US economy: the point of no return?

Issue 

Last week, there was rejoicing in the US at signs that the long recession might be coming to an end. But, writes WINIFRED WOLF, the withering of the US economy has reached a point which recalls the defeat of British industry as it drifted away behind US competition before, during and after the first world war.

There are three sectors where the US economy has until now had a head start over Japanese and West European competition: aerospace, armaments and the financial sector.

At the end of November 1991, the USA listened to an announcement in blank amazement: the second biggest aircraft manufacturer in the USA and the world, McDonnell Douglas, was to sell 40% of its commercial aircraft sector to the Taiwanese firm Taiwan Aerospace Corp.

Competition from the European Airbus, nursed along by more than 100 billion marks in tax money, has put pressure on the company on the US market. As if to underline this defeat, on December 5, the renowned 64-year old airline company Pan Am announced bankruptcy.

As for the armaments industry, sales representatives of Japanese firms have been pointing out after the Gulf War that the heart of this operation, just as much as all the new US high-tech weapons, was of Japanese origin: chips.

In semiconductor production, the USA had to surrender its leading position to Japan in the 1980s. Now, leading US electronics firms have been announcing losses and massive lay-offs. IBM alone is to shed 25,000 jobs before the end of 1992. AT&T amd its conputer offshoot NCR reduced their workforce by 14,000.

In the finance sector, the USA lost its leading position to Japan in the 1980s. This is the sphere of greatest danger to the US economy. Until the beginning of the 1980s, the list of the biggest banks was led by the US; now only one US company — Citicorp — is to be found amongst the world's top 30 lending institutions. Two of the biggest banks, Bank America and Chase Manhattan, have come close to bankruptcy in the past five years.

Insurance collapse

April 1991 saw the biggest ever collapse in the insurance sector, when the state of California had to take over the Executive Life Insurance Company. The firm had been playing around with junk bonds. The same fate has overtaken an entire branch of the finance sector, the US savings and loans.

What the S&L crisis amounts to is that some 3000 savings institutions, as a result of irresponsible but legally encouraged speculation, have been in reality bankrupt since 1989, with the state asuming the huge burden of underwriting the deposits.

The cost falling to the already over-indebted US from the collapse of this branch is rising from year to year. Starting at $100 at least $500 billion.

In Novembver, the General Accounting Office (GAO), a kind of finance policy watchdog for the US Congress, announced that in coming months there might be a further tide of bankruptcies in the banking sector and that 35 of the 200 biggest US banks were in danger of collapse.

On the New York stock market, up to December 1991, the average of the decisive shares (the Dow Jones index) had once again sunk to a level of between 2800 and 2900, the "Gulf War dividend" having melted away. The index is slightly above the level it was at just before the 1987 stock market crash — four year after, and thus de facto no interest. Already in the mid-1980s, Wall Street had to surrender its role as the world's leading stock market to Tokyo.

Since 1987 45,000 stock market-related jobs have gone, and a further 40,000 dismissals were announced in 1991. Two of the biggest broking houses, Merrill Lynch and Salomon Brothers, were caught up in spectacular scandals in 1990 and 1991.

Events such as the fall of Pan Am — or the fact that Washington's leading bank, the First American, was controlled by the bank of organised crime, BCCI, and, furthermore, that this latter was closely connected to the CIA — are all symptoms of the decline of empire, resulting from the inner decay of US society, offering ironic parallels with the fall of the Soviet Union.

Over the past five years, the USA has lost whole slices of the world market. The core of US industry, the auto industry, is in deep crisis. General Motors, Ford and Chrysler turned in the biggest losses in US history in 1991. Big sectors of the car market have been take over by imports from Japan and Korea and above all by production from "transplants" of Japanese car companies in the US. In the third quarter of 1991, according to the Wall Street Journal of November 5, profits of the 631 biggest US industrial enterprises were down 23% on the previous year.

The US government wants to enlarge the economic union of Canada, Mexico and the USA as quickly as possible and to set up a a broad North and Central American union to oppose the European union. However, by the end of 1991, opposition was developing to this project, above all in Canada and the USA.

Fear of competition

The reason is the fact that the products of US industry can only to a limited extent, if at all, hope to compete with products from Mexico. This is only partly a matter of production by Mexican firms undercutting US products in terms of quality and price. Often US, Japanese and European firms set up sites in Mexico, where they can escape from the established US unions in order to gain market shares in Canada and the USA.

The industry of the mighty USA is frightened of competition from Mexico. There exists in the USA, according to Business Week, "fertile soil for a protectionist campaign". The magazine considers that "if the world's economies do not begin to counteract the recessive tendencies, the politicians could once again begin to 7> just as happened in the Great Depression".

The government, with the danger of a sudden deterioration due to a general financial crash, has very little room for economic manoeuvre. The US National Bank lowered the discount rate four times between July 1990 and the end of 1991 in order to make credit cheaper for enterprises and individuals. However, this has not led to an upturn in consumption and investment.

Record deficit

The US budget had already in 1990 achieved the record level of $270 billion, and the deficit for 1991 will be at leat $348 billion. In 1991, for the first time, the USA spent more on interest payments on this debt than on defence. Further cuts in taxes, as urged by some leading politicians, may lead to a slight upturn in investments, but they will also increase the budget deficit to an ever more dangerous level.

Other leading economists, including the influential banker Felix Rohatyn, are taking the opposite view. Their — not unrealistic — starting point is that the root of the problems of the US economy is to be found in the poor infrastructure, the miserable education system, the increasingly unsatisfactory health services and the inadequate investment aimed at increasing overall productivity.

They urge an overall increase in taxation in order to finance a basic structural upgrading. Such a program, however, involving as it does taking money from enterprises and private individuals, will first of all deepen the recession — that "cleansing cold shower". [Abridged from International Viewpoint.]

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