US Perspectives 2006 – The U.S. Economy

Economic perspectives for the future are based on the economic performance of the past, and are therefore provisional at best. Capitalism is a chaotic system, so it is particularly difficult to predict the exact rhythm and timing of the economic cycle with any real precision. Nevertheless, we can form a general idea of what the economy holds in store by analyzing the best available data and studying the history of the economic cycle and understanding the nature of the capitalist system.

We have been following the ups and downs of the U.S. economy for a number of years. But more important than the relative highs or lows of the stock market, or the growth and contraction of GDP, are the effects all of this has on workers’ consciousness.  It is the constant instability and precarious nature of life under capitalism that will in time force the American working class to move on a massive scale in order to change their conditions of life. Already, there are symptoms of a changing mood among American workers, and this mood can grow far more rapidly than even we might expect.

Although the economy is ostensibly growing at the present time, it is growth based on the super-exploitation of working people and the relentless extraction of both relative and absolute surplus value. This is a “boom” that feels a lot more like a slump.  When a “technical” slump comes at a certain stage, the effect will be even harsher.  A recession is inevitable in the coming period so long as the capitalist system with its inherent cycle of booms and slumps continues to exist. While it is impossible to say precisely when or to what degree the economy will contract, there are many indications that it could be quite serious.  What is clear is that even a minor recession can radically affect workers’ consciousness.

From the standpoint of the class struggle, the current weak boom is not at all a bad thing, as some workers are taking measures to defend what they have; a serious slump could dampen workers’ struggles for a period.  There is no direct, mechanical relationship between the economic cycle and workers’ consciousness.  Non-economic factors such as wars, terrorist attacks, natural disasters, and other seemingly unrelated phenomena can also rapidly affect consciousness and the economy. With the world economy balanced on a knife’s edge, even a minor shock can send it over the precipice and have a major effect on workers’ consciousness.

True, the stock market is “rocketing ahead” and major corporations recently posted their biggest profit gains in 4 years. The official unemployment rate has been creeping downward and is hailed as proof that the economy is improving (it currently hovers around 4.6 percent).  GDP grew steadily at 3.5 percent in 2005, although it slowed sharply to an adjusted 1.7 percent in the fourth quarter. But what do these figures really mean for working people?

Just 1.98 million jobs were created in in 2005, an average of 165,000 per month.  This is barely more than the 150,000 positions that need to be created each month just to keep up with the number of new workers entering the job market. These are overwhelmingly service-industry jobs: low-wage and non-union with few if any benefits or protections.  They in no way make up for the destruction of the industrial backbone of the economy and the loss of quality unionized jobs fought for over decades of labor struggles. Some 3 million manufacturing jobs have been lost since mid-2000. The services sector now makes up roughly 80 percent of U.S. economic activity. Those manufacturing jobs that have remained in the U.S. have been moved to the largely un-unionized Southern states where lower wages and more dangerous working conditions prevail (as is the case with some Japanese automakers).

Mass layoffs continue as jobs are off-shored and those still employed are compelled to do more work for the same or less pay.  20,000 Volkswagon workers are being laid off; 30,000 from Ford; 8,000 from Kraft; 1,500 from DuPont, etc.  In February 2006 alone, there were 1,073 mass layoffs reported, each involving more than 50 workers.

Wages and benefits paid to non-government workers rose by just 3.1 percent in 2005, the smallest amount in nine years.  This was not enough to keep up with inflation which rose at roughly 3.4 percent, meaning that there was an actual fall in compensation of -0.3 percent, the worst result since 1996.

Millions of U.S.  workers are no longer even counted as unemployed, skewing the official unemployment figures which are most likely at least twice as high.  Many people feel lucky to find minimum wage jobs, which at just $5.15 an hour is lower than it was 50 years ago when adjusted for inflation.

