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Can the U.S. Economy Escape the Law of Gravity?
Hegemony and Prosperity in the Neoliberal Era
Seminar Paper No. 9
Oct 2001
Gary A. Dymski
Can the U

Can the U.S. Economy Escape the Law of Gravity?

Hegemony and Prosperity in the Neoliberal Era

Gary A. Dymski

Department of Economics

University of California, Riverside

Riverside CA 92521-0427 USA

Email: dymski@mail.ucr.edu

To be presented at the 49th Annual Conference of the Japanese Society for Political Economy, Komazawa University, Tokyo, October 20-21, 2001.

[European] capital markets cannot equal that of the U.S. in breadth, liquidity, and competitiveness in the foreseeable future. -- Emile Despres, Charles P. Kindleberger, and Walter Salant (1966, p. 528)

It is tempting to look at the market as an impartial arbiter .. But balancing the requirements of a stable international system against the desirability of retaining freedom of action for national policy, a number of countries, including the U.S., opted for the latter. -- Paul Volcker (1979, p. 4)

The most significant economic event of the era since World War II is something that has not happened: there has not been a deep and long-lasting depression. -- Hyman Minsky (1982)

1. Introduction

Steady U.S. macroeconomic growth has been the one constant during the tumultuous 1990s, a decade that saw Japan’s momentum-less stagnation, the Mexican financial crisis of 1994-95, the investment boom and financial crisis in East Asia, and the Brazilian and Russian devaluations and Long-Term Investment meltdown of 1998-99. In the past six months, U.S. economic growth has slowed. Whether this slowdown constitutes a recession — and hence whether the U.S. economy can escape the "law" of economic gravity, wherein goes up must eventually come down — is not clear at this writing. Interest-rate cuts aimed at stimulating renewed growth have not worked; they have neither regenerated investment nor stimulated exports via a devaluation of the dollar. Indeed, interest-rate cuts have not led the dollar to fall against other currencies. These cuts have at least temporarily reversed a dropoff in housing starts and resale prices. As Figure 1A shows, the dynamics of the U.S. business cycle have changed: since the 1980s, these cycles have been longer and more stable than in the past.

What then is different about the U.S. business cycle? Why has it changed, if it has? And what are the implications of these changes for U.S. and global economic growth, and for U.S. households? This essay uses ideas developed by two giants of 20th Century economics, Hyman Minsky and Michael Kalecki, to answer these questions. These two figures had well-developed ideas about the sources of cyclical fluctuations, emphasizing respectively financial instability and and labor and capital militancy. Both focused on the sources of growth and stagnation in advanced capitalist economies. Both highlight elements that are crucial in the contemporary global system. At the same time, the ideas of both are incomplete. This partial character is, in part, calculated. Kalecki was aware of the importance of monetary factors in cyclical fluctuations, but elected to deemphasize these in his formal work (Dymski, 1996a). Conversely, Minsky was well aware of the importance of labor-market and workplace relations, but chose to emphasize financial factors in his theoretical work.

Thus, the silence of one is the focal point of the other. Many economists have taken up the challenge of combining these two authors’ insights in models incorporating financial and labor dynamics. See, among others, Crotty (1990), Itoh and Lapavitsas (1999), Jarsulic (1988), Sawyer (1985), Skott (1989). These efforts at capturing and extending the ideas of Kalecki and Minsky emphasize important questions of theoretical consistency and vision.

This essay takes an empirical, not theoretical, approach, using these authors’ ideas as guideposts for an empirical exploration of the U.S. macroeconomic situation. These authors’ ideas about how U.S. business cycles have evolved are shown to be accurate for the post-War period up until the 1980s. However, patterns since then have diverged. We argue that a further "silence" in both authors’ models may explain the new patterns. Both Minsky and Kalecki analyze an implicitly national economy, and do not consider the impact of sustained global imbalances on U.S. cyclical fluctuations.

In most cases, a nation’s cross-border imbalances are typically contained, and net out over time. The situation of the U.S. economy in the last twenty years is different. The U.S. has gradually built up a trade deficit -- and corresponding capital-account surplus — of unprecedented size during this period. This huge asymmetry in flows has become a fundamental feature of the global economic structure. This profound a sustained cross-border imbalance cannot be explained in purely economic terms: overseas investors and trading partners would have crowded the exit doors by now. So the persistence of this imbalance must rest on something else, something deeper — and as it happens, another imbalance.

This further imbalance is the U.S.’s hegemony in the global political-economic system. This hegemony has given the U.S.’s "safe harbor" role unprecedented importance in this era of great instability and recurrent crashes -- just when financial deregulation and relaxed controls on cross-border movements have made it feasible for those with wealth to reallocate their wealth portfolios globally. The period during which the U.S. has been a "safe harbor" magnet for global wealth has largely corresponded with a period in which the trading capacity of many of the United States’ national partners has expanded (and in which the restructuring of American manufacturing and agriculture has been completed). So a global macroeconomic imbalance, paralleling the deeper global power imbalance, has arisen on the basis of a sustained exchange of competitively-priced goods for the promise of economic security. This global imbalance is the root cause of the change in the character and timing of U.S. cyclical fluctuations. Understanding the current situation requires both using these theorists’ ideas and also adapting them to these new circumstances.

2. The Cyclical Models of Minsky and Kalecki

The work of John Maynard Keynes provides a useful frame for the cyclical models of both Minsky and Kalecki. Keynes’ discovery of the principle of aggregate demand in the early 1930s formed the basis of the "Keynesian Revolution" in economics. This "Revolution" shifted the focus of national economic policy away from microeconomic market regulation and toward the control of aggregate behavior. In Keynes’ view, only devotion to outdated ideologies could block full employment in advanced economies; if business were reluctant to invest, for example, socialized investment should be pursued as a matter of course. Keynes recognized that this step would severe the link between investment expenditure and wealth-owners’ supply of loanable funds. Governments might then achieve the euthanasia of rentiers — that is, break the dependence of income flows on previously accumulated wealth — by pursuing low-interest-rate policies.

