David Harvey, monomaniacs and the rate of profit

December 17, 2014

David Harvey is a Distinguished Professor at the City University of New York (CUNY), Director of The Center for Place, Culture and Politics (http://pcp.gc.cuny.edu/) and author of numerous books. For over 40 years, he has been one of the world’s most trenchant and critical analysts of capitalist development. And he has developed a global audience for his on-line video lectures on reading Capital, (see http://davidharvey.org/). Harvey won the 2010 Isaac Deutscher prize for the best Marxist book of the year with The Enigma of Capital (http://www.amazon.com/Enigma-Capital-Crises-Capitalism/dp/0199836841).

I have commented on Harvey’s contributions to Marxist economics on various occasions on my blog.

Professor Harvey has always been critical of the view that Marx’s law of the tendency of the rate of profit to fall plays any significant role as a cause of crises under capitalism. In his award winning book, The enigma of capital, he states that “There is, therefore, no single causal theory of crisis formation as many Marxist economists like to assert. There is, for example, no point in trying to cram all of this fluidity and complexity into some unitary theory of, say, a falling rate of profit”.

Recently, Harvey has returned to this point in the presentation of an essay to the University of Izmir, Turkey in October. You can see a You tube screening of that presentation at https://www.youtube.com/watch?v=-ZJrNgb-iiY&spfreload=10

What was particularly interesting to me was that, in his paper, Professor Harvey singles me and my work out as an example of those who support Marx’s law of profitability as the cause of crises. He opens his paper with the words “In the midst of crises, Marxists frequently appeal to the theory of the tendency of the rate of profit to fall as an underlying explanation. In a recent presentation, for example, Michael Roberts attributes the current long depression to this tendency”. He continues: “Roberts bolsters his case by attaching an array of graphs and statistical data on falling profit rates as proof of the validity of the law. Whether the data actually support his argument depends on (a) the reliability and appropriateness of the data in relation to the theory and (b) whether there are mechanisms other than the one Roberts describes that can result in falling profits.”

Harvey is very sceptical of my work and that of others: “Before submitting pacifically to the weight of the empirical evidence that has been amassed by Roberts and many other proponents of the falling rate of profit theory, some serious questions have to be asked”. And he proceeds to ask them.

I think that it is significant that such an eminent Marxist economist (or I think he prefers ‘historical-geographical materialist’) should produce a paper that critiques my work. It is also revealing that he reckons there is a need for him to take to task the work of those supporters of Marx’s law as the cause of crises. Clearly, recent work by such as Carchedi, Kliman, Freeman, Moseley, Shaikh, Esteban Maito, Tapia Granados, Peter Jones, Mick Brooks, Sergio Camara and others, is gaining some traction. So much so that, recently, one Marxist economist from the ‘overproduction school’ called me a ‘monomaniac’ in my attachment to Marx’s law of profitability as the main/underlying cause of capitalist crises (see Mike Treen, national director of the New Zealand Unite Union, at the annual conference of the socialist organisation Fightback, held in Wellington, May 31-June 1, 2014, and a seminar hosted by Socialist Aotearoa in Auckland in November 10, 2014 — http://links.org.au/node/4156).

Anyway, I approached David Harvey for his paper and suggested that we conduct a debate on the issues involved. Professor Harvey graciously agreed that a debate would be a great idea and that we could conduct this debate in public, on my blog and elsewhere. So I attach Harvey’s paper Harvey on LTRPF but also point out to you that it will eventually appear in its final form as David Harvey, Crisis theory and the falling rate of profit; to be published in 2015 in The Great Meltdown of 2008: Systemic, Conjunctural or Policy-created?, edited by Turan Subasat (Izmir University of Economics) and John Weeks (SOAS, University of London); Publisher: Edward Elgar Publishing Limited.

It is not possible to do justice to Professor Harvey’s critique of the supporters of Marx’s law as the cause of crises. You must read the whole paper. But in essence, Harvey argues that the LTRPF is not the only or even the principal cause of crises. Thus it cannot be the basis of a Marxist theory of crisis. Indeed, as he said above: “There is, I believe, no single causal theory of crisis formation as many Marxists like to assert”. He is sceptical of Marx’s law being relevant and accepts the views of MEGA scholars like Michael Heinrich that Marx also probably became sceptical and dropped it. “I find Heinrich’s account broadly consistent with my own long-standing scepticism about the general relevance of the law” (see my posts on Heinrich, http://gesd.free.fr/mrhtprof.pdf). Indeed, Harvey has doubts that it is a law at all: “we know that Marx’s language increasingly vacillated between calling his finding a law, a law of a tendency or even on occasion just a tendency”.

Harvey argues that we proponents of Marx’s law as the basis of a theory of crises are one-sided and monocausal in our approach because: “proponents of the law typically play down the countervailing tendencies”. Thus we rule out many features of capitalism that may be better causal factors in crises. For example, we ‘monomaniacs’ (to use Mike Treen’s term) “suggest financialization had nothing to do with the crash of 2007-8. This assertion looks ridiculous in the face of the actual course of events. It also lets the bankers and financiers off the hook with respect to their role in creating the crisis.”

Moreover, Professor Harvey pours cold water over our “array of graphs and statistical data on falling rates of profit as proof of the validity of the law”. He doubts their validity because there is plenty of evidence in the ‘business press’ that the rate of profit, or at least the mass of profit, in the US has been rising, not falling. And even if it is correct that there was a post-war fall in the rate of profit, “Profit can fall for any number of reasons”. He cites a fall in demand (the post-Keynesian explanation); a rise in wages (the neo-Ricardian profit squeeze explanation); ‘resource scarcities’ (Ricardian); monopoly power (Monthly Review school view of rent extraction from industrial capital).

Professor Harvey prefers other reasons for capitalist crises than Marx’s law. There is the effect of credit, financialisation and financial markets; the devaluation of fixed constant capital in the form of obsolescence; and, above all, the limits on consumer demand imposed by the holding down of real wages relative to capitalist investment and profits. He wants us to consider alternative theories based on the “secondary circuit of capital” i.e. outside that part of the circuit to do with the production of value and surplus value and instead look at that part concerned with the distribution of that value, in particular ‘speculative overproduction’. Again, he wants us to look at the crises caused by a redistribution of the value created by ‘dispossession’, a form of ‘primitive accumulation’ where wealth is accumulated by force or seizure and not by the exploitation of wage labour in production as in fully developed modern capitalism.

Well, Professor Harvey has provided a new opportunity to debate these points and hopefully for all of us interested in this to gain a better understanding of what causes crises under capitalism so we can resist and overcome the power of capital eventually. I have replied to Professor Harvey’s paper as best as I can with my own, which can be found here reply-to-harvey.

Naturally, I do not agree with Harvey on any of his points. I think that Marx’s law of profitability does provide the cornerstone of the Marxist theory of crisis, which I think is coherent and ascertained from Marx’s works, mainly Grundrisse and Capital. I don’t think Marx’s law is logically incoherent or ‘indeterminate’ or that he dropped it in his later years, as Heinrich suggests. As for being monomaniacal or one-sided, I agree with G Carchedi: “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ”monocausality” of crises.”

I don’t think that I or other supporters of Marx’s law as the basis of the cause of crises have ignored the countervailing tendencies to the tendency of the rate or profit to fall as capital accumulates. That’s because the law is both the tendency and countertendency. Henryk Grossman, supposedly the most ‘monomaniacal’ of all supporters of the law as a theory of crises, in his book devoted 68 pages to the tendency and 71 pages to all the countertendencies.

