All economic downturns eventually bottom out, the economy stabilizes at a new low level and a recovery begins. The question is whether any upturn can be sustained for more than a few months as unemployment continues to rise and massive personal, company and government debts constrict spending.
The capitalist class hope for a strong recovery. The stock market rally of the past several months is based on such hopes. But all predictions for the advanced capitalist economies suggest growth of only 0.5 to 1 percent in the last six months of 2009 and 1 to 2 percent in 2010. In the past severe downturns have been followed by strong growth, for example 8.5 percent a year in the USA from 1933 to 1936 after the sharp contraction of 1929 to 1932.
Lessons from previous recessions
Studying past recessions can illustrate possible developments in the period ahead. The recession of 1973–75 was a U-shaped recession. Such a recession lasts several quarters and it takes some years for the economy to return to strong growth. Rather than emerging from a U shaped recession however it is very possible that we will see a W-shaped recession. Such a “double-dip” recession was seen in a number of countries in the early 1980s. In the USA, for example, the economy was in recession from January 1980 to July 1980, shrinking at an 8 percent annual rate. It then grew at an 8.4 percent annual rate in the first three months of 1981 but as interest rates were raised to counteract inflation dipped back into recession from July 1981 to November 1982.
And it is also possible that we will see a L-shaped recession. An example of an L-shaped recession occurred in Japan following the bursting of an asset price bubble in 1990. The economy suffered from deflation and experienced years of recession or sluggish growth and has never returned to the high growth rates experienced from 1950 to 1990. The current world recession followed a similar asset price bubble and there are many aspects of the crisis that suggest a L shaped recession. World GDP has fallen between 4 and 6 percent, industrial production in developed economies has fallen by between 15 and 34 percent and world trade has contracted by more than 20 percent. As in Japan in the 1990’s any weak economic growth we are now seeing is not due to free market self-correction, but to huge government spending, largely aimed at bailing out the banks. The US stimulus for example amounts to a figure of $1.84 trillion of deficit spending this year (13 percent of GDP, a figure only exceeded during the world wars).
Underlying problems not solved
None of the underlying problems in the world economy have been solved however. Housing is still in crisis. A new wave of repossessions as millions lose their jobs will drive down house prices and drive up bank losses. The International Monetary Fund estimates that the international banking system still stands to lose $4 trillion ($2.2 trillion in the United States, $1 trillion in Europe, and $800 billion for the rest of the world).
The world crisis is a crisis of overproduction. In other words there are too many goods chasing too little money in the hands of consumers. World car factories are producing 20 to 30 million cars a year more than cannot be sold. As a result, capital investment is dropping fast (by 40 percent in the first quarter of this year in the USA). Industry is functioning at only 60-80 percent of capacity around the globe, its lowest point since the 1930s. The result will be further factory closures and huge job losses in industry after industry.
Working class under attack
Over the years of the boom working-class consumption was financed by the growth of mortgage and other personal debt. That option has ended. For years to come working class people will be paying off debt at the same time as real wages contract and the public services they receive are slashed.
For now capitalism has turned to Keynesian solutions-cheap credit through low interest rates and deficit spending by governments to make up for capital’s lack of investment and to create demand from consumers. The results have been poor due to the cost of the bailout of the banks, rising unemployment and the debt hangover. Neither variant of capitalist economic policy, the free-market neoliberalism which has dominated the last thirty years or Keynesianism, can solve the crisis. Increasingly workers will see this and increasingly they will look towards the ideas of Marxism, both to explain the crisis of the system and to point towards an alternative.
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This article is part of the series collected by the Socialist Party, the CWI in Ireland, on aspects of Labour History.