For Keynes, then, modern capitalist societies can block the cyclical dynamics that generate recurrent high unemployment and asset price collapses. Minsky and Kalecki can be understood as challengers to Keynes’ (perhaps willfully) optimistic view that the business cycle is a thing of the past. Minsky considers the cyclical implications of capital-market and financial structures; Kalecki, in his "full employment" article, focuses on labor extraction.

The Minsky Financial-Instability Model. Hyman Minsky argues in a series of papers and books published primarily in the 1970s and 1980s that advanced capitalist economies are subject to cyclical variability due to financial instability. The precondition for financial instability is a set of financing relationships between surplus units with excess resources and deficit units which seek to spend beyond their available means. These arrangements are fragile in a dual sense: borrowers' expectations about future income may be disappointed; and lenders may encounter difficulties in supporting their financing commitments. So spending supported by financing gives rise, respectively, to default and liquidity risk. Intermediaries may ameliorate these risks for lenders or borrowers, but only by bearing them or passing them on to third parties. The level of these risks, and hence the degree of financial fragility, depends on three factors: the terms and conditions of financing; the riskiness of the projects being financed; and the balance-sheet obligations of the borrower units.

The more financing is arranged to facilitate purchases in a given period, the greater the demand for aggregate output. This financing-induced boost to demand carries a cost, however: the economy becomes more financially fragile as financial commitments rise relative to income flows. The range of income outcomes that permits deficit units to meet repayment commitments shrinks as leverage (the ratio of debt to income) grows — both for individual units and for the economy as a whole. Financial instability may arise when a significant number of borrowers cannot meet repayment demands, so that cash-flow disruptions spread to other units’ balance sheets and large portions of value of the economy’s asset-liability structure is jeopardized. The potential for mismatches between cash-flow obligations and asset and liability values is enhanced by the existence of resale markets for financial claims on capital assets; the price of an asset for which a high return is anticipated can soar, encouraging the financing of more such activity regardless of risk.

Minsky argued that expectations, debt-financed expenditures, and balance-sheet relationships -- and hence financial fragility — will evolve systematically during the business cycle. Initially, balance sheets are robust because assets are conservatively priced and debt commitments modest; but during an expansion, asset prices rise and debt burdens grow until finally liability commitments outpace asset returns and a downturn is induced. An economy becomes more financially fragile as an expansion proceeds, and eventually a period of financial instability occurs: asset values fall, and a debt-deflation cycle may be unleashed.

Figure 2A: A stylized Minsky crisis in the Small Government Era




Stages: Robust Fragile Ponzi Collapse

NOTE: Time elapses from left to right, growth is measured vertically. AA indicates a zero-growth position.


Minsky summarizes the cyclical evolution of expectations and balance sheets in a ratio between two hypothetical prices: the financial-market price of a representative capital asset, which he terms PK , and the production-cost price of that asset, PI. Minsky argues that as a boom period proceeds, an asset bubble emerges: specifically, the asset bubble arises when the ratio (PK/PI) exceeds one for an extended period of time. Figure 2A shows a stylized picture of a Minsky crisis, emphasizing the key role of asset bubbles in cyclical fluctuations. The rapid pace of output growth eventually exhausts industrial capacity and forces firms to take on debt to expand production. The combination of euphoric expectations and competitive pressure drives up debt/income ratios and asset prices simultaneously; leverage is rewarded.

The shift from prosperity to recession involves, simultaneously, the collapse of the (PK/PI) ratio and the collapse of the income stream that supports the economy’s liability structure. In the downturn, deficit units’ inability to service debt leads to defaults and forces the sale of assets in markets with few buyers, sinking PK further. If the price of output (PI ) falls, the burden of debt worsens. This crash state is the Minsky crisis.

Kalecki’s "Political Business Cycle" Model. The central concern in Kalecki’s writings — including his early Polish-language essays anticipating Keynes’ principle of aggregate demand — was the problem of investment and employment fluctuations in capitalist economies. In his formal models, Kalecki (1954) identified several sources of fluctuation, including variable price-markup ratios and accelerator effects. At least as well known, despite its brevity and non-technical charater, is a model Kalecki did not formalize, his essay "The Political Economy of Full Employment."

Here Kalecki argues that sustained full employment is impossible in advanced capitalist societies. His pessimism stems, in effect, from the dependence of capitalist accumulation on Marxian exploitation. He argues first that if unemployment falls too low, workers’ effort in production will decline, reducing the profit rate. So as unemployment falls, worker effort may diminish, and capitalists may feel coerced into providing jobs under terms and conditions that compromise profitability. In effect, profit levels are subject to a labor-effort/output tradeoff. This danger can be averted only if the economy is operated at sub-full-employment levels; but a low-output state -- stagnation — also diminishes profits. Continued capitalist accumulation is especially threatened if workers unite in social democratic parties that demand full employment as a political outcome. For then the very legitimacy of the powers and rights of the owners of the means of production can be subjected to fundamental challenges. Capitalists’ loss of control leads them to capital strike and/or reduced investment, initiating the downturn. As Figure 2B illustrates, there is an upper limit to capital accumulation.


Figure 2B: The Kaleckian political business cycle

Real output growth rate Unemployment level

(+) zero









There is also effectively a lower limit on growth. High unemployment levels are beneficial in some respects for capitalists: high labor effort is assured, wages are low, and their control over the production process is guaranteed. Low rates of capacity utilization may be problematic, especially for firms that have significant financial leverage. Another problem arises because of the influence of labor in the political sphere. If unemployment rises beyond some point, political agitation by the working class might trigger government counter-cyclical action. This is suggested as the lower boundary for employment in Figure 2B.