Anybody who has read my book, The Great Recession, knows that I fill large amounts of space to the role of the US housing boom and bust, the banking crisis, exotic and toxic derivatives etc. Indeed, my current blog has at least 25 posts on the relation between profitability, credit (debt), banking and the crisis. And in 2012, the year after DH gave the Isaac Deutscher memorial speech at the Historical Materialism conference, I presented a long paper entitled Debt Matters (Debt matters). The role of credit in crises is important and I and others have spent some time trying to incorporate that into a Marxist theory of crisis.

As for the data, well, I and many others have painstakingly tried to ensure proper empirical analysis and statistical techniques to justify the case that there has been a secular fall in the rate of profit of capital in all the major economies, as well as a cyclical process(or waves) of profitability when countertendencies come into play. If these data are wrong, then I await alternative data from Professor Harvey. I don’t think anecdotal evidence from the business press is sufficient.

My and the work of others have enabled us to get a causal sequence of the development of capitalist crises. As Marx himself argued, there is a point in the accumulation process when the rate of profit on the stock of investment falls to a level where new investment actually leads to a fall in the mass of profit and new value. This ‘absolute overaccumulation’ of capital is the trigger moment for the collapse of investment and then bankruptcies, unemployment and falling incomes – in other words, a slump. A study by Tapia Granados has shown this causal sequence holds for the US economy since 1945 (does_investment_call_the_tune_may_2012__forthcoming_rpe)_and I and G Carchedi have shown it holds for the Great Recession too (The long roots of the present crisis). Profits call the tune. This seems to me a much more compelling case for explaining crises (with even predictive power) than falling back on various theories from bourgeois economics based on credit booms (Austrian school), financial speculation (Minsky), lack of demand (Keynes); low wages and inequality (Stiglitz and the post-Keynesians), as I think Harvey does – see my paper, The causes of the Great Recession (The causes of the Great Recession).

All the alternative theories have one thing in common: that, if their particular theory is right, then capitalism can be corrected through financial regulation (Martin Wolf, James Galbraith), higher wages (post-Keynesians), or progressive taxation (Piketty) without removing the capitalist mode of production itself. That’s because these theories argue that there is no fundamental contradiction in capitalist mode of production that causes recurrent and cyclical crises (as Marx claimed); there are only problems with circulation.

I am ‘monomaniacally’ convinced that the theory of crisis must be found in the production process even if it manifests itself in circulation and realisation. Appearances can be deceiving.

Anyway, let’s discuss.

Japan: no mandate

December 15, 2014

Shinzo Abe’s Liberal Democratic Party won the snap general election. The LDP won 290 of 475 seats in the lower house of parliament — the more powerful of the two chambers — roughly matching its performance two years ago, Together with its coalition partner, the Buddhist-affiliated Komeito, which won 35 seats, the LDP has retained the two-thirds majority necessary to pass legislation without recourse to the upper house.

Abe called the election, he said, to get a ‘mandate’ from the electorate for his so-called Abenomics. This is a set of policies of monetary easing, fiscal tightening and ‘supply-side neoliberal ‘reforms’ designed to get Japanese capitalism out of its stagnation. On the level of accelerating real GDP growth, investment and ending deflation, it has miserably failed (see my post, http://thenextrecession.wordpress.com/2014/10/13/japan-the-failure-of-abenomics/). The economy remains flat at best.

But where he has succeeded is in reducing the real incomes of the average Japanese household and boosting the profitability of big business.

Japan real wages

Under Abenomics, household real incomes have fallen 4%, while profits and profitability has risen 6-9% (if still below the peak of 2007).

Japan NRC

But so far, this has been to no avail in raising business investment. Instead higher profits have been diverted into the stock market and property – the usual results of monetary easing and ‘labour reform’ everywhere since the end of the Great Recession.

Japan business investment

Abe claims he has his mandate for more of the same. But the election results hardly show that. The snap election exposed the weakness of the main opposition Democrat Party that did not even run enough candidates to win. Even so, the DP increased its number of seats from 62 to 73. And the Communists doubled their representation. Abe’s LDP did no better than last time and the coalition with the religious Komeito will be in the same position as last time.

Indeed, the most significant figure in the election was the historically low turnout, down from the previous record low in 2012 of 59.3% to just 52.3%. Many Japanese citizens either did not see the point of the election or were not enamoured of any the major parties. Once again in an election in a major capitalist economy since the Great Recession, the NO VOTE party won. Since 2009, over 20m voters have stopped voting.

Japan voter turnout

The estimated turnout is an all-time low since figures were kept in 1890! (see my post, http://thenextrecession.wordpress.com/2012/12/16/japan-election-lowest-turnout-since-records-began/).

Greece: Samaras gambles

December 12, 2014

Financial markets got very excited this week when Greece’s conservative PM Antonis Samaras announced that he was going to bring forward an upcoming parliamentary vote for a new president to this month from February. Greek stock prices fell nearly 20% in two days, the biggest fall since the global crash of 1987.

Investors are really worried that if Samaras fails to get his candidate elected as President after three voting chances in parliament, a general election will have to follow in January. That could lead to the victory of the leftist opposition party Syriza (Syriza leads by 6-8%pts in the polls). Then Greece would have a government pledged to renegotiate the debt owed to the EU/IMF and to reverse many of the austerity measures imposed by the Troika (the EU Commission, the IMF and the ECB) as conditions for loans of nearly €300bn made to Greece since 2010. That could provoke a new crisis in the Eurozone.

The term of Greece’s incumbent president is nearly up, and while the role is primarily ceremonial, the president still has the power to call elections and ‘arrange’ coalitions. The decision of Samaras to go for a snap presidential election vote in parliament two months early was forced on him.

Samaras and his junior partner in government, Venizelos from Pasok, are between a rock and hard place. They wanted to ‘exit’ the existing troika programme in 2015 without any ‘lines of credit’ being introduced, as Portugal has already done. But that has not proved possible because they still need a final tranche of funds from the Troika to tide them over and the Troika won’t deliver unless 1) the Greek government meets new fiscal plans and targets and 2) Greece takes a line of credit from the IMF to fall back on once the Troika program ends.

But it is political suicide in any 2015 parliamentary election for Samaras to accept more fiscal austerity beyond that agreed and a line of credit that ties him to the IMF, after having told the Greek electorate that austerity is over and the rule of the Troika is done with.

So Samaras has gambled by going for an early presidential vote without any agreement with the Troika, given that the Euro leaders have agreed to a two-month extension on the program without imposing extra austerity. This is a small window of opportunity for Samaras. However, he must win the presidential vote for his candidate or he will be forced into an early general election.

The coalition has a small majority in parliament (155 votes out of 300). But the presidency is only achieved with 180 votes, so he needs a minimum of an extra 25 MP votes. Samaras cannot get this from Syriza, the Communists and the Fascists, so he is left with independents, the Greek Independents and the smaller left parties. Up to now, they have been opposing his policies in parliament so he is up against it in getting the necessary votes.

Greek parliament

But he may get them for two reasons: 1) independent MPs may fear they will lose their seats if there is an early general election and 2) they may not want the populist left Syriza party to win an election. So the financial markets may be over-pessimistic because if Samaras can twist enough arms and offer enough bribes he may manage to get the extra votes he needs. There are three votes between 17 December and 29 December and it will probably go to the wire on the last vote.

