Richard Wolff

(University of Massachusetts, Amherst, USA)

The Fragility of US Capitalism in 2003

(Paper presented to the Socialist Scholars Conference, Cooper Union, New York, March 16, 2003, as part of AESA Panel: “Market Meltdowns: Assessing Collateral Damage” This is a second, revised draft (April 1, 2003). It is not for publication, citation, or any other use.)

The capitalist system in the US now faces the best yet also the worst of times. Wealth expanded dramatically in the 1990s, elevating a few million Americans into the ranks of the genuinely if modestly rich. Yet, that decade also dropped the great mass of Americans further below the rich minority. Wealth and income inequalities grew sharply. The new millennium finds the US economy in better shape than those of its potential rivals. Japan’s economy keeps failing to escape from over a decade’s depression. The European Community suffers stalled growth and persistent unemployment. Trying to manage its political unification, common currency, and absorption of Eastern Europe generated major and so far uncontrolled contradictions. China had the world’s fastest growth record for the last 20 years, but its domestic beneficiaries are relatively few. Most Chinese remain very poor. While less burdened than these other major economic blocs, the US is now entering its fourth year of economic decline. Rising unemployment; stagnant corporate profits; stock markets that keep falling far below their historic peaks; corporate and personal indebtedness at never-before-seen historic highs; a fast-rising federal budget deficit; falling consumer confidence; and a falling dollar signal serious economic trouble.
The dialectic of positive and negative just as starkly frames US capitalism’s global position. Its lobbyists and the mass media that it owns can still mobilize domestic majorities to fund a militarized super state even after the Cold War when no serious military threat remains. This state can mount aggressive and expensive (and profitable) military interventions celebrated as liberations bringing freedom and well-being to those it bombs. The bill for all this is paid by tax “reforms” favoring corporations and the rich plus cuts in social programs and entitlements for the masses. Envious capitalists in other places – who cannot do likewise inside their societies - look on in shock and awe. Some are opting to accept a subordinate position within a global US empire, and more probably will.
Yet, after an easy intervention in Afghanistan, the huge difficulties besetting the war on Iraq reveal the dialectical other side. Some envious allies whose interests are pushed aside are becoming adversaries. Many countries’ public opinion turns against the US as overreaching for world control in dangerous ways. The US state in 2003 is more isolated and hated than at any other time in its history. Washington politicians may grab headlines by substituting “freedom fries” for French fries, but the hard economic shifts mostly run the other way against US capitalists. Foreign consumers begin to shun McDonalds, Coca Cola, Citibank and US vacations. Foreign investors pull away from US companies’ stocks and bonds as well as reduce their holdings of Treasury securities and the dollar. Foreign capitalists adjust business strategies to avoid the costs of direct and indirect association with US military misadventures. The capitalists and the public opinion in many countries press their governments to make new alliances (including new military buildups) strong enough to protect their assets and themselves from US foreign policies and their ramifications. Struggles now engaging in many places will determine which companies and which countries will accept subordination within a US empire and which will ally against it.
The effects of US power and its military use also depend on the extremes of wealth and poverty that now differentiate the US from the Third World. The impossible debts of the latter – arranged chiefly for the benefit of their wealthy, governing elites – require mass flows of repayment with interest to their US creditors. Predictably, those elites tax their poor more while cutting their social programs to free the money for those flows. The creditors, chiefly the largest US banks, use the profits from Third World loans for dividends to their shareholders (mostly the richest people in the world) and for making further profitable loans. Massive wealth thus flows from the poorest to the richest. While business executives, politicians, and compliant academics deny, excuse or apologize for this Robin Hood-in-reverse world of global finance, it is recognized, resented, and repudiated by ever more people,
The contradictions inside the US and in its international position threaten to explode. The task here is to explain why, where the momentum points, and what is to be done.

I. Domestic capitalist strategy
Inside the US a massive economic shift is underway. More than just a rollback of the New Deal’s social support programs and progressive tax reforms, this shift discards a tradition basic to US economic history. In one part of that tradition, capitalists – once individuals but now mostly organized as boards of directors of large corporations - have usually gotten more output from their workers than capitalists elsewhere have achieved. In the other part of the tradition, capitalists in the US compensated their more heavily worked employees with higher and more rapidly rising real wages than workers won in most other countries. However, in recent decades – and especially in the 1990s – while US workers’ productivity continued to rise, their real wages did not. This break with tradition influences both the domestic and international contradictions agitating US society.
