By MICHAEL ROBERTS*
The new US administration, whoever it may be, will have to impose higher taxes and cut government spending.
The US stock market is booming, the dollar is rising in the currency markets, the US economy is rolling along at close to 2,5% real GDP growth, and unemployment is no higher than 4,1%. It seems that the US economy is achieving what has been called a 'soft landing', that is, an exit from the 2020 pandemic crisis without a recession. In fact, there seems to be no landing at all. Some are even thinking of a rejuvenation: the US economy is getting younger and better.
If that were the case, then why is the current Democratic presidential candidate, Kamala Harris, only tied in the polls with former Republican President Donald Trump? In fact, the betting world is predicting that Trump will win this election. How can this be happening when the US economy is doing so well?
It seems that a sufficient proportion of the electorate is not so convinced that they live in a better and more prosperous time. In the latest WSJ poll, 62% of respondents rated the economy as “not so good” or “bad”; this explains the lack of any political dividend produced by President Biden and to be obtained by Harris.
I would argue that the reason for this is twofold. First, US real GDP may be growing and financial asset prices are rising, but the story looks different for the average American household, which has no financial assets to speculate on. Instead, while wealthy investors are growing their wealth, under the Trump and Biden administrations, Americans have experienced a horrendous pandemic followed by the biggest drop in living standards since the 1930s, driven by a very sharp rise in the prices of consumer goods and services.
Average wage increases over the past six months have failed to keep up with the pace seen before the pandemic. And officially, prices are still about 20% higher than they were before the pandemic. In any case, many items not covered by the official inflation index (insurance, mortgage rates, etc.) are skyrocketing. So after taxes and inflation are accounted for, average incomes are roughly the same as they were when Biden took office.
It’s no wonder that a recent poll found that 56 percent of Americans thought the U.S. was in a recession and 72 percent thought inflation was rising. The world may be great for stock market investors, high-tech social media companies, the “magnificent seven” and billionaires, but it’s not so great for many Americans.
This disconnect between the optimistic views of “boomers,” that is, mainstream economists, and the “subjective” perceptions of most Americans has been called the “vibecession.” American consumers’ perception of the state of the economy is far below what it was when Biden took office.
Americans are well aware of the costs that official indices and mainstream economists ignore. Mortgage rates have reached their highest level in 20 years, and home prices have soared to record levels. Auto and health insurance premiums have soared.
Indeed, income and wealth inequality in the U.S., among the highest in the world, is only getting worse. The richest 1% of Americans receive 21% of all personal income, more than double the share of the poorest 50%! And the richest 1% of Americans own 35% of all personal wealth, while the bottom 10% of Americans own 71%; yet the bottom 50% own only 1%!
In fact, when you look more closely at the much-vaunted real GDP numbers, you can see why there is little benefit to most Americans. The GDP growth rate is driven by health care; the increase in GDP accounts for the rising cost of health insurance, but it does not account for better health care. And that cost has skyrocketed in the last three years. And then there are growing inventories, which mean unsold goods, in other words, production without sales. And then there is increased government spending, mainly on weapons manufacturing, which helps GDP growth but does not make people better off.
If you look at economic activity in the US manufacturing sector, based on the so-called purchasing managers survey, the index shows that US manufacturing has been contracting for four straight months ahead of the November election.
The government and mainstream media proclaim the low unemployment rate in the United States. But much of the net increase in employment has been in part-time jobs or in government services, both federal and state. Full-time employment in important, higher-paying, career-oriented industries is not growing. If a worker has to take on a second job to maintain his or her standard of living, he or she is unlikely to be optimistic about the economy’s future. In fact, second jobs have increased significantly.
And the job market is starting to get worse. Monthly net job gains have been trending downward; the latest figure for October showed only 12 new jobs added, as it was hit in part by hurricanes and the Boeing strike.
Both job openings and quit rates have fallen to levels typically seen in recessions. Companies are hesitant to hire full-time workers, and employees are reluctant to quit due to concerns about job security and a growing shortage of available opportunities.
Mainstream economists make much of the undoubtedly better performance of the US economy compared to Europe and Japan, and compared to the rest of the major G7 capitalist economies as a whole. But an average real GDP growth rate of 2,5% is hardly a success compared to the 1960s, or even the 1990s, or before the Great Recession of 2008, or before the pandemic crisis of 2020.
