Economic Turmoil from USA to Brazil
— an interview with Bob Brenner
[Robert Brenner is an editor of Against the Current and author of the recent book The Boom and the Bubble (Verso). This interview appeared in Folha de Sao Paolo (Brazil), 31 August 2003.]
Folha de Sao Paolo: To what extent has the stimulus program of the Federal Reserve and the Bush administration brought economic revival?
Robert Brenner: Since the start of the cyclical downturn at the end of 2000, U.S. authorities have unleashed an unprecedented economic stimulus.
The Fed has lowered interest rates by 5.5% to near postwar lows. The administration has slashed taxes and ramped up military spending, with the result that the general government budget balance has gone from a surplus of 1.4% to a deficit of more than 3%. The dollar has been helped down by the Treasury.
Nevertheless, up until now, this record boost has brought little dynamism. Investment, the key to economic health, continues to decay, with spending on new plant and equipment in the first half of 2003 languishing 12% below its level of 2000.
The growth of Gross Domestic Product stumbled along at about one percent in the same period, leaving aside the enormous expenditures on Iraq. Joblessness is still rising rapidly, with the actual rate of unemployment close to eight per cent (taking into account discouraged workers no longer seeking a job).
Government intervention has had disappointing results because it has been unable to speak to the economy's fundamental problems -- massive over-capacity leading to sharply reduced profitability in manufacturing, compounded by record corporate indebtedness.
Because the manufacturing sector, as well as non-manufacturing high technology industries like telecommunications, already have too much means of production and need to mend their balance sheets, they have had little incentive to invest in response to lower interest rates.
Consumer spending, virtually alone, has driven the economy. But the rise of consumer expenditures has depended upon a virtually unprecedented step-up of household borrowing in the face of recession, mostly against home equity. The vertiginous increase in debt has itself been made possible by the Fed's sharply reduced interest rates, combined with fast rising housing prices.
Recently, the sharp increase in military spending to fund the war on Iraq has given a further big fillip to demand. But how long it can continue is an open question. By contrast, the government's gigantic tax cuts, mostly in the form of reductions of the levy on dividends, are failing to provide much stimulus because they are going almost entirely to the very rich, who will put them into financial assets or savings accounts.
FdSP: Is the recovery finally taking place now, and, if so, is it sustainable?
RB: It is generally believed by Wall Street economists that the U.S. economy is finally starting to pick up steam. It must be said that, so far, there is little direct evidence for this. Nevertheless, it may well be that the sheer size of the stimulus is finally bringing about an acceleration.
But even if a significant economic speedup is now materializing, its sustainability is very much open to question, because it will likely depend on the same debt-dependent consumption and expanding financial bubbles that have kept the U.S. economy turning over since the start of the cyclical downturn at the end of 2000.
Thanks especially to the Fed's further interest rate reductions in November 2002 and June 2003, share prices have been rising uninterruptedly for the past six months -- even as bond prices rose and interest rates fell in the same period, as an expression of what the bond market believed to be the economy's underlying weakness.
A New Mini-bubble?
The rising stock market has been a major factor in improving the business climate, as the Fed undoubtedly hoped. But equity prices have risen far faster than profits. In June the price-earnings ratio of the S&P 500 reached 33:1, compared to an historic average of about 14:1.
By late July, Thomson Financial was reporting that, for the equity market as a whole, the ratio of sales to purchases by corporate insiders was running at $11.32:1, while that for NASDAQ was a shocking $1177:1. With tech stocks once again ascending into the firmament, it's already beginning to feel a bit like the late 1990s. If a stock market correction takes place, it could very well derail the economy.
While stock market capitalization fell by some $6 trillion between 2000 and 2002, the value of real estate, buoyed by the reduction in the cost of borrowing and the transfer of investment funds from equities to housing, rose by $3 trillion.
This created a “wealth effect” quite analogous to that brought about by runaway share prices between 1995 and 2000. In 2002, households were able to “extract” an astonishing $700 billion from their houses, and this was indispensable in keeping consumption rising.
But it seems highly unlikely that housing prices can continue to increase as rapidly as they have over the past half decade -- at triple the pace of consumer prices -- or that mortgage rates can stay as low as they have-near post-war lows. Yet if consumers are unable to go on treating their houses like ATMs, the economy will lose a lot of its momentum.
Because, thanks to the massive government stimulus, U.S. consumers have been able to sustain their consumption through the cyclical downturn, while the rest of the world has had to cut back, the ratio of U.S. imports to exports has risen to unheard of levels, and trade and current account deficits have set one record after another.