Capitalist employers hire workers only if and when their labor adds more value to the capitalists’ bottom line than the wages paid to hire them. The difference between what the worker’s labor is worth and what it costs the employer has been called a “surplus” by the many economists who stressed its importance over the years of capitalism’s history (including Adam Smith, David Ricardo, and Karl Marx). Capitalist corporations draw their profits from this surplus. They use the profits to sustain the capitalist system and their privileged position within it. US workers have long been among the most productive of surplus in the world. Indeed, they have produced rising rates of surplus. That is, while their wages grew, their production of a surplus (the gap between what they produced and their wages) grew even faster. This situation was sustained for a century and a half with few interruptions. Because the tradition of US capitalism combined rising wages with an even faster rising surplus, it yielded remarkable wealth and social stability.
Many factors contributed to this quality of US capitalism. The historically weak labor movement, waves of immigration, the absence of a labor party, and workers’ religious and ethnic divisions kept wages from rising more quickly. In contrast, the rapid accumulation of capital in the form of machines-per-worker, the intensity of labor imposed on the workers, and a culturally cultivated individualist work ethic made workers ever more productive. Rising wages and standards of living were won by workers’ struggles in the US partly because capitalist employers could pay for them out of the even faster rising surpluses produced by those workers. US capitalists grudgingly came to accept rising wages as a necessary cost to obtain the more quickly rising surpluses. For the workers, rising wages compensated for the exertions, indignities, and exhaustion of their labor. Those among the workers who disparaged the compensation afforded by wages and demanded that workers themselves control and dispose of the surpluses became the political pariahs successively denounced and persecuted as wobblies, anarchists, socialists, and communists. So long as US workers obtained rising wages and believed that they adequately compensated their labor, the tradition of US capitalism described above could take root and flower.
But the compensation stopped in the mid-1970s. Workers’ productivity kept rising while wages did not. Capitalists’s profits correspondingly began to soar. By the 1990s – as so often in capitalism’s history – a profit boom spun out of control into a speculative bubble that burst in early 2000. In this latest capitalist boom-bust cycle, it was the end of rising real wages after the mid-1970s – the break with US capitalism’s tradition – that both enabled the boom and then imposed the bust.
The computers installed in many production lines during the 1990s raised the outflow of commodities produced per worker dramatically. With stagnant hourly wages, profits rose quickly and the stock market took off. Rapidly rising stock prices enabled many capitalists to sell more stock, raise huge sums for still more computerization and thereby enjoy a virtuous cycle of exploding profitability. Foreign investors, investing here to capture a piece of those profits, intensified the cycle. Meanwhile, real hourly wages in the US had been declining since the mid-1970s with only occasional, brief departures from the downward trend. This reflected a labor movement weakened since the 1960s at the bargaining table and also politically. Wages fell also as waves of new immigrants willing and able to take jobs at pay below past US norms and increasing numbers of women, former retirees, and teenagers searched for jobs. A broad rightward shift in US politics and cultural values facilitated a closer government-business collaboration that also depressed wages.
The US working class responded in three basic ways to the collapse of the tradition of rising wages and the real hardships of falling wages. First, workers’ families sent more of their members into the paid labor force. Second, individual workers took more jobs and worked more hours per week. In effect, workers tried to sustain their family living standards by doing more labor. The resulting stress and exhaustion strained already fragile marriages and parent-child relationships (often to the breaking point as evidenced by rates of divorce, abuse, and so on). However, with falling wages, the extra labor did not suffice to maintain the standards of living that US workers had traditionally come to expect and demand. They needed a third strategy to achieve that: massive indebtedness. In the last twenty-five years, US workers became the most heavily indebted of any working class on the planet.
Unable or unwilling to force higher wages from capitalist employers, US workers did much more labor and borrowed heavily. Capitalists not only gained from the falling wages coupled with rising labor productivity, but their workers’ credit purchases maintained demand for capitalist products. US capitalists benefited in yet another way since their profits were the source of much of the money lent to workers at high interest rates (which further boosted capitalists’ profits). Historically heavy labor and unprecedented debt greased the wheels of the 1980s’ boom and its evolution into a speculative bubble in the 1990s. After the bubble burst, as we argue below, these same conditions worsened the continuing downturn.
