The global crawl

In this post I am returning to my theme that the world capitalist economy is in a Long Depression in which the recovery in output and employment after the end of the Great Recession of 2008-9 is very weak and much less in extent and pace than we have seen in previous recoveries after capitalist slumps like those of 1974-5, 1980-2 or 1990-1.  Be warned, in doing so, there will be an awful lot of graphs!

Global industrial production is crawling along.  The World Bank produces a monthly index of global industrial production, making it a very good measure of how well the productive sector of the world capitalist economy is doing.  This index covers the world and is not confined to the major capitalist economies (G7) or even the advanced economies.  It includes the likes of China, India and emerging Asia and Latin America.

What does the index show?  It shows a real crawl – indeed in the latter half of 2012, global industrial output growth slowed to no more than a 2% year-on-year pace, below the average seen over the last 20 years of about 3% a year.  There was a sharp recovery after the humongous fall in the Great Recession, but that recovery seems to have dissipated and is certainly not nearly as strong as the recovery in the 1990s up to the emerging economy crisis of 1998 or after the slump of 2001.

image001

The weakness is particularly visible in the major capitalist economies of the US, Europe and Japan.  In a recent post, Michael Burke highlighted how just awful the relative decline in UK industrial output has been since the Great Recession (http://socialisteconomicbulletin.blogspot.co.uk/2013/01/20-years-of-lost-output.html).  See his graph below.

13 01 14 Figure 1 Industrial production[4]

As Michael puts it: “The base date for measuring output is 2009 when the IP was set at 100. This means that in each of the last 3 months industrial production has been below the level seen in 2009, which was the deepest recession in Britain since the 1930s….. The British economy has slumped to levels of output last seen 20 years ago”.

Another more recent measure of activity in the global productive sector is the global Purchasing Managers Index (PMI), something I have followed in other posts to establish a more up to date gauge of where the world economy is going.  If the global PMI is above 50 then there is expansion indicated in the world manufacturing sector.  Below 50 means contraction.  After the initial burst of recovery from the Great Recession, expansion turned back into contraction in 2012 until the last few months.  The index is now just over 50, suggesting slow growth.

image004

I’ve argued in this blog many times that the key to sustained growth is investment by the capitalist class in new equipment, plant and buildings (what is called capex).  The Oxford Economics research bureau has constructed a world capex index to see how productive investment is going.  Again it’s the same story.  After the initial recovery from the Great Recession, investment growth worldwide has slipped back and is now rising at no higher than 2% a year compared to an average of over 5% a year before the Great Recession.

image009

Not all economists agree that investment is needed to kick-start or sustain economic growth.  The Keynesians seem to think that ‘effective demand’ is what is needed,  meaning not just or even mainly investment, but a significant rise in spending, mainly consumer spending, or failing that, any spending, namely from government.  This theory leads some Keynesians to argue, as Joseph Stiglitz does, that the reason for the weak recovery is rising inequality, which reduces consumer spending by the masses and so keeps ‘effective demand’ weak (http://opinionator.blogs.nytimes.com/2013/01/19/inequality-is-holding-back-the-recovery/).  However, other Keynesians like Paul Krugman reject this version of the ‘underconsumption’ thesis based on inequality.  For Krugman (as for Keynes), if capitalists have more to spend on luxury goods that will do for effective demand just as well, even if it is morally repugnant (http://krugman.blogs.nytimes.com/2013/01/20/inequality-and-recovery/).

The Austrian school deny the role of consumption in sustaining economic growth.  On the contrary, more consumption means less saving and thus less investment.  And it is investment by the capitalist sector that matters.   Marxist economics agrees that investment is the driver of growth and employment.  The question is what will cause investment to rise.  The Austrians say it is plenty of saving, while the Marxists say it is plenty of profit.

Both the Austrians and the Marxists reckon that profit matters.  From profit flows investment and then employment and then consumption – not vice versa as the Keynesians would have it.  But there is one big difference.  The Austrians  reckon that profitability will be fine as long as the market is left to its own devices and there is no interference by trade unions or government or monopolies.  The Marxist view is that there is an inherent contradiction in the capitalist investment process, namely the tendency of the rate of profit to fall with accumulation.  That happens because of the capitalist mode of production for profit and leads to cycles of booms and slumps that interfere with steady investment expansion, whatever the ‘interference’ of government or monopoly.

