07.11.2024

Will America be able to reindustrialise ... or has that bird already flown to Asia?

Was the economy, stupid

What effect will the new president’s policies have on the US economy? Will real wages rise? What about profits? Michael Roberts investigates

The US stock market is booming, the dollar is riding high in currency markets, the economy is rolling along at about 2.5% real GDP growth, and unemployment is no higher than 4.1%. It appears that the US economy is achieving what is called a ‘soft landing’ - ie, no recession - as it comes out of the pandemic slump of 2020.¹ Indeed, there appears to be no landing at all. Some call it the ‘Benjamin Button economy’²: the US economy is only getting younger and better.

So why did the candidate of the incumbent Democrat administration, Kamala Harris, end up losing to the Republican president of 2017‑21, Donald Trump? How could that be the case, if the US economy was going so well? It seems that a sufficient proportion of the electorate was not so convinced of a prosperous and better time for them. In a Wall Street Journal poll before the election, 62% of respondents rated the economy as “not so good” or “poor”, which explains the lack of any political dividend for either outgoing president Joe Biden or Harris.

I would argue that the reason for this is twofold. First, the US real gross domestic product may be growing and financial asset prices booming, but it is a different story for the average American household, hardly any of whom own any financial assets to speculate with. Instead, while rich investors boost their wealth, under the previous Trump and Biden administrations Americans have experienced a horrendous pandemic, followed by the biggest slump in living standards since the 1930s - driven by a very sharp rise in prices of consumer goods and services.

Average wage rises failed to keep pace until the last six months or so. And officially prices are still some 20%-plus higher than before the pandemic, but with many other items that are not covered by the official inflation index (insurance, mortgage rates, etc) rocketing. So after tax and inflation is accounted for, average incomes are pretty much the same as when Biden came into office.

No wonder a recent survey found that 56% of Americans thought the US was in a recession and 72% thought inflation was rising. The world may be great for stock market investors, the ‘Magnificent Seven’ hi-tech social media companies and the billionaires, but it ain’t so for many Americans.

Vibecession

This disconnection between the optimistic boomer views of mainstream economists and the ‘subjective’ feelings of most Americans has been called a ‘vibecession’ - American consumers’ sentiment is way down from when Biden came into office.

Americans are well aware of costs that the official indexes and mainstream economists ignore. Mortgage rates have reached their highest level in 20 years and home prices have risen to record levels. Motor and health insurance premiums have rocketed. Indeed, inequality of incomes and wealth in the US - among the highest in the world - is only getting worse. The top 1% of Americans take 21% of all personal incomes - more than double the share of the bottom 50%! And the top 1% of Americans own 35% of all personal wealth, while 10% own 71%; yet the bottom 50% own just 1%!

Indeed, when you look more closely at the much heralded real GDP figures, you can see why there is little benefit going to most Americans. The headline GDP rate is driven by healthcare services, which really measure the rising cost of health insurance, not better healthcare, and that cost has rocketed in the last three years. And then there are rising inventories, which means stocks of goods unsold - in other words, output without sale. Not to mention increased government spending, mainly for arms manufacturing - hardly a productive contribution. If we look at economic activity in the US manufacturing sector, based on the so-called purchasing managers survey, the index shows that US manufacturing had been contracting for four consecutive months leading up to the November 5 election.

The administration and the mainstream proclaim the low US unemployment rate. But much of the net increase in jobs has been in part-time employment or government services, both federal and state. Full-time employment in important productive sectors that pay better and offer a career has been lagging. If a worker has to take on a second job to maintain his or her standard of living, he or she might not feel so bullish about the economy. Indeed, second jobs have increased significantly.

And the labour market is starting to turn for the worse. The monthly net increase in jobs has been a downward trend, with the latest October figure just +12,000 (affected partly by hurricanes and the Boeing strike). Both job offers and job quits rates have dropped to levels typically seen in recessions. Companies are hesitant to hire full-time workers, and employees are reluctant to quit due to job security concerns and an increasing dearth of available opportunities.

Mainstream economists make much of the undoubted better performance of the US economy, compared to Europe and Japan - and compared to the rest of the top G7 capitalist economies as a whole. But an average real GDP growth rate of 2.5% is hardly such a success, when compared to the 1960s - or even the 1990s or before the great recession of 2008, or before the pandemic slump of 2020.

