In an essay dated June 2005 (and republished in 2009 as Chapter 2 of The Great Recession) Michael Roberts has a perceptive account of what he calls ‘the property time bomb’. He notes that never before had real house prices risen so fast for so long in so many countries, and quotes an Economist article of June 2005 which called it, ‘the biggest bubble in history’.
The total value of residential property in the OECD had more than doubled from $30bn to $70bn in the previous five years. House values had never been higher in America, Britain, Australia, New Zealand, France, Spain, Holland, and Ireland. This was a bigger bubble bigger than the stock market boom of the 1990s that collapsed in 2000, or the great boom of the 1920s which ended in the Great Depression of 1929-33. In The Great Recession [TGR] Michael writes that:
World capitalist growth now depends on US household spending and US spending depends on housing prices in the US rising forever. This is a pyramid scheme that will topple over eventually… the US housing bubble is set to burst …the US economy will drop like a stone, as many Americans face bankruptcy when they cannot make their mortgage payments, while others will have to pull in their spending horns … this year the UK and Australian housing markets have slumped. With that economic growth has slowed to under 2 per cent a year. Spending in the shops has stopped growing altogether (TGR p.10).
Here Michael’s line of causation directly accords with the analysis which Atif Mian and Amir Sufi were to elaborate in their 2014 book, House of Debt which has attracted much attention. In Michael’s 2005 discussion, a fall in profits is mentioned only in passing, and as a consequence of a fall in consumer demand, not as a cause of the crisis – ‘if the housing market collapses that will make a huge hit on the profits of big business’ (p.12).
In Feb 2006 Michael published another accurate and well-documented analysis of the growing crisis caused by falling house prices in the UK, Australia and the US.
The downturn in the US housing market has now started … housing affordability, particularly in the coastal cities is stretched to the limits. America’s households are leveraged up to their eyeballs and now rely on rising housing prices to supplement their incomes … so even just a slowdown in house price rises would hit consumption (TGR p.17).
What has already happened in the UK and Australia, he suggests, shows what lies in store for the US.
The collapse of a house price boom in the UK (and in Australia) last year is the future for US homeowners. The price fall deducted something like 2-3 per cent from real spending growth in these economies.… UK retail sales are now growing at their weakest rate for 20 years and recorded the worst figures for January sales since 1945 … and unemployment is steadily rising. (TGR p.17).
This fall in demand – and the reasons for it – is a major dimension of the 2007 -09 crisis in the US and in the way in which the crisis unfolded in other countries, notably Ireland and Spain. It is essential that the house price / housing debt / demand story be incorporated into any fully developed Marxist account of the crisis.
Yet in recent years Michael’s thinking about the 2007-09 crisis has taken a radically different direction. His new book The Long Depression is to be welcomed as currently the most thorough exploration of the crisis from a falling profits standpoint. It contains a wealth of indispensable empirical material, the analysis covers the major sectors of the global economy, and it is a lively read. Here I focus only on Michael’s account of the US phase of the crisis.
In arguing for the tendency of the rate of profit to fall as the crucial underlying cause of the 2007-09, Michael has given far too little weight to other causal forces which were in play. The house price/consumer demand dimension of the crisis is mentioned only occasionally and briefly. In his main discussion of the 2007-09 US crisis (Chapter 5), housing as such is not discussed. There is only a passing mention that:
investment in real-estate took an almighty plunge after the credit-fuelled boom up to 2007, but investment in productive assets also tumbled. The mass of profits dropped like a stone, especially for the financial sector (TLD p. 67).
Factually this is not correct. The general category of real-estate includes the vast sector of commercial property and this did not collapse in 2007. The initial crash was in residential house prices and it started at the beginning of 2007, well before the banking crisis became serious. Certainly investment in the house construction sector fell, but overall investment levels in the non-financial sector did not fall until 2009. (See my earlier post for a summary of the evidence). The effect of a fall in investment by firms in the residential housing sector was more than counterbalanced by an increase in investment in other sectors. The Economic Report of the President for 2008 says that:
In contrast to residential investment, real business investment in non-residential structures grew at a strong 16 per cent annual rate over the four quarters of 2007… investment in equipment and software grew 3.7 per cent, a bit faster than the 2006 pace. (ERP 2008 p.32).
It was in late 2008 and early 2009 that ‘investment spending (other than structures) plummeted’ (ERP 2010 p.126). But by the fourth quarter of 2008 well over than a million jobs had been lost as a consequence of the fall in household demand which happened as a reaction to the collapse of house prices from the beginning of 2007 onward. (See Table 5 in my recent post.)
Michael does discuss debt, but now sees it as a secondary question – a trigger of crises, rather than a cause. In his book, Chapter 6 is called Debt Matters and it contains much material of great interest. But the analysis is focused almost exclusively on corporate debt. There is a section on housing but it is very brief.