If Marx’s law is correct, it should mean that rising profitability and especially rising total profits should lead to more investment.  Indeed in many posts (see http://thenextrecession.wordpress.com/2012/06/26/profits-call-the-tune/), I have tried to show that profits lead investment, not vice versa.  And in my book, The Great Recession, and in an academic paper, I have analysed the causal connections more closely (http://thenextrecession.files.wordpress.com/2011/07/the-profit-cycle-and-economic-recession.pdf).

Even better has been the work of A Tapia Granados, entitled Does investment call the tune?  Empirical evidence and endogenous theories of the business cycle, to be found in Research in Political Economy, May 2012, http://sitemaker.umich.edu/tapia_granados/files/does_investment_call_the_tune_may_2012__forthcoming_rpe_.pdf).   Tapia shows that in over 251 quarters of US economic activity from 1947, corporate profits stop growing, stagnate and then start falling a few quarters before a recession.  Using regression analysis, Tapia finds that pre-tax profits can explain 44% of all movement in investment, while there is no evidence that investment can explain any movement in profits.

Dr Jim Walker of the Austrian school has also confirmed that causation process: from profits to investment, not vice versa, in the business cycle.  Using Granger Cause analysis that tests null hypotheses, he tested two data series, US corporate  profits  and corporate investment, and found that the null hypothesis that ‘a change in corporate profits does not cause a change in corporate investment’ was strongly rejected.  In other words, corporate profits do appear to predate and explain movements in investment.

So that brings us to a conundrum.  US profitability has made a significant recovery since the trough of the Great Recession in mid-2009.  And the mass of profit has jumped well ahead of the previous peak in early 2006.  So why has there not been a similar sharp recovery in investment and thus growth?  Well, the first thing to say is that US economic growth has been much better than that in Europe or Japan and so has investment growth.  And that would seem to follow as average profitability has not recovered much at all in Europe and Japan, as I shall show below.

Second, even though profitability in the US has risen, profitability in the productive sector (industry, manufacturing and transport) has not done so well.  The rate of profit in the US financial sector rose significantly from the mid-1990s as the credit boom began while the rate of profit in the non-financial sector remained in the doldrums.

image004

As a result, net investment (after depreciation) remains at very low levels.

image002

It’s true that the mass of profits did rise significantly after the trough of 2009 in the US.  But these profits seem to have been ‘hoarded’ as cash by the large companies in both the US and Europe.

image007

One reason give for this conundrum has been offered by a Canadian right-wing think tank, CD Howe Institute.  This institute points out that cash balances in corporations were building up for some years even before the crisis and slump.  It is not a reluctance of companies to invest because of the slump.  Instead they need cash on hand in order to source goods and raw materials in a hurry instead of building up inventories or stocks.  So cash has replaced high inventories in a world of ‘just-in-time’ manufacturing.  This may have some validity but it also suggests that high cash balances are no indicator of low investment.  And yet that is what we have.  So this explanation does not really seem to answer the conundrum.  I reckon there are better reasons.

The first is that even if the US profit share is up, US corporate profitability is still below the levels of previous peaks in 2006 and 1997 respectively.

image002

Second, debt deleveraging still has some way to go, even though debt to income has come down for households (mainly through mortgage defaults).  Public sector debt to GDP is still rising and corporate debt is stable at relatively high levels.  Only low interest rates are keeping many companies from going under.   But Keynesian-monetarist type policies of low interest and ‘quantitative easing’ have done nothing to stimulate investment in the productive sectors,  Instead, they only jack up stock and bond prices for the financial sector and the rich.  And what fiscal stimulus and extra government spending there has been applied has not been to boost government investment.  Indeed, the US government is now preparing fiscal austerity measures for this year that will more than match anything done in Europe.