Major economies remain limping along in the current phase of long depression. For after each recession or contraction (2008-9 and 2020), GDP has followed a lower real growth path—that is, the previously observed trend has not been restored. The trend growth rate before the global financial crash and the Great Recession has not been recovered; in other words, the growth trajectory has fallen further after the 2020 pandemic slump. Canada is still 9% below trend; the eurozone is 15% below; the UK is 17% below; and even the US is still 9% below.
Furthermore, much of the U.S.’s outperformance in economic growth is the result of a sharp increase in net immigration, twice as fast as in the eurozone and three times as fast as in Japan. According to the Congressional Budget Office, the U.S. labor force will have grown by 5,2 million people by 2033, largely due to net immigration. Thus, the economy is expected to grow by $7 trillion more over the next decade than it would have without a new influx of immigrants.
It is therefore a great irony that the second reason Harris’s campaign is not far ahead of Trump is the issue of immigration. It seems that many Americans consider curbing immigration to be a fundamental political issue—that is, they blame low real income growth and low-paying jobs on “excess” immigrants. But this is not the case; the opposite is true. In fact, if immigration growth slows or if a new administration introduces severe restrictions or even bans on immigration, US economic growth and living standards will decline.
The only way the U.S. economy could sustain even 2,5 percent annual real GDP growth for the rest of this decade would be if the productivity of the American workforce increased very sharply. But over the decades, U.S. productivity growth has slowed. In the 1990s, productivity growth averaged 2 percent per year, and even faster, at 2,6 percent per year, during the dot-com credit boom of the 2000s. But during the long depression years of the 2010s, the average rate fell to an all-time low of 1,4 percent per year. From the Great Recession of 2008 through 2023, productivity has grown by only 1,7 percent per year. If the size of the employed labor force were to stop growing because immigration was curtailed, real GDP growth would fall to less than 2 percent per year.
Most expect that the massive government subsidies that big tech companies are receiving will increase investment in productivity-boosting projects. In particular, massive spending on artificial intelligence (AI) could ultimately provide a sustained boost to productivity growth. But that outlook remains uncertain and uncertain—at least given the pace at which these new technologies are being introduced across the U.S. economy.
So far, productivity growth has occurred mainly in the climate- and environmentally damaging fossil fuel industry, with little sign of spillover to other sectors. Since 2010, US oil and gas production has nearly doubled, yet employment in the sectors that depend on it has declined. So productivity gains in the sector have been achieved through a decline in employment.
There is a serious risk that a massive investment bubble is forming, financed by rising debt and government subsidies. The whole thing could come crashing down if returns on capital for the US corporate AI and high-tech sector fail to materialise. The reality is that, aside from the profit boom of the high-tech social media giants, the average profitability of the productive sectors of US capitalism is at an all-time low.
Yes, profit margins and profit mass are very high in the Magnificent Seven; however, overall profit growth in the US non-financial corporate sector has slowed to a near standstill. Now, it must be remembered that it is now well established that profits lead to investment and then to employment in a capitalist economy. When profits rise, investment, and thus employment, follows with a lag. If investment growth slows, the expected productivity growth will not materialize.
Furthermore, overall profit data is biased in two ways. First, profits are heavily concentrated in mega-corporations, while small and medium-sized businesses are struggling under the burden of high interest rates on their loans. About 42% of smaller U.S. companies are unprofitable, the highest number since the 2020 pandemic. At this critical time, 53% of these companies were losing money.
Second, much of the increase in profits is fictitious profit (to use Marx’s term for profits made from buying and selling financial assets that supposedly represent real assets and corporate profits). Using a method discovered by Jos Watterton and Murray Smith, two Canadian Marxist economists have estimated that fictitious profits now account for about half of the total profits made in the financial sector. If they were to disappear in a financial collapse, corporate America would be badly hurt.
And that brings us to the issue of rising debt, both in the U.S. corporate sector and in the public sector. If the AI-related bubble were to burst, many companies would face a debt crisis. More U.S. companies have already defaulted on their debt in 2024 than at any start of the year since the global financial crisis, as inflationary pressures and high interest rates continue to weigh on riskier corporate borrowers, according to S&P Global Ratings.
But we must not forget about “zombie” companies, that is, those that are no longer able to cover their debt service costs with profits and therefore cannot invest or expand, but only continue to operate like the living dead. They have multiplied and are surviving now because they take out more loans to pay off their previous loans — so they are vulnerable to high lending rates.
