By Michael Roberts
I am doing two posts before the US presidential election on Tuesday. The first is on the state of the US economy; and the second will be on the respective economic policies of the two main candidates, Democrat Kamala Harris and former Republican President Donald Trump.
The US stock market is booming, the dollar is riding high in currency markets, the US economy is rolling along at about 2.5% real GDP growth, 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. Indeed, there appears to be no landing at all. Some call it the Benjamin Button economy: the US economy is only getting younger and better.
So why is the candidate of the incumbent Democrat administration, Kamala Harris only neck and neck in the polls with the Republican former president Donald Trump? Indeed, the betting world reckons that Trump will win. How can this be the case if the US economy is going so well?
Electorate not convinced
It seems that a sufficient proportion of the electorate is not so convinced of a prosperous and better time for them. In the latest Wall Street Journal poll, 62% of respondents rated the economy as “not so good” or “poor,” which explains the lack of any political dividend for President Biden or Harris.
I would argue that the reason for this is two-fold. First, the US real GDP 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 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 not covered by the official inflation index (insurance, mortgage rates etc) rocketing. So after tax and inflation are 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.
Inequality is getting worse
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% of Americans 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. And then there is increased government spending, mainly for arms manufacturing, hardly a productive contribution.
US manufacturing has been contracting
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 has been contracting for four consecutive months leading up to the November 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 into 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.
Major economies remain in the ‘long depression’
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 compared to the 1960s, or even the 1990s or before the Great Recession of 2008, or before the pandemic slump of 2020.
The major economies remain in what I have called a Long Depression, namely where after each slump or contraction (2008-9 and 2020), there follows a lower trajectory of real GDP growth – i.e. 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 Eurozone is 15% below; the UK 17% below and even the US is still 9% below.
Moreover, much of the US 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 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 a new influx of immigrants.
So it is a great irony that the second reason why the Harris campaign is not 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 a new administration introduces severe curbs or even bans of immigration, US economic growth and living standards will suffer.
Over decades, US productivity growth has slowed
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 American labour force. But over the decades, US productivity growth has slowed. In the 1990s, average productivity 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 boost investment in productivity-boosting projects. In particular, the massive spending on AI 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 climate and 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.
Average profitability, outside of high-tech, is low
There is a serious risk that a huge investment bubble is building up, funded by increased debt and government subsidies, that 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 all-time lows.
Yes, the mass of profits is very high for the Magnificent Seven and profit margins are high, 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. 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 profits data are 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.
Rising debt in the public and corporate sector
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 don’t). 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.
And that brings us to the issue of rising debt, both in the US corporate sector and in the public sector. If there were a bursting of the bubble over AI, many companies would be faced with a debt crisis. Already, more US companies 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 S&P Global Ratings.
And don’t forget the ‘zombies’ 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.
Hidden danger of credit held by ‘shadow’ banks
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 bailed out by over $100bn of emergency funding by government regulators. I have already highlighted the hidden danger of credit held by so-called ‘shadow banks’, non-banking institutions that have lent large amounts for speculative financial investments.
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 is one issue that both candidates, Kamala Harris and Donald Trump, have ignored. It’s the level of the public debt. But this debt matters.
The US government has spent $659billion so far this year paying off the interest on its debt, as the Federal Reserve’s rate hikes dramatically raised the federal government’s cost of borrowing. Public sector debt, currently estimated at $35trn, or around 100% of GDP, has only one way to go: and that’s up. The debt load is set to soar higher – potentially reaching $50trn within the next 10 years, according to a projection from the US Congressional Budget Office (CBO).
Does rising public debt matter?
The CBO reports that federal debt held by the public (ie the ‘net debt’) averaged 48.3% of GDP for the last half century. But the CBO projects that by next year, 2025, net debt will be larger than annual economic output for the first time since the US military build-up in the second world war 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 discussed in detail the flaws in the MMT argument in other posts, but the key concern here is that government spending, however financed, may not achieve the necessary investment and employment increases. That’s 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.” That’s because “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.”
Greater debt means greater interest paid by government
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 other 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 program, behind only social security, medicare, and defense. Relative to the economy, net interest costs grew from 1.6 percent of GDP in 2020 to 2.5 percent in 2023.
Debt interest set to soar in coming years
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 far more than CBO projected. If interest rates remain about 1% point above previous projections, then interest on 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 second-largest government program, exceeding Medicare, 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 fade away with its namesake.
From the blog of Michael Roberts. The original, with charts and hyperlinks intact can be found here.
