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.