Long depression

The major economies remain in what I have called a long depression: namely where after each slump or contraction (2008-09 and 2020) there follows a lower trajectory of real GDP growth - ie, the previous trend is not restored. The trend growth rate before the global financial crash (GFC) and the great recession has not returned, and the growth trajectory dropped even further after the pandemic slump of 2020. Canada is still 9% below the pre-GFC trend; the euro zone is 15% below; the UK 17% below and even the US is still 9% below.

According to the Congressional Budget Office, the US labour force (not employment) will have grown by 5.2 million people by 2033, thanks mainly to net immigration, and the economy is projected to grow by $7 trillion more over the next decade than it would have without the new influx of migrants.

So it is a great irony that the second reason why the Harris campaign did not go way ahead of Trump is the question of immigration. It seems that many Americans regard curbing immigration as a key political issue - ie, they blame low real income growth and poorly paid jobs on ‘too many immigrants’ and yet the opposite is the case. Indeed, if immigration growth slacks off or if the new administration introduces severe curbs or even bans on immigration, US economic growth and living standards will suffer (see below).

The only way the US economy could sustain even 2.5% a year in real GDP growth in the rest of this decade would be by achieving a very sharp increase in the productivity of the labour force. But, over the decades, US productivity growth has slowed.

In the 1990s, average growth was 2% a year and even faster at 2.6% a year during the ‘dot.com’ credit-fuelled 2000s. But in the long depression years of the 2010s the average rate slipped to its lowest at 1.4% a year. Since the great recession of 2008 right up to 2023, productivity has been rising at just 1.7% a year. If the size of the employed workforce were to stop rising because immigration had been curbed, then real GDP growth would slip back under 2% a year.

The mainstream hope that the huge subsidies pumped into the big hi-tech companies by the government will raise investment in productivity-boosting projects. In particular, the massive spending on artificial intelligence will eventually deliver a sustained step-change rise in productivity growth. But that prospect remains uncertain and dubious - at least given the pace of the infusion of these new technologies across the US economy.

So far, productivity growth has been mainly in the environmentally damaging fossil fuel industry, with little sign of infusion across other sectors. Since 2010, oil and gas production in the US has almost doubled and yet employment in the upstream sector has declined. So the productivity gains in the sector have been achieved by falling employment.

There is a serious risk that a huge investment bubble is building up, funded by increased debt and government subsidies - which could come crashing down if returns on capital for the US corporate sector from AI and hi-tech do not materialise. The reality is that, apart from the profits boom of the so-called ‘magnificent seven’ of hi-tech social media giants, the average profitability of the productive sectors of US capitalism is at an all-time low. Yes, the mass of profits is very high for the magnificent seven, as are profit margins, but total profit growth of the US non-financial corporate sector has slowed almost to a stop.

And, remember, it is now well established that profits lead investment and then employment in a capitalist economy.³ Where profits lead, investment and employment follow with a lag. If investment growth falls, then the expected productivity growth will not materialise. Moreover the overall profit data is biased in two ways.

First, profits are heavily concentrated with the big mega companies, while the small and medium-size companies are struggling with the burden of high interest rates on their borrowing, and squeezed costs on raw materials and labour. Around 42% of US small-cap companies are unprofitable - the most since the 2020 pandemic, when 53% of small caps were losing money.

Second, much of the rise in profits is fictitious (to use Marx’s term for profits made by buying and selling financial assets that supposedly represent real assets and earnings of companies, but do not). Using the method of Jos Watterton and Murray Smith, two Canadian Marxist economists, I estimate that fictitious profits are now around half the total profits made in the financial sector. If that were to disappear in a financial crash, it would seriously damage corporate America.

Debt

And that brings us to the issue of rising debt, in both the US corporate and public sector. If there were a bursting of the bubble over AI, many US companies would be faced with a debt crisis. Already, more have defaulted on their debt in 2024 than in any start to the year since the global financial crisis, as inflationary pressures and high interest rates continue to weigh on the riskiest corporate borrowers, according to the S&P Global Ratings research company.

And do not forget the ‘zombies’⁴: ie, companies that are already failing to cover their debt servicing costs from profits and so cannot invest or expand, but just carry on like the living dead. They have multiplied and survive so far by borrowing more - so are vulnerable to high borrowing rates.