This leads to the idea of a political business cycle, wherein macroeconomic growth fluctuates between the two limit points shown in Figure 2B. As unemployment falls during the expansion, capitalists will use their power to withhold investment to regain control over government policies. In turn, downturn is checked when unemployment leads to government counter-cyclical action and low wages lead capitalists to reinitiate investment expenditures.

3. Big Government, Small Government, and Neoliberal Capitalism

Minsky argues that there was a fundamental transformation in the dynamics of capitalism because of governmental policy reforms made during the Depression. He calls the period before the Depression "small-government capitalism." In that era, financial instability operated by imposing a cyclical discipline on wealth-owning and asset-owning units in the economy. The stock market crash and banking holiday of the Great Depression itself was only the most dramatic example of this "slaughter of capital" (to borrow Marx’s phrase) as a disciplining device. However, the Depression led to extensive new financial regulation, consolidated the "lender of last resort" role of the Federal Reserve, and (together with World War II) led to a new aggregate-demand role for government spending.

These changes brought on the big government era. Cyclical dynamics were fundamentally different in the big government era. Price deflation was checked by the interventions of the Federal Reserve and by counter-cyclical government expenditures. Instead, an inflationary bias was built into the cyclical dynamic (as a consequence of federal monetary and fiscal policy interventions). The tremendous increases in business failure, bank failure, and unemployment rates were eliminated. In effect, a tendency toward price inflation was the price of an interventionist state that "stabilized the unstable economy" (to paraphrase the title of Minsky’s 1986 book).

Figure 3A illustrates how the dynamics of financial instability are transformed under Minsky’s big-government capitalism. Note that the collapse of asset prices (the PK/PI ratio) is blocked before it turns negative. Investment too is stabilized at a low but positive level. Debt/income levels rise both cyclically and secularly. Balance sheets are not thoroughly "cleaned" through widespread business failures in the downturn, as in the small-government period; so debt/income ratios build up over time.

Figure 3A: Minsky crisis in the Big Government Era





Dymski and Pollin (1994) investigated Minsky’s notion that capitalism could be divided into "small" and "big" government eras using a variety of empirical measures. We collected annual data for the U.S. economy for the period 1887-1988 for a variety of macroeconomic and behavioral measures, including GNP, price inflation, the interest rate on 6-month commercial paper, and the business failure rate. We constructed a long-term bank-failure rate series. These variables were then grouped by cycle based on NBER business-cycle turning-point data. The value of a given variable in the "peak" year preceding a downturn was termed "year 0". The value of that variable in the subsequent year was termed "year 1", and so on. Cyclical trajectories were then computed for these variables (excluding variables when they would have been double-counted). The World-War periods (1913-18 and 1937-51) were discarded. Several variance-based tests determined that these cyclical patterns did indeed fall naturally into "small government" and "large government" groupings — but until the arrival of the 1980s.

But what was different? Dymski and Pollin noted that U.S. 1980s business cycle behavior (beginning with 1981 as a peak year) resembled the "small" government era because of its high real interest rate and its high rates of business and bank failure. At the same time, the characteristic problem of the big-government era — high price inflation — was clearly present. A puzzle was posed: was the 1980s episode different because of special contingencies (the accumulated effects of two energy shocks, Eurodollar recycling, aggressive monetary policy), was it a return to small-government patterns, or did it represent a new phase in cyclical behavior?

Data for two post-1970s cycles, extending over 20 years, are now available. These data suggest that the U.S. economy entered a new phase in the 1980s. We begin by investigating mean values of variables that figure centrally in Minsky’s model for the three periods in question: the small government era, 1887-1936; the big government era, 1951-1979; the 1980s; and the 1990s. Table 3A summarizes these results. Table 3A indicates first that real federal outlays were unchanged in the small-government era, and positive in the big-government era.

Average real GDP growth was indeed faster in the big-government era than in the small-government era. And as Minsky observed, the big-government era differed from the small-government era in that average price inflation was higher, the real interest rate was lower, and the bank and business failure rates plunged. The averages for unemployment rate and productivity growth were little different. But as the bottom portion of Table 3A reveals, volatility over the cycle was substantially less for the GDP growth rate, the unemployment rate, the real interest rate, and the inflation rate.

Systematic differences emerge between the big-government era and the 1980s and 1990s. Real federal outlays grew rapidly in the 1980s before turning negative in the 1990s. The pace of real GDP growth slowed progressively over these two decades. Average productivity growth slowed markedly in the 1980s before recovering somewhat in the 1990s. The average for the real interest rate climbs substantially in the 1980s and remains at historically high levels in the 1990s. The unemployment rate shows a similar pattern: a rapid climb in the 1980s, followed by slight decline — to an average higher than the big-government level — in the 1990s. This same broad pattern holds for the business and bank failure rates. These variables climb astronomically in the 1980s before falling somewhat in the 1990s to levels well above the big-government average. Stock prices, as measured by the Standard and Poor 500 average, grew much faster in real terms in the small-government era than in the big-government era; and this growth rate accelerated steadily in the 1980s and 1990s.


Table 3A: Average Levels of Aggregate Variables,

Small and Big-Government and Neoliberal Eras






ment (1887-31)

ment (1952-79)



Growth in real federal outlays (Pct) (1) (a)





Real GDP growth (Pct) (1) (a)





Real interest rate (2) (b)





Change in implicit GDP deflator (Pct) (1) (a)





Unemployment rate (Pct) (2) (a)





Productivity growth (Pct) (1) (a)





Growth in real stock prices (S&P 500) (Pct) (3)(c)





Bank failure rate (1) (d)





Business failure rate (1) (c)





Change in real before-tax profits (Pct) (4) (a)





Change in real net interest income (Pct) (4) (a)





Real consumer debt per person ($96) (4) (c)





Real mortgage debt per person ($96) (4) (c)





Average gap between highest and lowest values over the cycle:

GDP growth rate





Real interest rate





Rate of price inflation





Unemployment rate





NOTE: Bank and business failure rates are measured per 10,000 establishments. Data series extend over different periods: those tagged (1) are measured for the period 1887-2000; (2), 1891-2000; (3), 1900-2000; (4), 1952-2000.