While workers reacted to falling wages in these ways, capitalists’ disposition of their rising surpluses were also shaping US society. Taking increased profits from these surpluses, corporations used them for expensive mergers and acquisitions, to pay generous dividends to shareholders, and to buy equipment for still greater worker productivity. The rest of their rising surpluses the corporate boards allocated to support all the ancillary activities need for the entire system of rising surpluses to stay in operation.
Thus boards of directors distributed portions of the surpluses to supervisors and managers required to monitor, reward and punish workers, to buy tools, raw materials, and equipment, to sell the finished commodity output, and so on. These managerial tasks are crucial to successful capitalist enterprise even though, unlike the commodity-producing workers, they do not themselves generate surpluses. Especially in the 1990s, huge surpluses enabled enormous managerial salaries, bonuses, and benefits, legal and illegal. Other examples of ancillary activity include banks, stores, and the government. Each of these institutions needs regular infusions of surplus distributed by capitalists because each undertakes activities necessary for successful surplus production by workers. Banks handle money and provide credit to capitalist corporations in which commodities are produced: necessary functions but not themselves surplus-producing functions. Stores convert commodities produced elsewhere by capitalist corporations back into money. Governments provide the legislation, administration and legal adjudication ancillary but crucial to the smooth production of surpluses by workers elsewhere, namely in capitalist commodity-producing enterprises. The US economy proliferated such “white-collar jobs” in finance, wholesale and retail trade, management, government, and so forth across the last century and especially the last twenty five years.. This was possible only because capitalists had sufficiently huge surpluses to support so many people and institutions performing these ancillary functions. In turn, they spent those surpluses on purchases of the commodities produced in capitalist enterprises: the circular flow lubricating the entire capitalist system so long as each component fulfilled its role in the interdependent whole.
The new millennium saw the virtuous cycle of capitalist boom turn suddenly and dramatically into vicious cycle of capitalist bust. The speculative frenzies in the stock market of the late 1990s generated corrupt corporations, phony balance sheets, government regulators blinded or bribed, and spiraling expectations for profits that could not be realized. When these factors broke into the open, the resulting panic drove the stock market and then the rest of the economy into a decline now in its fourth year. The circular flow sprang a leak. Capitalist corporations that had become dependent on the rising stock market had to drastically reduce their investment plans and their payrolls. Unemployed workers and corporate downsizing mean reduced purchases of capitalist commodity outputs. Even workers still employed, exhausted by exploitation and burdened by massive debts, reduced their consumption expenditures. That generates further layoffs and more corporate reductions in a downward tailspin as dramatic and much more painful than the 1990s boom had been.
Crises in private capitalist economies usually make many eyes look to the government for salvation. Fed Chairman Greenspan obliges when the boom busts by cutting interest rates faster and further than ever before in US history. If borrowing is thus made cheaper, corporations and consumers should borrow and spend to revive the flagging economy. It does not work. Neither capitalist corporations nor consumers dare to borrow and invest in a declining economy reeling from the dashed hopes and mushrooming scandals exposed when the bubble burst. Bush rams through a Republican tax cut arguing that corporations and consumers will then spend more to revive the economy. This fails for the same reasons. Two years into his presidency, Bush and his supporters find themselves on a sinking economic ship up a famous creek with neither paddles nor baling cans left.
Only one possibility offers itself to prevent, reverse, or at least mask the unfolding economic and likely also political disaster for the Bushmen. The September 11, 2001, attacks on the World Trade Towers and the Pentagon bring a political windfall. Instead of being blamed for having failed to anticipate, detect, or deter the attackers – despite the biggest and best funded police, intelligence and military apparatuses in the world – the Bush administration deflects such criticism by nurturing alarm over the risks of further attacks. Bush positions himself as the man on the white horse who will now smite the evildoers at home and abroad to protect Americans from a hostile new world of terrorists. This works where all the Bush economic and political policies failed. Not only can Bush rebuild his sagging presidency upon the anti-terrorist rock, but he plans to use that same rock to try to manage the intractable domestic economic disaster threatening to undermine his administration.
