University, South Korea. The much longer interview appeared in The Hankyoreh from South Korea on 1/29/2009.
Interview:
SEONGJIN JEONG: Most media and analysts label the current crisis as a ‘financial crisis’. Do you agree with this characterization?
ROBERT P. BRENNER: It’s understandable that analysts of the crisis have made the meltdown in banking and the securities markets their point of departure. But the difficulty is that they have not gone any deeper. From Treasury Secretary Paulson and Fed Chair Bernanke on down, they argue that the crisis can be explained simply in terms of problems in the financial sector. At the same time, they assert that the underlying real economy is strong, the so-called fundamentals in good shape. This could not be more misleading. The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., western Europe, and Japan has steadily deteriorated, business cycle by business cycle in terms of every standard macroeconomic indicator-GDP, investment, real wages, and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was–by far–weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in US peacetime history.
JEONG: How would you explain the long-term weakening of the real economy since 1973, what you call in your work ‘the long downturn’?
BRENNER: What mainly accounts for it is a deep, and lasting, decline of the rate of return on capital investment since the end of the 1960s. The failure of the rate of profit to recover is all the more remarkable, in view of the huge drop-off in the growth of real wages over the period. The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to over-capacity in global manufacturing industries. What happened was that one after another, new manufacturing power entered the world market–Germany and Japan, the northeast Asian NICS, the southeast Asian Tigers, and, finally, the Chinese Leviathan. These later-developing economies produced the same goods that were already being produced by the earlier developers, only cheaper. The result was too much supply compared to demand in one industry after another, and this forced down prices and in that way profits.
The corporations that experienced the squeeze on their profits did not, moreover, meekly leave their industries. They tried to hold their place by falling back on their capacity for innovation, speeding up investment in new technologies. But of course this only made over-capacity worse. Due to the fall in their rate of return, capitalists were getting smaller surpluses from their investments. They therefore had no choice but to slow down the growth of plant and equipment and employment. At the same time, in order to restore profitability, they held down employees’ compensation, while governments reduced the growth of social expenditures. But the consequence of all these cutbacks in spending has been a long term problem of aggregate demand. The persistent weakness of aggregate demand has been the immediate source of the economy’s long term weakness.
JEONG: The crisis was actually triggered by the bursting of the historic housing bubble, which had been expanding for a full decade. What is your view of its significance?
BRENNER: The housing bubble needs to be understood in relation to the succession of asset price bubbles that the economy has experienced since the middle 1990s, and especially role of the U.S. federal reserve in nurturing those bubbles. Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private. At first, they turned to state budget deficits, and in this way they did avoid really deep recessions. But, as time went on, governments could get ever less growth from the same amount of borrowing. In effect, in order stave off the sort of profound crises that historically have plagued the capitalist system, they had to accept a slide toward stagnation. During the early 1990s, governments in the US and Europe, led by the Clinton administration, famously tried to break their addiction to debt by moving together toward balanced increase their investment and consumption, and in that way, drive the economy. So, private deficits replaced public ones. What might be called “asset price Keynesianism” replaced traditional Keynesianism. We have therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalized by state policy makers–and regulators-first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s.
JEONG: You were prophetic in forecasting the current crisis as well as the 2001 recession. What is your outlook for the global economy? Will it worsen, or will it recover before the end of 2009? Do you expect that the current crisis will be as severe as the Great Depression?
BRENNER: The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing. Economic forecasters have underestimated how had bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relied on asset price bubbles. In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plant and equipment was about a third off the previous the postwar low. Real wages were basically flat. There was no increase in median family income for the first time since WWII. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices. Economic performance was this weak, even despite the enormous stimulus from the housing bubble and the Bush administration’s huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was therefore to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge. “