Just How Sick Is Our Economy?

Ever since the dot-com bubble burst in a cascade of bankruptcies in 2001, there has been a running debate over the “new economy.” Was all the talk about information technology transforming industry and society real, or was it hype? Are we living through an economic revolution or simply another cycle on the old boom-bust roller coaster?

“The Boom and the Bubble” says the boom was more than hype but less than a lasting turn in the economy. In that respect, Robert Brenner offers a more scholarly analysis of the recent decade than most commentators who tend to overpraise or dismiss recent technological innovations. The merits of this latest ride notwithstanding, he concludes with the gloomy speculation that the United States is headed into another phase of the long economic downturn that he argues has held the world’s capitalist economies in its grip since 1973, and that “a U.S. recession will set off an international recession.” It is an unsettling prediction that may be premature.

If Brenner is right and the world is headed for serious recession, adequate returns on retirement savings may not be possible. That would mean living standards would not rise and aging Americans would have to postpone retirement. It would mean that poor countries would be stunted in development, and that the disorder of such developing regions as the Middle East would be exacerbated, not alleviated.

Yet Brenner, who completed his book before Sept. 11, was not able to factor into his analysis greater military spending by the United States, the recent shift to deficit spending, the re-entry of Russia to full participation in the global economy and other changes. It is nonetheless a prediction that demands our attention.

Brenner believes that the rising rate of productivity in the 1990s, which was at the center of the boom, was genuine, but no greater than the economy’s performance in a similar period of the great upturn, 1948 to 1973. (Productivity is the achievement of more output from the same or less investment of labor or capital.) The post-World War II era, he writes, saw a historic advance in productivity in the U.S. economy. However, that period was followed by a long downturn--from 1973 to roughly the mid-1990s--in profit and productivity in the United States and other capitalist economies.

Brenner writes that the long downturn era to which the United States is returning may be the permanent state of the world’s capitalist economies, saddled as they are with overcapacity to produce goods and lack of ability to produce profit and fresh funds for investment by the makers of those goods. He questions whether the vitality of the mid- to late-1990s--when profit and growth of real wages did better than they had done in the previous 20 years--”can be maintained over the medium to long term.”

It’s a good, if commonplace, question that has been asked before--during the great post-World War II upturn, during the downturn of 1958 and during the turbulent 1960s--and it runs against the predictions of those, including Federal Reserve Chairman Alan Greenspan, who have said repeatedly that, because of new technologies, industries are capable of increasing productivity more than they could historically.

But we won’t know who is right for some time, Greenspan with his optimism about technology or Brenner with his skepticism. Productivity figures may have risen in the first quarter of 2002 but the numbers are something of an illusion, attributed to employers reducing their work forces, lowering investment and wringing more output from those fewer workers. It is a scenario that fits nicely into Brenner’s thesis.

However, Brenner keeps a narrow focus on economic data, and “The Boom and the Bubble” seldom mentions issues of the changing world in the last 60 years that offer different and pertinent perspectives. In that way, the book shares the weaknesses of other economic analyses that have seen the world through a narrow prism. The 1990s produced hymns to progress, such as “The Long Boom” and “Dow 36,000,” as well as prophesies of doom, such as “The Crash of the Millennium.” The world is more complex than such books make it out to be, and so is the immense U.S. economy.

First, the great upturn starting in 1948 followed more than a decade of Depression and half a decade of world war. Investment in military technology during that war and in the military-industrial complex during the Cold War changed the world and the position of the United States.

Brenner almost never refers to military spending as the foundation for the U.S. economy, but surely it has been one. To take one example, defense research spending led in 1958 to the development of the integrated circuit, the more capable transistor that is at the heart of every machine used today. Such circuitry made possible smarter machines in factories, not only in the United States but around the world.

For example, the transformation of nations such as South Korea is responsible for the overproduction of industrial goods that Brenner believes has weakened U.S. economic prospects. But, in reality, the development of South Korea’s economy from one of subsistence farming to a main center of highly skilled industry has expanded the global economy, with opportunities for the United States to make markets in education, computer and telecommunications software, medical science, entertainment and other areas of modern life. Also, South Korea, which endured the first shooting war of the Cold War era, provides a footnote to contemporary history. It was the industrial advances of South Korea that convinced Soviet President Mikhail Gorbachev in the 1980s that the Soviet Union had to reform its planned economic system.

Second, the long downturn that began in the 1970s resulted from many complications flowing from the Vietnam War, which cost the U.S. economy a surplus of national wealth that had built up in the post-World War II era.

In the aftermath of Vietnam, business in the 1970s lacked capital for investment, inflation beset the economy and the pension investment funds that had grown to include the stock of most public companies were unable to make adequate returns. The pension funds’ need for higher returns on investment were then a major factor pushing corporations in the 1980s to “restructure” and earn higher profits. The investment bankers and financial capitalists that Brenner cites were the agents of economic changes, but not the causes of it.

Third, the 1990s followed the collapse of the Soviet Union and the communist economies in Russia and its neighboring countries. The U.S. defense budget declined, and technologies, such as the Internet and high-speed communications, initially developed for the military, came into use in the civilian economy. The result was a spread of cellular telephones, of satellite broadcasting and tracking of freight movements. Sensors developed for military use have led to important capabilities in monitoring of the heart and other vital organs.

Something else happened in the late 1990s boom that Brenner doesn’t factor into his argument: The U.S. economy grew comparatively larger than all others. In 1995, the domestic economy was about 60% larger than that of Japan. Today the U.S. economy is larger than the combined economies of Japan, Germany, France, Britain and Italy. Brenner sees this imbalance as unstable and a threat to continued prosperity. But it is unstable only if other countries do not develop and provide markets for U.S. output of technology and knowledge. And returns are not yet in on that question.

With a careful and statistic-filled examination of profit ratios and economic returns, Brenner has written something of a thriller with a to-be-continued ending. Which outcome will it be? Very likely a muddling-through amalgam of upturns followed by downturns, followed by.... That’s the cyclical pattern of the 50-odd years covered in “The Boom and the Bubble.” And there’s little doubt it will continue.