His candidate is former European Commissioner Stavros Dimas, very acceptable to the Troika and possibly respectable in the eyes of MPs and even parts of the Greek electorate. If he can get Dilma elected, the crisis is over and the government will have another two years in office, with the hope that the Greek economy will recover along with the Eurozone and conditions for the average Greek will improve, giving him a chance to win another election in 2016.

If he manages to get this done, it will be a political blow to Syriza. Samaras’ motivation is to split the opposition, “removing uncertainty and restoring political stability ….. when the current parliament elects a president at the end of the month, the clouds will be gone and the country will be ready to officially enter the post-bailout era.” Samaras decided it was better to go now while he is still ‘resisting’ Troika demands for austerity rather than wait until February when his position would be even weaker.

But it is a gamble. Even if Samaras wins over every independent lawmaker, which is unlikely since some have openly promised to vote against the government candidate, he would still fall short by one vote. Indeed, if all opposition lawmakers vote against the government nominee, that will be enough to bring down the government: the five opposition parties control 121 seats, the exact number needed to prevent a government win.

If Samaras does fall short, then a general election in January would probably means a victory for Syriza in coalition with some smaller left parties. It is unlikely that the Euro leaders will agree to anything that Syriza wants and so a stalemate will ensue that will create huge uncertainty in financial markets and push the Greek economy back into an immediate crisis. Also, a Syriza government may well become a beacon to other populist movements in the periphery that could impel them forward.  This is the risk for the Greek ruling class. However, if Samaras can pull it off, he can ‘save’ Greek capitalism from disaster and a takeover by the ‘forces of labour’ as represented by Syriza.

The long-term problems remain, however. After five years of severe austerity and depression, when the living standards of the average Greek household have fallen by 40% and poverty (and starvation) haunt the streets of Athens and the countryside, the government is at last running a surplus on its annual budget (revenue over spending, excluding debt interest). So it does not need to borrow more from the Troika. And the government is forecasting a rise in real GDP in 2015 for the first time since 2009.

But really the best that can be said for the economy is that it has finally stopped plunging into an abyss and has hit the bottom – hard. Government debt still stands at 175% of GDP, even after a ‘restructuring’ of the debt owed to European banks back in 2012 (see my post, https://thenextrecession.wordpress.com/2012/03/09/greece-the-biggest-debt-default-in-history/).

There is no prospect of that debt ratio being reduced to 120% by the end of the decade as demanded by the Troika. And even that level is twice what is acceptable to the Euro leaders as the maximum in the decade beginning in 2020. Greece is burdened with a such a heavy level of public (and corporate) debt that Greek taxpayers and small businesses will have to service, that it will keep living standards at ‘third world’ levels for a generation. No wonder Syriza’s demand for a renegotiation of the debt with the EU is so vital.

Unemployment (26%), particularly youth unemployment (50%), remains near record levels with little sign of a significant reduction.

Greek unemployment and GDP

Those Greeks who are well off enough to leave the country have done so to seek work elsewhere and, of course, very rich Greeks have taken their money and capital already to the likes of London to purchase big mansions.

One thing has been achieved by the depression and the austerity: lower labour costs. Labour costs per unit of (falling) production have dropped 30% since 2010 (see https://thenextrecession.wordpress.com/2014/02/11/greece-cannot-escape/).

Greek ULC

And so the profitability of Greek capital has improved. But even so, profitability is still way below the peak of 2006 before the Great Recession and the Eurozone depression..

Greek ROP

… and has hardly recovered on a long term perspective.

Greek LT ROP

Investment is now lower than it was in the late 1960s! Even if Samaras succeeds in his gamble, Greek capitalism remains at the bottom of a hole.

Oil, the rouble and the spectre of deflation

December 8, 2014

Crude oil prices have dropped to five-year lows in just a few months.  And the reason is clear: it’s supply and demand!  On the supply-side, the most significant development has been the accelerating expansion of shale oil and gas production in North America, mainly in the US.

Oil and gas reserves are trapped in layers of shale rock and can be released by a process of hydraulic water pressure called fracking.  By sinking hundreds of rigs in quick succession, shale rock can produce significant supplies of tight oil and natural gas – and this process in North Dakota, Texas and other areas has turned US oil production round.  US oil output up to now had been based in traditional deep oil reserves in Texas, Louisiana and the Gulf of Mexico.  US production was in decline from the mid-1970s to around 4mbd and falling.  But with shale, annual output has rocketed back to 9mbd, near previous peaks.  Fracking for tight oil and gas is now spreading across the globe as those countries with large shale reserves look to exploit it in Poland, China, Europe and even the UK.

The other side of the price equation is demand.  Global demand for energy, particularly oil, has slowed.  That’s mainly because global economic growth has slowed since the Great Recession ended.  China has led the way with slowing growth, along with the other large emerging economies, like Brazil and India; and the major advanced capitalist economies remain in ‘low gear’ (see my post, http://thenextrecession.wordpress.com/2014/11/08/the-world-economy-in-low-gear/).  Industries are increasing their use of fossil fuels at a slower pace than expected, while transport demand is in decline (Americans are driving less).  Energy conservation has been stepped up and energy intensity (energy per unit of output) is falling everywhere.  All the international energy agencies now expect oil and gas prices to stay at these new lows for some years ahead.

The biggest losers are those countries that rely on energy exports to make their money: Saudi Arabia, the rest of the Arab oil states, super-rich Norway, super-poor Venezuela, Mexico and, above all, Russia.  The Saudis have launched a counter-offensive.  With more than five times the reserves of American shale, they are taking on the shale producers by increasing production in order to drive down the price to the point where shale producers start losing money (their production costs are way higher than the Saudis: about $50/b to $25/b).  So far this has not worked and shale production continues to rise.  But the Saudi policy is destroying the revenues of other OPEC producers like Venezuela – and Russia.

Putin may have faced up to ‘the West’ over Ukraine and refused to budge but, as I argued in a previous post (http://thenextrecession.wordpress.com/2014/11/10/from-poroshenko-to-putin-its-all-downhill/), the West has been winning the economic battle and the oil price has been the major weapon.  The collapse in the oil price has exposed the weakness of the Russian economy.

Just a year ago, Russia’s stockpile of dollars from energy exports stood at more than $515bn.  Now as oil revenues have dissipated and sanctions on Russia imposed by the West over Ukraine have been applied, Russia’s trade surplus has diminished and the flight of capital by oligarchs and others out of Russia and the rouble has rocketed to $120bn a year.  As a result, FX reserves have dropped below $400bn and the rouble has plunged in value to the dollar by 40% this year, invoking a sharp rise in the inflation of prices in Russian shops and shortages of imported goods.

Russian FX

$400bn is still a large reserve and the Russian central bank has tried to prop up the rouble by selling its dollars and buying the Russian currency in FX markets.  But it did not work.  Then the central bank just let the ruble go to save dollars.  And the rouble plunged further.  Now it has started buying roubles again with its reserves to stop the fall, again to no avail.

Russian rouble

Central bank policy is all over the place. And this is worrying Putin who has begun to criticise his own bank appointees.  The problem is that much of these reserves cannot be used to prop up the currency because enough must be kept to cover payments for essential imports (the IMF recommends at least three months worth of imports).  If reserves drop below that level, the rouble will go into even more meltdown as foreign lenders (mainly European banks) pull out their money.  Also the fall in the ruble means that all those Russian companies with big dollar debts and loans, particularly Russian banks, face huge dollar bills that they cannot meet.