This plan does not entail relieving workers’ debts nor raising their wages, since that would threaten corporations’ profits. His is a Republican plan, after all. It aims to fix an economy broken by yet another capitalist boom and bust cycle without, of course, questioning capitalism. In this Republican plan, a new surge of empire building will solve all the problems at once. Bush and his advisers have found the magic bullet. Under cover of defeating terrorism, playing the trump card of military superpower, basking in the patriotic support attending fearful wars, Bush will forcibly reorganize the whole world to make the US safe and the rest of the world democratic and prosperous. Under US management this reorganized world will also solve the otherwise intractable economic problems at home.

II. International capitalist strategy
In starkest terms, Bush plans to solve the economic problem at home by using military force to build an empire abroad. Dominating foreign sources of raw material (oil plus much more), foreign markets, and foreign investment opportunities will return profitability to corporations in the US. Cheap and reliable flows of raw materials imports into the US will yield competitive advantages for US corporations and for foreign corporations who locate here and behave appropriately. Dominated foreign countries will manage their markets to favor exports from US-based corporations. Investment opportunities in those countries – including rebuilding after US attacks - will go first to US and US-favored corporations. These advantages, rationalized as fair rewards for the US’s costs in establishing and maintaining the new empire, will give an unbeatable competitive edge to the firms favored by the US government. These hopes fuel the Bush strategy. Of course, the disadvantages thereby imposed on other countries’ capitalists fuel their hostilities and counterstrategies.
Workers inside the US risk further wage reductions as the empire shifts investment to more profitable outlets abroad. The costs of empire (especially when imperialist leaders curry popular support by tax cuts) will likely reduce government programs for working families, retirees, the sick, students, and so on. What little remains of traditional US wages above global averages will likely evaporate. What capitalists thereby lose in sales to US workers they hope to more than make up in exports to markets within a global US empire. Profitable investment opportunities for firms favored by the US government will multiply in the construction of transportation, telecommunication, and other networks needed to integrate the empire. When wages fall far enough inside the US to enable profits high enough, investments may flow back from elsewhere in the empire. Otherwise, they wont. The Bush plan for empire will not reverse the deepening gap between the top 20 percent and the bottom 80 percent of the US wealth and income distributions.
Capitalist enterprises around the world will confront a stark either/or proposition emanating from the US. Either accept the new militarily enforced US empire or die. Acceptance will mean direct subordination to the US government and/or alliances with favored US corporations through mergers, acquisitions, or “agreements” to play subordinate roles. Capitalist states will face much the same either/or. Protest against such subordination will mark any enterprise or government as an enemy of the empire targeted for exclusion from its opportunities and benefits, or worse.
Western Europe, Russia, China and Japan face this either/or. Bush and Rumsfeld made that clear in the diplomatic fights over war on Iraq. “Model your subordination after the British, get out of our way, or perish in the manner of Saddam Hussein.” All old agreements, alliances, and institutions are swept aside in the messianic drive to Americanize the world, to replicate everywhere the social perfection of Texas. You are with us or you are against us.
This right-wing Republican plan for empire was ignored as an unworkable fantasy and unnecessary risk in the 1980s and 1990s. Yet its proponents (Cheney, Rumsfeld, Perle, Wolfowitz, et al) could revive and implement it after 9/11. They offer it as the solution for (1) the general economic decline since the stock market bubble burst in 2000, and (2) the mass anxiety over terrorism flowing from the alarmism nurtured ever since 9/11. The US capitalist elite is waiting to see if Bush’s imperial wars solve their economic problems. The US masses wait to see if those wars solve their economic difficulties and their frightened sense of vulnerability to terrorism. The likelihood that a new surge of US empire-building can meet all these expectations is small: a judgement shared by, for example, many deeply skeptical stock market players and analysts in April, 2003.

III. Conclusion: Strategic Contradictions and the fragility of US capitalism
Cultivated alarmism over terrorism and successive wars is more than a means of empire building. It is also a weapon of mass distraction from continuing domestic economic decline and from the Bush Republican cutting of social programs at home and military empire building abroad. Like all weapons, its effectiveness depends on the entire social context of its use.