The years 1913-18 are excluded from the small-government era.

SOURCES: (a) Bureau of Economic Analysis, Department of Commerce; (b) Federal Reserve Board;

(c) Economic Report of the President, February 2001; (d) Federal Deposit Insurance Corporation.

Overall, the data shown in Table 3A clarify several points. First, with the exception of the rate of price inflation and the trend in real government spending, the averages for the 1980s and 1990s are broadly similar. Second, these averages are clearly distinct from those for either the small- or the big-government era. The 1980s and 1990s resemble the big-government era in that GDP growth has been relatively robust and far less volatile than in the small-government period. But like the small-government era, the real interest rate and business and bank failure rates are high. The U.S. economy has not returned to the big-government pattern after the disruptions of the 1980s; nor has it reverted to the small-government pattern. Instead it appears to be in a new phase, which we term the neoliberal era. The defining characteristics of this era are the systematic deregulation of financial intermediation and financial flows, relatively open trade flows, and a shift in government’s role. To borrow Kregel’s (1998) terminology, the "big government" role of counter-cyclical spending has largely disappeared; replacing it are government’s "big bank" mechanisms for stabilizing the economy (the central bank’s lender of last resort function and its use of interest rates to moderate inflationary and deflationary tendencies). The "capital-labor accord" that was implicitly struck during the Golden Age period is abrogated. Labor’s right to organize, to protect its real wages from erosion, and to negotiate directly with firm owners and managers is challenged; similarly, the use of government expenditures to support the unemployed, the infirm, and the elderly is increasingly restricted.

Government is no longer envisioned as a guarantor or provider of security for individuals; instead, its more modest role is to police market relations, to insure that the rules of the game are fair. Indeed, authors that discuss the new global regime usually take as their theme the surrender of government control to market forces; the possibility of capital flight or disinvestment (or both) serves as a check on any government’s capacity to protect its citizens’ living standards or its firms’ cash flows. This notion that all governments are equally small before the onslaught of globalization will be carefully considered below.

We now compare cyclical dynamics during the small-government, big-government, and neoliberal eras. Figure 3B contrasts the cyclical patterns of post-peak growth in real GDP in these three periods. Note that the average GDP decline in the downturn is substantially larger in the small- than big-government eras. The big government puts a higher "floor" under real GDP growth; but the "ceiling" growth rate for real GDP is lower than in the small-government period. The 1980s and 1990s data show a more rapid recovery from downturn than in earlier years. The 1980s boom resulted in a much higher peak growth rate than was seen either in the big-government average or in the 1990s. Figure 3C shows the cyclical dynamics of the unemployment rate. The unemployment rate achieves a lower average level at the business-cycle peak in the small-government era than it does subsequently, and conversely climbs to a much higher peak level in the wake of the downturn. Again the fluctuation of the unemployment rate is moderated in the big-government era. The 1980s marks a sharp break with the big-government pattern: the unemployment rate climbs quickly to a high level — and even when moderating does not fall to big-government levels. The unemployment rate in 1990s cycle is again higher than big-government levels until the later years of the cycle; it also displays less variability over the cycle than in the small- or big-government periods.

The distinct character of the three eras is clearly seen in Figure 3D, which portrays the cyclical pattern of price movements. The sustained deflationary momentum of the small-government era is clearly evident. The contrast between small- and big-government dynamics could not be greater. In the big-government era, inflationary pressure rises in the downturn as the monetary authority intervenes and counter-cyclical spending is triggered. The authorities exploit the inflation/stability trade-off in favor of stability. The 1980s and 1990s business cycles are utterly different. In each case, inflationary pressure is highest at the initial business-cycle peak. This pressure then moderates steadily through the downturn and renewal of expansion. The same distinct patterns are evident for real interest rates in Figure 3E. In the small-government era, the real interest rate rises substantially and for a prolonged period after the peak — a pattern related to that era’s deflationary bias. By contrast, real interest rates fall after the peak in the big-government era due to Federal Reserve intervention. And once again the 1980s and 1990s present a new pattern — a virtually constant real interest rate without cyclical momentum.

One implication of the active countercyclical interventions of government in the big-government period is shown in Figure 3F, which sets out the cyclical dynamics of stock-market prices. In the small-government period, stock-market values decline steadily for an average of two years after a peak year. In the big-government era, a slight increase in stock prices is recorded in the downturn year, followed by a substantial recovery in the following year. The 1990s follows this big-government pattern. The 1980s does not; the sharp downturn in stock prices recorded between 1981 and 1982 reflects the extreme disorganization of financial markets and macroeconomic aggregates during that time period. However, a dramatic recovery soon follows. Figures 3G and 3H portray the cyclical dynamics of business and bank failure rates. A common pattern is found for business failures: the downturn induces an upsurge in business failures, which moderates and turns down as the expansion proceeds. The exception is the 1980s cycle, which is immediately preceded by a period of stagflation and a downturn two years just earlier. Figure 3H illustrates that the bank failure rate does not consistently vary over the business cycle. In the 1930s and again in the 1980s there is clear evidence of a cyclically-linked bank failure wave. In both cases, this was not a recurrent event, but instead a symptom of the collapse of the formal intermediation structure.

In sum, several factors suggest the U.S. economy has been in a new period since the end of the 1970s. Real interest rates and price inflation no longer vary systematically over the cycle; instead their behavior is relatively smooth over time, suggesting that these variables are responding to forces other than the cyclical momentum of the U.S. economy itself. The behavior of the unemployment rate over the cycle has also shifted: it has in the 1980s and 1990s drifted downward, not upward, in the latter stages of the expansion. If these are all indications of new forces at work, they cumulatively work to extend the length of recoveries and, evidently, to ease or offset pressures that would otherwise trigger a downturn.

