ANDREW KLIMAN The Failure of Capitalist Production Underlying Causes of the Great Recession THE FAILURE OF CAPITALIST PRODUCTION Underlying Causes of the Great Recession Andrew Kliman ^fpy) PlutoPress www.plutobooks.com In memory of Ted Kliman (1929-2009) and Chris Harman (1942-2009) For Jesse For Anne Contents List o f Tables viii List o f Figures ix List of Abbreviations xi Acknowledgments xii 1 Introduction 1 2 Profitability, the Credit System, and the “ Destruction of Capital” 13 3 Double, Double, Toil and Trouble: Dot-com Boom and Home-price Bubble 28 4 The 1970s—Not the 1980s—as Turning Point 48 5 Falling Rates of Profit and Accumulation 74 6 The Current-cost “ Rate of Profit” 102 7 W hy the Rate of Profit Fell 123 8 The Underconsumptionist Alternative 151 9 What is to be Undone? 181 Notes 208 Bibliography 227 Index 234 List of Tables 2.1 Non-Linear Effect of Falling Profitability on Business Failures 17 4.1 Growth Rates of Real GDP Per Capita 53 4.2 Sovereign Debt Defaults and Restructurings, 1946-2005 57 4.3 Debt and GDP, U.S. 61 5.1 Rates of Profit, U.S. Corporations, Selected Trough Years 82 6.1 Rates of Profit and Equity-market Rates of Return 117 7.1 Rapid Depreciation of Computer Equipment 142 8.1 Real Income G rowth, U.S., 1979-2007 160 8.2 The Final Part of Output and Economic Growth 163 8.3 Initial Situation 169 8.4 First Ten Periods 172 8.5 W orldwide G rowth of Real GDP since 1600 174 8.6 Investment and Growth, 1965-92 Averages 176 ‘>.1 Pay, Exports, and Economic G rowth in the U.S. .uul China 187 List of Figures 2.1 Distributions of Rates of Profit 18 3.1 Mortgage Borrowing and Real Home Prices, U.S. 29 3.2 Relative Increases in Liabilities and Assets, U.S. Households 30 3.3 Net Lending or Borrowing by U.S. Households 31 3.4 TED Spread, August 2008-January 2009 35 3.5 S&P 500 Index 39 3.6 Nonfarm Payroll Employment, U.S. 41 3.7 Nom inal and Real Federal Funds Rates 42 3.8 Federal Funds Rate and Home Mortgage Borrowing 43 3.9 Excess Savings as Percentage of W orld GDP 45 4.1 Growth of W orld GDP Per Capita 52 4.2 Impact of China on Growth of GDP Per Capita 53 4.3 Gap between Actual and Potential Real GDP, U.S. 54 4.4 Growth Rate of Industrial Production, U.S. 55 4.5 Growth of Industrial Capacity, U.S. 56 4.6 Outstanding Debt as Percentage of GDP, U.S. 60 4.7 Change in Debt, All U.S. Domestic Nonfinancial Sectors 62 4.8 Changes in Debt o f U.S. Treasury and Households 63 4.9 Individual and Corporate Income Taxes, U.S. 64 4.10 U.S. Treasury Debt as Percentage of GDP, Actual vs. Hypothetical 65 4.11 Gap between Actual and Potential Labor Force, U.S. 67 4.12 Average Duration of Unemployment, U.S. 68 4.13 Real H ourly Compensation of U.S. Employees 69 4.14 Changes in Income Inequality among U.S. Households 70 4.15 Growth of Government Structures, U.S. 71 5.1 Rates of Profit, U.S. Corporations 76 5.2 U.S. Multinationals’ Rate of Profit on Foreign Direct Investment 79 5.3 Effect of Inventories on Before-Tax Rate of Profit 81 5.4 Inflation-Adjusted Properry-Income Rates o f Profit 83 5.5 Inflation-Adjusted Before-Tax Profit Rates 84 5.6 Adjusted and Unadjusted Rates of Profit 85 5.7 Effect of Alternative Adjustments on Rates of Profit 87 X THE FAILURE OF CAPITALIST PRODUCTION 5.8 The Rate o f Profit and the Rate of Accumulation 91 5.9 Net Investment as Percentage o f Profit, U.S. Corporations 92 5.10 Net Investment as Percentage of After-Tax Profit, U.S. Corporations 93 6.1 Cherry Picking Troughs and Peaks 104 6.2 Current-Cost “ Rates of Profit,” U.S. Corporations 111 6.3 Property-Income Rates of Profit 112 6.4 Relationship between Current-Cost and Historical-Cost Rates of Profit 114 6.5 Current-Cost and “ Real” Rates o f Profit, U.S. Corporations 120 6.6 Current-Cost, “ Real,” and Inflation-Adjusted Rates o f Profit, U.S. Corporations 121 7.1 Net Value Added and Compensation of Employees, U.S. Corporations 125 7.2 Profit Share of U.S. Corporations’ Net Value Added 125 7.3 Actual and Constant-Profit-Share Rates of Profit 127 7.4 Standard Decomposition of the Rate of Profit 130 7.5 Compositions o f Capital, U.S. Corporations 132 7.6 Gap Between Nom inal and MELT-Adjusted Rates of Profit 134 7.7 Alternative Decomposition of the Nominal Rate o f Profit 135 7.8 Rate of Depreciation, U.S. Corporations 141 7.9 Rate of Non-IPE&S Depreciation, U.S. Business Sector 143 7.10 Losses Due to Additional Moral Depreciation, U.S. Corporations 144 7.11 Variables Adjusted for Excess Depreciation 146 7.12 Adjusted and