The gutting of the industrial heartland of the country has led to the wholesale destruction of entire swathes of formerly prosperous American cities. The process of gentrification of major city centers has marginalized millions of the poorest members of society, hitting Blacks and other minorities especially hard, Detroit, the former forge of the U.S. auto industry and birthplace of the United Auto Workers is in a virtual state of collapse.  Factory closures, off-shoring, and bankruptcies are being used to shatter the once powerful Michigan labor movement.

The official unemployment rate in Detroit stood at 14.1 percent in 2005, nearly three times the national rate, and is probably far higher. More than one-third of its residents live under the poverty line. Its population has declined drastically: from over two million in the 1950s to just 900,000 today.  Social services, public sanitation, and bus service have been gutted as hundreds of municipal jobs have been cut.  Crime, violence, and burned-out buildings make this once strong working class city eerily reminiscent of the film “Robocop”.  This is the face of capitalism in the 21st century.  Even in the wealthiest country on earth, extreme poverty and even elements of barbarism are increasingly common.

The massive trade deficit continues to hang over the U.S. economy, especially the import-export gap with China. The overall trade deficit in 2005 reached a record $725.8 billion, fueled by record imports of oil, food, cars and other consumer goods. The February 2006 trade gap was the third highest on record, suggesting the annual trade deficit may surpass last year’s record, and the many economists expect it may eventually grow as high as $1 trillion annually. This means that Americans spend billions more on imported goods than are sold abroad. Most of this shortfall is paid for by increased borrowing – which will have to be paid back with interest.

The Federal government is in now debt to the tune of $8.4 trillion. This means that each and every family in the U.S. owes nearly $134,000 as part of the national debt. Interest payments alone on this borrowed money are a colossal drain on the economy.  An astonishing 52 percent of all U.S. Treasury debt is now held by overseas owners. It is only due to the United States’ position of predominance in the world economy that foreign bankers are willing to finance this deficit. But how long can this last?  Sooner or later this contradiction will have to be resolved.

The United States imported a record $175.6 billion of crude oil in 2005, paying a record average price of $46.78 per barrel.  Gasoline is expected to hit more than $3.00 a gallon in the summer of 2006, which will have a knock-on effect throughout the economy. High gasoline and heating oil prices contribute to inflation and hit the working poor hardest as they have the least disposable income to work with.  For many, driving a car is no longer a viable option.  In cities where public transportation is in a state of disrepair, millions of working people are in an intolerable situation. With food and medical expenses also rising rapidly, many Americans must now choose between food, gasoline, or medical care.

Health Care costs are another massive drain on the economy. As reported by National Coalition on Health Care, total national health expenditure rose 7.9 percent in 2004 -roughly three times the rate of inflation Total spending was $1.9 trillion in 2004, or $6,280 per person. Total health care spending represented 16 percent of GDP. Spending on health care is expected to increase at a similar rate for the next decade, reaching $4 trillion by 2015, or 20 percent of GDP. The US spends more on health care than any other industrialized nation on earth, and yet over 45 million Americans are without health insurance. Those that do have it must pay through the nose for increasingly limited access to quality care.

In 2005, employer health insurance premiums increased by 9.2 percent – again around three times the rate of inflation. The annual premium for an employer health plan covering a family of four averaged nearly $11,000. The annual premium for single coverage averaged over $4,000. This crisis in health care is reaching epidemic proportions.  Untold numbers of working people die each year because they have no access to basic, preventative health care, let alone advanced care. This is the legacy of a trade union movement that fought for health benefits for its members alone, instead of for the whole of society.  The only solution is the abolition of the HMOs and a universal health care system providing quality care for all. The labor movement must be at the forefront of this struggle.

Soaring health care costs, stagnant wages, and the need to pay for day-to-day expenses with borrowed money have contributed to a dramatic fall in the rate of personal savings, which went into negative territory in 2005 for the first time since the Great Depression. The Commerce Department reports that the savings rate fell by 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing. This at a time when 78 million Americans are on the verge of retirement. The savings rate has been negative for an entire year only twice before – in 1932 and 1933 – during the Great Depression.