In some ways, the simplest explanation for this world in a crawl is that profitability has not recovered at all for most capitalist economies.  The US remains the exception.  Using the EU Commission’s AMECO database, I found that the net rate of return on the stock of capital in the major economies in 2012 was still well below the peaks of 2007 everywhere except the US (and on my own measure of the US rate of profit even there it is lower than 2007).

image002

Dr Walker (op cit) looked at the return on equity for companies in Europe and Asia.  This is not such a good measure of corporate profitability, although it does measure profit against the value of a company’s stock price, which perhaps takes into account any fictitious capital.  On this measure, Walker found that only China really had achieved a higher average rate of return since the crisis.  Rates of return on equity in Europe and Japan were down 30-50% compared to before the crisis.

image004

Now some investment bank economists have recently suggested that global manufacturing is set for a revival this year.   And it’s true that there have been some signs of a pick up in capital goods orders and we shall know by the end of this week if the PMIs in the Eurozone and elsewhere are also indicating some expansion – they are deep in contraction territory at the moment.

world cap goods orders

So I’ll return to those measures when we get the data.  But even if there is a pick up from the lows we’ve seen in 2012, the investment cycle will probably remain in the doldrums and so will global growth.

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16 Responses to “The global crawl”

  1. Bruciebaby Says:

    Are you still thinking that there will be a recession in the US in 2013 or 14?

    • michael roberts Says:

      Bruce
      I never said 2013, which I think will be another crawl. My forecast for recession was no earlier than 2014 and possibly 2015. Yikes – it’s so dangerous to forecast. I was too late with the Great Recession – I said 2000-10 and it was 2008-9. The main thing is that profitability will not be restored sufficiently to sustain faster growth without another recession.

  2. jamescoles Says:

    Another superb post. I’ve gleaned a great deal from this and the many others that you’ve put out. But I wonder, is the causal relationship between investment and profit-rates as clear cut as you seem to suggest? Even if profit rates are falling, capitalists are still coerced into investing, as something is still better than none, right?

    • michael roberts Says:

      Yes, as long as the mass of profits are rising. Even then, firms will go on investing for a while after profits start falling, perhaps to the point of making outright losses. But some go bust and then take others down with them, revenues fall for all, employment drops and we have a recession.

  3. paulc156 Says:

    Interesting read. You link to José A. Tapia Granados paper regarding ‘profits leading investment’ and that does appear to be borne out in the data he shows but if you look at figure 2 [near the end of the paper] it shows in the most recent slump that investment turned down just before profits, whether before or after tax.

  4. joseph.hartney@hsbcib.com Says:

    Hi Michael, thanks for this illuminating overview.

    I was interested in the graph that you showed comparing Rates of Proift in
    the Financial and non-Financial sector. I had a couple of questions about
    this;

    1) Do you know how financial and non-financial are being separated in this
    measure?

    2) The two graphs tend to show that the higher ROP of Financial companies,
    nevertheless tends to follow the ups and downs of the non-Financial ROP,
    with a small lag. It seems to me that this is in-keeping with Marxist
    theory that views Financial ups and downs as being driven primarily by the
    ups and downs of the productive sector.

    The one exception however is the period from 1998 onwards – here the
    decline in the non-financial ROP diverges sharply from a rise in the
    Financial ROP – is there something different taking place here that
    explains this divergence between the productive and Financial sectors?

    Kind regards.

    Joe.

    From: Michael Roberts Blog

    To: Joseph HARTNEY/HBEU/HSBC@HSBC

    Date: 22/01/2013 12:41

    Subject: [New post] The global crawl

    michael roberts posted: ” In this post I am returning to my theme that the world capitalist economy is in a Long Depression in which the recovery in
    output and employment after the end of the Great Recession of 2008-9 is very weak and much less in extent and pace than we have “

    • michael roberts Says:

      Joseph
      1) I used the definitions made by the US Bureau of Economic Analysis, which means the financial corporate sector covers banks, insurance companies, mutual funds, investments funds hedge funds etc. The non-financial sector is the rest, excluding government and residential property.
      2) I agree. From the mid-1990s there is a significant financialisation of the US economy and above all fast rising stock and bond prices, attracting profits into investment into financial assets rather than into real assets – and of course into property. The great credit boom was under way, shoring up the system, but at the same time weakening the productive sectors. The bubble burst in 2007.

  5. Edgar Says:

    Isn’t it true to say that the Marxist position is that as workers wages increase this forces bosses into coming up with labour saving devices. So, shouldn’t investment rise as profits fall?

    • michael roberts Says:

      Yes, wage rises would reduce profits, other things being equal, so capitalists strive to increase the rate of exploitation or labour productivity by introducing new technology. This can raise the share and rate of profit for a while. But Marx’s law of the tendency of the rate of profit to fall argues that this won’t continue indefinitely. Eventually the rate of profit will fall and then total profits, causing an investment crisis. So it’s a cycle of rising investment and then a slump in investment, before the restoration of profitability by the destruction of the value of the old stock of investment allows the whole ‘crap'(to use Marx’s phrase) to begin again.