BEA-Based Rates of Profit 147 8.1 Workers’ Share of U.S. National Income, 1960-2009 154 8.2 Real H ou rly Compensation, Private-Industry Workers in U.S. 157 8.3 Real H ourly Wages and Salaries, Private-Industry Workers in U.S. 157 8.4 Shares o f Income 170 8.5 Growth of Investment, Consumption, and GDP in U.S., 1933-2009 174 9.1 Fall in Six Largest Economies’ Real GDP G rowth, 2007-2009 188 List of Abbreviations AIG American International Group BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics CBO Congressional Budget Office CPI-U consumer price index for all urban consumers CPI-U-RS CPI Research Series Using Current Methods CPI-W consumer price index for urban wage earners and clerical workers Fed Federal Reserve System GDP Gross Domestic Product IM F International Monetary Fund IPEScS information-processing equipment and software LIBOR London Inter-Bank Offered Rate LTFRP law of the tendential fall in the rate o f profit MELT monetary expression of labor-time NIPA National Income and Product Accounts OECD Organization for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries PCE personal consumption expenditures S&Ls savings and loan associations S&P Standard and Poor’s TARP Troubled Assets Relief Program TSSI temporal single-system interpretation Acknowledgments I thank everyone who provided expert advice on technical matters and everyone who offered comments on the papers, book reviews, talks, interviews, and draft manuscript that eventually turned into this book. I have benefited enormously from their feedback. It not only improved the book significantly but guided the direction of my research in crucial ways. I would like to thank each one by name, but unfortunately I cannot. Even were they not too numerous to list, they include many audience members and reviewers whose names I do not know. If you are among them, please know that the difference between what you originally read or heard and the ideas as they appear in the final text is a sign of my debt and gratitude to you. I thank my departmental colleagues at Pace University, who have been very supportive of my research. I also thank the university’s Dyson College o f Arts and Sciences, which granted me released time to pursue my research on profitability trends and provided a research grant that enabled me to purchase a supersized computer monitor. The monitor has made the work of data analysis much less onerous and more productive. None of the book is a republication of previously published works of mine, but I have drawn freely on those listed below. I thank the following publishers for allowing me to do so: • The Commune, which published “The Economic Crisis: An interview with Andrew Kliman” as pamphlet no. 4, November 2008. • The Institute for Social Sciences o f Gyeongsang N ational University, which published “ Masters of Words: A reply to Michel Husson on the character o f the latest economic crisis,” in Marxism 21, vol. 7, no. 2, Summer 2010. • International Socialism, which published “ A Crisis for the Centre of the System,” in issue no. 120, October 2008, and “ Pinning the Blame on the System,” a review of Chris H arm an’s Zombie Capitalism, in issue no. 124, September 2009. • Lexington Books, which published Reclaiming Marx's “ Capital” : A refutation o f the myth o f inconsistency in 2007. xii ACKNOWLEDGMENTS xiii • Marxist-Humanist Initiative, which published “ The Persistent Fall in Profitability Underlying the Current Crisis: New ternporalist evidence” in March 2010 and, in With Sober Senses, its online publication: “ On the Roots of the Current Economic Crisis and Some Proposed Solutions,” A pril 17, 2009; “ How (Not) to Respond to the Economic Crisis,” May 5,2009; “ Cherry Picking Peaks and Troughs,” May 13, 2009; “ Appearance and Essence: Neoliberalism, financialization, and the underlying crisis of capitalist production,” May 17, 2010, and “ Lies, Damned Lies, and Underconsumptionist Statistics,” September 16, 2010. • Megafoni, an online journal, which published Joel Kaitila, Lauri Lahikainen, and Jukka Peltokoski’s interview, ‘“ Kukaan ei tiedá, onko kriisi ohi’—Andrew Klimanin haastattelu,” on November 23, 2009. • Palgrave Macmillan, which published “ Production and Economic Crisis: A temporal perspective,” in Richard Westra and Alan Zuege (eds), Value and the World Economy Today in 2003. • Razón y Revolución, which published Juan Kornblihtt’s interview, “ Entrevista al Economista Estadounidense Andrew Klim an,” in El Aromo no.