Davos: responsible capitalism

January 16, 2017

Today, the global political and economic elite meet in Davos Switzerland under the auspices of the World Economic Forum (WEF).  Every year the WEF has an annual meeting in the super exclusive ski resort of Davos, with the participation of 3,000 politicians, business leaders, economists, entrepreneurs, charity leaders and celebrities.  For example, this year Chinese president Xi Jinping, South Africa’s Jacob Zuma and many of the economic mainstream gurus and banking officials are among the attendees. Xi Jinping will be the first Chinese president to attend Davos and will lead an unprecedented 80-strong delegation of business leaders, economists, academics and journalists.  He will deliver the opening plenary address on Tuesday and use it to defend “cooperation and economic globalisation”.  

US vice-president Joe Biden, China’s two richest men and London mayor Sadiq Khan will travel on private jets to nearby airports before transferring by helicopter to escape the traffic on the approach to the picturesque town. So many jets are expected that the Swiss government has opened up Dübendorf military airfield, an 85-mile helicopter flight away, to accommodate them.  The increase in private jet flights – which each burn as much fuel in one hour as typical use of a car does in a year – comes as the WEF warns that climate change is the second most important global concern.

While the rich elite fly in on their private jets, extra hotel workers are being bussed in to serve the delegates, while packing into five a room in bunk beds.  One of the main themes of Davos will be the rising inequality of income and wealth.  So Davos itself is a microcosm.

At Davos’ super luxury hotel the Belvedere, there will be “specially recruited people just for mixing cocktails”, as well as baristas, cooks, waiters, doormen, chambermaids and receptionists  to host world leaders, business people and celebrities, who this year include pop star Shakira and celebrity chef Jamie Oliver (worth $400m).  Last year, a Silicon Valley tech company was reportedly charged £6,000 for a short meeting with the president of Estonia in a converted luggage room. The hotel has also previously flown in New England lobster and provided special Mexican food for a company that was meeting a Mexican politician.

Britain’s Theresa May will be the only G7 leader to attend this year’s summit as it clashes with Donald Trump’s inauguration as the 45th US president.  Last year, former UK PM David Cameron partied tie-less with Bono, Leonardo DiCaprio and Kevin Spacey, at a lavish party hosted by Jack Ma, the founder of internet group Alibaba and China’s richest man with a $34.5bn (£28.5bn) fortune. Tony Blair also attended the Ma party last year.

Basic membership of the WEF and an entry ticket costs 68,000 Swiss francs (£55,400).  To get access to all areas, corporations must pay to become Strategic Partners of the WEF, costing SFr600,000, which allows a CEO to bring up to four colleagues, or flunkies, along with them. They must still pay SFr18,000 each for tickets. Just 100 companies are able to become Strategic Partners; among them this year are Barclays, BT, BP, Facebook, Google and HSBC. The most exclusive invite in town is to an uber-glamorous party thrown jointly by Russian billionaire Oleg Deripaska and British financier Nat Rothschild at the oligarch’s palatial chalet, a 15-minute chauffeur-driven car ride up the mountain from Davos. In previous years, Swiss police have reportedly been called to Deripaska’s home after complaints about the noise of his Cossack band. Deripaska’s parties have “endless streams of the finest champagne, vodka, and Russian caviar amidst dancing Cossacks and beautiful Russian models.”

The official theme of this year’s forum is “responsive and responsible leadership”!  That hints at the concerns of global capitalism’s elite: they need to be ‘responsive’ to the popular reaction to globalisation and the failure of capitalism to deliver prosperity since the end of the Great Recession and they also need to be ‘responsible’ in their policies and actions – a subtle appeal to the newly inaugurated Donald Trump as US president or Erdogan in Turkey, Zuma in South Africa, Putin in Russia and Xi in China.

The WEF has been the standard bearer of the positives from ‘globalisation’, new technology, free markets, ‘Western democracy’ and ‘responsible’ leadership.  Trump and other leaders of global and regional powers now seem to threaten that enterprise.  But Trump is the result of the failure of the WEF project itself i.e. global capitalist ‘progress’.

In my book, The Long Depression, in the final chapter I raised three big challenges for the capitalist mode of production over the next generation: rising inequality and slowing productivity; the rise of the robots and AI; and global warming and climate change.  And these issues are taken up in this year’s WEF report entitled The Global Risks Report.  The WEF report cites five challenges for capitalsim:  1 Rising Income and wealth disparity; 2 Changing climate; 3 Increasing polarization of societies; 4 Rising cyber dependency and 5 Ageing population.