By mid-2006 the residential boom in the United States had reached mega proportions. Household debt expanded rapidly during the so-called neoliberal era As a result of falling interest rates that reduced the cost of borrowing and created the ensuing property boom in many advanced capitalist economies in the past fifteen years. The creditors were the banks and other money lenders. The assets (home values) eventually collapsed, placing a severe burden of deleveraging on the financial sector (TLD p.99).
The discussion that follows concentrates only on debt in the corporate sector. Astonishingly there is no mention of the collapse in consumer demand as millions of households across America had began to deleveraging following the drop in house prices at the start of 2007. No note is taken here of the mass of evidence, painstakingly presented in Mian and Sufi’s House of Debt book, that before the banking crisis went critical (when Lehman folded in September 2008) jobs and businesses in large parts of the US had already been severely hit as a result of the contraction in consumer demand from the start of 2007 as household borrowing began to fall, and income was switched to debt repayment. See my recent post.
Michael had already dismissed the analysis in the House of Debt when it was published in 2014. Rightly he criticises its authors for lack of discussion of profit. But he then argues:
Sure consumption falls in recessions, but investment falls even more. The Great Recession and the subsequent weak recovery is not the result of consumption contracting. But investment virtually stopped (see my post ) And behind investment (whether in productive or unproductive sectors) lies profitability.
Certainly there is much to criticise in Mian and Sufi’s book, not least their failure to discuss profitability. The surplus money capital which poured into the financial systems of the US and other countries – and which fuelled the expansion of mortgage lending and housing prices was not just based, as they suggest, on East Asian trade surpluses. As I have shown, there were two other major sources: (1) accumulations of money wealth in the hands of the rich as inequality increased, and (2) the swelling cash reserves of the corporate sector, as profits recovered faster than investment after the 2000 downturn. Mian and Sufi also play down the impact of the banking crisis on the continuing rise in unemployment at the end of 2008 and in 2009.
But it is not convincing to say simply that a Marxist analysis must entirely reject their convincing analysis that the 2007 crash in house prices and fall in consumer demand directly led to large increases in unemployment before the banking crisis went critical. Marxism needs a demand story.
There are sections of Michael’s book which show a commendable alertness to the complex forces which determine a major crisis. The analysis of five inter-twinned cycles in the history of capitalist development is a promising line of theoretical and empirical advance which needs to be followed. Three of the cycles are clearly evident in the 2007-09 crisis. A construction cycle (housing) was interconnected with credit processes (mortgage financing) and with the profitability for the banks of mortgage-based securities.
But Michael’s way of tracing the linkages between these dimensions of crisis runs into difficulties He creates difficulties for his account by misreading some basic elements in Marx’s value theory.
In my view, and I think in Marx’s, circulation and distribution are at a lower plane of causal abstraction, or if you like, closer to the proximate than the ultimate or underlying causes. A collapse in the stock market or in real-estate prices will not lead to a collapse in production unless there are already serious difficulties in the latter. There have been many stock market collapses without a slump in production (1987) but not vice versa.
But the stock market deals with fictitious capital, in which contractual claims on the flow of surplus-value are traded. It is external to the circuit of productive capital. As Marx says at the start of Capital Vol. 3, ‘the capitalist production process, taken as a whole, is a unity of the production and circulation processes (p.117). Capital in the money form is both the starting point and the necessary terminus of the social reproduction sequence. Only to the extent that demand is available at each stage in the circulation process can value and surplus-value be realised in the money form.
Levels of abstraction are not the same as a hierarchy of causal processes. Michael is right to say that a large-scale collapse of demand needs explanation and that Keynesian accounts are inadequate.
To say the cause of the Great Recession was due to a lack of demand is bit like saying that that the cause of the streets being wet today is because it is raining today. That tells us nothing about why it is raining today and/or what causes rain to happen. Describing the Great Recession as a lack of demand is just that, a description, not an explanation.
The critique of Keynesian demand management in this article is well argued and deserves careful study. But in his insistence that demand is simply and directly determined by the level of productive investment, Michael seriously weakens the explanatory power of Marxist political economy. In his review of the Mian and Sufi book he writes:
It’s investment that is the swing factor in recessions and recoveries, not consumption. Or to be more exact, it is profits that call the tune, because investment demand drops off when profits do. As profitability falls over time, eventually the mass of profit will fall and this will force weaker businesses to cut back on investment or even close down. Then there is a cascade of falling ‘effective demand’ as companies go bust or lay off labour.
Here some of the tendencies identified in Marxist analysis are treated as direct causal determinations operating automatically. Both factually and theoretically the explanation of the 2007-09 crisis which results is seriously flawed, given that overall investment levels in the US non-financial sector did not fall until 2009.
Readings of Capital 