The Crash

by Alexander Cockburn

How did we get from the Merrie Then to the Dismal Now? The bubble in stock prices in those last five years sparked an investment boom as corporations found mountains of cash available, either from the sale of overvalued stocks or by borrowing money from the banks against the high asset value of these same stocks. And as the Lewinsky years frolicked by gaily, there was a simultaneous consumption boom as the richest fifth of the citizenry, the elite Delta Force of our national consumers, saved a lot less and spent a lot more.

The shadows were there for those who cared to look for them. In 1998, 1999 and 2000, when the boom was reaching historic proportions, when annual borrowing by U.S. corporations had reached a historic peak as a percentage of GDP and when Fed Chairman Alan Greenspan was vaunting the power of markets, the rate of profits was falling in the non-financial corporate sector, significantly so in manufacturing.

The bubble was due to burst, and then it did. Now, with the market going down, corporations have less money, can borrow less and invest less. Consumers have less to spend and begin to lose the appetite anyway. Down go the rates of investment and consumption, and the amount of government debt that the Bush administration can muster as a Keynesian stimulus is more than offset by the decline in private debt as people turn prudent and ratchet up their savings.

But the problem goes deeper. The corporate investment boom of the late 1990s took place against a backdrop of falling profitability. Who builds new plants when the bottom line is turning sourer year by year? Answer: U.S. corporations in the late Nineties. There was no correlate of investment against the rate of return, hence the amassing of over-capacity on a herculean scale. Between 1995 and 2000, retail store space grew five times faster than the population. Earlier this year, Business Week reckoned that only 2.5 percent of communications capacity is being used. The most notorious sector was indeed telecommunications, where borrowing was vast and stocks insanely inflated, with stock analysts boiling up ever more ludicrous ways of claiming profitability for their favored picks. In this sector, the leading edge of the boom, between 1995 and 2000, the value of TMT stocks grew by 6.1 times but their earnings by only 2.1 times.

So was there really a "New Economy" emerging in the sunset of the century, as proclaimed by so many exuberant choristers? True, the 1995 to 2000 economy did do better than in any five year period back to the early Seventies. By all standard measures such as productivity, economic growth, wages, growth of investment unemployment, inflation, it was a pretty good time. But, as Professor Robert Brenner of UCLA, whose "Boom, Bubble, Bust: The U.S. in the World Economy" is about to be published by Verso, aptly asks, "If the five years 1995 to 2000 truly saw the emergence of a New Economy, manifesting 'extraordinary performance,' as Clinton's Council of Economic Advisers put it, what are we to call the period 1945 to 1973, which excelled it in every respect?" Productivity growth was about 15 percent slower in those five recent years than in the 25 years between 1948 and 1973.

For now? On the one hand, over-capacity; on the other, a drop in investment and consumption driven first by the drop in the market, then by fear. It will be quite a while before anyone feels the need to invest, hence to borrow. Give the rich a tax cut? It won't help. They'll put it in the bank. Government investment? Yes, it could be done on an appropriately vast scale, but only by public investments of a sort that Republicans have never countenanced and that vanished from the political platform of the Democratic Party decades ago. For sure, planes and missiles for the Navy and Air Force, plus millions worth of food aid dropped on Afghanistan, and new computers for the Office of Homeland Security aren't going to do the trick.