This is not to suggest that the U.S. economy is a pain-free zone. Business and bank failure rates are much higher than in the big-government era; the business-failure rate variable remains cyclically responsive, but at a far higher level than before. What force or forces could simultaneously impose a higher level of microeconomic pain (the higher business and bank failure rates) and a more extended period of macroeconomic expansion? Before confronting this question, we turn to the evolution of Kalecki’s political business cycle in the U.S. context.

4. Kalecki’s Political Business Cycle in the Three Eras

Kalecki’s political business-cycle model suggests that the behavior of the unemployment rate should change once workers have political representation. Specifically, it should not fall as low in expansions, due to problems with labor-extraction under welfare-state full employment, nor should it rise as high in downturns, due to the political power of labor. Table 4A provides evidence in support of this conjecture about the shift from the small- to the big-government era. The average peaks and troughs of the unemployment rate indeed follow this pattern. The 1990s cycle also shows this moderate pattern of fluctuation; but the 1980 pattern doesn’t fit — unemployment rates are too high both at the top and bottom of the cycle. The top portion of Table 4A also illustrates that profits fell by much more in the 1980s than they had on average during the big-government era.

The bottom portion of Table 4A presents some ambiguous evidence about the basic posture of the U.S. unemployment rate in these three eras. The observed unemployment rate in expansion years was just below the "natural" unemployment rate (as calculated by Gordon (2000)) in the small-government era, but then substantially below it during expansions in the big-government era. This conclusion follows in part because Gordon’s natural rate drifts upward over time. Now suppose a constant unemployment rate is used — for example, 5.15 percent, which is the average "natural" rate Gordon calculates for the 1900-98 period. Then the opposite conclusion emerges: small-government expansions can now be regarded as closer to whatever constant unemployment target one may pick. In effect, Gordon’s "natural" unemployment rate with secular drift builds in Kalecki’s full-employment/labor-extraction model, as it suggests that a higher natural rate obtains. The neoliberal era in any event represents a sharp rift with this scenario. The unemployment rate rises dramatically higher than whatever point of reference one chooses, in a clear break from the cyclical patterns of both the small- and big-government eras.


Table 4A: Unemployment Rates and Gaps during the Small-Government,

Big-Government, and Neoliberal Eras

Average unemployment rates

Average growth rate of


over the business cycle:

real profits over the cycle

























Gap between Expansion-Year Unemployment Rates and:


"Natural" Unemployment Rate

5.15 Percent

4 Percent

















NOTE: The "Natural" unemployment rate figures from the appendix to Gordon (2000)

are used in the first column. Gordon's "natural" rate drifts upward secularly from 4.2 percent

in the late 1800s to 6.5 percent in 1980 before falling back to 5.3 percent by 1998. Figures for

unemployment gaps are calculated only for expansion years (those with positive GDP growth).

SOURCE: See Table 3A.


This sharp increase in the overall unemployment rate may be linked to the large drop in real profits noted in the 1980s in Table 4A. This point is also supported by the calculation of average profit growth rates shown in Table 3A: that is, the growth rate of profits slowed dramatically in the 1980s relative to its average pace during the big-government era. The figures for profits shown in both Tables 3A and 4A suggest that the growth rate and stability of profits were restored to more satisfactory levels in the 1990s. This suggests that the labor side of Kalecki’s political business-cycle model has broken down in the neoliberal era: capital has restored the growth rate of profits and a higher unemployment rate has been reestablished; but the political penalty associated with high unemployment rates appears to have eased.

Two factors may account for this shift in the Kaleckian cyclical dynamic between the big-government and neoliberal eras. One factor, also pertinent for the transformation of Minskian financial dynamics, is explored in section 5 below. The second factor, summarized in Table 4B, is a shift in the sources of GDP growth during expansion years.

Table 4B decomposes GDP growth in several ways. The two leftmost columns separate GDP growth into the growth rates of productivity and labor. The growth rate of labor, in turn, is decomposed into the growth of workers in the labor force, of labor force participation by working-age adults, and of working-age adults. The last two columns record the percentage of GDP growth explained by labor growth (the remainder is due to productivity), and the average change in the unemployment rate during expansion years. Table 4B shows that in the small-government era, productivity growth accounted for just a third of GDP growth. This pattern changed during the first two decades of the big-government era, as productivity growth accounted for most of GDP growth. This permitted rising real wages and eased capital-labor conflict during these years. In the 1970s cycles, however, productivity growth fell dramatically. Offsetting this in expansion years was a rapidly rising labor force (due especially to the entry of women into the labor force). Figures 4A and 4B provide a visual interpretation of these shifts. These figures "stack" the four explanatory elements in GDP growth. Labels indicate the contributions to GDP growth of these various elements for the six time periods shown in Table 4B. The percentage increases in workers as a percentage of the labor force, and in the labor force as a percentage of the working-age population, are combined in the term "labor participation." Figure 4A shows that labor participation made a relatively small and stable contribution to GDP growth in expansion periods through 1974. Productivity (GDP/worker) growth made the largest initial contribution to GDP growth in the 1950s expansions; as this component weakened, adult population growth increased.

Table 4B: Sources of U.S. GDP growth in expansion years




Labor force


% Share of

Change in

ty (GDP per



in labor


rel. to adult



Labor in



of Labor




GDP growth

ment rate

Small gov’t.











1951-53, 1955-57,




































































Figure 4B picks up the story from the 1976-79 expansion through the present. Adult population growth falls over time. Productivity hits an historic low in the late 1970s, though labor participation compensates. Labor participation falls but remains high in the 1980s, as productivity recovers slightly. Then the 1990s expansion restores the formula of the beginning of the Golden Age: productivity growth is the largest factor in GDP growth (see Table 4B), with moderate adult-population growth far more significant than labor-participation growth. Productivity-led growth means the possibility of gains-sharing with labor and a curtailment of the labor-conflict factors which Kalecki’s model emphasizes. The reduced level of labor-participation growth means less pressure on available labor supply.