The report points out that while, globally, inequality between countries has been “decreasing at an accelerating pace over the past 30 years”, within countries, since the 1980s the share of income going to the top 1% has increased in the United States, United Kingdom, Canada, Ireland and Australia (although not in Germany, Japan, France, Sweden, Denmark or the Netherlands).  Actually, as I have shown in recent posts, global inequality (between countries) has only decline because of the huge rise in incomes per head in China.  Excluding, there has been little improvement, with many lower income countries having worsening inequality.  And as the WEF says, the slow pace of economic recovery since 2008 has “intensified local income disparities with a more dramatic impact on many households than aggregate national income data would suggest.”

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The latest measures of inequality of incomes and wealth as presented by Thomas Piketty, Emmanuel Saez, Daniel Zucman and recently deceased Tony Atkinson, are truly shocking, with no sign of any reduction in inequality in the US, in particular.


Since the global financial crisis the incomes of the top 1% in the US grew by more than 31%, compared with less than 0.5% for the remaining 99% of the population, with 540 million young people across 25 advanced economies facing the prospect of growing up to be poorer than their parents.  And to coincide with Davos, Oxfam, using the data compiled for the annual Credit Suisse wealth report finds that the world’s eight richest individuals have as much wealth as the 3.6bn people who make up the poorest half of the world!


In my blog and , I discuss the reasons for this sharp increase in inequality.  Inequality is a feature of all class societies but under capitalism it will vary according to the balance of power in the class struggle between labour and capital.  The WEF report likes to think that the cause is the differential of skills between those who are better educated and therefore can obtain higher wages.  But research has shown this to be nonsense.  The real disparity comes when capital can usurp a greater proportion of value created in capitalist production.  Increased profitability, lower corporate taxes and booming stock and property markets since the 1980s have shifted up incomes from capital compared to wages, particularly for the top echelons in corporations.

And then there is the impact of ‘capital bias’ in capitalist production that I have referred to before.  According to the economists Michael Hicks and Srikant Devaraj, 86% of manufacturing job losses in the US between 1997 and 2007 were the result of rising productivity, compared to less than 14% lost because of trade.


“Most assessments suggest that technology’s disruptive effect on labour markets will accelerate across non-manufacturing sectors in the years ahead, as rapid advances in robotics, sensors and machine learning enable capital to replace labour in an expanding range of service-sector job.  A frequently cited 2013 Oxford Martin School study has suggested that 47% of US jobs were at high risk from automation and in 2015, a McKinsey study concluded that 45% of the activities that workers do today could already be automated if companies choose to do so.” (WEF).

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Technological change is shifting the distribution of income from labour to capital: according to the OECD, up to 80% of the decline in labour’s share of national income between 1990 and 2007 was the result of the impact of technology.  While at a global level, however, many people are being left behind altogether: more than 4 billion people still lack access to the internet, and more than 1.2 billion people are without even electricity.

In my book, I cite the next challenge for capitalism is climate change from global warming.  The WEF report does too.  There are a growing “cluster of interconnected environment-related risks – including extreme weather events, climate change and water crises” .Global greenhouse gas (GHG) emissions are growing, currently by about 52 billion tonnes of CO2 equivalent per year.  Last year was the warmest on the instrumental record according to provisional analysis by the World Meteorological Organisation. It was the first time the global average temperature was 1 degree Celsius or more above the 1880–1999 average.  According to the National Oceanic and Atmospheric Administration, each of the eight months from January through August 2016 were the warmest those months have been in the whole 137 year record.


As warming increases, impacts grow. The Arctic sea ice had a record melt in 2016 and the Great Barrier Reef had an unprecedented coral bleaching event, affecting over 700 kilometres of the northern reef. The latest analysis by the UN High Commissioner for Refugees (UNHCR) estimates that, on average, 21.5 million people have been displaced by climate- or weather-related events each year since 2008,59 and the UN Office for Disaster Risk Reduction (UNISDR) reports that close to 1 billion people were affected by natural disasters in 2015.

The Emissions Gap Report 2016 from the United Nations Environment Programme (UNEP) shows that even if countries deliver on the commitments – known as Nationally Determined Contributions (NDCs) – that they made in Paris, the world will still warm by 3.0 to 3.2°C. To keep global warming to within 2°C and limit the risk of dangerous climate change, the world will need to reduce emissions by 40% to 70% by 2050 and eliminate them altogether by 2100.