An inflated sense of wealth due to rising house prices also contributed to this drop in the savings rate, as millions of home-owners felt richer than they really are due to double-digit price increases in many markets. After the burst of the Information Technology stock market bubble in the late 1990s, another bubble started inflating: the US property boom. Consistently and often rapidly rising house prices allowed homeowners to take out multiple mortgages on their homes, thus providing them with a seemingly ever-expanding source credit with which to continue spending beyond their means.

But higher interest rates, necessary to counter rapidly rising inflationary pressures  elsewhere in the economy, threaten to end this expansion. Already, the housing market is leveling off in many areas.  A fall in prices could lead to a nightmare situation for many homeowners who could end up owing more on their mortgage than their home is worth.  Even a slowdown in the rise of house prices – never mind a collapse – could set off an economic chain reaction with serious effects throughout the U.S. and world economies. Housing-related job growth has been twice as fast as other sectors of the economy and has contributed nearly one-quarter of all net new jobs in the last two years.

It is estimated that if the annual rise in house prices slows to just half the current rate of 12 percent, housing’s contribution to private consumption growth will disappear. The real growth rate of the U.S. economy would fall to recession levels and could even cut 1 percent or more off of global output growth. With falling returns on investment in U.S. assets, many foreign bankers would likely have to reconsider the financing of the massive U.S. deficit – one of the only things keeping the U.S. economy afloat.

With the industrial backbone of the economy in steep decline, consumer spending now accounts for roughly two-thirds of U.S. economic activity. Much of this is on credit and has definite limits. According to the Federal Reserve Board, consumer debt hit $1.98 trillion in October 2003, up from $1.5 trillion in 2000. This figure includes credit card and car loan debt, but excludes mortgages, and is equal to roughly $18,700 per U.S. household. When mortgage and other debt is included, the debt was an astonishing $9.3 trillion in April 2003, an increase of $2.3 trillion since January 2000. In 2003, credit card debt alone stood at over $735 billion, with the average household balance among those with credit card debt at around $12,000. In the 10 years between 1993 and 2003, consumer debt more than doubled, and has continued to expand steadily since then.

Credit allows for the artificial expansion of the market; but this effect is temporary as it only puts off until later the day when all this money must be paid back – with interest.  As credit is squeezed through rising interest rates, consumption will drop, unleashing an ugly spiral of layoffs, price wars, and bankruptcies. The vast expansion of credit over the last few years only serves to put off the day of reckoning.

The war in Iraq and other military operations around the world are a tremendous drain on resources that could otherwise be used to build schools, hospitals, and rebuild the crumbling infrastructure of the country.  The Bush Administration has truly put “guns before butter”.  Total expenditure on the Iraq war is estimated at $320 billion so far, and according to the Center for Strategic and Budgetary Assessments, the costs are rising steadily: from $48 billion in 2003 to $59 billion in 2004 to $81 billion in 2005 to an anticipated $94 billion in 2006. As reported by the Congressional Research Service, the U.S. government is now spending nearly $10 billion a month in Iraq and Afghanistan, up from $8.2 billion a year ago.  In today’s costs, spending on the Iraq War outpaces the $61 billion a year that the United States spent in Vietnam between 1964 and 1972.

Some analysts believe the total cost of these wars could easily top $1.2 trillion when taking into account the continuing costs of health care for the nearly 20,000 American troops that have been wounded so far. This would be more than the combined costs of the Korean War ($455 billion) and the Vietnam War ($650 billion).  Some 2,500 US troops have been killed so far, and the cost in Iraqi and Afghani lives and destruction is incalculable.

The economic stimulus of the war has been concentrated in only a few industries and a few cities, while the costs are paid by all working people. Companies with close ties to the White House, such as Halliburton and Bechtel are among the main beneficiaries of this blatant corporate welfare. According to David Lesar, Halliburton’s chairman, president and CEO, 2005 was “the best in our 86-year history … For the full year 2005 we set a record for revenue and achieved net income of $2.4 billion with each of our six divisions posting record results.”