In sum, the balance of forces underlying U.S. macroeconomic growth has changed in the 1990s. In our approach, we have seen that the growth period of the 1990s resembles the 1950s in some ways. However, because 1990s productivity growth was well below its Golden Age peak, GDP growth has been lower overall, and there are fewer gains to share.

5. Global Hegemony and the U.S. Business Cycle

The United States’ global hegemony is the missing factor that may explain both the transformation of Minskyian financial cycles and the "softening" of Kaleckian political business-cycle constraints. It is an accepted wisdom today that the U.S. economy has unassailable global power; see, for example, Cumings (2000). This global power emanates from the political sphere; it extends to the economic sphere due to the preeminence of Wall Street and the "New Economy." U.S. global dominance is paralleled by weaknesses elsewhere: Latin America had its Lost Decade in the 1980s, while Japan’s economy has been mired in its own Lost Decade of the 1990s; and for much of the two past decades, Europe was stagnant due to problems of transition in Eastern Europe and due to policies implemented to meet the European Monetary Union criteria.

The two bases of the U.S. economy’s strength have been badly shaken in the recent past. Wall Street has never recovered momentum after the late-1998 Russia/Brazil crisis; and in early 2000 the New Economy began the longest period of retrenchment and failures since its launching. Most other data on the U.S. economy indicate weakness, not strength: most notably, manufacturing-sector layoffs, an unprecedented trade deficit, and a low household saving rate. The layoffs, the trade deficit, and the low saving rate are all linked to the strong dollar: a strong dollar attracts foreign savings, draws in foreign savings, and undermines exports. The overvaluation of the dollar thus appears to be the obstacle to correcting this situation. For example, Godley and Izurieta (2001) argue that the U.S. can avoid a macroeconomic squeeze due to sectoral imbalances only by improving its net export position, which requires reducing the value of the dollar.

Krugman (2001) has also recently recommended policy steps to reduce the value of the dollar and restore U.S. exports. He argues that the U.S. should learn from the post-peso crisis experience of Mexico; and he cites as a precedent the devaluation of the dollar under the 1985 Plaza Accord in the mid-1980s. Krugman’s argument rests on an apparent paradox: the U.S. has a weak trade position, but it possesses the power to strengthen its trade balance by making its currency weaker. Underlying Krugman’s argument is this premise: the strategic position of the U.S. economy rests on its proprietorship of the world’s reserve currency of choice. But this doesn’t mean that the value of the dollar can simply be manipulated to facilitate U.S. macroeconomic growth. For the dollar is also the ultimate positional asset in the neoliberal order.

Since the dollar is a fiat currency, after all, its strength rests ultimately on the strength of the U.S. itself. This strength rests on several distinct bases: U.S. military power and this nation’s geographic isolation from world "hot spots;" the size of the U.S. economy and the sophistication and relative openness of its financial markets; the U.S.’s (reluctant) willingness to absorb at least immigrants with wealth assets and the capacity to generate jobs; and the shrinking list of prosperous, secure alternatives.

The links between political and economic instability, capital movements, and currency balances and values have been examined by economists over the course of many years. Kindleberger’s well-known 1937 volume, for example, described capital movements as destabilizing: "capitalists seek to avoid the country of business of depression and avoid the possibility of national bankruptcy" a process that can end only with drastic action, such as an overnight devaluation, banking system collapse, a debt moratorium, foreign exchange controls, or the "accession of a ‘strong man’ to power." (Kindleberger (1937: 170-172)).

This argument leads directly to Kindleberger’s well-known argument that the international financial system functions well only when one nation is willing and able to function hegemonically as the international lender of last resort — as the guarantor of global financial stability (Kindleberger, 1973, 1974). This in turn sets up the idea that a nation which functions as a hegemonic financial center is special, and its currency should enjoy special privileges. In the 1960s, the U.S. developed a trade deficit, at the same time that its leading companies were acquiring business assets abroad. This imbalance is sustainable only if the rest of the world is willing to hold the dollars thus released from their nation of origin. The idea of a dollar shortage had been suggested in the 1950s; in the 1960s a number of authors joined this argument to the idea of the U.S.’s superior financial and investment markets — see Kindleberger (1965) and the well-known essay by Despres, Kindleberger, and Salant (1966) which is cited above. The Bretton Woods fixed exchange-rate system did not survive the stresses of this period; policy flexibility was needed, as Volcker (1979) later noted. During the 1970s, the dollar fell against all the currencies of its major trading companies. This was viewed by American economists as a means of "passively" accomplishing restoring balance-of-payments equilibrium (Krause, 1970), and by Europeans as an effort by the U.S. to export the worst effects of 1970s stagflation to Europe (Parboni, 1979). U.S. military power reached a low in the 1970s with defeat in Vietnam.

By the end of the 1970s, the U.S. economy was in disarray (see Figure 4B). This led to a sea-change in the orientation of U.S. economic policies — away from a welfarist, regulationist state and toward marketization and deregulation. The U.S. banking system, previously protected from price competition, was opened to market forces and consolidation. U.S. workers were exposed to new risks, pay cuts, and dislocation. Paul Volcker (1979) baldly described the mood among U.S. policy-makers: "a controlled disintegration in the world economy is a legitimate objective for the 1980s."

The U.S. position on balance-of-payments management was transformed in the midst of period of "controlled disintegration:" the idea of managing the exchange rate to permit passive balance-of-payments adjust was replaced by the idea of a passive exchange-rate policy. This policy approach was captured in McKinnon’s suggestion that the U.S. is the "Nth country" in a world of "N-1" managed currencies. The Reagan Administration used this philosophy as a means of implementing a macroeconomic policy that imposed tight money and high interest rates as a means of attacking inflation, on the one hand, and expansionary fiscal policy as a means of stimulating demand, on the other. The result was a rapid rise in the value of the dollar (see Figure 5A) and a rapid deterioration of the U.S. current account. Overseas wealth-owners (especially Japan) bought dollar-denominated assets. Coincidentally, the Reagan Administration reasserted U.S. military might. The high real interest rates, combined with a collapse in commodity prices, destabilized heavily-indebted Latin America and led to its "lost decade."