If corporate defaults rise, then this will put renewed pressure on the creditors, namely the banks. There has already been a banking crisis (last March) that led to several small banks going under and the rest being bailed out by over $100 billion of emergency funding by government regulators. I previously highlighted the hidden danger of credit held by so-called ‘shadow banks’ - non-banking institutions that have lent large amounts for speculative financial investments.⁵

And it is not just the corporate sector that is coming under debt servicing pressure. Throughout the campaign for the US presidency over the last few months, there was one issue that both Kamala Harris and Donald Trump ignored: the level of the public debt. But this debt matters.

The US government has spent $659 billion so far this year paying off the interest on its debt, as the Federal Reserve’s rate hikes dramatically raised the cost of borrowing. Public-sector debt - currently estimated at $35 trillion, or around 100% of GDP - has only one way to go: and that is up. The debt load is set to soar higher - potentially reaching $50 trillion within the next 10 years,⁶ according to a projection from the US Congressional Budget Office (CBO).⁷

The CBO reports that federal debt held by the public (ie, ‘net debt’) averaged 48.3% of GDP for the last half century. But it predicts that by 2025 net debt will be larger than annual economic output for the first time since the US military build-up in World War II and will rise to 122.4% by 2034.

But does this rising public debt matter? The suggestion that the US government will eventually need to stop running budget deficits and curb rising debt has been strongly rejected by exponents of ‘Modern Monetary Theory’. MMT supporters argue that governments can and should run permanent budget deficits until full employment is reached. And there is no need to finance these annual deficits by issuing more government bonds, because the government controls the unit of account, the dollar, which everybody must use. So the Federal Reserve can just ‘print’ dollars to fund the deficits, as the treasury requires. Full employment and growth will then follow.

I have previously discussed in detail the flaws in the MMT argument,⁸ but the key concern here is that government spending, however financed, may not achieve the necessary investment and employment increases. That is because the government does not take the decision-making on investment and jobs out of the hands of the capitalist sector. The bulk of investment and employment remains under the control of capitalist firms, not the state. And, as I have argued above, that means investment depends on the expected profitability of capital.

Let me repeat the words of Michael Pettis, a firm Keynesian economist:

… the bottom line is this: if the government can spend additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true … creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment … If US companies are reluctant to invest not because the cost of capital is high, but rather because expected profitability is low, they are unlikely to respond … by investing more.

Moreover, the US government is borrowing mostly to finance current consumption, not to invest. So just getting the Federal Reserve to ‘print’ the money required to cover planned government spending will only produce a sharp depreciation of the dollar and a rise in inflation.

Rising debt adds to the demand by bond buyers for higher interest rates to insure against default. For the US, that means each one percentage point increase in the debt-to-GDP ratio increases longer-run real interest rates by one to six basis points. The more the debt grows, the more the government has to shell out in interest to service that debt - and the less money the US government has to spend on other priorities like social security and crucial parts of the social safety net. Interest costs have nearly doubled over the past three years, from $345 billion in 2020 to $659 billion in 2023. Interest is now the fourth-largest government programme, behind only social security, medicare and defence. Relative to the economy, net interest costs grew from 1.6% of GDP in 2020 to 2.5% in 2023.

In its latest baseline, the CBO projected that interest would cost more than $10 trillion over the next decade and exceed the defence budget by 2027. Since then, interest rates have risen far more than the CBO projected. If they remain about 1% above previous projections, then interest on public debt would cost more than $13 trillion over the next decade, exceed the defence budget as early as next year and become the second-largest government programme by 2026.

America’s economic might does give it substantial leeway. The dollar’s role as the international reserve currency means demand for US debt is ever-present, and AI-driven productivity growth could indeed help lessen its debt problems. But the size of the public-sector debt cannot be ignored. The new administration will soon be applying higher taxes and cuts in government spending. If it does not, bond ‘vigilantes’ will cut back on purchases and force the new president into applying severe fiscal austerity anyway. As the IMF chief economist, Pierre-Olivier Gourinchas, said just before this election, “Something will have to give.”

Bidenomics will no doubt fade away with its namesake.

Victory

In one sense, who won mattered little to big finance and big business. Both candidates were dedicated to the capitalist system and making it work better for the owners of capital.