According to the Russian Central Bank, the country has to repay $30bn of debt this month and another $138 bn in the next 18 months.  Only 2% of this debt is owed by the government, while non-financial enterprises accounted for more than 60%, the rest mostly belong to the banking debt, including Russia’s largest bank – the state-owned bank Sberbank.

So they are asking for (and getting money) from the government to bail them out.  State oil giant Rosneft, for example, has asked for $44bn, equalling more than half the remaining balance in the so-called Wellbeing Fund that’s earmarked to support the pension system.  VTB Bank and Gazprombank have already gotten more than $7 bn from the Wellbeing Fund and are asking for billions more.  If FX reserves and wealth funds are used up to bail out the banks, then planned infrastructure projects will be dropped and pensions will come under threat.  And the three-month import limit will get closer.  At current rates of decline in FX reserves, that limit could be reached by summer 2015.

Putin‘s annual address to the Russian parliament last week showed he was getting worried.  He even offered a complete amnesty to oligarchs who have been spiriting their money out of Russia like a waterfall in the last few months.  “I propose a full amnesty for capital returning to Russia,” Putin said. “I stress, full amnesty.”  “It means,” he continued, “that if a person legalizes his holdings and property in Russia, he will receive firm legal guarantees that he will not be summoned to various agencies, including law enforcement agencies, that they will not ‘put the squeeze’ on him, that he will not be asked about the sources of his capital and methods of its acquisition, that he will not be prosecuted or face administrative liability, and that he will not be questioned by the tax service or law enforcement agencies.”  

In Russia, two of the major classes of people who have large amounts of capital overseas are organized criminal groups and the so-called oligarchs. In stressing that there would be no prosecution, Putin appeared to explicitly leave the door open to money obtained illegally. “He’s talking to people who have engaged in corporate raiding,” said Professor Louise Shelley, founder and director of the Terrorism, Transnational Crime and Corruption Center at George Mason University in Fairfax, VA. “There are thousands of cases where people who have used criminal processes and false documents to acquire assets. He’s talking to organized crime figures who have taken over businesses.”  She added, “There are no large fortunes that are entirely clean money in Russia.”

Assuming the oil price stabilises at around $60/b next year, Putin can avoid a debt crisis next summer, if he can squeeze Russian corporations to buy roubles with their dollar export revenues (a form of capital controls) and to bail out the banks with government reserves.  Putin is doing just that.  But that does not save the domestic economy.  The sanctions plus the collapse in oil prices have pushed the Russian economy into recession.  The government admitted that the economy would contract by about 1% next year, with investment falling 3.5% and average household incomes down nearly 3% in a year!  Indeed, for the first time in 15 years, living standards for the average Russian will fall in 2015. A freeze on inflation-linked pay has been imposed and inflation is rising at nearly 10% a year now.

Putin may be very popular because of his foreign policy over Ukraine and ‘standing up’ to the West, but his popularity will now suffer because of his domestic policy.  Russian-style austerity is coming.  Whereas government spending has risen an average 10% a year in the past decade, it will now be cut.  Cutting military and police spending is politically impossible because Putin needs the support of the security establishment so he can rely on them in case of social unrest. This means the government will have to target investments, benefits and salaries. Last week, Putin announced a 5% cut in real terms from 2015-2017 by reducing “ineffective spending,” except for defence and security.  Putin used to promise Russians that their country would overtake Germany as the world’s fifth-largest economy by 2020. In May 2012, he signed a decree pledging to increase real wages by half by 2018. Those promises are now dead in the water.

Putin continues to rely on his Ukraine policy for popularity and Ukraine’s economy is in an even worse state.  Ukraine’s central bank reserves have dipped below the $10bn mark for the first time since 2005 after making a gas payment to Russia’s Gazprom (see my posts on Ukraine).  The IMF will probably hand over another $2.7bn in funding to tide the Kiev government over.  But it is clear that Ukraine needs another $20bn over the next two years to handle the war in the east and fund debt repayments.  An IMF mission arrives tomorrow to plan a massive austerity plan for the Ukrainian people in return for funding.

But probably the most important aspect of the collapse in the oil price is the spectre of global deflation.  World inflation has been very low since the Great Recession, another indicator of the Long Depression that the world economy has been locked into.  But what inflation of prices there has been has mainly been due to the sharp rise in energy prices.  Non-energy price rises have been minimal.  Now, with the sharp fall in energy and other commodity prices (metals, food etc), deflation is the spectre haunting the globe.

Global PPI

Oxford Economics finds that if oil prices were to fall to as low as $40/b, then 41 out of 45 countries it follows would experience deflation.


Some argue that this is good news. This is the line of some neoclassical economists and the Austrian school.  Falling prices, particularly in energy and food, will raise consumer purchasing power, and help boost demand and thus economic growth.

But for profitability, it is bad news.  Inflation of corporate producer prices is another temporary counteracting tendency to falling profitability.  If it disappears, then the downward pressure on profitability from any new technology investment will be greater as falling prices squeeze profit margins.  In that sense, deflation is not good news for the capitalist sector, especially if it is burdened with heavy debts (small businesses in particular).  So the crisis brewing for Russian businesses may be followed by others.  It could be another factor leading to a new global slump, this time based in the non-financial productive sector of capitalism.

After May – even more austerity

December 3, 2014

George Osborne, Britain’s finance minister, delivered his so-called autumn statement (in December!) today.  This covers the current state of public finances and plans for future tax and spending measures.

The Conservative-led coalition faces an election next May and its main pledge when it came into office in May 2010 was to ‘balance the budget’ and reduce government debt.  After the huge bank bailout and the impact of the Great Recession of 2008-9 on tax revenues and welfare spending, the government deficit stood at over 10% of GDP and gross government debt had rocketed to over 75% of GDP.

The government blamed this on the profligacy of the previous Labour government.  This was nonsense, of course.  Labour had run relatively small deficits, has reduced government spending as a share of GDP and debt was low until the global banking crash.

Labour budget

And the Conservatives would have done exactly the same as Labour in bailing out the City of London with more borrowing.

The Conservatives are obsessed with the government deficit and debt – getting them down has been their measure of ‘prosperity’.  But even on this measure, they have failed.  Osborne made much of the reduction in the deficit ‘by half’ by April 2015.  But back in 2010, he forecast that he would balance the budget by April 2016.  He has now announced that this target will not be achieved until April 2019.


And to meet this target, even assuming that Britain continues to grow at 2-3% over the next four years, the government will have to impose a massive round of public spending cuts on welfare benefits and services.  It will also have to raise taxes, although it claims that it can cut income tax again during the life of the next government (although that promise is pushed back to 2019).

And the deficit is one thing.  Government debt is still rising in real terms.  Debt is over £160 billion more than forecast back in 2010 and is now well over 90% of GDP on a gross basis and is not expected to peak on the best forecasts until 2019.

The government has failed because the UK economy has not grown in income anywhere near as much as the government forecast back 2010.  Osborne forecast real GDP growth would average about 2.7% a year; instead it has averaged up to this year only 1.3%, half the rate.  At the same time, although unemployment has come down, most of the new jobs have been part-time, low-paid and self employment (see my post,
This has meant that real incomes (ie after inflation) have fallen by the largest amount since the Great Depression of the 1930s.

