Weaknesses of the American Recovery

The worst that can happen to an economy is to break the harmony — so to speak — between its basic variables. I like three to exemplify it: industrial production, installed production capacity and level of capacity utilization. Their performance is an expression of reliable social demand levels, which, in turn, depends on employment and wage levels. Both are linked — like the installation of equipment — to capital advances, which Ricardo called pace of capital formation and Marx — with certain necessary adjustments — called the rate of accumulation.

Which indicator would give us signs of the “harmony” between those variables? The overall profitability of the economy. This can be followed in various ways. There is a very interesting relationship between the profits of U.S. non-financial corporations and installed production capacity. If this relationship grows, there is usually success in accumulation, backed by high levels of social demand for production. Just realize that, at times, the success of high demand levels, and consequently of production, might be based on credit, which is more or less normal. But when this support mechanism (not just for investment, but also for consumption) goes beyond certain limits, the success of production growth becomes more and more apparent, more artificial and, as it turns out, a prelude to a collapse of what — one believed — was a virtuous circle.

This happened in the United States from 1998 to 2002, essentially. And after an “apparent” recovery, it worsened from the beginning of 2006 through the middle of 2009. How, then, have these indicators behaved in the U.S. economy — let us say — from the early ‘90s until last month? Apparently very harmoniously from January 1990 until the end of 1997. All rose, including the profitability indicator. But I highlighted “apparently” because one of the basic supports of economic dynamism — real wages of all private companies — not only did not go up, but also accumulated a real decline of nearly 3 percent from January 1990 to June 1995 — four years in a row — in order to level out for a full year. Can you imagine all of the employees whose salaries did not improve for six years? This happened in the United States. After falling, it was not until June 1996 to February 1998 that the American real wage recovered to the level it had been, precisely, in January 1990.

It is certain that on the side of employment, with the exception of a stagnation during the first two years (January 1990 to January 1992) within the larger 20 year period, growth accumulated by 10 percent through the end of 1997, even including a slow but continual increase of real wages, which lasted until December 2003. Nonetheless, with wages on the rise, employment stayed the same for three years, from the beginning of 2001 until the beginning of 2004. Thanks to credit, exaggerated credit and its speculative management, there was an “apparent recovery” from the middle of 2002 through the end of 2007. But, as we all know, everything crashed from early 2008 until the middle of 2009. They lived through an 18-month slowdown of investments, wage stagnation and, most severely, employment. This has been one of the most severe recessions in our neighbor’s memory, and, regrettably, that has meant one of the greatest deteriorations in the quality of life of the American working population (our migrants included).

Contradictorily, this deterioration and impoverishment have allowed the U.S. economy to stop falling in the second semester of 2009 and begin to show signs — in various contradictory moments — of a certain recovery during the first 10 months of 2010. But neither at the production level, nor at the capacity utilization level, nor at the employment level have the best moments of this nearly 12-year period, mixed with real and artificial success, been reached. No, no one can say that our neighbors have already recovered (and us with them) because the actual levels are still far below the previous highs.

And because conflicting signals that prevent the guarantee of a sustained recovery still exist. I mention only one: the actual level of U.S. debt. Yes, our neighbors owe more than twice than what they produce. They hold close to 40 percent of world debt. Nothing more than this calls everything into question. Only this, for the financial fragility it represents. No doubt.

rojasags@yahoo.com.mx