the Rate of Profit and the Debt Explosion

1. Falling profitability and its Incomplete Recovery. See Figure 1.

A. Over the long haul, profitability (the rate of profit) drives the ups and downs of the U.S. economy, unless replaced by spending based on borrowing.

B. I see the era since the 1970s as involving a constant effort by capitalists to use politics and economics to restore the rates of profit that had prevailed in the 1950s and 1960s. This involved restructuring (the destruction of less-profitable capitals) and the cutting of wages relative to productivity.

C. There was partial success in the 1990s, but U.S. profitability was held down by (1) increased competition; and (2) the global “race to the bottom,” which kept down consumer spending. But wage cuts, etc., continued.

2. Profitability peaked in 1997, but the boom continued until 2000. Even then, there was a relatively limited recession (given the situation of U.S. and world capitalism).

A. It’s not limited for those slammed by unemployment and stagnant wages, but it’s not hurting the capitalists in a big way yet. A true crisis hurts the capitalists as a class, not just workers and the less-competitive capitalists.

B. the boom continued – or the recession was limited – through a process of displacement: instead of financing accumulation and growth from profits, it’s been done through debt accumulation. It’s a little like a relay race, passing the baton to corporate debt, personal debt, and now, government debt.

1) the boom continued after 1997 first because of the rise of corporate debt (see Figure 2) which continued until 2003.

2) Its role was increasingly replaced by the increase in consumer indebtedness (see Figure 3) which also kept the recession from being really deep.

3) Consumer indebtedness cannot continue to increase, because

(a) the fall in consumer net worth (see Figure 4).

(b) the likely fall in stocks, because the price/earnings ratio is too high by historical standards (see Figure 5).

(c) the likely fall of the value of the main middle-class asset (housing) because house purchase prices are way out of line with rental prices (see Figure 6).

(d) the debt problem encourages a second dip of the recession, perhaps even before the election, especially if interest rates begin to rise.

C. If we escape the “second dip of the Dubya recession,” it will be because of growing government deficits and debt. The latter is shown by Figure 7

1) This is socialization of the profitability problem by the creation of government debt.

2) To some extent, the rate of profit has risen in 2002-3 because of (1) increased demand (due to rising debt) and (2) stagnant wages (due to anti-labor policies).

Figure 1: Non-Financial Corporate Profit Rates.

Source: U.S. Dept. of Commerce National Income and Product Accounts and Federal Reserve Flow of Funds.

Figure 2: Rising Corporate Debt.

source: “The U.S. Economy: A Changing Strategic Predicament” by Wynne Godley (

Figure 3: Rising Personal Debt


Of course, big debts can be handled if assets are large enough, so we should look at net worth.

Figure 4: Falling Personal Net Worth (in recent years)

source of figures 3 and 4: Deficits, Debts and Growth: A Reprieve but not a Pardon  October 01, 2003 by: Anwar Shaikh, Dimitri B Papadimitriou, Claudio H Dos Santos, and Gennaro Zezza (


Figure 5: the price/earnings ratio says that stocks are still too high.

source: Robert Shiller (

Figure 6: House Ownership Prices are out of line with Rental Prices.

source: Dean Baker & Simone Baribeau, “Homeownership in a Bubble: The Fast Path to Poverty?” (August 13, 2003)  


Figure 7: Increased Government Indebtedness.


[talk given to the Santa Monica College, March 16, 2004]


thanks to Doug Henwood, who found the (obvious!) mistake in the calculation of the profit rate in figure 1.



Jim Devine, a.k.a. James G. Devine

Professor of Economics

University Hall (Rm. 4227)

Loyola Marymount University

One LMU Drive, Suite 4200

Los Angeles, CA 90045-2659 USA

office phone: 310/338-2948; FAX: 310/338-1950