UK real wages

As a result, tax revenues have nowhere matched that expected by the government.  So the budget forecasts have proved woefully wrong.  Revenues from income tax and national insurance during the most recent 12-month period have grown at an annual rate of only 1.8% compared with the budget forecast of 5%.

The government stood back from imposing too severe a reduction in the budget deficit after 2012, for fear that the economy would drop back into a new slump – and it nearly did.


But that just means, in its obsession with the deficit, that if the Conservatives win the election in May, they will launch a new round of austerity measures.

Maybe a new round of austerity won’t happen because the Conservativces won’t win next May.  But all three major parties are committed to more spending cuts in bowing to the God of ‘fiscal probity’.  “All parties support balancing the current budget in the next Parliament. Deficit spending is clearly still deemed to be politically untenable in the UK.” Gavyn Davies, FT.

Compared to the Chancellor’s plan, Labour would permit extra borrowing to finance investment (1.5% of GDP) and would allow themselves longer to attain balance for the current budget.  But they would still impose austerity to the tune of half the amount of the Conseravtives.

Behind the obsession with deficits and debt lies the real agenda.  It is two-fold: to reduce the size of the public sector and destroy any vestiges of the ‘welfare state’, opening up public goods and services to deliver profits to the capitalist sector.  The other aim is lower the burden of tax on and increase the subsidies to the capitalist sector over the long term to boost profitability.

This hidden agenda is sometimes exposed.  Only this week, a Conservative MP called for huge cuts.  “The Chancellor could make a £20 billion start by culling Whitehall’s sprawling bureaucracy, enforcing public sector pay settlements, freezing benefits, reducing the welfare cap, scaling back middle-class welfare and looking again at the state pension.” Dominic Raab, Conservative MP for Esher and Walton.

Note the attack on the state pension.  This has been sacrosanct up to now.  But the Conservatives are now preparing to dismantle it, using the argument that the young should not have to pay for the old and that’s unfair.  The right-wing Economist magazine took up this call: “Britain’s fiscal problems are partly the result of over-generous spending on the old. They should pay off some of the debts instead of passing them all on to the young.”

But apparently it is not unfair for the poor to pay for the rich.  In the UK the bottom 10% of income earners pay more in all taxes as a percentage of their income than the top 10%.

The government could switch its priorities on spending from defence, subsidies to industry, lowering corporation tax, more tax cuts for the rich to boosting public investment, services and welfare.  Despite its headline noise on a few infrastructure projects (rail, flood protection etc), it is doing no such thing.

Faster growth would soon deal with any deficit anyway.  In terms of real annual GDP growth, the OBR estimates that a 0.1% point increase would do as much over the four years from 2015-16 for the deficit as roughly £3 billion of spending cuts.  The trouble is that the UK economy may be growing at 3% a year currently, but nobody expects that to last.

The Office for Budget Responsibility has actually revised down its forecasts for growth after this year for every year up to 2019.  Even Osborne admitted that the “warning lights” are flashing over the health of the global economy, and Britain “cannot be immune”.

Yes, any new downturn in the world economy would soon push the UK economy back into recession too.  Osborne raises only that risk to a booming UK economy (the fastest in the G7 this year).  But there are serious domestic risks too.  Most of the contribution to the ‘boom’ of 2014 is coming from the unproductive sectors of the economy (housing – prices rising at 12% a year; and financial services as the City of London ploughs on).

Manufacturing output is still struggling and despite a huge devaluation of the pound back in 2010, UK exports have failed to get anywhere near the government’s expectations.

UK boom

Productivity growth remains appalling.

UK productivity

That’s  mainly because the business sector is unwilling to invest in new technology or skilled labour at good rates of pay.  Investment to GDP in most major capitalist economies has been falling.  But it is particularly low in the UK.


And that is because profitability in the corporate sector, although improving a little after all the austerity measures so far, is still below levels seen in the late 1990s or even 2005.

UK profitability

After six years, the UK economy has only just got back to where it was before the Great Recession.


But the economy is standing on the chicken legs of a credit-fuelled property and services boom, sustained, ironically, by cheap labour provided by hard-working, young immigrants from Europe and elsewhere.

The Conservative government aims to cut back that immigration and impose a new and severe round of public spending cuts, while big business stands by with its arms folded.  The economy will falter, especially if there is new world economic downturn, and the government’s targets on public finances will fall short, just as they have done up to now in this parliament.

The seven-year itch

November 28, 2014

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC (http://www.deanbaker.net/index.html#about). He is frequently cited in economics reporting in major media outlets. He writes a weekly column for the Guardian Unlimited (UK), the Huffington Post, TruthOut, and his blog, Beat the Press, features commentary on economic reporting. Dean was cited by the Real Economics Review as one of the few economists that predicted the global financial crash of 2008, as he had been warning about the credit-fuelled housing bubble in the US. He often speaks at trade union and labour seminars presenting a Keynesian-style analysis and policy solutions to the current crisis.

Baker has just written a blog post in which he reminds us that it is now seven years since the Great Recession started across the major economies (http://www.truth-out.org/opinion/item/27614-seven-years-after-why-this-recovery-is-still-a-turkey). Looking at the US, he points out: “usually an economy would be fully recovered from the impact of a recession seven years after its onset. Unfortunately, this is not close to being the case now….It would still take another 7-8 million jobs to bring the percentage of the population employed back to its pre-recession level.” He continues: “it would take us more than four years to get back to pre-recession employment rates.” And “the economy is still operating close to 4% points. This translates into roughly $700 billion a year being thrown in the garbage because we don’t have enough demand in the economy. That comes to more than $2,000 per year for every person in the country”. And “If the economy sustains a 3% annual growth rate, it would take us close to four years to close the demand gap. And next to no one thinks the economy will be able to sustain a 3% growth rate for the next four years”.

It is a damning indictment. We could add to Baker’s list that, outside the US (an economy that has done better than most since the Great Recession ended in mid-2009), unemployment rates have hardly fallen from high levels in most of Europe, where GDP is still below the level of 2007 in many countries and GDP per person is even lower. Above all, real incomes for the average households have stagnated or fallen significantly in most counties including the US and the UK. So this is not a normal ‘recovery; it is not ‘a return to normal’ (see my post, http://thenextrecession.wordpress.com/2014/08/14/the-myth-of-the-return-to-normal/).

The question is: why has the Great Recession morphed into what I call a Long Depression? Baker reckons that it is “weak demand”. Baker: “The basic problem since the collapse of the bubble is finding a way to replace the demand that it had been generating.” Well, that is not entirely true if we mean weak consumer demand. As I have shown in many previous posts, household consumption did not fall hugely in the Great Recession and in most countries it has returned, as share of GDP to levels of 2005 as the OECD pointed out recently (http://thenextrecession.wordpress.com/2014/11/08/the-world-economy-in-low-gear/).

G7 demand

The other part of ‘demand’ is investment demand. Investment (both private and public) plummeted during the Great Recession – indeed, it is my argument that investment fell before and that led to the laying off of labour, the closure of old technology and the collapse of incomes and the slump. Investment remains seriously down from seven years ago. A new study by the Institute of International Finance, an international banking research group, provides new evidence for that (http://www.voxeu.org/article/causes-g7-fixed-investment-doldrums).

The IIF study shows that total investment relative to GDP in the G7 economies stood at 19.3% in 2013 – a decline of 2.6 percentage points relative to 2007. Business investment (i.e. investment in machinery, equipment, transport, structures, and intangible assets) has been especially weak. In the second quarter of 2014, G7 private non-residential investment amounted to 12.4% of GDP, compared to the peak of 13.3% in 2008.