    • GrahamB Says:

      The causality is profits to investment and not vice versa, but in the study quoted profits are responsible for under half the movement in investment, so there are other factors that also influence investment.

      One is wages. The keynesians are right for the wrong reason. A rise in real wages isn’t so much about about demand, rather as you say, it will ‘incentivise’ capitalists to investment their cash mountains.

      For capitalists in a competitive market, when everyone is investing you strive to be the first and best investor. When the environment is cost cutting, you want to be the most vicious.

  6. billjefferies Says:

    The World Bank figures are based on a moving average of exchange rates and therefore, underestimate the growth of the emerging markets. That is really the story of the last four years. There’s also issues how the WB weight their measures.
    There is no global recession, depression or stagnation. Rather there is an emerging market boom and an advanced nation stagnation, although that too is uneven. Relatively strong recovery in the USA and Germany, stagnation in Southern Europe, Uk and Japan.
    Its not really legitimate to separate the rate of profit by sector. All profits originate in the productive sector, by definition. The aggregate is what counts. As financial profits have been generally rising as a proportion of total profits, and exceed NFP, then by separating them you get a lower rate of profit. Not clear as to whether you include foreign profits, do you?

    • michael roberts Says:

      I can’t believe that you deny there was a global recession between 2008-9 of major proportions (the Great Recession). I have specifically argued that the world economy is not now in recession (contraction) and is unlikely to be so in 2013. But the recovery since 2009 has been poor, particularly in the advanced economies. You like the word ‘stagnation’ to describe the lack of recovery in the advanced economies, which still constitute 55-60% of the world economy, while I use the word ‘depression’, meaning that these economies on the whole have not returned to the previous pre-crisis peaks or closed the gap in lost output. It’s similar to the period of 1932-37, when there was recovery from the depth of the recession but it did not end the depression, or like the various brief recovery periods in the long stagnation of Japan after 1990.

      The so-called emerging economies have done better, although they are not growing as well as before the Great Recession (China, for example, is not). On a PPP-basis EM per capita real GDP rose 3.8% a year from 2002 to 2008. But the average from 2010 has been just 1.5% a year. The relatively strong growth in Germany and the US compared with the rest of the adavanced economies is still slower than before the Great Recession. And yes, there is stagnation (depression) in the rest of Europe and Japan.

      In its very latest global update out yesterday, the IMF reckons US real GDP growth will be 2% this year, slower than 2.3% in 2012. Germany will grow just 0.6% compared to 0.9% in 2012 – hardly strong – although to be fair, the IMF expects the second half of 2013 to show some acceleration. It reckons overall world output growth (in PPP terms) will be 3.5% in 2013, slightly up on 2012, but slower than 2010 or 2011. Using market exchange rates (my preferred measure), real GDP growth is even slower across the board. The IMF calls all this a ‘fragile recovery’, not a boom. That seems fair.

      Yes, all profits originate in the productive sector, but what has happened in the last 20 years is that much of those profits were transferred to unproductive sectors and then they (mostly) were not used to reinvest in productive sector investment, but in fictitious capital (financial assets) and property. That lowered investment rates in tangible and productive assets. Separating the ROP for each sector shows how the productive sector has been starved of capital from the profits that it originates and so capitalism has become less productive even on its own terms. Including foreign profits does not really change the trends between the two sectors, although it obviously raises the overall rate of profit based on domestic profits only.

      • billjefferies Says:

        Of course I don’t deny there was a recession, but even on your own graph of world industrial production the recovery was very strong. 12 months after the crash, IP – and trade I might add – were above their pre-crash levels.
        Even then the crash was not in any sense comparable with the Great Depression, where world output fell 30% and did not recover for seven years. This time it fell 0.6% and had recovered within a year. In the noughties GDP per capita grew at its strongest rate since the post war boom, twice its level of the 1990s. Growth of 1.5% is still pretty strong historically. The EM are now around 40% by cash or 50% by PPP of world output.
        So no great depression or stagnation.
        The US mass and rate of profit now exceed their pre-crash levels and are currently comparable with the peaks of the post-war boom. And they’re likely to rise, this is still the recovery phase of the cycle.

