Page 2 of
2
Mouth-to-mouth will fail beached
economies By Walden
Bello
came savagely in the dot.com collapse
of 2002, which wiped out $7 trillion in investor
wealth.
A long recession was avoided, but
only because another bubble, the housing bubble,
took the place of the dot.com bubble. Here,
Greenspan played a key role by cutting the prime
rate to a 45-year low of 1% in June 2003, holding
it there for a year, then raising it only
gradually, in quarter-percentage-increments. As
Dean Baker put it, "an unprecedented run-up in the
stock market propelled the US economy in the late
nineties and now an unprecedented run-up in house
prices is propelling the current
recovery."
The result
was that real estate prices rose by 50% in real
terms, with the run-ups, according to Baker, being
close to 80% in the key bubble areas of the West
Coast, the East Coast north of Washington, DC, and
Florida. Baker estimates that the run-up in house
prices "created more than $5 trillion in real
estate wealth compared to a scenario where prices
follow their normal trend growth path. The wealth
effect from house prices is conventionally
estimated at five cents to the dollar, which means
that annual consumption is approximately $250
billion (2% of gross domestic product [GDP])
higher than it would be in the absence of the
housing bubble."
The China
factor The housing bubble fueled US growth,
which was exceptional given the stagnation that
has gripped most of the global economy in the last
few years. During this period, the global economy
has been marked by underinvestment and persistent
tendencies toward stagnation in most key economic
regions apart from the United States, China,
India, and a few other places. Weak growth has
marked most other regions, notably Japan, which
was locked until very recently into a 1% GDP
growth rate, and Europe, which grew annually by
1.45% in the last few years.
With
stagnation in most other areas, the United States
has pulled in some 70% of all global capital
flows. A great deal of this has come from China.
Indeed, what marks this current bubble period is
the role of China as a source not only of goods
for the US market but also capital for
speculation.
The relationship between the
United States and Chinese economies is what I have
characterized elsewhere as chain-gang economics.
On the one hand, China’s economic growth has
increasingly depended on the ability of American
consumers to continue their debt-financed spending
spree to absorb much of the output of China’s
production. On the other hand, this relationship
depends on a massive financial reality: the
dependence of US consumption on China’s lending
the US Treasury and private sector dollars from
the reserves it accumulated from its yawning trade
surplus with the United States: $1 trillion so
far, according to some estimates.
Indeed,
a great deal of the tremendous sums China - and
other Asian countries - lent to American
institutions went to finance middle-class spending
on housing and other goods and services,
prolonging the fragile US economic growth but only
by raising consumer indebtedness to dangerous,
record heights.
The China-US coupling has
had major consequences for the global economy. The
massive new productive capacity by American and
other foreign investors moving to China has
aggravated the persistent problem of overcapacity
and overproduction.
One indicator of
persistent stagnation in the real economy is the
aggregate annual global growth rate, which
averaged 1.4% in the 1980s and 1.1% in the 1990s,
compared with 3.5% in the 1960s and 2.4% in the
1970s.
Moving to China to take advantage
of low wages may shore up profit rates in the
short term. But as it adds to overcapacity in a
world where a rise in global purchasing power is
constrained by growing inequalities, such capital
flight erodes profits in the long term. And
indeed, the profit rate of the largest 500 US
transnational corporations fell drastically from
4.9% from 1954-59, to 2.04% from 1960-69, to
-5.30% from 1989-89, to -2.64% from 1990-92, and
to -1.92% from 2000-2002. Behind these figures,
notes Philip O’Hara, was the specter of
overproduction: "Oversupply of commodities and
inadequate demand are the principal corporate
anomalies inhibiting performance in the global
economy."
The succession of speculative
manias in the United States has had the function
of absorbing investment that did not find
profitable returns in the real economy and thus
not only artificially propping up the US economy
but also "holding up the world economy", as one
IMF document put it. Thus, with the bursting of
the housing bubble and the seizing up of credit in
almost the whole financial sector, the threat of a
global downturn is very real.
Decoupling chain-gang
economics? In this regard, talk about a
process of "decoupling" regional economies,
especially the Asian economic region, from the
United States has been without substance.
True, most of the other economies in East
and Southeast Asia have been pulled along by the
Chinese locomotive. In the case of Japan, for
instance, a decade-long stagnation was broken in
2003 by the country’s first sustained recovery,
fueled by exports to slake China’s thirst for
capital and technology-intensive goods. Exports
shot up by a record 44%, or $60 billion. Indeed,
China became the main destination for Asia’s
exports, accounting for 31% while Japan’s share
dropped from 20 to 10%. As one account in the
Strait Times in 2004 pointed out, "In
country-by-country profiles, China is now the
overwhelming driver of export growth in Taiwan and
the Philippines, and the majority buyer of
products from Japan, South Korea, Malaysia, and
Australia."