This episode demonstrated the willingness of the U.S. to seek its own position of advantage even at the expense of allied nations’ distress. This was the apparent advantage of being the "Nth country." By 1985, U.S. trade was so badly in deficit that the Plaza Accord was pushed through as a means of reducing the competitive advantage of Japan. As Figure 5A shows, net U.S. exports recovered substantially. This agreement was subsequently modified in the 1987 Louvre G-7 meeting; according to McKinnon (1996), this subsequent session marked a commitment by the U.S. and other nations to maintaining greater exchange-rate stability. This meant yet another shift in U.S. exchange-rate management. McKinnon describes it as follows: "Rather than ‘benigh’ neglect, the private markets came to believe that American monetary policy, and the policies of other countries, would eventually be adjusted if necessary to stop a run on the currency ... In particular, American monetary policy no longer perversely aggravated cycles in the dollar exchange rate and in world money" (1996, page 498).

As Figure 5A illustrates, this period of stability has come apart since 1995. Several reasons are to blame. One is the extended rise in U.S. financial-market prices (shown in Figure 5A); another is the major periodic financial crises of the late 1990s; and a final reason is perhaps the ‘private market’ beliefs cited by McKinnon. The rise of the dollar in this period, and the failure of the dollar to drop in response to interest-rate easing in 2000-01, can be attributed to the hegemonic role of the U.S., its status as a safe haven in a world of crumbling sanctuaries and alternatives.

Minsky’s Model and Global Imbalances. Overall, the Neoliberal era has seen the U.S. shift from the low dollar of the 1970s (after the breakup of Bretton Woods) to a variable "high dollar" regime, characterized by structural deficits on current account, from the 1980s onward. This has transformed the operation of the Big-Government Minsky cycle sketched out in Figure 3A. No longer is the cyclical downturn triggered by rising price inflation, and reversed through accomodative monetary policy. As shown in section 3, price inflation and the real interest rate no longer vary systematically over the cycle. The high dollar disciplines prices; and monetary policy is aimed at the dollar as much as at domestic conditions. Similarly, it can no longer be assumed that a U.S. financial collapse linked to cyclical pressures will trigger lender-of-last-resort (and stimulative) interventions. The level of U.S. equity prices reflects not simply domestic conditions but overseas wealth-holders’ assessment of the relative desirability of U.S. equities. Of course, the management of interest rates is far from the only tool aimed at enhancing the value of U.S. assets in the global competition for portfolio wealth. Regulatory and underwriting policies also do their part, by permitted the creation of an unprecedented pool of securitized and relatively safe credit.

The U.S. economy is likely to stumble in the Neoliberal period, then, not when price inflation roars out of control, or when asset markets collapse, but instead: when U.S. corporations can no longer use financial leverage to enhance their rates of return on capital; and when U.S. households are no longer able to meet the challenge of being simultaneously the world’s consumers of last resort and its borrowers of first resort. Figure 5B uses flow-of-funds data to show that U.S. households, in particular, have participated in a debt explosion since 1995. Net increases in real corporate non-financial debt did not keep pace with the ascension of U.S. equity prices in the late 1990s.

Figures 5C and 5D use the cyclical dating method of section 3 to show that household cyclical debt patterns have indeed shifted in the Neoliberal era. In the Big Government era, as Figure 5C illustrates, households increased real consumer debt in the last year of expansion, and then shed debt in the recession. In the Neoliberal era, households experience negative consumer debt growth in both the peak and recession years — a pattern consistent with the idea of consumer overindebtedness as a trigger for the downturn. Further, consumer debt grows at a faster pace in Neoliberal expansions than in Big-Government expansions. Figure 5D shows that in the Big Government era, real mortgage debt grew substantially even after the onset of recession, only to plunge to negative levels for several years. The data for the Neoliberal years show first the huge negative impact of the 1981-82 period on mortgage debt levels. The Neoliberal data also reveal that after this period of collapse, mortgage debt has been relatively impervious to the business cycle. Instead, as Table 3A shows, real mortgage debt has grown steadily through time. Several econometric tests also suggest that household debt has increased faster relative to GDP in the Neoliberal than in the Big Government era.

The shift from the low dollar of the 1970s to the high dollar of the Neoliberal regime has had one further significant effect, working through equity-market prices. The U.S. corporate sector — it may be more accurate to say, the firms listed on and trading through Wall Street exchanges -- has become ever more dominant relative to other national sectors. Table 5A presents data on the market value of the firms listed in Business Week’s annual "Global 1000" rankings. This table shows the dramatic turnaround in the relative market value of U.S. firms relative to firms from other global areas. This growth in U.S. firms’ market values reflects both their high capitalization levels and the premium they can now command in market-to-book value ratios. The market value of U.S. banks, for example, increased almost ten-fold between May 31, 1989 and May 31, 2001, whereas the market value of Japanese banks was cut nearly in half (that of European and British banks also grew rapidly, though less so than U.S. banks). The global dominance of Wall Street, reflected in the role of the U.S. as investment locus of last (first?) resort, is clearly evident in the Neoliberal era; and U.S. business cycles cannot but reflect this structural situation.

Kalecki’s Political Business Cycle and Global Imbalances. It follows from this argument about the dollar that those with substantial amounts of dollar-denominated wealth hold the key strategic position within the U.S. In this context the shift of the U.S. toward greater wealth inequality during the Neoliberal period (Wolff 1995, 1998) has been a key factor in softening the Kaleckian political constraint. The neoliberal period witnessed a weakening of trade unions in the U.S. and the relocation of a large proportion of U.S.-based manufacturing to peripheral regions or offshore. Much of the manufacturing which survives has imported lower wages and labor standards from abroad; most workers now live "one paycheck at a time."

