Jack Rasmus is Professor of Economics and Political Economy at Santa Clara University and St Marys College. He has produced a most remarkable study of the USA's recessions.
Part 1 describes and explains recessions. Part 2 looks at earlier examples of recession. Part 3 studies the origins and evolution of the current crisis, criticises Bush and Obama's policies, and presents a programme for ending it.
Rasmus points out, "the data show clearly that the largest contributor to the excess debt accumulation in the U.S. economy has been neither the consumer nor the government; it has been the business sector, in particular the financial business segment of the economy." Total US debt was $50.6 trillion in 2008. Business debt (financial and non-financial) was $30.6 trillion, government (federal, state and local) $8.6 trillion, mortgage debt $8 trillion, and consumer debt $2.5 trillion.
As he observes, "the business-finance sector borrowing and debt accumulation is attributable largely to speculative investing." Speculative investment has grown at the expense of real, physical-asset, investment that creates jobs. The US Fed, US military and aid spending, and tax policies favouring the rich, have created $20-40 trillion excess money, which means more credit, which means more debt. Its financial instruments create money, credit, loans, debt, liquidity and therefore more speculative investment.
Rasmus explains, "In terms of federal government, debt accumulation has been the consequence of chronic government budget deficits. Those deficits in turn are the result of three developments: first, a three-decades-long restructuring of the tax system in which repeated tax cuts reduced wealthy investors' and corporations' tax contributions; second, by chronic war spending; and, third, increasingly in recent decades by the growing cost of the bailout of banks, financial institutions, and other businesses that has followed the financial crises that have occurred since the 1980s." So government debt is not due to its spending on health care, education or welfare.
There is too much debt and too little income (because too little production). The US working class's real earnings were lower in 2007 than they were in 1982. Increased debts are not due to a cultural shift (an idealist explanation), but because people had to borrow to maintain their living standards. As Ben Funnell wrote in the Financial Times, `capitalism's dirty little secret' was that "excessive [consumer] lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite."
The housing boom was driven by rising speculation in the housing market from 1998 on, pushing up house prices by 12 per cent a year in 1998-2000 (from just 3 per cent a year in 1988-98) and to 20 per cent a year from 2000 to 2006. So the Fed's low interest rates in 2003-04 did not cause the housing boom, and the subprime explosion was not the result of an overheated housing market, contrary to the usual stories.
From September 2008 to January 2009 the Fed injected more than $4 trillion into the finance sector. Yet bank lending to non-financial businesses fell every month in 2009. Giving the banks money doesn't get rid of their bad assets. Debts still pile up, leading to the next financial crisis.
Rasmus notes, "What this all produces is a tendency for the real economy to proceed in a downward trend or cycle." After each of the USA's ten `normal' recessions since 1945, each recovery has taken longer than the previous one and wage growth has been lower.
The usual fiscal-monetary measures have achieved less. Tax cuts don't work, not to the benefit of the economy anyway. For example, in 2001, Bush brought in $3.7 trillion tax cuts for the rich, yet real investment fell in 2002. The money went into foreign markets, tax havens and speculation.
Rasmus asserts that recovery needs " a massive dose of government spending in the short run and major structural changes in the economy in the longer run that restore a more equitable distribution of income."
He proposes, "an immediate, additional injection of fiscal spending equal to approximately 16 per cent of GDP, or $2.5 trillion, with a primary focus on job creation ... a subsequent permanent increase of the government's share of annual GDP, with the government assuming new roles in initiating necessary infrastructure and technology investment. That government share of annual GDP should rise from its post-1945 historical average of 20 percent of GDP to the 30-35 percent range ... a nationalization of the residential mortgage and small business property markets, followed by consumer credit markets in general ... implementing policies that establish a more equitable long-run distribution of income ... and restore the predominance of investment in real assets that create jobs ..."
He also advocates a public health care service, a reformed pensions scheme, and de-privatizing the student loan market. Tax reforms should include repatriating tax haven assets, rolling back tax cuts on capital gains, and creating a separate utility banking sector.