Gordon Brown's speech to the Confederation of British Industry last Sunday attracted media attention because it hinted that Brown was more hostile to Britain joining the euro than Tony Blair. This latest move in a tediously long-running saga that obsesses the chattering classes diverted attention from a much more interesting question-what happened to 'no more boom and bust'?
Brown has consistently argued that if Britain followed the US in adopting much more market-friendly policies, then the economy would escape the cycle of boom and slump that has afflicted it ever since the industrial revolution two centuries ago.
This theory is looking distinctly threadbare as the US economy sinks into what looks increasingly like a very serious recession. A fortnight ago the Financial Times reported on 'the release of spectacularly bad US data'-orders of durable goods, for example, had fallen by 8.5 percent in September.
Much worse was to come. On Wednesday of last week figures were released showing that the US economy shrank at an annual rate of 0.4 percent in the third quarter of this year-the first fall since the last slump in the early 1990s. A day later the US labour department announced that the rate of unemployment rose last month to 5.4 percent, the highest level in nearly five years. Around 415,000 non-agricultural jobs were cut, the biggest drop since May 1980. Perversely, American stockmarkets actually ROSE after this last news. 'Shares rise as investors focus on hopes of further action to stimulate growth,' the Financial Times explained.
In other words, the speculators who profited from the great stockmarket bubble of the 1990s expect the US state to continue to underwrite their bets with yet more cuts in interest rates and taxation.
This is remarkable evidence of the collective stupidity of stockmarkets. Share prices rose to stratospheric levels at the end of the 1990s, in the belief that output and profits would continue to rise. This was underpinned by claims that the US economy, thanks to the information technology revolution, was undergoing a 'productivity miracle'.
But recent studies have shown that the higher productivity growth the US experienced in the second half of the 1990s reflected high investment in specific sectors, along with the normal effects of a period of rapid growth. This period had already ended before 11 September. Wynne Godley and Alex Izurieta wrote in a paper published in August, 'The US economy is probably now in recession, and a prolonged period of subnormal growth and rising unemployment is likely unless there is another round of policy changes.' In a series of earlier papers Godley and his collaborators analysed the imbalances building up in the US economy.
In particular, they showed that the boom was fuelled by massive borrowing by firms and households, and predicted that when these borrowers had to reduce their debts the result would be a serious recession. The credit boom involved a huge surge in investment in new productive capacity.
In industries such as telecommunications, companies projected the high rates of growth in sales and profits reached at the height of the boom into the indefinite future, and invested accordingly. But the rate of profit in US manufacturing has been falling since 1997.
The inevitable crunch became visible about a year ago. Industries like telecoms-supposedly on the cutting edge of the 'New Economy'-found themselves caught in a classic crisis of overinvestment. Vast chunks of productive capacity have been written off before they ever came on stream because it isn't profitable to use them.
Once investment slumped only high levels of spending by better-off consumers were keeping the economy afloat, but 11 September put paid to that. In October the index of American consumer confidence fell to its lowest level since 1994. If the US economy turns down, so will the world economy.
The Financial Times commented last Saturday, 'The great lesson of this past year, backed up by new research by the International Monetary Fund, has been how completely the world depends on the US as a source of growth.' The developing world recession underlines the importance of the movement against global capitalism.
Rather than falling silent, as many apologists for the status quo have demanded since 11 September, we need to highlight the fact that capitalism cannot even deliver on its promises of rapid economic growth.