As during the later 1990s, this has been indispensable in enabling the rest of the world economy to keep turning over, offering overseas manufacturers increased demand for their goods and, with the dollar remaining as high as it has, an increasing share of the U.S. market.
Until fairly recently, the rest of the world was more than willing to fund the U.S. current account deficit that was sustaining their economies. But as the United States entered recession and the stock market plummeted, overseas investors virtually stopped buying U.S. equities or making direct investments, setting off a major fall in the value of the dollar, especially against the euro.
Were the dollar's decline to become severe, it would in all likelihood force down U.S. asset prices, drive up U.S. interest rates and reduce the size of the U.S. market, threatening growth both in the United States and on a global scale.
So far, East Asian governments have saved the day, keeping the U.S. currency aloft by making huge purchases of dollars and dollar-denominated U.S. assets in order to repress the value of their own currencies, so as to enable their own domestic manufacturers to continue to increase their exports.
In the second quarter of 2003, according to the Financial Times, the Japanese and Chinese governments were obliged to cover no less than 45% of the U.S. current account deficit. By closing the rising financing gap that would otherwise have resulted, East Asian governments have enabled the Fed and the administration to pursue hyper-expansionary policies for the U.S. and the world economy.
In their absence, the government's program would very likely have already been cut short by rising borrowing costs and/or a downward spiral of currency and asset prices, inviting a new recession across the globe.
FdSP: Will the United States be able to drive a new wave of global economic growth, or will the U.S. recovery just exacerbate international imbalances and asymmetries?
RB: Paradoxically, in order to grow, the world economy requires the worsening of international imbalances -- particularly the increase of the U.S. current account deficit and of East Asian current account surpluses.
This is, in large part, the result of a quarter century of cutbacks in the growth of wages and of government spending, along with the widespread adoption of neoliberal policies. The combination of economic austerity and the opening of commodity and capital markets has slowed the expansion of domestic markets almost everywhere. It has thereby rendered most of the world dependent upon exports and thus on the continued rapid growth of U.S. imports and continued ascent of the U.S. current account deficit.
The world economy faces a double bind. In order to eliminate its imbalances, the dollar must fall. But were the dollar allowed to decline substantially, the United States could not maintain its role as motor for the world economy. It is for this reason that East Asian governments have moved to buttress the dollar, and U.S. economic authorities have not objected.
But if a new cyclical upturn, led by the United States, continues on this self-contradictory path, existing imbalances will only get worse. The money that is flooding onto U.S. asset markets to cover the exploding current account deficit and hold up the dollar will, directly or indirectly, fuel U.S. equity price, real estate and bond bubbles.
At the same time, in combination with the U.S. government's enormous subsidy to demand, it will force up U.S. relative prices, paving the way for the further growth of imports at the expense of U.S. industry and the worsening of over-capacity in manufacturing on a global scale. This is, of course, pretty much the same self-undermining process that has plagued the world economy and its U.S. component throughout the bubble-driven boom of the later 1990s and the cyclical downturn that followed. The inexorable rise of U.S. obligations to the rest of the world enables the rest of the world to grow through exports while undermining U.S. productive power and, in that way, the capacity of the United States to honor those obligations.
It seems as if the dollar must eventually fall and interest rates rise, putting an end to the expansion.
FdSP: What are the prospects for a recovery of economic growth by emergent economies/countries?
RB: The recovery of the emergent economies – reliant as it will have to be on the growth of exports -- will have as its necessary condition the expansion of the U.S. market, and thus the still uncertain return to health of the U.S. economy. Unfortunately, however, recovery in the United States and advanced capitalist countries can in no way guarantee recovery in the developing world.
Thanks to the opening up of their capital markets, and neo-liberalization more generally, economies like Brazil must rely for their growth upon the flow of finance from the core. Nevertheless, they have only limited ability to attract capital. This is because it is the obviously the economies of the core that overwhelmingly determine the demand for and supply of capital on a world scale, and thus its availability and cost to everyone else.
Today the unusually low interest rates that prevail in the United States, as a consequence of the cyclical downturn and the Fed's stimulus policy, for the moment are driving investors in the core to take on increased risk in order to secure higher yields. This is facilitating a stepped up flow of capital to the periphery, stimulating the sprouts of an economic turnaround there, just as in the first “emerging markets” craze of the early 1990s.
But it is unlikely that this will continue. If, as is still possible, the U.S. expansion falters, there will be renewed recession throughout the advanced capitalist world. As a consequence, even worse downturns could be expected in the developing world.