G7 private non-residential fixed investment

G7 investment

The question is: why did investment fall and why has it failed to recover and so get the major capitalist economies back up to previous levels and potential trend growth? Dean Baker says investment demand is weak because the economy is weak: “Firms don’t go on investment splurges in a weak economy.” But this is tautological. There is no explanation in this of why things are worse this time. Investment is the issue, as Baker says. But why?

It has been my argument that the major capitalist economies have been suffering from low profitability of capital plus a huge build-up in debt (household, corporate and public) that weighs down on the ability or willingness of capitalists to step up investment.

This is despite that fact that capital in all the major economies has been squeezing wages and reducing employment to get profit margins and the mass of profit up to record levels (ie raising the rate of surplus value as the main counteracting factor to low or falling profitability).
Deleveraging of debt (fictitious capital) has been minimal, indeed to the contrary, as central banks pump in more money to get interest rates down and stock markets booming in an attempt to stop economies slipping back into slump.

In a future post, I shall try to analyse the latest position on the US rate of profit now that we have the latest key data for 2013 and see if my proposition holds that profitability has failed to return to pre-crisis levels even in the US and is still below levels seen in the late 1990s. This is certainly the case for the UK and of course in most of the Eurozone and Japan.  But what is significant is that the mass of profits in the US has nearly stopped rising (see my post,

And indeed, according to the IIF, the huge cash hoards that the largest companies in the G7 economies built up by squeezing wages and jobs and not investing is also beginning to decline as companies buy back their own shares and pay out dividends to their shareholders.

G7 non-financial corporations’ net cash flows

G7 cash
Marxist economist Michael Burke has pointed out before that business investment has been falling in the major economies since the late 1990s (see http://thenextrecession.wordpress.com/2014/06/22/investing-in-finance-but-not-in-people/.). And the IIF shows that, investment relative to GDP has exhibited a downward trend since the 1990s in Germany, UK, Japan, and Italy.

G7 total investment rates

G7 investment gdp
In my view, this is because the profitability of capital has fallen in the major economies since the peak of the late 1990s (see my post, http://thenextrecession.wordpress.com/2014/04/23/a-world-rate-of-profit-revisited-with-maito-and-piketty/).

A proxy for falling profitability is the capital-output ratio. This measures the growth of new value compared to new investment. This ratio has been rising in most major economies since the 1990s, according to the IIF – in other words the value returned from investment has been falling. Compared to 2000, all the major economies (including the US but excepting Japan which has had a huge rising ratio for decades) now have higher capital output ratios.

G7 capital–output ratio

G7 capital output

Dean Baker in his post goes on about the need for ‘more demand’ which he sees coming from government spending “We can spend more on infrastructure, on education, on retrofitting buildings to make them more energy efficient and reduce greenhouse gas emissions.” Or through work-sharing to get unemployment down: “increased family leave, sick days, and vacation. This is the secret to Germany’s low unemployment rate. The average work year there is more than 20% shorter than in the US.” But he admits this won’t happen. No government is planning to boost government spending, on the contrary; or introduce work sharing.

Actually that is not entirely true. The IMF, the OECD and others are calling for programmes of infrastructure spending to replace the failure of business to invest. And the EU leaders have announced a new Europe-wide investment plan. The EU projects claims to create 1.3m new jobs over three years, by ‘seeding’ €21bn in public money to ‘spark’ €307bn ($383bn) of additional private investment. This is nonsense, of course. The public money had already been earmarked for projects in previous EU budgets so it is not new money but merely a transfer to this scheme. And it is very unlikely to inspire businesses to join in a public-private initiative. The EU Commission itself estimates that the annual investment gap in Europe stands between €230-370bn, while the plan only offers €€100bn a year for three years.

Anyway, the question is whether even a Keynesian-style government spending programme, either directly through public works or through subsidies to the capitalist sector, would deliver faster growth or full employment. It is a Keynesian illusion that it would. Such projects may boost the profits of those companies that get the contracts to build, but at the expense of the rest as they face the cost of higher government borrowing and taxes that will be needed to pay for it (see my post http://thenextrecession.wordpress.com/2013/01/13/multiplying-multipliers/). More likely what is ahead is another slump in the major economies rather than a sustained recovery and a new period of expansion.

US GDP up but…profits down

November 25, 2014

The US GDP revised data for the third quarter of 2014 came out today. US economic growth was revised up from a 3.5% annual pace to 3.9%. The US economy had expanded at a 4.6% rate in the second quarter. So it has now experienced the two strongest back-to-back quarters of growth since the second half of 2003.


This was the fourth out of the past five quarters that the economy has expanded above a 3.5% pace, although bear in mind that the economy contracted during the first quarter after a ‘bad winter’. So year-on-year growth, a much better guide to the pace of expansion was up only 2.4% in Q3’2014, actually a slight slowdown from Q2 yoy growth of 2.6%.

Nevertheless, 2014 annual real GDP growth looks like reaching at least 2.4%, or slightly higher than the 2.3% recorded in 2013 – if still well below the long-term average of 3.3%, or even the average of 2.7% achieved between 2002 up to 2007, before the Great Recession.

Looking at the underlying data, the main driver of the slight acceleration in real GDP growth in 2014 so far has been business investment and state and local government spending – from a low base. In today’s data, the pace of annual growth in business investment was raised to 7.1% from a 5.5%. That sounds good and year on year growth in business investment reached 8.5% in the third quarter.

However, that may not last. What was also to be found in the revised data were the first figures for corporate profits in Q3. Corporate profit margins, the difference between what businesses charge per unit of production and their costs per unit, reached a record high, at 15.6%

US profit margins

But corporate profits as a whole have virtually stopped rising, up only 0.4% year-on-year in Q3’2014, while after-tax profits are contracting and have been throughout the year.

US profit BT and AT
It is my argument in previous posts and papers that where profits go, business investment will eventually follow and then economic growth and employment. The relatively strong US real GDP growth figures announced today are backward looking. Profits call the tune for the future and they are now stagnant (before tax) and falling (after tax). If we lag the change in business investment (blue line) by a year behind the change in profits (red line), then it looks like this.

US profit and investment

The graph suggests that business investment growth is likely to contract and disappear during 2015, if corporate profits stay stagnant or contract further.

I’m a celebrity – get me out of here!

November 22, 2014

Myleene Klass is a sort of B-list celebrity in Britain (http://en.wikipedia.org/wiki/Myleene_Klass). She comes from a family of musicians, quite well-off, went to private school, studied at the UK’s prestigious Royal Academy of Music, became a professional musician and pianist, eventually joined a successful pop band and is now a model for various food and clothing brands. She has appeared on B-class TV programmes like I’m a celebrity – get me out of here!, where you are parked in a jungle for several weeks with other celebrities and have to undergo various humiliating tests. She is apparently worth about £11m ($18m) in net worth and no doubt earns at least six figures a year.

She has attacked the proposed introduction of a wealth tax on British homes worth more than £2m that the current opposition Labour leader Ed Miliband wants to introduce. This so-called ‘mansion tax’ would mean around an annual payment of about £3000 a year by those who have such properties. In the UK, given the huge property boom of the last 20 years, these homes are mainly in central London. On a second rate TV show, Klass railed against Miliband, that this was attacking ‘poor grannies’ who may have big houses but no income.

