Commentary by Masao Suzuki

On June 21, the Chairman of the U.S. Federal Reserve Bank, Ben Bernanke, gave a very downbeat report on the U.S. economy following a two day meeting of the Fed. Bernanke, who is also a professor of economics, admitted that he didn’t have a good explanation for why economic growth in the United States was so weak and the unemployment rate stuck at about 9%. But Marxist political economy does have an explanation: that economic stagnation is a natural outcome of a capitalist economy.

Mainstream economics sees economic growth as natural in a capitalist economy. Free market economists blame the government for economic instability; for example they blame government housing policies, not Wall Street, for the housing boom and bust and financial crisis. Keynesian economists are more realistic in that they recognize that financial speculation can lead to a crisis, but insist that proper regulation and strong government action can stabilize a capitalist economy.

The problem is that economic instability can follow times when free market policies ruled (such as the Great Depression of the 1930s following the Roaring 20s, and the Great Financial Crisis of 2008 following decades of deregulation). Economic instability can also follow periods when Keynesian economic policies dominated (such as the decade of stagflation – recessions and inflation – of the 1970s following the post-World War II Keynesian period).

Marxist political economy sees stagnation as rooted in capitalism itself, not government policy (as do free-market economics), or lack of a strong policy (as do the Keynesians). Businesses try to lower their labor costs by cutting wages and benefits – for example more and more companies are dropping or cutting their employee health insurance and defined benefit pensions. But this limits the ability of workers to buy goods and services. At the same time businesses are constantly reinvesting their profits from cutting workers pay into new capital and new technology, becoming more productive and thus able to produce more. The contradiction between limited ability of workers to consume and the growing ability of companies to produce leads to what Marx called “crises of overproduction,” known as recessions today.

Over the last 30 years, the boom and bust cycle of capitalism has been softened by a huge build-up of debt in the United States. Between 1983 and 2007, the U.S. economy experienced two recessions (in 1990 and 2001), fewer than the post-World War II economic boom period. But at the same time total debt grew twice as fast as the economy, from 1.8 times GDP (the measure of total output of the economy) in 1983 to 3.5 times GDP in 2007. The debt boom between 1983 and 2007 was mainly in the private sector, as total (federal, state, and local) government debt grew more slowly. Government debt was 25% of total debt in 1983 but less than 15% of total debt in 2007. The fastest growth of debt was in the financial sector, which went from less than 14% of total debt in 1983 to almost one-third of total debt (32.4%) in 2007.

This huge buildup in debt ended with the debt-fueled housing boom and bust and then the financial crisis of 2008. Since then total debt has actually fallen, a huge change from the almost 9% increase in total debt each year during the 1983 to 2007 period. Financial sector debt, which was the fastest growing type of debt, actually dropped 17% from 2008 to 2010. This was largely made up by a huge increase in federal government debt of more than 47%, as seen in the large federal government budget deficits of the last few years.

But growing opposition to the growing federal debt in Congress and the administration means that the federal government debt will grow more slowly, and total debt will continue to fall. As a result the U.S. economy is likely to slow even more and could even fall back into a recession. Until and unless U.S. capitalism finds a way to grow without the stimulus from ever-greater amounts of debt, high unemployment is likely to continue for years.

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