In early 2002 Alan Greenspan declared that the American recession which had begun a year earlier was at an end. By the fall the Fed was obliged to backtrack, admitting that the economy was still in difficulties and deflation a threat. In June 2003 Greenspan was still conceding that ‘the economy has yet to exhibit sustainable growth’. Since then Wall Street economists have been proclaiming, with ever fewer qualifications, that after various interruptions attributable to ‘external shocks’—9/11, corporate scandals and the attack on Iraq—the economy is finally accelerating. Pointing to the reality of faster growth of gdp in the second half of 2003, and a significant increase in profits, they assure us that a new boom has arrived. The question that therefore imposes itself, with a Presidential election less than a year away, is the real condition of the us economy.footnote1 What triggered the slowdown that took place? What is driving the current economic acceleration, and is it sustainable? Has the economy finally broken beyond the long downturn, which has brought ever worse global performance decade by decade since 1973? What is the outlook going forward?

In mid-summer 2000, the us stock market began a sharp descent and the underlying economy rapidly lost steam, falling into recession by early 2001.footnote2 Every previous cyclical downturn of the post-war period had been detonated by a tightening of credit on the part of the Federal Reserve, to contain inflation and economic overheating by reducing consumer demand and, in turn, expenditure on investment. But in this case, uniquely, the Fed dramatically eased credit, yet two closely interrelated forces drove the economy downward. The first of these was worsening over-capacity, mainly in manufacturing, which depressed prices and capacity utilization, leading to falling profitability—which in turn reduced employment, cut investment and repressed wage increases. The second was a collapse of equity prices, especially in high technology lines, which sent the ‘wealth effect’ into reverse, making it harder for corporations to raise money by issuing shares or incurring bank debt, and for households to borrow against stock.

The recession brought an end to the decade-long expansion that began in 1991 and, in particular, the five-year economic acceleration that began in 1995. That boom was, and continues to be, much hyped, especially as the scene of an ostensible productivity growth miracle.footnote3 In fact, it brought no break from the long downturn that has plagued the world economy since 1973. Above all, in the us, as well as Japan and Germany, the rates of profit in the private economy as a whole failed to revive. The rates for the 1990s business cycle failed to surpass those of the 1970s and 1980s, which were of course well below those of the long post-war boom between the end of the 1940s and end of the 1960s. As a consequence, the economic performance during the 1990s of the advanced capitalist economies taken together (g7), in terms of the standard macroeconomic indicators, was no better than that of the 1980s, which was in turn less good than that of the 1970s, which itself could not compare to the booming 1950s and 1960s.footnote4

What continued to repress private-sector profitability and prevent any durable economic boom was the perpetuation of a long-term international—that is, systemic—problem of over-capacity in the manufacturing sector. This found expression in the deep dip of—already much reduced—manufacturing profitability in both Germany and Japan during the 1990s, and in the inability of us manufacturers to sustain the impressive recovery in their rates of profit between 1985 and 1995 much past mid-decade. It was manifested too in the series of increasingly deep and pervasive crises that struck the world economy in the last decade of the century—Europe’s erm collapse in 1993, the Mexican shocks of 1994–95, the East Asian emergency of 1997–98, and the crash and recession of 2000–01.

The roots of the slowdown, and more generally the configuration of the us economy today, go back to the mid-1990s, when the main forces shaping the economy of both the boom of 1995–2000 and the slowdown of 2000–03 were unleashed. During the previous decade, helped out by huge revaluations of the yen and the mark imposed by the us government on its Japanese and German rivals at the time of the 1985 Plaza Accord, us manufacturing profitability had made a significant recovery, after a long period in the doldrums, increasing by a full 70 per cent between 1985 and 1995. With the rate of profit outside of manufacturing actually falling slightly in this period, this rise in the manufacturing profit rate brought about, on its own, a quite major increase in profitability for the us private economy as a whole, lifting the non-financial corporate profit rate by 20 per cent over the course of the decade, and regaining its level of 1973. On the basis of this revival, the us economy began to accelerate from about 1993, exhibiting—at least on the surface—greater dynamism than it had in many years.

Nevertheless, the prospects for the American economy were ultimately limited by the condition of the world economy as a whole. The recovery of us profitability was based not only on dollar devaluation, but a decade of close to zero real wage growth, serious industrial shake-out, declining real interest rates, and a turn to balanced budgets. It therefore came very much at the expense of its major rivals, who were hard hit both by the slowed growth of the us market and the improved price competitiveness of us firms in the global economy. It led, during the first half of the 1990s, to the deepest recessions of the post-war epoch in both Japan and Germany, rooted in manufacturing crises in both countries. In 1995, as the Japanese manufacturing sector threatened to freeze up when the exchange rate of the yen rose to 79 to the dollar, the us was obliged to return the favour bestowed upon it a decade earlier by Japan and Germany, agreeing to trigger, in coordination with its partners, a new rise of the dollar. It cannot be overstressed that, with the precipitous ascent of the dollar which ensued between 1995 and 2001, the us economy was deprived of the main motor that had been responsible for its impressive turnaround during the previous decade—viz. the sharp improvement in its manufacturing profitability, international competitiveness and export performance. This in turn set the stage for the dual trends that would shape the American economy throughout the rest of the decade and right up to this day. The first of these was the deepening crisis of the us manufacturing sector, of exports, and (after 2000) of investment; the second was the uninterrupted growth of private-sector debt, household consumption, imports and asset prices, which would make for the sustained expansion of a significant portion of the non-manufacturing sector—above all finance, but also such debt-, import- and consumption-dependent industries as construction, retail trade and health services.

As the dollar skyrocketed after 1995, the burden of international over-capacity shifted to the us. Matters were made much worse for us manufacturers when the East Asian economies entered into crisis in 1997–98, leading to the drying up of East Asian demand, the devaluation of East Asian currencies, and East Asian distress-selling on the world market. From 1997, the us manufacturing profit rate entered a major new decline. Yet, even as manufacturing profitability fell, the us stock market took off. It was initially driven upward by a precipitous decline of long-term interest rates in 1995, which resulted from a huge influx of money from East Asian governments into us financial markets, pushing up the dollar. It was systematically sustained to the end of the decade by the loose-money regime of Alan Greenspan at the Fed, who refused to raise interest rates between early 1995 and mid-1999 and came vigorously to the aid of the equity markets with injections of credit at every sign of financial instability. Greenspan was acutely conscious of the depressive impact on the economy of both Clinton’s moves to balance the budget and the new take-off of the dollar. He therefore looked to the wealth effect of the stock market to offset these by jacking up corporate and household borrowing, and thereby investment and consumer demand. In effect, the Federal Reserve replaced the increase in the public deficit that was so indispensable to us economic growth during the 1980s, with an increase in the private deficit during the second half of the 1990s—a kind of ‘stock-market Keynesianism’.footnote5