Miliband was non-plussed, but could easily have answered this charge. First, most of these £2m houses are owned not by poor grannies but by very well off people, 40% don’t live in them and a sizeable number are owned by rich foreigners who have bought them in order to get a windfall from the London property boom (prices rising at 12% a year currently) and rent them out or leave them empty. Second, under the planned tax, those with £2m plus homes and low incomes would not have to pay each year, as the tax would be rolled up until that person kicked the bucket. Indeed, if a £2m house increases in value by 10% a year, that would add £200,000.  A mansion tax of £3000 is just 1.5% of that boost to wealth.

Klass’s attack (and the whining of other ‘celebrities’ like Griff Rhys-Jones, who says he will leave the country – although he lives in a big ranch in Wales and only uses his huge mansion in London on visits) is not to protect ‘grannies’. Klass has not complained about another tax, the so-called ‘bedroom tax’ that is actually being applied by the government, which reduces the benefits received by ‘poor grannies’ and other single people who have a ‘spare bedroom’ in their flats. These grannies are being forced to move into smaller accommodation or be even poorer. Klass had nothing to say about them.

Of course, Klass and Rhys-Jones are really complaining about paying any tax at all. The rich see paying tax as almost immoral – it takes away what they have ‘earned’ through hard work, talent and being clever – although usually it is just luck or being born rich. Anyway, I’m not sure that a 50% increase in the value of a home has anything to do with hard work or talent. But tax is immoral – or so says British PM David Cameron when recently announcing that the ruling Conservatives will cut taxes after the next election

Actually, if you think about it, taxes are the most moral social thing you can do – paying your contribution to the social good and to help others. The problem is that the spending by governments that kow-tow to the rich is often on military hardware, subsidies to large companies to invest and handouts to rich landowners and farmers – and of course taxes on the rich (like a mansion tax) are kept to the minimum.

And wealth may bring ‘happiness’ but it certainly does not bring morality and a ‘help thy neighbour’ philosophy. There are often well-publicised stories about rich philanthropists who set up trusts for the sick, for the arts etc. Actually, trusts are good tax havens for money that rich people don’t know what to do with. And there is way more money that goes to financing lobby organisations and politicians who aim to protect the interests or the rich and the super-rich.

In a great new book, Billionaires: reflections on the upper crust,  (http://www.newrepublic.com/article/120092/billionaires-book-review-money-cant-buy-happiness), Darrel M West outlined various social surveys that show the richer a person is, the less likely they are to redistribute some of their wealth and earnings to those less lucky or ‘talented’.  A University of California study found that people driving expensive cars were four times more likely to cut in front of other drivers or ignore pedestrians right of way than those in cheap cars. They considered themselves kings of the highways. In another study, the richer the person, the more likely they were to take candy from a jar left outside a laboratory, despite a sign saying that it was for children only! The New York State Psychiatric Institute surveyed 43,000 Americans and found that, by some wide margin, the rich were more likely to shoplift than the poor. Independent Sector found that people with incomes on an average of $25,000 a year gave away 4.2% of their income while those on over $150,000 a year gave away only 2.7%.

As a UCLA neuroscientist put it: “As you move up the class ladder, you are more likely to violate the rules of road, to lie, to cheat, to take candy from kids, to shoplift, and be tightfisted in giving to others”. Apparently, the richer you get the more you want and the less you want to give. Mike Norton at the Harvard Business School found that, when asked, rich people still felt that they were two or three times short of the money they needed to be really happy!

But so it goes on. There is never too much for some. For example, the world’s most famous bond trader is Bill Gross. He was head of the largest bond fund company in the world for years, PIMCO. But recently, he had been making some bad investment decisions and PIMCO started to lose money for its clients (banks, insurance companies etc). The clients started to withdraw their money and Gross was sacked for failure. But failure came nicely wrapped up in a going away present. He was paid $290m to leave! Bill Gross’ take-home pay was huge but he is not the wealthiest bond fund manager in the world. He is worth only $2bn, while the far less well known David Tepper is worth $11bn and Carl Icahn is worth over $20bn.

Indeed, there are more super-rich people in the world today than ever before. According to a new survey from Wealth-X and UBS (http://www.billionairecensus.com/home.php), the number of people with more than $30m in assets jumped 6% to hit a new record of 211,275 in 2014). Among them, they hold a staggering $30trn, or nearly twice the size of the US GDP. Those 211,275 people account for just .004% of the world’s population but hold 13% of the world’s wealth.   Most of these uber-rich hold their wealth in the companies and properties they own and the income they make they hoard up in cash. North America remains number one when it comes to population and wealth. 74,865 people in North America hold some $10bn between them. 69,560 of the ultra wealthy call the US home and hold $9.6bn. Europe has the second-largest concentration of ultra high net worth individuals, followed by Asia, but Asia will overtake Europe by 2027. The ultra wealthy are overwhelmingly male, 87%.

A mansion tax would not be even noticed by these people – although if it were brought to their attention, they would still complain about it being unfair.

The hidden crime of capitalism

November 21, 2014

A recent estimate was made of the economic cost of varied human action globally. The annual economic burden of smoking on health services, shortened life expectancy and illness was found to be the greatest at $2.1trn a year, closely followed by the losses from wars and armed violence around the world and by obesity.

Global economic burdens

These burdens are not just from ‘human action’ but really come from the crimes and waste of capitalism: tobacco companies promoting cigarette smoking, wars provoked by imperialism and nationalism; food companies selling ‘affordable’ junk food with high concentrations of sugar, salt and fats – and of course global warming and climate change.

But one economic burden not recorded in this list is the waste from economic recessions and depressions. The loss of jobs, incomes and assets like homes is no small beer. And the longer the slump, the greater the loss.  This is a hidden crime of capitalism.

The current ‘recovery’ from the Great Recession of 2008-9 has been so weak and so drawn out that the overall loss of value compared with potential output if there had been no slump and/or a quick recovery is huge – probably close to $10trn over five years for the US alone. That ‘damage’ easily matches the damage from smoking over the last five years.

This crime of capitalism is ignored by mainstream economics. For example, Robert Lucas is a Nobel prize winner and leading exponent of the view that modern capitalism is an efficient manager of human resources and the output of labour. He is infamously quoted as saying in 2003, that the problem of depressions had been solved by modern mainstream economics (http://thenextrecession.wordpress.com/2010/05/28/vulgar-economics-in-despond/). In 2010, he argued that there can be ‘shocks’ to the steady equilibrium growth path of capital investment, but they would usually be temporary. Very quickly, growth would return to its previous trend (http://danieljmitchell.wordpress.com/2011/06/16/nobel-prize-winner-analyzes-the-obama-growth-gap/).

Lucas presented the following chart of US economic growth over the last 140 years.  The red line represents trend economic growth and the blue line shows the actual growth rate. In this bird’s eye view, growth has been inexorable and mostly pretty much along the equilibrium trend path.

US real gdp

Or has it? The Great Depression of the 1930s stands out a huge deviation from this scenario, even at this height of observation. Also what is subtly missing from view is the gradual slowdown in trend growth especially since the 1980s. And a closer inspection of the blue line in the last six years reveals a distinct gap from the red line. And there appears to be no quick ‘return to normal’ (see my posts, http://thenextrecession.wordpress.com/2014/05/17/us-is-not-closing-the-gap-and-neither-is-the-uk/

Lucas noted this gap too.  For him, the problem this time was that “government is doing too much,” and he specifically highlighted the “likelihood of much higher taxes, focused on ‘the rich’” and a “large increase in the role of government”.  Well, none of those things happened except for the government bailing out the banks and the US economy still has not made up time from those ‘shocks’.