Service industries have, in the meantime, gone in two different directions. One is the "New Economy," consisting of enclaves of workers with specialized skills who are able to command scarcity rents. With the accelerated growth of asset prices during much of the neoliberal era, much of these workers’ compensation has come in the form of shares and stock options, effectively aligning their interests with those of wealth-owners. The second consists of service jobs demanding few skills. These have become the reserve of economically insecure, heavily minority workers. These workers’ ranks include many undocumented laborers, whose presence reinforces high levels of labor effort in lower-skill occupations (Dymski, 1996b). Indeed, the absence of inflationary pressures during the Neoliberal era can be attributed both to the high dollar and to the high levels of immigrant and low-wage labor.

These two arms of the new service economy are structurally interlocked. Business and consumer services are increasingly targeted toward upscale customers — the prosperous few whose fortunes are tied to the stock market — and supplied by low-wage and immigrant labor. This interlock, like the rise of the global factory and of immigrant labor, also affect the political dynamics of the business cycle that Kalecki identified in his model. Gains in employment will have very different rewards for ‘average’ workers — and hence political effects — than did employment gains in the Big Government era. And unemployment pressures may operate differently in these two ends of the new service economy; pain felt in the lower reaches of the wage and skill structure may be invisible in the privileged reaches of the workforce (and vice versa). Some portions of the "working class" gain when new sources of low-wage labor are opened up; and other portions lose. Class solidarity by workers dissolves in the face of the working class’s numerous skill-based, education-based, racial and gender divides (Dymski, 1996c).


This essay has investigated the shifting behavior of the U.S. business cycle by revisiting the Dymski-Pollin analysis of Minsky’s small-government/big-government framework. Dymski and Pollin (1994), writing at a time when only 1980s business cycle data were available, established first that small government and big government business-cycle patterns differed in several important ways. The debt-deflation/interest-rate strangulation mechanisms of the small government era were replaced, in the big government era, by an inflationary bias linked to governmental stabilization policies. Similarly, as Kalecki’s political-business cycle model predicts, unemployment moved in a narrower band in the big government period. Dymski and Pollin went on to speculate that the 1980s may have represented a return to small-government cyclical patterns.

This essay has reproduced the Dymski-Pollin methodology for both the 1980s and 1990s business cycles. We have argued that these years represent a new period, whose cyclical dynamics are distinct from those of both the small and the big government eras. The key difference is the emergence of a persistent and ever-deepening asymmetry in the global role of the U.S. economy. This asymmetry has gone under different names here — the U.S. as safe haven of choice; the U.S. household as consumers of last resort; the power of Wall Street. This new period —the Neoliberal era — is distinctive, of course, because nation after nation has been forced into deregulation, privatization, and market-opening. But this essay has argued that this era is also distinctive in that the U.S. economy has consistently had a high-dollar policy linked to a persistent deficit on current account (and a persistent surplus on capital account). When these structural features first emerged, they drew substantial attention from policy-makers and the public at large. But the sky did not fall, as Minsky once put it; these structural features — with the global imbalances they imply — have become persistent and stable features of the world economy. It is telling that only when the U.S. entered a period of slower growth in 2000 did concern with the huge U.S. trade deficit reemerge.

These structural imbalances have altered the business-cycle dynamics of the Neoliberal era — GDP and employment and investment growth has become less volatile, and growth periods have persisted for longer than in the past. Inflationary pressure has virtually disappeared due to the strong dollar; monetary policy has shifted in focus from domestic to global markets; and Kalecki’s upper bound on unemployment has been altered through structural shifts in the labor market (which in turn are intimately linked to globalization).

The answer to the question posed in the title of this essay is self-evident: no economy can avoid the "law of gravity" wherein what goes up must come down. The U.S. has not reached the end of history, even if the current slowdown does not ripen into a recession. The triggers that might generate U.S. slowdowns are different, and maybe "fuzzier" than in the past. The ability of the American household to maintain consumption expenditures and absorb debt is a key. The balance between asset-price appreciation, debt buildup, and consumption is undoubtedly a knife-edge. The boom in financial prices has put the U.S. economy in danger by spreading into other positional assets, notably housing. (Indeed, in some high-demand areas, housing prices rise and fall with movements in the NASDAQ index.) Parallels with the experience of Japan a decade earlier should be carefully considered.

The second factor that could trigger a U.S. slowdown (or turn a slowdown into a meltdown) is a change in the special position of the dollar as the ultimate safe haven in a world of stagnation and insecurity. This trigger actually has worked to sustain the U.S. dollar (and hence U.S. prosperity, working through the effects of a high dollar on price inflation, interest rates, mortgage refinancings, etc.) up until now. For the worse are conditions in the rest of the world, the higher the rental value of the dollar, and the more distorted the United States’ external position can become without adverse effects.

Can this be the sustainable calculus of 21st Century economics? It seems unlikely. As we have noted, Despres, Kindleberger, and Salant once argued that a global dollar shortage justified a U.S. trade deficit together with a high dollar.What is on offer now, perhaps, is not so much a dollar shortage as a global security shortage. And the good life is for sale; its rental price the cost of acquiring U.S. dollars. But the current situation rests on too many knife-edges to persist indefinitely. Even the protection offered by a nuclear missile shield — a last-ditch attempt to secure the permanent status of the U.S. as safe haven? — cannot ease the increasingly unsustainable pressures on increasingly polarized U.S. households and businesses. Then the globe’s leading nations will be forced to choose yet again between the military and the populist solutions to global capitalist instability and crisis. History has recorded how this choice was resolved in the last century; can we be wiser in this new one?




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