Immanuel Wallerstein

The Economic Recovery That Isn’t Happening

Most    politicians and pundits have a vested interest in promising better times ahead, provided their policy advice is followed. The current worldwide economic difficulties have provided no exception to this behavior. Whether the discussion focuses on unemployment in the United States or the escalating costs of state borrowing in Europe or the suddenly declining rates of growth in China, India, and Brazil, expressions of middle-run optimism remain the order of the day. 

But what if it isn’t justified?  Every once in a while, a bit of honesty breaks through. On Aug. 7, Andrew Ross Sorkin wrote an article in The New York Times in which he offered “a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. An entire generation of investors hasn’t made a buck.” On Aug. 10, James Mackintosh similarly wrote in the Financial Times: “Economists are starting to accept the Great Recession has permanently damaged growth. …Investors are more pessimistic.” And to top it off, the New York Times ran a story on Aug. 14 on the rising cost of faster trades in which, deep down in the article, one could read: “[Investors] have also been put off by a market that has delivered almost no returns over the last decade because of asset bubbles and instability in the global economy.”

Amidst all the observations that incredible amounts of money are being made by a few, how can it be that the stock market is a losing proposition? For a long time, the basic wisdom concerning investments was that, over the long run, the return from stocks, adjusted for inflation, was high, and specifically higher than bonds. This was supposed to be the reward for taking the risks derived from the greater short-run or even middle-run volatility of stocks. Calculations vary but generally speaking return from stocks over the past century have been much higher than from bonds, presuming of course that one held onto the stocks.

What is less noticed is that the same century-long level of profits from stocks has been more or less twice the increase in GDP – something that has led a few analysts to call it a Ponzi game. It turns out that much of that wonderful return from stocks has occurred in the period since the early 1970s – the era of what has been variously called globalization, neoliberalism, and/or financialization.

But what has been in fact happening during this period? We should start by noting that the post-1970s period came after the period of the biggest (by far) expansion in production, productivity, and global surplus-value in the history of the capitalist world-economy. This is why the French call this period the “trente glorieuses” – the thirty (1943-1973) glorious years. In my analytic language, this was a Kondratieff A-phase, and those holding stocks during this period did very well indeed. So did producers in general, wage workers, and governments in terms of revenue. It seemed to give a mightily renewed fillip to capitalism as a world-system, coming after the Great Depression and the vastly destructive Second World War.

Alas, such good times did not go on, could not go on, forever. For one thing, the expansion of the world-economy was founded on some quasi-monopolies in so-called leading industries which lasted as long as they lasted, until they were undermined by competitors who finally made an entry into the world market. More competition reduced prices (its virtue) – but also profitability (its vice). The world-economy entered into a long stagnation over the next thirty to forty inglorious years (1970s-2012+). This period was marked by growing indebtedness (of more or less everyone), growing unemployment worldwide, and growing retreat for many, perhaps most, investors from the stock market to the safety of the bond markets, most notably to U.S. Treasury Bonds.

U.S. Treasury Bonds have been safe or safer of course, but not very profitable, except for an ever smaller group of banks and hedge funds that manipulated worldwide financial operations – without producing any value. So this brought us to where we are today: a world that is incredibly polarized, with real wages significantly down from their 1970 heights (but still above their 1940 low points) and government income significantly down as well. One debt “crisis” after another impoverished one segment of the world-system after another. And as a result what we call effective demand has been drying up worldwide, which is what Sorkin is referring to when he says that the market is no longer attractive as a source of profits with which to accumulate capital.

Well, you might say, at least there have been the so-called newly-emerging countries, which have been doing better as the United States and western Europe seemed to be getting into greater and greater trouble. The list is long and consecutive. It includes first Japan, then South Korea and Taiwan, then southern Europe and Ireland, then the BRICs (especially China, India, and Brazil), then Turkey and Indonesia, and now (some claim) various African states. The problem is that most of these turn out to have done well only temporarily, and then in their turn began to fall into “trouble.”

The core of the dilemma is one of the fundamental contradictions of the system. What maximizes income for the most efficient players in the short run (increased profit margins) squeezes out buyers in the longer run. As more and more people and zones are fully engaged in the world-economy, there is less and less margin for “adjustments” or “renewal” and more and more impossible choices faced by investors, consumers, and governments.

Remember that the rate of return over the past century has been twice that of the increase in the GDP. Can this be replicated a second time? It is hard to imagine – not only for me but so it seems for most potential investors in the market. This creates the constraint we see exhibited every day in the United States, in Europe, and soon in the “emerging economies.” The level of debt is far too high to sustain. 

So on the one hand there is a powerful political call for “austerity.” But austerity means in effect cutting back on existing benefits (such as pensions, level of health care, expenditures on education) and cutting back as well on the role of governments in guaranteeing these benefits. And if most people have less, they obviously spend less, and people who sell find fewer people who buy – that is, lower effective demand. So production is still less profitable (returns from stocks) and governments are still poorer.

It is a vicious circle, and there is no easy or acceptable way out. That may indeed mean that there is no way out. This is something some of us have been calling the structural crisis of the capitalist world-economy. It leads to chaotic (and fairly wild) fluctuations, as the system bifurcates, and we find ourselves in a very long fierce struggle about what kind of system should succeed the one we’re in.

The politicians and the pundits prefer not to face up to this reality and the choices they impose. Even a realist like Mr. Sorkin ends his analysis expressing the hope that the economy will get “a shot in the arm” and that the public will have “faith in the long term.” If you think that will be enough, I’m willing to sell you the Brooklyn Bridge.