This from a company that has been regularly investigated for over-pricing, corruption, and fraud. According to the Boston Globe, the Army recently found that Halliburton had $263 million of exaggerated or unexplainable costs on a $2.4 billion no-bid contract in Iraq, yet still paid Halliburton $253 million of the $263 million. The country’s treasury is being looted on an unprecedented scale as the burden of maintaining the state is further shifted from the wealthiest in society to the poorest.

Unprecedented spending on “defense” and “Homeland Security” means that cuts need to be made elsewhere.  Bush’s “plan” to deal with the colossal debt his administration has rung up is to make tax cuts for the rich permanent and to slash social spending to the bone. He is cynically and purposely using the debt as a battering ram against social programs while spending billions on war.  His proposed $2.77 trillion budget for 2007 includes a record $439.3 billion for the military while cutting $36 billion from Medicare, and slashing or abolishing 141 discretionary programs, including programs to prevent violence against women and to provide vocational education.  This is separate from the billions that will be required for continuing the wars in Iraq and Afghanistan. Despite the cuts, the federal budgetary deficit is expected to rise from $318 billion in 2006 to $423 billion in 2007.

These policies have resulted in an unprecedented polarization of society as the rich get ever richer, and the poor sink further into misery, degradation, and marginalization. There are now 7.5 million millionaire households in the U.S. – not including the value of a main residence. The number of households worth more than $5 million – the so-called “Ultra High Net Worth category” – surged by 26 percent in 2005 to 930,000.

On the other side of the spectrum, the official poverty rate in 2004 was 12.7 percent of the population, up from 12.5 percent in 2003. That represents 37 million people, 1.1 million more than in 2003, and 5.4 million more than in 2000.  The poverty rate for Blacks and Hispanics is roughly double that for non-Hispanic Whites and Asians, although non-Hispanic Whites are joining the ranks of the impoverished more rapidly than any other group. The poverty rate is also higher among those under 18 years old at 17.8 percent, which represents 13 million children.  (As reported in the Annual Social and Economic Supplement of the Current Population Survey)

These are the official figures and do not fully take into account the true scale of under- and unemployment, displacement, homelessness, undocumented workers, and other marginalized sectors of society.  And these figures do not yet take into account the effects of Hurricane Katrina. Once again, this reveals the true state of capitalism in the world’s most powerful country at the beginning of the 21st Century.

There is much more that can be said about the state of the U.S. economy, but it is sufficiently clear from the above that GDP numbers and a rising stock market don’t tell the full story. It is also clear that the decisions that most affect our lives are taken in the corporate boardrooms and by the CEOs.  The government is controlled by the millionaires and billionaires of both big business parties, and it is in the interests of the millionaires and billionaires that they write and enforce the laws.

In the final analysis, the right of any economic system to continue depends on its ability to develop the means of production.  On a world scale, capitalism is no longer able to do this, and even in the richest country on earth it has long-ago ceased to play a progressive role.  The extreme polarization of wealth and the “casino”-like economy, in which money is made not through investment in productive capacity but by gambling on the stock market are a reflection of this. However, there will be no automatic collapse of the system.  Capitalism must be overthrown by the organized efforts of the working class, consciously moving to seize its destiny into its own hands.

It’s worth repeating that economic perspectives are not only about the absolute lows or highs of the economy.  The “experts” may tell us that the economy is booming, but millions of “ordinary” workers sure don’t see it that way. It won’t require another 1929-style crash before workers start to mobilize to stop the bosses’ attacks – it is already happening. Millions of workers realize the relationship between the massive spending on the “war on terror” and the cuts here at home.   More and more workers are coming to the realization that the attacks they are suffering are part of an all-out offensive by the bosses, intended to turn back the clock 70 years or more. This is already having an effect on the labor movement and on the political situation of the country. Beneath the surface of society, big explosions of the class struggle are being prepared.

Coming Soon: The US Political Situation