By Joseph Choonara
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Economic warnings

This article is over 2 years, 10 months old
All the signals suggest the global economy could be heading for another recession. Joseph Choonara looks at the factors behind a crisis that the system could find difficult to resolve.
Issue 450

“The economy is the BEST IT HAS EVER BEEN! Even much of the Fake News is giving me credit for that!” With this tweet, Donald Trump greeted news this summer that the US economy had achieved the longest period of expansion in its history — 121 months of growth.

This reminded me of my occasional visits to North Yorkshire’s premiere theme park, Lightwater Valley. Here I would ride what was accurately advertised as the “longest rollercoaster in Europe”. Not the tallest, the fastest or the most exciting, merely the longest. Grinding interminably along its 2,268.3 metres is a reminder that “longest” and “best” are not quite the same thing.

In fact, the US’s slow and steady expansion is flattered by the even more miserable growth elsewhere. Since 2009, the US has outperformed Japan, Germany, France, the UK, Canada and Italy. The Eurozone is teetering on the edge of a recession, its decline led by stuttering German manufacturing. Both the German and British economies shrank in this year’s second quarter.

Outside the traditional core of the capitalist system, Brazil has emerged from a savage recession only to narrowly avoid a “double-dip” slowdown this year. India’s prime minister Narendra Modi, recently seen speaking at a rally in the US alongside fellow chauvinist Trump, emulated the latter by slashing corporation tax in an effort to reverse his country’s slowing growth.

China’s explosive pre-2008 expansion has not resumed and has slowed to about 6 percent a year, the lowest rate since 1992. Whether this reduced growth is sustainable is open to question. Its earlier boom was built on a combination of factors, notably exports of manufactured goods, massive levels of capital investment and low wages. Each of these factors has come under pressure. Wages have slowly edged up, investment and productivity growth have declined, and exports, already hit by the crisis, now face further pressure from the US-China trade war.

This in turn hits other economies (including the US) that export manufactured goods or raw materials to China.

This latter factor shows how economics and politics have become caught in a deadly feedback loop. The crisis of 2008 accelerated a long-developing crisis of mainstream neoliberal politics. This helped bring to power figures such as Trump, who have further destabilised both politics and economics. Add to this the possibility of a no-deal Brexit and we have a recipe for sharpening panic and declining trade. A recent OECD report, which referred to “idiosyncratic geopolitical risks”, argued: “Escalating trade policy tensions are taking an increasing toll on confidence and investment, adding to policy uncertainty…and endangering future growth prospects.”

Undermining prospects

No wonder mainstream commentators are warning of a new global recession. However, what lies behind it is not simply the immediate issue of trade undermining prospects. Marxist economist Michael Roberts argues that, while trade is a “trigger point”, a global downturn in corporate profits underlies the emerging malaise. The problems must also be placed in the context of structural changes to capitalism, in particular the “new normal” that emerged after 2008.

Consider the US economy. While it may be doing better than many other economies, by historical standards, its recent growth is put in the shade by earlier shorter yet more impressive bursts. The Financial Times points out that the US economy grew 43 percent from 1991 to 2001, and by 38 percent during an even shorter boom under Ronald Reagan in the 1980s. The recent decade of growth has seen it expand just 25 percent, reflecting average annual growth of 2.3 percent.

These statistics tell us two things about capitalism today. The first is that a new crisis is probably just about due. Capitalism has always been a system characterised by periodic crises. Decisions taken by members of the ruling class might be able to alter the way crises manifest, or affect their timing, but they cannot stop them altogether.

This brings us to the second point about contemporary capitalism. The more our rulers seek to defer crises, the more the result is sluggish, miserable growth along with new forms of instability.

If we go back to the early history of US and other early industrial powers, we see a definite pattern. Periods of rapid expansion would take place, spurring high levels of accumulation of capital as profits were ploughed back into production. Ultimately this would displace workers from the production process through automation, replacing them with machinery. Often these spurts of growth would be accompanied by a rapid expansion of the financial system and, especially towards their end, this tended to become increasingly speculative.


As Karl Marx argued, such growth was self-undermining because, in his analysis, the pool of profit was limited by the amount of workers’ labour that could be exploited by the system. The amount of investment in “dead labour”, labour expended in the past and crystallised in machinery and raw material, would expand far faster, spurred on by competition between capitalists, ultimately reducing the return on investment. This led to Marx’s famous “law of the tendency for the rate of profit to fall”. For a while, credit expansion could paper over the cracks, pushing capital beyond its limits, but eventually a crisis would develop. Indeed, financial instability could hasten crises by puncturing confidence and bringing about sudden contractions of credit.

Crises were typically accompanied by mass unemployment, driving down wages, but also, critically, by large numbers of bankruptcies and defaults, in which unprofitable capital would be written off, and bad debts destroyed, restoring profit rates and paving the way for a new boom.

By the mid-20th century, this pattern had changed. There were several factors involved. One was the growth of capitalist enterprises. The failure of firms essential to ending a crisis becomes harder when giant firms dominate sectors of the economy. The failure of these leviathans risks plunging the system into a long-lasting, intractable slump. In the US, firms grew through most of the 20th century. After the crises in the 1970s and early 1980s average firm-size declined a little, but in the past three decades it has bounced back — centred on areas of the economy such as finance and information technology.

This was bemoaned recently by the Financial Times’s Martin Wolf, who noted that the rate at which new firms are created has trended steadily down since the 1980s, leading to near monopolies and declining competition. He called for a return to “creative destruction” to restore dynamism to the economy.