The World Bank forecasts that water stress could cause extreme societal stress in regions such as the Middle East and the Sahel, where the economic impact of water scarcity could put at risk 6% of GDP by 2050. The Bank also forecasts that water availability in cities could decline by as much as two thirds by 2050, as a result of climate change and competition from energy generation and agriculture. The Indian government advised that at least 330 million people were affected by drought in 2016. The confluence of risks around water scarcity, climate change, extreme weather events and involuntary migration remains a potent cocktail and a “risk multiplier”, especially in the world economy’s more fragile environmental and political contexts.

The third big challenge cited by the WEF is restoring global economic growth.  The report points out that permanently diminished growth translates into permanently lower living standards: with 5% annual growth, it takes just 14 years to double a country’s GDP; with 3% growth, it takes 24 years. “If our current stagnation persists, our children and grandchildren might be worse off than their predecessors. Even without today’s technologically driven structural unemployment, the global economy would have to create billions of jobs to accommodate a growing population, which is forecast to reach 9.7 billion by 2050, from 7.4 billion today.”

So the WEF report highlights a whole batch of problems ahead for the stability and success of global capitalism. And what are the answers for a ‘responsive and responsible’ global leadership gathering in Davos?  Capitalism must be preserved, of course, but it will necessary “to reform market capitalism and to restore the compact between business and society.”

But having said that globalisation is failing in its report, the WEF then says that the way forward is really more of the same.  “Free markets and globalization have improved living standards and lifted people out of poverty for decades. But their structural flaws – myopic short-termism, increasing wealth inequality, and cronyism – have fueled the political backlash of recent years, in turn highlighting the need to create permanent structures for balancing economic incentives with social wellbeing.”

Thus the WEF report calls on the rich elite “to be responsive to the demands of the people who have entrusted them to lead, while also providing a vision and a way forward, so that people can imagine a better future.” And how to do this?  “Leaders will have to build a dynamic, inclusive multi-stakeholder global-governance system…the way forward is to make sure that globalization is benefiting everyone.”

Reducing inequality and poverty, boosting productivity and growth through new technology while preserving jobs and raising incomes; reducing gas emissions into the atmosphere to avoid global catastrophes, while preserving and reforming capitalism through global cooperation from Trump in the US, Xi Ping in China, Putin in Russia and Brexit Britain and the European Union.  Hmm…

ASSA 2017 part 2 – Economists and the state of economics

January 11, 2017

Part one of my report on ASSA 2017 covered the debate among mainstream economists and others on the scale and impact of rising inequality and the role of automation on labour and the capitalist economy.

Talking of inequality brings me to consider the state of economics now, as expressed in ASSA 2017.  The failure of mainstream economics to forecast the Great Recession or to explain it; and the subsequent failure to explain how to get out of the Long Depression that ensued raised questions about the methods and polices of the mainstream at this year’s ASSA.

Nobel prize winner Angus Deaton at ASSA had serious questions.  Economic data were faulty, the models used by economists were unreal and the inequality we see in the world was mirrored in the economics ‘profession’ itself.  Deaton sounded upset that most economists could not get their stuff into the top journals, leaving the gravy train of pay and fame to a small elite of Nobel prize winners.  A few top economists got high pay, good jobs and tenure and the same people got their papers in the top five journals and often not on merit.

Of the 537 people who have held American Economic Association office since 1950, for example, 51.1 percent got their doctorates at the University of Chicago, Columbia, Harvard and the Massachusetts Institute of Technology. One-third of the members of the Council of Economic Advisers have had doctorates from MIT. Elite-level economics has become a quite exclusive club.

But economists in general are not really hard done by in the wider scheme of things.  They generally get paid better than most other academics and other ‘professions’ – at least in America.  Indeed, the latest data at ASSA show that newly appointed economists in American academia could expect way more than in most jobs and even most ‘professions’ – starting salaries in the US ate $80-120k.  And even more is paid to economists who go into banking and the world of Goldman Sachs.


And it is not hard to see why.  The aim of mainstream economics is not to analyse society objectively but to defend and promote capitalism and markets as the only viable system of human organisation.  Modern economics is an apologia not a science. For this wasteful and unproductive exercise, economists are paid relatively well compared to occupations that provide things and services that most people actually need.