If, on the other hand, the expansion gathers momentum, U.S. equities will likely skyrocket and the cost of borrowing, long artificially low, is likely to “over-correct” and leap higher. (It may be doing so already). Nor can any respite be expected from the succession of international financial crises that have marked the neoliberal era, disrupting development in the emerging economies with sickening regularity.
Such developments would wreak havoc in neo-liberalized developing countries, just as they did in the second half the 1990s, requiring even higher interest rates, lower wages, deeper spending cuts, greater budget surpluses, and the further sell-off of national assets at bargain basement prices in order to insure the continued inflow of capital.
Neoliberal Road to Ruin
FdSP: What are the prospects for the Brazilian government's macroeconomic policy -- considering the interest rate (24% per year), the fiscal surplus (4.2% from GDP), and floating exchange rate?
RB: These hyper-austere macro-economic policies of the Brazilian government obviously represent a continuation of F.H. Cardoso's disastrous neoliberal policies of the 1990s. Ironically, they respond to Cardoso's legacy of debt and vulnerability by further deepening his program. But the devastating contradiction of this approach could hardly be clearer.
In order to attract the huge flows, not just of foreign direct investment but of short-term capital that the neoliberal road to growth requires, Brazil must adopt economic policies favored by the international financial markets and the IMF -- fiscal surpluses to cover government interest payments, super-high interest rates to suppress inflation.
But these policies self-evidently run counter to the requirements of economic growth. They suppress private expenditures on plant and equipment and hold down government spending on infrastructure, research and development, social services, and the like. Since the inexorable result is to keep down employment and wages, the domestic market can stagnate at best.
To the extent that capital actually flows into Brazil as a result of these policies, the floating exchange rate tends to rise, undercutting the potential to grow by way of exports, but enhancing the value of foreign investors' Brazilian holdings.
It is hardly surprising that such policies, over the course of the 1990s, brought little amelioration of living standards, declining investment as a percentage of GDP, a collapse of trade and current account balances, and the astronomical increase of public and international debt.
Nor is it shocking that, in Brazil today, capital accumulation is virtually non-existent; that unemployment, running at 20% in the industrial districts, is higher than under Cardoso; that real wages keep falling; and that the industrial sector stagnates. Under such conditions, as before, foreign capital enters Brazil only in order to exploit its high returns on lending or to buy up privatized companies on the cheap, not to make productive investments.
In its March 2003 report on neo-liberal market opening, co-authored by its chief economist Kenneth Rogoff, the IMF itself concluded that “there is no proof in the data that financial globalization has benefitted growth, [but] there is evidence that some countries may have experienced greater consumption volatility as a result.”
This is, of course, a huge understatement, in view of the succession of disasters that have overtaken virtually every developing economy that has followed the neoliberal road over the last decade or so<197>Argentina, Korea, Turkey, Venezuela, Indonesia, Thailand, to name just a few. It is, in any case, hardly a revelation to Brazilians who suffered crisis after crisis throughout the 1990s with little to show for it except greater inequality, increasing dependence on foreign capital, enhanced power and wealth for the domestic financial sector, and a mountain of foreign debt twice as high as that when Cardoso assumed the presidency.
How any Brazilian government, let alone one purporting to represent the majority of the population, can persist with such suicidal macro-economics is not easy to fathom.
FdSP: What constrains a left-wing government, such as Lula's administration, to adopt macroeconomic policies more conservative than those of our former president. Are there alternatives?
RB: What evidently constrains Lula's government to ever more conservative, ever more austere, macro-policy is its commitment to open capital markets and to paying off Brazil's debts on the terms imposed by the IMF. The worry is that, if Brazil disavows these commitments, the punishment that international investors will mete out -- shutting off the flow of capital to the country -- will
render life in Brazil even more difficult than it is now.
Economists of all persuasions understand that the only viable policy under such conditions is to stoke aggregate demand by increasing public deficits and lowering interest rates, as the far-right government of the United States is doing today. But in Brazil one has the sorry spectacle of a government responding to deep recession with policies designed to further deflate the economy -- this so that the country can earn foreign exchange and run a government surplus, in order to pay its overwhelming foreign debts.
There is an old expression to the effect that, “in the debt-credit relationship, if the debt is small the debtor is in trouble, but if the debt is very large, it is the creditor who is in trouble.” The Brazilian government is in a position to re-negotiate the terms of its debt with the IMF. Indeed, if Brazil were obliged to default, its relations with international capital would probably become more healthy.
In 1998, about the time that Brazil began accepting the ever more onerous conditions imposed by the IMF, Russia defaulted. Since that since that time, it has enjoyed an ever improving economy, with a huge influx of foreign investment. In view of its plentiful endowment of natural resources, its skilled labor force, and its modern institutions, Brazil should be in a better position than Russia to attract foreign investors, for whom, in the last analysis, profits not politics is what's essential.
