The Boom, the Bubble, and the future - analysis of American economic recovery - Interview

Challenge, July-August, 2002 by Robert Brenner

Q Our objective in this interview is to get a sense of whether you think the current economic recovery and expansion is durable. But to begin, we should discuss the long economic decline between 1973 and 1995. What were the principal causes of this decline, in your view?

A. Essentially, the long downturn resulted from the sharp fall of the profit rate and the long time it took to recover. This development was itself largely rooted in the decline, and failure to recover, of the profit rate in manufacturing alone. What initially caused the drop in the manufacturing rate of profit was a profound intensification of competition in the international manufacturing sector between 1965 and 1973, which resulted in overcapacity and overproduction systemwide. Lower-cost, higher-profit producers from Japan and western Europe entered into the world market and imposed their lower prices, reducing the ability of high-cost producers to mark up over their costs. (By profit rate, I mean profits net of depreciation divided by net capital stock.)

Initially, the fall in profitability in international manufacturing was located in the United States, but, following the sharp devaluation of the dollar between 1971 and 1973, the manufacturing sectors of the other leading advanced capitalist economies were also obliged to shoulder a good part of the burden. The fall in the profit rate--perhaps 25--30 percent in aggregate--was not confined to the United States, but affected the advanced capitalist economies taken together, and reduced profitability persisted for two decades or more. The result was reduced investment and output growth, thus reduced productivity growth and, in turn, reduced wage growth and elevated rates of unemployment, from 1973 through 1993 and beyond.

Q. But why did the downturn persist?

A. That is a good question. Given that the problem was overcapacity, one might reasonably expect that capital would have shifted out of oversubscribed, low-profit lines into others where it could get a better return. But, instead, for the most part, the leading firms across the advanced capitalist world found it made better sense to fight rather than to switch. They had huge masses of "proprietary" capital--in the form of relations with suppliers and customers and, especially, technological capability--that they could use only in their own industry. They therefore sought to respond to intensified competition not so much by reallocating means of production to other industries as by themselves investing so as to cut costs in order to produce the same goods more profitably. Meanwhile, newly emerging producers in parts of the third world--especially East Asia, but also, in the 1970s, in places like Brazil and Mexico--found that, with their far lower wage costs, they could profitably enter into even oversupplied lines.

The overall outcome was not enough exit and too much entry, exacerbating the initial problem of overcapacity and overproduction. Ironically, Keynesian public deficits made this situation possible. It was only the huge subsidy to demand made possible by the turn to heavy government borrowing across the advanced capitalist world that allowed the global economy to keep turning over and to maintain stability through the end of the 1970s.

Q How did Reaganomics affect economic prospects?

A. [Federal Reserve chairman Paul] Volcker's huge interest-rate increases at the end of the 1970s and start of the 1980s were meant, in the first instance, to defeat inflation. But they were aimed, more fundamentally, at restoring profitability by shaking out the huge ledge of high-cost, low-profit means of production that was the legacy of the Keynesian 1970s, as well as, of course, by raising unemployment so as to reduce the growth of real wages. But these measures were, in a sense, too successful, because the recession they provoked led by 1982 to the danger of depression. The ensuing third world debt crisis threatened to bring down the leading banks and provoke a financial collapse.

Q. And then the Reagan tax cuts?

A. Yes. Ironically, what allowed for the maintenance of growth and stability over the course of the 1980s was the implementation of Reagan's record Keynesian deficits, created by tax cuts for the corporations as well as military spending increases.

It was, in a sense, politically impossible to allow the huge liquidation of means of production via depression that had been the way the system historically had prepared the way for new booms. But the cost of keeping the system turning over through big deficits was, first, the maintenance of a large amount of high cost, low-profit means of production that should have been forced out of operation, arid, second arid most important, the persistence of record-high real interest rates. It was high real interest rates, plus the failure of profitability to rise above its reduced levels at the end of the 1970s, that made for the continuation of slowed growth through the end of the 1980s.

Q Some claim that the issue is technological. They say the reason for slowed growth was that our old technologies based on electricity were exhausted and new technologies had yet to mature. You seem to believe that technology is simply there for the taking. I am not so optimistic. Do you think, for example, that computer prices would have fallen as fast in the early 1990s under different circumstances? Would great new standardized products have proliferated as rapidly? Do you disbelieve the Paul David idea that technologies require time to mature?