But the price of apologetics is to fail to see crises coming in the capitalist mode of production.  Mainstream economics failed to forecast the Great Recession and then to explain it.  And it has failed to explain the subsequent Long Depression and how to get out of it.

Indeed, as the ASSA elite bemoaned these failures in Chicago, the Bank of England’s chief economist also warned of the dangers of placing too much faith in economic forecasts. Andy Haldane admitted economic forecasting was “in crisis” and failed to warn adequately about the financial crisis. And he said of economics: “It’s a fair cop to say the profession is to some degree in crisis”. His intention was to highlight the problems inherent in placing too much reliance on large models of the economy which assume people always behave rationally. Mr Haldane said he hoped the lessons learnt after the financial crisis would help economics move away from “narrow and fragile” models to a broader analysis which encompasses insights from other disciplines.

In the Richard Ely ASSA lecture, Esther Duflo reckoned economists should give up on the big ideas and instead just solve problems like plumbers “lay the pipes and fix the leaks”.  Elsewher, at ASSA, it was also suggested that economists were more like engineers than physicists.

This sounded like Keynes’ famous remark that economists should be like dentists – sorting out troublesome teething problems so that capitalism can then run smoothly. Apparently, Duflo reckons the analogy of plumbers means that pure scientific method of cause and effect was less important than practical fixes. So economists should be more like doctors than medical researchers.  Plumbers, dentists, engineers, doctors – but not, it seems, social scientists, let alone scientific socialists.

The failure of economics does not auger well that the mainstream will know what to do about the rise of ‘the Donald’.  At ASSA, a pack of Nobel Prize-winning economists gave Donald Trump and his policy plans the thumbs-down.  “There is a broad consensus that the kind of policies that our president-elect has proposed are among the polices that will not work,” said Joseph Stiglitz, summing up the views of the panel that included his fellow Columbia University professor Edmund Phelps and Yale University’s Robert Shiller.

Phelps was particularly critical of Trump’s singling out of individual companies for abuse and praise, saying such interference could end up discouraging newcomers from entering markets and bringing with them much-needed innovation. “The Trump government is threatening to drive a silver spike into the heart of the innovation process,” he said. Phelps also voiced concern about Trump’s plans for big tax cuts and spending increases. “Such a policy runs the risk it could lead to an explosion of public debt and ultimately cause a serious loss of confidence and a deep recession,” he said.  Shiller was the only Nobel Prize winner on the panel discussion who didn’t take a shot at Trump. “I’m a natural optimist and I would not like to speculate on how bad it could get,” he said.

Much of this moaning appeared to be sour grapes.  So far, Trump has appointed only one economist to his administration, the rest are mostly billionaires.  Apparently, he does not like ‘experts’.  But as Glenn Hubbard, former Bush adviser and now head of Columbia Business School, said: “I think the president will get any economist, he asks”.  Indeed there was another ASSA panel, chaired by Harvard’s top professor Greg Mankiw who were positive about Trumponomics.  John Taylor and Alan Kreuger expected good results from Trump’s proposed infrastructure plans.

Of course, the economists who are really excluded are those on the radical wing of the ‘profession’ who are not engaged in apologia.  They were not looking to join Trump and they were not going to be invited. In the URPE sessions, Esther Jeffers of the University of Paris reckoned that capitalism is on the verge of a new crisis, due to “the misuse of monetary policy, and the fragility of emerging economies”.  Ilene Grabel of the University of Denver also focused the locus of crises in the so-called emerging economies, because they are being challenged by the pursuit of negative interest rates by some of the world’s central banks and the move away from monetary expansion by the US Fed.

As readers of my blog will know, while rising debt costs threaten many corporations in emerging economies, I still think the locus of the next recession will be found in the advanced capitalist economies, particularly the US.  Minqi Li at the University of Utah presented a new paper that looked at the fall in the profit rate in the US, Japan and China during the 1970s.  He reckoned the revival of profitability up to the Great Recession was now over and the locus of capitalism’s demise could be found in any further decline.

However, mainstream economics does not look at profitability of capital as an indicator of the health of capitalism.  That is why it failed to see the Great Recession coming and will not see the next one.  Since the end of the Great Recession, financial asset prices have rocketed while prices and profitability in the ‘real’ economy have not.