One big problem for the Bush program lies in the condition of the US working class in 2003. Workers taking multiple jobs and working ever-longer hours accumulated historically unprecedented levels of exhaustion, stress, family dysfunction, and debt to maintain their standards of living as real wages fell since the mid-1970s. The epidemics of alcoholism, tranquilizer and anti-depressant consumption, psychological dysfunction, child and spousal abuse, 12-step programs and so on offer ample evidence. Not much more work effort can be squeezed from these circumstances. The potential for a reaction of workers against these burdensome conditions rises, especially as real wages keep falling (under the pressure of rising unemployment since 2000) and government support programs for workers suffer more cuts (not only in the Bush federal budget for fiscal 2004 but also in the crisis budgets of all 50 states for 2003 and 2004). US capitalism is exhausting and embittering the goose that produces the golden eggs it calls profits. The war on Iraq can do little to improve this situation and may do much to aggravate it.
The second cloud looming over Bush’s plans is the threat that consumption expenditures by US workers will fall sooner or more than exports rise. The “historic decline in consumer sentiment” in 2002 and 2003 reflects more than the stock market collapse since 2000 and rising unemployment. US consumption spending is also falling because work energies, emotional investment in goods accumulation, creditworthiness, and visions of a positive future are all tapped out. There is little reason to suppose that government intervention in the economy can preclude its further decline as consumption expenditures wither. After all, despite countless governmental agencies and cooperating academics monitoring the rising profit conditions of the 1990s and a vast arsenal of regulations and policies designed to manage the upswing, it veered utterly out of control, bubbled, and burst.
The third contradiction emerges in the realms of politics and culture in the US.
Intensified imperial expansion, successive wars, and the terrorism and anti-terrorism they produce usually generate the suppression of criticism, dissent, and civil liberties. It is naïve to imagine that the new suppressive institutions staffed by Bush appointees will limit their targets to terrorists. As Attorney General Ashcroft’s behavior already shows, suppression displays many dimensions. The entire center-left spectrum of opinion is thereby provoked beyond skepticism about or opposition to the Iraq war. US politics and culture polarize into increasingly harsh suspicions and confrontations. The critics of war, empire and the suppression of civil liberties may evolve into significant social movements. They may ally with workers reacting against economic conditions. Whether and how they do this will strongly influence Bush’s – and indeed the world’s – future.
The fourth contradiction is emerging in the Third World. The Bush program for a new empire clearly concentrates on those regions to make them profitable adjuncts to/for US capitalism. They are poor and militarily defenceless. Whatever US money cannot buy, its bombs can force. Concentrating on their integration into the US empire avoids – or at least postpones - a direct confrontation the actual or potential competitors of the US: the European Community, Russia, Japan, and China. However, Third World countries may not accept integration into a US empire on US terms – with or without military conquest. Post-war Iraq may resemble what Afghanistan meant to the Soviet Union and what it increasingly means for the US. Anticipating US demands, might Third World countries seek better deals with the Europeans or others? Might they band together to offer stiffer resistance to US plans?
The fifth contradiction flows directly from the European Community, Russia, China, and Japan. The Iraq war alters their strategies and alliances. Like the US, they too look to solve their internal economic problems in part by foreign economic expansion (buying, selling, and investing abroad). Bush’s Pax Americana threatens their expansionary interests. Some or all may ally against the US. In various possible combinations, their aggregate populations, markets, resources, industries and military establishments would confront Bush’s imperial agenda with incalculable but certainly huge problems and risks. The falling out among globalization’s erstwhile proponents will provide new allies for globalization’s critics and thus new contradictions for Bush’s imperialism. Colliding capitalist imperialisms provoked world war twice in the last century.
Arguably at the historic peak of its strength, US capitalism seems committed to a global imperial expansion begun in Afghanistan and Iraq. The causes, contradictions and risks of that expansion expose US capitalism’s fragile other side. The dialectic of capitalism provokes not only its own growth but also criticism of the costs, unevenness, and social effects of that growth. The victims, competitors, and opponents of capitalism will likely find their way to repose the old question with new urgency: might a different, non-capitalist kind of economic system grow without the unwanted side-effects? The old mole of anti-capitalist revolution is being born again.