Larry Fink of BlackRock, the world’s largest asset manager, had said he was “tired of hearing this is the biggest election in your lifetime”. The reality, says Fink, is “over time it doesn’t matter”. And it is true that the underlying endogenous forces of capitalist production, investment and profit are much more powerful than any particular policy adopted and implemented by a government. Nevertheless, pro-capitalist politicians can differ on what is best for capitalism at any one time. And there were some differences between Trump and Harris on what to do over the next four years.

The main planks of what Trump calls “Maganomics” include more aggressive tariffs on imports from around the world, especially from China, and a draconian crackdown on immigration. His campaign rhetoric also pushed for greater political influence over monetary policy and the Fed on interest rate decisions and in the manipulation of the dollar.

Trump claims that he will “deliver low taxes, low regulations, low energy costs, low interest rates and low inflation, so that everyone can afford groceries, a car and a beautiful home”. His proposed tax cuts range from income via overtime pay, tips and pension benefits to massive across-the-board cuts for individuals and corporations. This would undoubtedly reduce taxes for the very rich (yet again), but increase it for nearly everybody else.

Trump claims that these tax cuts for the very rich and the big corporations would boost investment and growth, based on the discredited ‘trickle-down’ theory: ie, if incomes and wealth for the rich rise, then they will spend more and so the benefits will ‘trickle down’ to the rest of us.

But the evidence is to the contrary. The last 50 years have seen a dramatic decline in taxes on the rich across the advanced democracies. And several studies show that this has had little or no effect on economic growth - and much more effect on increasing inequality. Two economists from Kings College London, using a newly constructed indicator of taxes to identify all instances of major tax reductions on the rich in 18 countries between 1965 and 2015, find that such tax cuts lead to higher income inequality in both the short and medium term, but do not have any significant effect on economic growth or unemployment.⁹

Per capita GDP and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that did not, the study found. But the analysis discovered one major change: the incomes of the rich grew much faster in countries where tax rates were lowered. Surprise!

As for Trump’s last period of office, when he introduced sharp cuts in corporate and personal income tax, Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley found that for the first time in a century, the 400 richest American families had lower effective tax rates than people in the bottom 50% of income earners.

Bond investors and Wall Street are worried that these tax cuts, while very welcome from their point of view, could only increase the huge government budget deficit and public sector debt - something that is anathema to the financial sector. Trump’s answer was that he would ‘pay for’ the tax cuts by dramatically increasing the tariffs on imports. He planned to impose a 10% levy on all US imports and a 60% tax on goods coming from China. Indeed, Trump talked of imposing tariffs sufficiently high to allow him to end income tax altogether!

But the Penn Wharton Budget Model research group has estimated that Trump’s plans would raise US budget deficits by $5.8 trillion over the next decade. Even the conservative Tax Foundation think tank estimated that his new plan to exempt overtime work from federal levies would cost the US a further $227 billion in lost revenue over the next decade.

Again, empirical analysis of these policies indicate significant damage to US economic performance. A recent study suggests that Trump’s policies are “sharply regressive tax policy changes, shifting tax burdens away from the well-off and towards lower-income members of society”.¹⁰ The paper, by Kim Clausing and Mary Lovely, puts the cost of existing levies plus Trump’s tariff plans for his second term at 1.8% of GDP. It warns that this estimate “does not consider further damage from America’s trading partners retaliating and other side effects, such as lost competitiveness”. This calculation “implies that the costs from Trump’s proposed new tariffs will be nearly five times those caused by the Trump tariff shocks through late 2019, generating additional costs to consumers from this channel alone of about $500 billion per year”, the paper said. The average hit to a middle-income household would be $1,700 a year. The poorest 50% of households, who tend to spend a bigger proportion of their earnings, would see their disposable income dented by an average of 3.5%.

Trump’s tariff measures would result in levies on imports supercharged to levels last seen during the 1930s following the passing of the landmark protectionist Smoot Hawley Tariff Act. Trump claims the trade barriers would not only raise revenues, but lead to the restoration of US manufacturing. When import tariffs are used to protect a burgeoning and fledgling manufacturing sector, as they were in the US back in the late 19th and early 20th century, they may have helped. But now in the 21st century, US manufacturing is in relative decline - a trend that would not be reversed by protectionist policies (that horse has bolted to Asia).