But, as we go into 2017, optimism reigns about the capitalist economy, if not with President Trump. It’s going to take a year or so to see if the current optimism expressed in financial markets and among some mainstream economists at ASSA about an economic recovery under Trump is based on good analysis or just on apologia.

ASSA 2017 – part one: productivity and inequality

January 9, 2017

One of the main themes of this year’s annual conference of the American Economics Association, ASSA 2017, was whether capitalism was slowing down.  Was the productivity of labour (output per ASSAworker or per hours worked) no longer growing at previous trend rates and indeed capitalism was entering some level of permanent stagnation?

If capitalism could no longer develop the productive forces effectively, then its historical raison d’etre disappears. Of course, the ASSA assembly of 13,000 economics professors and graduate students, mainly from American universities, to hear hundreds of economics papers did not see the ‘productivity puzzle’, as it has been called, like that.

In the largest hall, the leading mainstream economists of our time debated the issue of slowing productivity growth, confirmed by all the measures, and what this meant.  Olivier Blanchard, former chief economist at the IMF, doubted that productivity was being measured properly at all.  Barry Eichengreen from Berkeley University was more confident of measurement, but argued that there was nothing particularly strange about the current slowdown, as such “decelerations” are “ubiquitous” in many countries at different times.  Productivity slowdowns are usually the result of too little investment in the skills of the workforce and wasteful investment in means of production; or caused by special ‘shocks’ like a sharp oil price rise.  Eventually, the slowdowns end.

Kenneth Rogoff of Harvard University (infamous for the past juggling of his debt data) was even more optimistic.  The productivity growth slowdown now being experienced was temporary. Karl Marx claimed that capitalism would grind to a halt “as the first industrial revolution was fading” but it didn’t.  Keynesian Alvin Hansen (father of the ‘secular stagnation’ thesis) reckoned something similar “at the Great Depression” and he was wrong too.  Rogoff reckoned the current slowdown was caused by a huge ‘debt crisis’ that remains after 2007, but that will subside and the productivity slowdown will “eventually come to an end”.  Marty Feldstein, former economics adviser to the Bush presidency, was very buoyant.  The US economy may have slower productivity growth than before but it was doing better than anywhere else because of its wonderful “entrepreneurial culture and financial system” (!) and a labour market not encumbered with “barriers created by large labor unions, state-owned enterprises and very high tax rates.”

Amid this paean of praise for capitalism in its ‘temporary’ moment of slowdown, the data provided by Dale Jorgensen from Harvard offered a more realistic picture.  Jorgensen reckoned that there were clear signs that, while recovery from the current crisis was likely, a longer-term trend toward slower economic growth will be re-established.”  Jorgensen broke down the composition of economic growth globally and found that the real driver of growth was not ‘innovation’ or even investment in new technology (as measured in neoclassical terms as total factor productivity – TFP), but mainly more and more investment in existing technology and materials.


This conclusion had also been reached by John Ross in his study of Jorgensen’s work before“What is crucial is that the role of different forms of capital, i.e. intermediate products/circulating capital and fixed investment/fixed capital, is the overwhelming force driving US economic growth. Taking the two together 76% of US sectoral output growth is due to fixed and circulating capital, 15% due to labour, and only 9% due TFP.” (Ross).


It means that capitalism mainly grows by relatively more investment in means of production, namely fixed capital with existing technology and material inputs (what Marx called constant capital) relative to investment in labour hours (or variable capital).  The impact of ‘innovation’ and new technology is small.  And Jorgensen reckons that the contribution of the latter will get smaller in the next decade.

In a way, this is another confirmation of Marx’s law of capital accumulation, a long-term tendency for the organic composition of capital to rise.  Marx’s law of the tendency of the rate of profit to fall is the other side of the coin.  To some extent, this tendency will be counteracted by an increase in the exploitation of labour through more people entering the workforce globally and by increased hours of work – but not decisively over the long term.

The other big issue relevant both to future productivity and inequality is the advent of robots and AI.  The ASSA conference collected the main mainstream researchers on this subject.  Daron Acemoglu from MIT argued that automation would actually create as many jobs as it would lose for human beings and the economy would be “self-correcting” in terms of employment and inequality.  William Nordhaus of Yale University presented six reasons why robots and AI would not lead to ‘singularity’ (exponential replacement of humans in production) in this century.  And so all is well with the advent of robotic automation in 21st century capitalism.  Fear of extreme inequality and mass unemployment can be dismissed.