If corporate defaults increase, this will put renewed pressure on creditors, namely banks. There was already a banking crisis last March that led to several small banks failing and the rest being bailed out with more than $100 billion in emergency financing from government regulators. It is worth noting the hidden danger of credit held by so-called “shadow banks,” non-bank institutions that lent large amounts of money for speculative financial investments.
And it’s not just the corporate sector that’s under pressure to service its debt. Throughout the campaign for the US presidency in recent months, there’s one issue that both candidates, Kamala Harris and Donald Trump, have ignored. It’s the level of public debt. But this issue is important.
The U.S. government has spent $659 billion so far this year paying interest on its debt, as Federal Reserve rate hikes have dramatically increased the federal government’s cost of borrowing. Public sector debt, currently estimated at $35 trillion, or about 100 percent of GDP, has only one way to go: up. The debt burden is expected to climb even higher. It could potentially reach $50 trillion over the next 10 years, according to a projection by the U.S. Congressional Budget Office (CBO).
The CBO reports that federal debt held by the public (i.e., net debt) has averaged 48,3 percent of GDP over the past half-century. But the agency projects that next year, 2025, net debt will be greater than annual economic output for the first time since the U.S. military buildup in World War II, and will rise to 122,4 percent by 2034.
But does this increase in public debt have consequences? The suggestion that the US government will eventually need to stop running budget deficits and curb the growth of debt has been strongly rejected by exponents of Modern Monetary Theory. Proponents of MMT argue that governments can and should run permanent budget deficits until full employment is achieved. 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, that everyone must use. So the Federal Reserve can simply “print” dollars to finance the deficits as required by the Treasury. Full employment and growth will follow.
There has been much discussion about the flaws in the MMT arguments, but the main concern here is that government spending may not influence the investment needed to significantly increase employment. This is because the government does not make the decisions about investment and employment, since these are in the hands of the capitalist sector. Most investment and employment remain under the control of capitalist firms, not the state. And, as I argued above, this means that investment depends on the expected profitability of capital.
Let me repeat the words of Michael Pettis, an orthodox Keynesian economist: “The bottom line is this: If the government can spend additional funds in a way that makes GDP grow faster than the debt, politicians need not worry about runaway inflation or debt accumulation. But if that money is not used productively, the opposite is true.” This is because “creating or borrowing money does not increase a country’s wealth unless it results directly or indirectly in an increase in productive investment… If American businesses are reluctant to invest not because the cost of capital is high but because expected profitability is low, they are unlikely to respond… by investing more.
Furthermore, the U.S. government is borrowing primarily to finance current consumption, not to invest. This simply causes the Federal Reserve to “print” the money needed to cover planned government spending. But this process tends to produce a sharp depreciation of the dollar and an increase in inflation.
Rising debt increases the demand from bond buyers for higher interest rates to insure against default. For the U.S., this means that every one percentage point increase in the debt-to-GDP ratio raises long-term real interest rates by one to six percentage points. The more debt grows, the more the government has to pay out in interest to service that debt—leaving less money for the U.S. government to spend on other priorities, such as Social Security and other crucial parts of the social safety net. Interest costs have nearly doubled in the past three years, from $345 billion in 2020 to $659 billion in 2023. Interest is now the fourth-largest government program, behind only Social Security, Medicare, and defense. As a whole, net interest costs have risen 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 defense budget by 2027. Since then, interest rates have risen much more than the CBO had projected. If interest rates remain about 1 percent above previous projections, interest on the public debt would cost more than $13 trillion over the next decade, exceed the defense budget as early as next year, 2025, and become the government’s second-largest program, surpassing Medicare, by 2026.
The economic power of the United States gives it substantial room to maneuver. The dollar’s role as the international reserve currency means that demand for U.S. debt is always present, and AI-driven productivity growth could indeed help ease its debt problems. But the size of its public sector debt cannot be ignored.
The new administration, whatever it may be, will have to impose higher taxes and cut government spending. If this does not happen, the “vigilante capitalists” will reduce their bond purchases and force the new president to implement severe fiscal austerity anyway. As the IMF’s chief economist Pierre-Olivier Gourinchas said shortly before this election: “Something will have to give.” Biden’s economy will be consigned to history, as will President Joe Biden himself.
*Michael Robertsis an economist. Author, among other books, of The great recession: a marxist view (Lulu Press) [https://amzn.to/3ZUjFFj]
Translation: Eleutério FS Prado.
Originally published on blog The Next Recession.
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