However, as research by C P
Chandrasekhar and Jayati Ghosh has underlined,
China is indeed importing intermediate goods and
parts from these countries but only to put them
together mainly for export as finished goods to
the United States and Europe, not for its domestic
market.
Thus, "if demand for Chinese
exports from the United States and the EU slow
down, as will be likely with a US recession, this
will not only affect Chinese manufacturing
production, but also Chinese demand for imports
from these Asian developing countries."
Perhaps the more accurate image is that of
a chain gang linking not only China and the United
States but a host of other satellite economies
whose fates are all tied up with the now-deflating
balloon of debt-financed middle-class spending in
the United States.
New bubbles to the
rescue? Do not overestimate the resiliency of
capitalism. After the collapse of the dot.com boom
and the housing boom, a third line of defense
against stagnation owing to overcapacity may yet
emerge. For instance, the US government might pull
the economy out of the jaws of recession through
military spending. And, indeed, the military
economy did play a role in bringing the United
States out of the 2002 recession, with defense
spending in 2003 accounting for 14% of GDP growth
while representing only 4% of the overall US GDP.
According to estimates cited by Chalmers Johnson,
defense-related expenditures this year will exceed
$1 trillion.
Stimulus could also come from
the related "disaster capitalism complex" so well
studied by Naomi Klein: the "full fledged new
economy in homeland security, privatized war and
disaster reconstruction tasked with nothing less
than building and running a privatized security
state both at home and abroad".
Klein says
that, in fact, "the economic stimulus of this
sweeping initiative proved enough to pick up the
slack where globalization and the dot.com booms
had left off. Just as the Internet had launched
the dot.-com bubble, 9/11 launched the disaster
capitalism bubble". This subsidiary bubble to the
real-estate bubble appears to have been relatively
unharmed so far by the collapse of the latter.
It is not easy to track the sums
circulating in the disaster capitalism complex.
But one indication of the sums involved is that
InVision, a General Electric affiliate producing
high-tech bomb-detection devises used in airports
and other public spaces, received an astounding
$15 billion in Homeland Security contracts between
2001 and 2006.
Whether or not "military
Keynesianism" and the disaster capitalism complex
can in fact fill the role played by financial
bubbles is open to question. To feed them, at
least during the Republican administrations, has
meant reducing social expenditures. A Dean Baker
study cited by Johnson found that after an initial
demand stimulus, by about the sixth year the
effect of increased military spending turns
negative. After 10 years of increased defense
spending, there would be 464,000 fewer jobs than
in a scenario of lower defense spending.
A
more important limit to military Keynesianism and
disaster capitalism is that the military
engagements to which they are bound to lead are
likely to create quagmires such as Iraq and
Afghanistan, and these disasters could trigger a
backlash both abroad and at home. Such a backlash
would eventually erode the legitimacy of these
enterprises, reduce their access to tax dollars,
and erode their viability as sources of economic
expansion in a contracting economy.
Yes,
global capitalism may be resilient. But it looks
like its options are increasingly limited. The
forces making for the long-term stagnation of the
global capitalist economy are now too heavy to be
easily shaken off by the economic equivalent of
mouth-to-mouth resuscitation.
Walden
Bello is president of the Freedom from Debt
Coalition, a senior analyst at Focus on the Global
South, and a columnist for Foreign Policy In Focus
(www.fpif.org).
Sources: Dean Baker, "The Menace
of an Unchecked Housing Bubble," in Joseph
Stiglitz, Aaron Edlin, and J. Bradford DeLong,
eds., The Economists’ Voice (New York: Columbia
University Press, 2008) Robert Brenner, The
Boom and the Bubble (New York: Verso,
2002.) "China: the Locomotive," Strait Times,
February 23, 2004. Naomi Klein, The Shock
Doctrine (New York: Metropolitan Books,
2007). Philip Anthony O’Hara, "The
Contradictory Dynamics of Globalization," in B.N.
Ghosh and Halil Guven, eds., Globalization and
the Third World (Basingstoke: Palgrave
Macmillan, 2006). Robert Rubin and Jacob
Weisberg, In an Uncertain World (New York:
Random House, 2003). Robert Wade, "The
Aftermath of the Asian Financial Crisis," in
Bhumika Muchhala, ed., Ten Years After:
Revisiting the Asian Financial Crisis
(Washington, DC: Woodrow Wilson International
Center for Scholars, 2007)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
