THIS WEEK’S budget isn’t notable only for Gordon Brown’s willingness to squander billions on the conquest of Iraq. It comes against the background of increased difficulties for both the US and British economies. The situation is worse in the US. Last week figures were released that showed that the number of jobs outside agriculture fell by 108,000 in March. This is the fifth fall in the past seven months, including a huge drop of 357,000 jobs in February.
The Financial Times commented, ‘US economists have underestimated the economy’s weakness this year, consistently under-forecasting big drops in unemployment, production, retail sales and home purchases.’ These grim figures mean the National Bureau of Economic Research, the academic guardian of American economic statistics, can’t decide whether or not to declare the recession that began in the winter of 2000-1 over. According to the Financial Times, ‘It could end up being recorded as the longest uninterrupted recession since 1945.’
The financial markets have ignored all this, pushing up share prices and long-term interest rates. Stockmarket investors are fixated on the war in Iraq, and are hoping for a rapid US victory that will be followed, with equal speed, by a strong economic recovery.
This only goes to confirm, if further evidence were needed, the collective stupidity of financial markets – and often of individual investors as well. The fundamental cause of the US recession is the fact that in the late 1990s corporations expanded their spending on plant and equipment on a gigantic scale. Soaring share prices encouraged them to carry on investing even after the rate of profit started to fall in 1997.
But eventually US capitalism found itself stuck with far more productive capacity than it could profitably use. For example, thanks to the euphoria surrounding the hi-tech ‘new economy’, 39 million miles of fibre-optic cable were laid in the US – enough to circle the globe 1,566 times.
To restore their profitability, corporations have been slashing investment and laying off workers, driving the economy into recession. Company finances are improving, but the dissident economist Wynne Godley has pointed to the other imbalances from which the US economy suffers. He argues that if the US resumed growth at a rate of 3-4 percent a year while the rest of the global economy expanded more slowly, the US would find it much easier to import from the rest of the world than to export its goods to foreign markets.
The gap between what the US imports and exports would rise to 6-7 percent of national income by 2008. Government borrowing would also rise to an enormous 9 percent of national income. This means that US capitalism would be even more dependent than it already is on the willingness of the rest of the world’s ruling classes, especially in East Asia, to lend it money.
Godley argues that these levels of indebtedness are unsustainable, and so the US economy will instead stagnate, dragging the rest of the world down with it. An alternative scenario – in which the euro zone and/or Japan should take over the role of the engine of global capitalism – seems improbable. Both these economies have suffered from chronically slow growth for much of the past decade or so. This prospect is a bleak one for Britain. The British and US economic cycles tend to be quite closely aligned.
Moreover, Britain over the past ten years has enjoyed a milder version of the kind of speculation-driven boom that the US enjoyed in the 1990s. Like its US counterpart, it is coming unstuck.
The slowdown of the British economy has put Gordon Brown on the spot. His belated efforts to increase spending on public services were based on over-optimistic projections for economic growth. Slower growth means lower tax revenues to fund government spending. To make the sums add up Brown is now predicting a sharp recovery in economic growth in 2004-5.
According to the Observer, ‘Brown is banking on a massive rebound by stockmarkets and the tax-rich profits of the financial services and technology industries.’ But this gamble may well not come off. Brown is coming under increasing pressure from an increasingly anxious City to add further tax increases to the 1 percent rise in national insurance contributions that took effect last week.
Meanwhile, George W Bush is relying on tax cuts for the rich and huge increases in military spending – Congress has just voted him $80 billion for the war in Iraq. This will only make the crisis of government finances even worse. There is likely to be a bitter economic reckoning for the warmongers on both sides of the Atlantic.
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