  7. Mike Ballard Says:

    Real wages in the USA have been stagnant since the mid-60s as labour productivity has increased in real terms at a 1.3% rate. Marx demonstrates that the exchange-value of a commodity decreases as the productivity of labour increases. The lower the value of commodities produced by labour, the lower the rate of profit, which of course, only occurs after the commodities have been sold.

    Who will buy these beautiful commodities?

    Some will be purchased by capitalists and landlords; but they can only need so much. After all, it’s socially necessary labour time which goes into the commodities which are being sold and when the commodities being sold are more than the mass market can absorb, capitalists don’t invest in industries in which workers are producing more commodities than can be sold ergo, the cash sloshing around in capitalist coffers these days and the tendency to invest in ephemeral finance capitalist instruments, including government bonds issued by nations where capitalists are in a selling boom e.g. Australia’s mining capitalists.

    Australia’s dollar (AUD) is now very much stronger (59 USD cents in 2000/$1.05 USD 2013), as a result of the mining boom while the U.S. dollar (USD) is very much weakened through the export of the non-finance capital to areas of the world where increased rates of profit can be achieved via much lower prices for labour power and will be kept in that state as the price of the USD commodity falls due to Quantitative Easing (QE). The falling USD will stimulate the export of commodities produced by U.S. workers making ever lower real wages, especially when those wages are in USD with less and less value. So, expect more investment in the USA by foreign and domestic capitalists in future.

    • billj Says:

      “Marx demonstrates that the exchange-value of a commodity decreases as the productivity of labour increases. The lower the value of commodities produced by labour, the lower the rate of profit, which of course, only occurs after the commodities have been sold.”
      That’s not true at all. Marx shows that as productivity rises, then the cost of reproduction of labour power and the value of constant capital falls, so the rate of profit increases

      “The increased profit received by a capitalist through the cheapening of, say, cotton and spinning machinery, is the result of higher labour productivity; not in the spinnery, to be sure, but in cotton cultivation and construction of machinery.”

      http://www.marxists.org/archive/marx/works/1894-c3/ch05.htm

      who will buy these commodities? Not the workers, but the bosses spend a lot of money on expensive crap.

      • Mike Ballard Says:

        Good point. What I meant is that the rate of profit ‘per’ commodity sold is less because there is less value in the particular commodity. However, as the commodity is cheapened through greater productivity, the capitalist seller gains market share thus, can achieve a greater totality of profits.

        Example from Marx of what I’m getting at:

        “If the productive power of all the different sorts of useful labour required for the production of a coat remains unchanged, the sum of the values of the coats produced increases with their number. If one coat represents x days’ labour, two coats represent 2x days’ labour, and so on. But assume that the duration of the labour necessary for the production of a coat becomes doubled or halved. In the first case one coat is worth as much as two coats were before; in the second case, two coats are only worth as much as one was before, although in both cases one coat renders the same service as before, and the useful labour embodied in it remains of the same quality. But the quantity of labour spent on its production has altered.

        “An increase in the quantity of use values is an increase of material wealth. With two coats two men can be clothed, with one coat only one man. Nevertheless, an increased quantity of material wealth may correspond to a simultaneous fall in the magnitude of its value. This antagonistic movement has its origin in the twofold character of labour. Productive power has reference, of course, only to labour of some useful concrete form, the efficacy of any special productive activity during a given time being dependent on its productiveness. Useful labour becomes, therefore, a more or less abundant source of products, in proportion to the rise or fall of its productiveness. On the other hand, no change in this productiveness affects the labour represented by value. Since productive power is an attribute of the concrete useful forms of labour, of course it can no longer have any bearing on that labour, so soon as we make abstraction from those concrete useful forms. However then productive power may vary, the same labour, exercised during equal periods of time, always yields equal amounts of value. But it will yield, during equal periods of time, different quantities of values in use; more, if the productive power rise, fewer, if it fall. The same change in productive power, which increases the fruitfulness of labour, and, in consequence, the quantity of use values produced by that labour, will diminish the total value of this increased quantity of use values, provided such change shorten the total labour time necessary for their production; and vice versâ.”

        http://www.marxists.org/archive/marx/works/1867-c1/ch01.htm#S3a2b

        Thanks for your observation.

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