Instead, the Washington-based Peterson Institute for International Economics think tank calculates that 20% across-the-board tariffs, combined with a 60% tariff on China, would trigger a rise of up to $2,600 a year in what the average household spends on goods, as inflation rises accordingly. PIIE senior fellows Obstfeld and Kimberly Clausing think that the maximum amount of additional revenue the administration can raise - by applying a 50% tariff on everything - would be $780 billion.

According to Ernie Tedeschi of the Yale Budget Lab,

If we wanted to completely replace the [revenue raised from] income tax with a tariff, we would need at least a two-thirds tariff. And then you have to remember that people are going to start substituting away from imports and then there’s going to be retaliation and so on ... It’s impossible to make the math work. You probably can’t raise [tariffs] high enough.¹¹

Immigration

The other main plank of Maganomics is to cut back drastically on immigration. Trump has accused migrants of “poisoning the blood of our country”. Despite this grotesque racism, many Americans are convinced that their living standards and life are being affected by ‘too many immigrants’. According to Gallup, 2024 is the first year in nearly two decades that a majority of the public wants less immigration to the US. In the past year alone, the desire to reduce the amount of immigration has jumped by 10 points for Democrats and 15 points for Republicans.

Trump actually calls for the mass deportation of millions of immigrants. A recent report by the American Immigration Council finds that, should the government deport a population of roughly 13 million people who as of 2022 lacked permanent legal status and faced the possibility of removal, the cost would be huge - around $305 billion.

And this does not take into account the long-term costs of a sustained mass deportation operation or the incalculable additional costs necessary to acquire the institutional capacity to remove over 13 million people in a short period of time. If spread out over years, the cost would average out to $88 billion annually, for a total of $968 billion over the course of more than a decade, given the long-term costs of establishing and maintaining detention facilities, temporary camps and immigration courts. Moreover, about 5.1 million US-citizen children live with an undocumented family member. Separating family members would lead to tremendous emotional stress and could also cause economic hardship for many of these mixed-status families who might lose their breadwinners.

But the overall economic damage would also be significant. As I have argued, net immigration has helped the US economy to grow at a faster rate than other G7 economies. Losing these workers through mass deportation would reduce US GDP by 4.2% to 6.8%. It would also result in significant reduction in tax revenues. Removing immigrant labour would disrupt all sectors, from homes to businesses to basic infrastructure. As industries suffer, hundreds of thousands of US-born workers could lose their jobs.

Austerity

Trump’s Maganomics claims it aims to help the average US-born American, but in reality, of course, his policies will only further enrich the very wealthy at the expense of the rest, and also jeopardise economic growth and hike inflation. He is heavily backed by individual multi-billionaires like Elon Musk, who own about 4% of US personal wealth, and contributed one-third of the campaign money raised by Trump (a billionaire himself). The irony is that 74% of Americans would support an annual 2% wealth tax on personal assets over $50 million; 65% support raising the corporate income tax rate and 61% support raising top income tax rates - the exact opposite of Trump’s policies.¹²

As for Kamala Harris, she had no intention of introducing a wealth tax, or raising corporate taxes or those on the top income earners. On the contrary, Biden maintained the tax cuts that Trump introduced in his 2016-20 term that will last to 2025, and Harris would not have changed that. She also accedes to the anti-immigration sentiment and said she would support a new bill to continue the construction of more border walls with Mexico, costing billions - a policy that, when proposed by Trump in his previous successful campaign, was opposed by the Democrats.

When it comes to climate change, Trump has made it clear that he will relax regulations and allow further fossil fuel exploration and production - after all, he and Tesla boss Elon Musk are agreed that global warming is probably not man-made and anyway is not a serious risk to livelihoods and lives. Tell that to the hurricane victims in Florida. Harris was not much better, by the way. Whereas she was opposed to the extremely environmentally damaging method of extracting oil and gas by fracking back in 2019, now she backs new fracking leases to ensure ‘energy security’ after the energy-led price explosion following the Covid pandemic.

As for public services, with the budget deficit set to rise and public debt reaching well over 100% of GDP, both candidates said nothing, but it can only mean that fiscal austerity is on its way, big time. Tax revenues will not be increased - on the contrary. ‘Defence’ and arms spending to pay for the wars in Ukraine and the Middle East have reached record highs and will continue to rise, so what will have to give is public spending on education, transport and social care, etc.

Michael Roberts blogs at thenextrecession.wordpress.com.