Recent research by economists Robert F. Martin, Teyanna Munyan and Beth Anne Wilson of the US Federal Reserve examined the experience of 23 countries since 1970 (http://www.federalreserve.gov/econresdata/notes/ifdp-notes/2014/potential-output-and-recessions-are-we-fooling-ourselves-20141112.html). They found that economic output doesn’t return to normal following a recession, especially a major one like the Great Recession.

Indeed, the gap between potential growth and actual output just gets wider. As a result, the trend growth rate also falls as a consequence. As the chart below shows, a deep slump followed by a weak recovery steadily lowers the long-term growth rate in each successive year.


So there is no return to normal and there has been a permanent loss of value and output for the American people as a result of the housing bust, the global banking crash and the subsequent collapse in investment, incomes and employment.

According the Fed economists research, on average, GDP remains well below its previous trend, even for short and shallow recessions.  On average, there is a permanent loss of output equivalent to nearly 15% of potential GDP growth in deep recessions more seven years later.


As the economists sum it up: “that recessions tend to depress the long-run level of output may imply that demand shocks have permanent effects. The sustained deviation of the level of output from pre-crisis trend points to flaws in the way the economics profession models the recovery of output to economic shocks and raises further doubts about the reliance on measures of output gaps to determine economic slack. For policymakers, the results also point to the cost of recessions, especially deep and long ones”.

So much for Robert Lucas’ confidence in recovery as long as governments don’t interfere. Slumps anyway have lasting damage: incomes, jobs and homes that can never be recovered. And right now that damage is still rising.  It is another economic crime of capitalism.

Red warning lights

November 17, 2014

Speaking at the close of the G20 summit of world leaders in Brisbane Australia, British Prime Minister David Cameron exclaimed that “red warning lights are flashing on the dashboard of the global economy”, threatening another recession.

Of course, Cameron was not talking about the UK economy, which is going great guns, according to the British government, with six months to go a general election. Instead, he was covering his back, so that if any downturn in the British economy took place it could be blamed on the rest of the world. You see, as Cameron put it in an article for the Guardian, don’t blame me, you lefty liberals. If things go wrong from here, it will be because of the Eurozone that you all like so much. “The Eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too.”

But he had to admit also that “emerging market economies which were the driver of growth in the early stages of the recovery are now slowing down. Despite the progress in Bali, global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty.”

In effect, Cameron was accepting that capitalism is now global and no one country can escape if there is a crisis or slump in another large one or neighbour. If the Eurozone stays in depression and other major economies in the G20 also slip back into a slump, the UK economy will join them.

The G20 leaders announced that they were pledging to boost real GDP growth in the world economy by an extra $2trn, or a cumulative 2%, by 2018. This pledge was full of holes. First, growth is expected to be very weak over the next four years, at least compared to the rate of world growth before the Great Recession (see my post, http://thenextrecession.wordpress.com/2014/11/08/the-world-economy-in-low-gear/). So an extra 2% cumulative, or about 0.4% a year, would still mean slower growth than the global average in the last 20 years. Second, this was just a pledge: none of the G20 leaders were committed to implementing any of the measures necessary to achieve it.

The main method for doing this was to increase infrastructure investment (i.e more roads, railways, bridges, dams, broadband and other key long-term projects). A “Global Infrastructure Hub” is to be set up to promote more spending to close what is calculated as $70trn gap in such investment, or 100% of world GDP.

Again, this is likely to be pie in the sky. Throughout the neoliberal period (1980-2007), public investment has been viewed as a dirty word. So it has been systematically cut back.

Public investment

Now the IMF has been calling for action to boost infrastructure spending in its reports for the last year. But when you read the data on this, you find that the main method for the very necessary ‘austerity’ programs made by the governments of the leading economies to manage the extra borrowing and debt built up from bailing out the banks and the loss of income from the Great Recession was by cutting infrastructure spending! Most of such spending is financed by public investment as private capitalist companies are reluctant to fund such long-term risky projects unless backed by governments (the taxpayers). And it is public investment that has been slashed as the first way of getting government spending down (followed by cuts in welfare spending).

Take Japan. In order to try and control its government spending and get its large budget deficit down, the government just stopped its investment programs for the country.

Japan govt inv

Talking of Japan, as Cameron warned the world of a possible new global slump, we got the shock news that the Japanese economy had contracted by another 0.4% in the third quarter of this year and was thus technically in a new economic recession, while the fall in Q2 was revised down further. This was a shock for the mainstream economic forecasters, who had expected an expansion, although some of us had seen it coming (see my post http://thenextrecession.wordpress.com/2014/10/13/japan-the-failure-of-abenomics/).

It seems that the huge jump in sales tax imposed by the Abe government as part of its ‘three arrows’ of reform has driven real incomes for average Japanese households down so much that they have stopped spending. Private consumption is down since April at an annual rate of 10%, buying homes is down even more and most worrying for growth, business investment fell. And we have seen above that government investment has also been cut.

The Abe government now look set to delay its proposed second round of sales tax increase and probably call an early election so that the government can get a suitably long time to impose further measures on the population.

Paul Krugman has piped up in his blog to argue that it was good news that Abe was going to delay the sale tax hike – indeed he should drop it altogether (http://krugman.blogs.nytimes.com/2014/11/16/japan-through-the-looking-glass/). Krugman reckons that the Japanese economy is in a typical Keynesian liquidity trap and with interest rates ‘zero bound’ more quantitative easing won’t be enough to get the economy out of dreaded deflation.  What was needed was “a credible promise to be irresponsible”. The government should spend more and not worry about the budget deficit and the government’s debt level. More spending will boost growth and inflation and the deficits and debt will then look after themselves.

Krugman did not tell his readers that just a few years ago he reckoned that more monetary easing and fiscal spending would get Japan out of its hole, when this blog argued that it would not. Who was right? (http://thenextrecession.wordpress.com/2013/02/14/japans-lost-decades-unpacked-and-repacked/).

As it is, Japan has been running huge budget deficits to try and boost the economy and has not imposed any serious measures of austerity. According the IMF, Japan’s government deficit stood at 7.1% of GDP in 2014, nearly double the OECD average. Japan has reduced its deficit by 30% since the peak of the Great Recession in 2009. But the OECD average reduction is 60%. If we exclude the effects of the cyclical recovery since 2009 on government revenues and spending, then Japan’s austerity program has cut the deficit by 15%, but the OECD austerity average is 60% and Greece’s is over 100%!

What is holding back the Japanese economy is not a lack of government spending or more credit but the unwillingness of the capitalist sector to invest.

Japan Investment

The Abe government has made huge efforts to get the profitability of Japanese capital back to pre-crash levels. And by reducing real wages, it has succeeded somewhat.  But not yet enough it seems.

This is the common story of the weak recovery. The share of new value going to labour has been squeezed through unemployment, low wage jobs that are temporary, casual or part-time, along with cuts in welfare, pensions and higher taxes. So the share of new value going to profit has rocketed. But not enough to get kick-start capitalist investment. So, while Cameron turns the red warning lights on, the IMF now calls for government investment, while governments try to keep spending down.  It’s a funny old mess.


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