FdSP: What about capital controls?
RB: Reintroducing capital controls is a minimal condition for revived growth for Brazil. It is not only that, without such controls, capital will exit at the slightest sign of financial instability in Brazil or the appearance of higher yielding assets abroad.
Even worse, money will flee at any sign of progressive political developments, as it did in the first three months of Lula's presidency, when an astounding six billion dollars was withdrawn from the country. Without preventing capital flight, the current administration will remain entirely at the mercy of capitalists and the rich.
Despite increasing pressure from the United States and international capital, China, Taiwan, and Singapore all maintained capital controls through the 1990s and into the present. In stark contrast to neoliberalized Korea, not to mention Indonesia and Thailand, they all came through the Asian financial crisis unscathed.
Equally to the point, they have been required by the international capital markets to pay no discernable price for persisting with such controls, and have continued to attract external finance in accord with the ample opportunities that they offer for profitable investment.
Malaysia has shown, moreover, that it is possible to reintroduce capital controls in defiance of the IMF, thereby securing improved conditions for growth and stability but incurring no significant retribution from the international markets.
FdSP: How do you consider the election of President Lula?
RB: For perhaps a majority of those who voted for him, the point of electing Lula was to break with neoliberalism and begin to confront the huge injustices of Brazilian society. But Lula's government has embarked on a transition period aimed at preparing the ground for social reform, by adopting economic policies and carrying out institutional changes in accord with IMF recommendations, to the end of securing financial stability and winning the confidence of the international capital markets.
It may be wondered, however, if the implementation of these plans will not make social reforms more difficult. Will it not prevent the economic expansion that is necessary to provide the material base to pay for them? Will it not tip the balance of power against precisely those social forces who stand to benefit from them and who must be counted upon to fight for them?
The government has secured a primary budget surplus above 6% of GDP, a third higher than the IMF demanded. But the cost has been deep cuts in social spending. The government has achieved significantly reduced inflation. But this has been accomplished at the price of the elevation of interest rates to around 25% and the major rise in the exchange rate that has resulted from the influx of short-term capital.
It should be recalled that, time and again, President Cardoso accomplished the same sort of stabilization, in the wake of the succession of recessions that plagued his presidency. Yet such deflations can offer only the most limited and short term benefits to the economy, let alone the Brazilian people.
They attract only hot money and the foreign purchase of Brazilian assets. But they sacrifice the growth of investment, government, consumer and export demand. The hope is for financial stability. But this is, in reality, beyond the ability of the Brazilian authorities to fulfill, given the unfettered flow of capital that is guaranteed by both the national and most of the international economy.
The politico-institutional changes that Lula's government hopes to introduce appear to be even more self-defeating than his macro-economic policies. They seem destined to weaken politically the very constituencies of working people and the poor on which the government will have to rely, if it hopes to push through its social reforms against the inevitable opposition of capital, the privileged, and the mass media.
Granting increased autonomy for the central bank and privatizing government banks will endow the domestic financial sector with greater power, strengthening the long term foundations of neoliberalism.
The attack on pensions, supposedly aimed at eliminating inequality, has in fact reduced benefits, and in that way security, for public workers in general, leaving them more vulnerable. What is needed, by contrast, is to increase those benefits and extend them to broad sections of the labor force, so as to increase their economic and political clout.
The mooted “modernization” of trade unions must be for the purpose of increased “labor market flexibility.” But this can only reduce workers' ability to defend their conditions. Most generally, the slow growing economy that must result from ongoing austerity will make for high levels of unemployment, which cannot but render the working class more vulnerable and subject to attack on all fronts.
Lula's government is intent on holding down mass mobilization, so as not to frighten international capital. But unless such mobilization sharply increases, its hope for substantial social reforms will be rendered chimerical.
Brazil is notorious for one of the worst distributions of income and wealth anywhere in the world, buttressed by a notoriously unfair system of taxation, as well as a famously iniquitous landed structure. Yet the more equitable tax system, and the land reform, which are minimal preconditions for both meaningful economic development and real democracy in Brazil, are obviously unattainable except through heightened social conflict, and thus the enhanced political mobilization of the Brazilian people.
Lula and his government have offered little evidence that they are willing to encourage such struggle, or perhaps even countenance it. After so many years denouncing Fernando Henrique Cardoso for his capitulation to dependency and accommodation to the status quo, they surely have some explaining to do.
ATC 107, November-December 2003