Growing firm-size dovetails with a second factor — growing state intervention. From the 1930s onwards, capitalism increasingly appeared to take the form of competing “state-capitalisms”, complexes of national-based capitals tightly integrated with their respective states. This went furthest in the case of countries such as the former Soviet Union, but was echoed, to varying degrees, elsewhere.

The planning effected by these state-capitals did not eradicate the crisis tendencies of capitalism — it remained planning directed at anarchic competition at the international level, rather than planning to meet human needs — but the interventionist tendencies meant that when crises erupted, states would step in to try to manage them. Often this meant bailing out failing firms or trying to soften the impact through fiscal or monetary measures.

The gradual growth of global trade and the increasingly liberalised global financial system helped to undermine many of the arrangements that characterised this period, leading, from the 1970s onwards, to a shift away from some aspects of direct state management and intervention. However, the overall scale of state expenditure rarely fell, even if its activities were directed towards new goals.

Along with these changes, there was an expansion in the post-war period of what, from a capitalist perspective, can be regarded as “waste expenditure”. Most noticeably, arms spending rocketed in the Cold War. But there were other, less egregious, forms of state spending that were now woven into the fabric of capitalism, and essential to the system’s reproduction, without themselves directly yielding profits. This slowed down both the potential rate of growth and the crisis tendencies of the system.

This created a situation in post-war capitalism where profit rates would tend to fall gradually over successive cycles, without being restored by a sufficiently thoroughgoing crisis. In the 1950s and 1960s this meant an unusually long, powerful boom for capitalism. By the 1980s, it meant a tendency towards stagnation.

Attacks on labour

A combination of measures, including attacks on labour, some restructuring of industry and a deregulation of finance, helped restore some growth, but profit rates were never restored to the kind of levels they had been in the immediate post-war years, instead oscillating at lower levels as the system passed through successive expansions and contractions.

One consequence was that capitalism came to depend increasingly on credit expansion and financial exuberance to drive growth in its US and European heartlands. Forms of state intervention also increasingly took on a financialised form. For instance, in 2001, when the US economy was tipping into recession, the country’s central bank, the US Federal Reserve, slashed interest rates, helping to generate a housing bubble that pushed the economy forwards once more.

The year 2008 marked the point at which low profitability could no longer be offset by financial bubbles and credit expansion. Again, the crisis that followed was met with a sort of “financialised bailout”. Alongside tax cuts, much of the direct state assistance was directed towards the financial sector. More importantly central banks rapidly cut interest rates. They also engaged in quantitative easing, injecting liquidity into the financial sector by buying bonds.

China, which by the 1990s had emerged as powerful new centre of capital accumulation, exhibited elements of both old and new styles of capitalism. Its rate of investment, far from sluggish, exceeded that of the emerging industrial economies of the 19th and early 20th centuries, yet it combined this with a highly interventionist state. As with those earlier economies, the high pace of investment ultimately drove down profit rates as an expanding mass of investment chased the limited profits obtainable.

Moreover, as China integrated into the global system, it began to emulate its rivals’ use of financial measures to sustain its expansion. Notably, when the crisis broke in 2008, hitting its export-based model, the state unleashed a colossal wave of credit. While this helped maintain growth, it also created a mass of bad debt and speculative investment.

Across the globe, financialised bailouts, together with a squeeze on working class people, ratcheting up the degree of exploitation, helped lift the economy out of crisis. However, because these measures prevented a thorough clear-out of the system, preserving unprofitable firms that, according to a pure capitalist logic, ought to have gone bust, profit rates remained low. Consequently investment in productive activities also remains low. This is why productivity growth has stalled across the advanced capitalist countries and fallen even in China.

Unless firms invest in order to innovate and automate, why would productivity rise? It has been far more attractive to engage in financial speculation in an attempt to turn a quick profit. Subdued investment also explains the current high levels of employment in the UK. In the absence of productivity rises, even slow growth draws people into employment — it just tends to be low quality, badly paid work.

It is characteristic of the “new normal” that continued growth depends on ultra-low or negative interest rates, tax breaks and quantitative easing. Many of those presiding over the system would like to wean the economy off this medicine. In a recent intervention, the head of the Dutch central bank complained that record low interest rates in the Eurozone were becoming a “quasi-permanent situation”, creating new financial bubbles and driving up house prices. Yet scaling back these measures has proved extremely difficult.

Indeed, in September the European Central Bank felt forced to launch a new round of monetary stimulus and cut its main interest rate to -0.5 percent. The US Fed cut its rates three months earlier, and is under pressure from Trump to do more. Central bankers in Brazil, India, South Korea and Mexico have each cut rates. The Bank of Japan is currently threatening to further reduce already negative rates.

Competitive battle

Increasingly there appears to be a competitive battle between central banks to engage in stimulus and engender cheap lending.

Another aspect of this “new normal” is that it becomes hard to predict exactly when a new slowdown will develop. Perhaps there will be a trade deal between China and the US, boosting confidence for a time. Maybe central banks will find a way to prolong the period of growth, at the cost of further destabilising the financial system and paving the way for a deeper crisis further down the line.

If a global slowdown does develop, whether in early 2020 or later, central banks may stumble into it with few weapons in their arsenal to counter the crisis. They certainly cannot repeat the action taken in 2009-2010. Interest rates are already negative at historic lows and a new round of quantitative easing is hardly likely to reassure investors.

In this context, a key question is whether workers will be willing to pay the price for the failures of the system, through renewed austerity, further squeezes on pay and conditions, and rising unemployment. Millions of young people and workers are already questioning the ability of capitalism to prevent ecological catastrophe. They may be about to witness another aspect of the barbarity of the system.

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