Euphoria and the bursting bubble

As you read this, the papers are probably full of the news that the US economy is growing at the fantastic rate of over 6% a year. No wonder the stock markets of the world have been booming. However, Michael Roberts points out that in reality the economic growth that the US is now enjoying is an illusion. It is based on unhealthy premises of state spending and a massive credit boom, neither of which can last for much longer.

As you read this, the papers are probably full of the news that the US economy is growing at the fantastic rate of over 6% a year. No wonder the stock markets of the world have been booming. US share prices are up 25% this year in anticipation that the dark nights of economic recession or slump have been banished from America and, as the US recovers from the terrible year of 2001, it will sweep up the rest of the world (Europe and Japan) in a new economic boom.

US President Bush has been having a hard time of it recently. He thought that his adventurist attack on Iraq and Saddam would win him a landslide re-election victory in 2004, as Americans patriotically flocked to his support - just as some gullible Britons did to Thatcher after the Falklands. But unlike the Falklands war, which merely left a small contingent of the British army to look after the sheep in the fields, the Iraq war did not end last May when Bush declared hostilities over. Since then, Iraq has become a killing field for American troops and for Iraqi civilians in larger numbers than the American military invasion produced.

And the cost of the occupation is also mounting. Bush has already had to ask the US Congress to stump up $150bn to finance the Iraqi and Afghan occupations. He’s trying to raise some funds from the other imperialist powers, but the response of Germany and France has been to hold their noses. So Americans are worried and Bush has slumped in the polls just as his British poodle, Blair, has done back in London.

As always, everything now depends on delivering a successful economy that keeps sufficient numbers of Americans with enough in their pay packets each week. So the Bush gang is spinning euphoria about the success of their economic policies. The Republican National Committee views the state of the US economy through rosy spectacles: “Last month this economy exceeded expectations and added new jobs. Inflation is low. After-tax incomes are rising. Home ownership is at record highs. Productivity is high. Factory orders, particularly for high-tech equipment, have risen over the last several months. Our strategy has set the stage for sustained growth. By reducing taxes we kept a promise, and we did the right thing at the right time for the American economy.”

But growth and investment are one thing. Without jobs, Bush won’t win this time next year. That’s why the Bush gang is now rattling on about jobs. Treasury Secretary John Snow puts his name on the mast: “I would stake my reputation on employment growth happening before Christmas. Everything we know about economics indicates that the sort of economic growth expected for the next year, 3-4%, will translate into two million new jobs from the third quarter of this year to the third quarter of next year. That's an average of about 200,000 new jobs a month.” That’s an ambitious forecast, considering that job numbers have been falling for eight consecutive quarters and only in September was there a rise of just 50,000.

This euphoria is hogwash. Let’s make a prediction that’s more likely to come true. Having watched 2.6m jobs vanish since he took office, Bush will likely soon be the first president since Depression-era leader Herbert Hoover to preside over a net loss of jobs in his first term.

The reality is that the economic growth that the US is now enjoying is an illusion. It is based on three things. The first is massive spending by the government. The Republicans are supposed to believe in the ‘free market’ and oppose the whole idea of a state that interferes in the free rein of capitalism. But when needs must, ideology goes out of the window. Just like Reagan did before him back in the 1980s, Bush is trying to replace the failure of capitalists to invest and spend by getting the government to do it. Defence and “homeland security” spending is at record levels. The free market has been replaced by Keynesian-style pump-priming of the capitalist economic cycle.

Second, along with spending, Bush has introduced huge cuts in the taxation of companies. For example, small businesses can buy a Lincoln Navigator, Cadillac Escalade, Lexus, Chevrolet, or Ford and deduct the entire cost from their 2003 taxes! The government is paying for business cars! And the new Bush tax stimulus package allows small businesses to deduct up to $100,000 of capital business expenditures immediately per year. Also, there are tax cuts for shareholders’ dividends and in incomes, particularly for the better off. Although much of this largesse will not reach the unemployed and the low-paid because they are so poor they don’t pay much tax, middle-class America is getting a temporary boost to their pay packets. And they are spending it.

And finally, Mr Bush’s pal in the Federal Reserve Bank, septuagenarian Alan Greenspan, is helping to keep the spending spree going by keeping interest rates at an all-time low of 1%. So Americans continue to borrow like there was no tomorrow, particularly to buy houses and cars. The house price bubble goes on expanding and expanding, while the army of the jobless goes on growing.

Spending and unemployment are hand in hand in a merry dance of economic death because Americans are not buying goods made in the US. The US now consumes nearly 90% of the world's capital, but produces less than half the manufactured items it consumes. In September, the number of jobs in manufacturing declined for the 38th month in a row and weekly earnings went down for the first time in 14 years.

So how is all this spending being paid for? First, Bush is borrowing to pay for the government’s tax cuts, Iraq and arms spending. Second, Americans are borrowing to buy foreign cars and products. And Americans can do this because the dollar is the main currency of trade and investment. As a result, the American government just prints more greenbacks and foreigners are paid in these dollars.

But if you run a huge debt up with the rest of the world, the risk is that your creditors will start to demand more interest or they will stop taking your dollars. America is keeping interest rates down, so the fall guy is the dollar. Its value has slumped by 15% since the beginning of this year. So the US will have to keep printing more and more dollars to pay its debts.

And there is no such thing as a free lunch. The government may be cutting taxes to persuade people to spend, but companies are cutting their workforces and also reducing the benefits to those still working. In the US, employers still pay the bulk of their workers' health care bills, but their contribution has slipped over the last five years to 70% of total health care costs from 75%.

And more workers are going without insurance, even at large companies. Around 10million workers and family members at companies with more than 500 employees did not have employer-provided health coverage in 2001. The number of Americans without insurance has, meanwhile, grown to 43.6million, the highest since 1998.

"I'm having to beg for my insulin," said Cathy Barkovich, 33, a diabetes patient in Harmony, Pa. She said her husband's health plan stopped paying for her brand-name prescriptions in July and the American Diabetes Association says that no generic equivalent exists. When she applied to a manufacturer's free insulin programme, she was told that only uninsured patients were eligible. Her husband, a $40,000-a-year interstate bus driver, is considering dropping their coverage so she can get the drug, explained Ms. Barkovich. One in 20 self-employed workers dropped their coverage last year.

And in Southern California 70,000 supermarket workers have been on strike. The companies want to freeze wages for two years and they want them to pay some of their own medical insurance premiums.

This spending and borrowing bubble is set to burst next year. Interest rates cannot be lowered any more, Bush cannot borrow any more or cut taxes any more. Sure, US companies have improved their profitability by cutting jobs and reducing benefits, but they cannot raise their prices because of huge competition from abroad. China and other Asian producers are riding through world trading markets like the Horses from the Apocalypse, destroying all before them. American manufacturers are trapped between a lack of pricing power and a too costly workforce.

Bush is trying to help them out through tax cuts and letting the dollar slide in world markets. But there is little sign that American capitalists are prepared to keep their side of the bargain by raising investment and employing more unemployed. Instead they are keeping their cash in the banks and ‘outsourcing’ their operations abroad to Mexico, India and China.

In the meantime, the debts mount for the US government and for American households and when the tax cheques run out early next year and there are still no jobs, a great squeeking sound may be heard as the debt and housing bubble bursts, along with the dollar. It will be the sound that spells the end of this fake boom and the end of Bush’s hopes for re-election.