As we have pointed out on more than one occasion in this space, the government deficit is far from being a primary trouble spot. In fact it serves as an important counteracting force to the prevailing stagnation. On the other hand, the business community here and abroad sees the deficit, presumably because of its effect on interest rates, as a crucial cause of instability in the capitalist world as a whole. No doubt this perception, regardless of its accuracy, influences business decisions. Nevertheless, the elimination or sizable reduction of the deficit would remove a key prop to demand, and is therefore notably dangerous at a time when an economic recession is already overdue. What we said in an earlier discussion of the deficit still holds: “Today’s capitalism . . . can’t live without the deficits and it can’t live with them” (“The Federal Deficit: The Real Issues,” MR, April 1984).
The trade deficit poses an equally if not more formidable dilemma. Given the extraordinarily complicated nature of the problem, it is even questionable whether anything short of a severe recession could seriously reduce the present huge excesses of imports over exports. . . . But let us assume for the sake of argument that the trade gap can eventually be eliminated or reduced to a negligible amount. For that to happen the rest of the world would have to digest an enormous volume of imports from the United States while at the same time reducing their exports to this country. That would deal a crippling blow to the ability of debt-laden third world countries to service their debts and at the same time add greatly to the troubles of U.S. banks. Nor would the advanced capitalist countries be any more pleased by such a solution of the U.S. trade deficit. They too are in the midst of stagnation, mass unemployment, and excess productive capacity. A reversal of their trade trends, i.e., a cut in exports and a rise in imports, could easily bring on a severe depression in view of the extent to which their economies depend on an export surplus. A harmonious resolution of the conflicting interests on trade between the United States and the other major powers is clearly not in the cards. On the contrary, any significant reduction in the U.S. trade deficit would more probably be the prelude to an outburst of trade wars.
As it is, the tensions between the United States and its major trading partners are all too numerous. A healthy proportion of the dollars earned by the trade-surplus countries are returned to this country to purchase treasury securities, stocks, real estate, and manufacturing enterprises. In the absence of this flow of capital to the United States, the international value of the dollar would go into a tailspin, in the course of which international trade and finance would be severely disrupted. Meanwhile, Washington flails about trying to get its allies to alter their trade and interest policies in order to alleviate U.S. difficulties. On the other hand, the other nations insist that the United States straighten out its own affairs, thus hopefully restimulating the world economy. Since both sides suffer from illusions about the practical possibility of making progress along the lines they propose, the tensions that threaten ultimately to break out in trade and currency wars keep mounting.
The point is that none of the predicaments facing the United States is solvable in a stagnating world economy. It appears that the two deficits are both essential, the one to keep the economy of the United States from collapsing, the other to keep the rest of the world from collapsing.
In this situation, the attention of economists, politicians, and media experts in the United States has been turning to the search for a way to restructure the U.S. economy in a radically new direction. A typical example is the lead story in Business Week of November 16, less than a month after the crash. The headline reads as follows: “It’s time for America to wake up. The message is clear: Americans have spent too much, borrowed too much, and imported too much. Now it has to stop.” Although the hard edges of the proposed remedies are sometimes smoothed over, the main thrust is clear: consumption has to be reduced. And to this end wages have to be held down and government spending on subsidies, welfare, and social security programs lowered.
The supposed rationale for this approach is that less consumption will result in more savings and hence increased investment, leading to a resurgence of growth. Economic growth in the United States will pull the whole world with it, and all the problems of a stagnant global economy will gradually evaporate.
The trouble with this reasoning of course is that higher savings do not bring about more investment. The causal relation is rather the other way around: when investment increases, incomes (especially corporate profits) increase and so do savings. What propels investment is not savings but attractive profit opportunities. And by the same token, what has been holding back investment in the period of stagnation is the lack of opportunities for profitable productive activity. Proposed remedies aimed at reducing consumption would merely further reduce the stimulus to invest.
Some of the more perceptive observers of the economic scene are aware of this paradox, and are counting on a big jump in exports to stimulate higher investment. But as already noted above, exports large enough to perform this function would create havoc in the rest of the world, with the result of a severe contraction in the markets for our exports.
The simple fact is that there is no growth miracle available. The notion that the world economy can be shifted into high gear under present circumstances is pure illusion. And if anything is crystal clear, it is that belt-tightening surely offers no way out.
. . . [T]he mess the economy is in flows not from excessive consumption but from capitalism’s ruthless pursuit of unlimited wealth by any and all available means, whether or not these have anything to do with satisfying the needs of real human beings. The only remedy for this situation is a truly revolutionary reconstruction of the whole socio-economic system.
History shows that such fundamental transformations take a long time to accomplish. It is reason, however, not history that tells us that the time will be shorter the more clearly the victims of the outworn system see the need for the change. In the meantime, they have a dual task: to learn about the need for a new system and to struggle to protect themselves against the ravages of the old.
Paul M. Sweezy (1910-2004) was a Marxist economist and founding editor of Monthly Review. Harry Magdoff (1913-2006) was a co-editor of Monthly Review (1969-2006). The text above is an excerpt from “The Stock Market Crash and Its Aftermath,” the Review of the Month of the March 1988 issue of Monthly Review (39.10).