At the same time as the big hitters in mainstream economics debated global productivity and stagnation, in a much smaller room, radical economists, under the auspices of the Union of Radical Political Economics (URPE), were having a similar discussion.  Interestingly, nobody on the panel there though that capitalism was in some ‘secular stagnation’, as formulated by Keynesians like Larry Summers, Paul Krugman or Robert J Gordon, at previous ASSAs. 

Bill Lazonick reckoned that productivity growth had slumped because capital had switched from productive investment into rentier activities of financial speculation.  Companies don’t use the stock market to raise money, they support the stock market”.  Anwar Shaikh reckoned that the Keynesian idea of secular stagnation was silly and that the core of the capitalist problem lay with profitability, not productivity as such.  The key to investment was the profitability of enterprise (the profit rate after deducting interest, rent etc going to the capital of finance and circulation) and that was low.  Until that rose, productivity and economic growth would remain low.

In another room, the ‘centrist’ wing of ASSA met.  These are the more radical Keynesians who reckon that capitalism is failing because of wrong policies and regulations (or lack of them).  If the politicians and rich elite adopted the right ones, then all would be well – or at least fairer and more productive.  You see the problem is that the ‘rules of the game’ have been altered, as Nobel Prize winner and adviser to the leftist British Labour leadership, Joseph Stiglitz, puts it.  The rules have been altered in favour of the rich, corrupt and in favour of finance over productive; in favour of monopoly over competition; in favour of rent over productive profit (see his book).

The panel here were convinced that if the rules in the labour market were changed to help unions organise, then inequality and poverty could be reduced.  Lawrence Mishel reckoned that the “main driver of inequality was the lack of worker power and the globalisation which has led to trade agreements that hurt the incomes of the majority –something mainstream economists lie about”.  Mishel listed the “staggering” number of “poor economic decisions” made in recent decades like austerity, deregulating financial markets, supply-side tax cuts, inadequate efforts to address climate change, the fight against the Affordable Care Act in many states and in Congress, etc.

Dean Baker at the Center for Economic and Policy Research, who also has a book out aptly called “Rigged”, highlighted the need to reverse rising inequality from excessive CEO pay, a bloated financial sector, patent and copyright protections and protections for highly paid professionals.  He calculated that the “efficiency gains” from “reducing or eliminating these rents” would be worth over $3trn, to be used in other productive ways.

What was needed was to “restructure the market” to produce different outcomes because simple tax changes would not do the trick.  Baker said this policy ‘rigging’ of the economy shows that the ‘free market’ does not operate.  Here he seems to be implying that, if it did, then all would be well and fair.  Because the market is ‘rigged’, not because a market economy exists, we need government to intervene to correct inequalities, injustices and apply policies for the majority not for the few.

Baker fails to explain how the market got ‘rigged’.  Did this just happen? Why was the policy choice for the rich not the majority?  Was it not ever thus?  Baker is looking at the symptoms not the causes. Marxists like me would say the policies that led to rising inequality and the growth of finance capital came about because the Golden Age of capitalism, with its decent pensions, public services and benefits and full employment, could no longer be afforded by market capitalism as the profitability of capital plunged through the 1970s.  So the ‘rigging of the rules’ was necessary for the saving of the capitalist market system.

In a later ASSA session, the mainstream, the radical and the liberal met to discuss “the future of growth” (in effect, the future of capitalism). The IMF’s Jonathan Ostrey (naturally) remained optimistic about the future.  In contrast, Robert Gordon was there to tell us the story of his recent book: that capitalism was in for slow growth because the new technologies would have only limited impact.  Anwar Shaikh presented the (Marxist?) argument that capitalism was subject to regular crises and was past it use-by date.  And James Galbraith and Gerald Friedman presented the liberal Keynesian view as above.

There is no doubt that inequality of incomes and wealth has reached levels in some countries like the US or the UK not seen since the start of modern capitalism.  In another session, Daniel Zucman, presented a paper from himself, Emmanuel Saez, Thomas Piketty (the former rock star economist) and the recently deceased Tony Atkinson, that offered the latest data on inequality of incomes in the major economies.  It showed inequality of incomes was highest and still rising in the US; has risen sharply in China (although now tapering off) and was still relatively low (but still higher) in France.


But is high or rising inequality the fault-line of modern capitalism; is it the cause of low productivity growth and recurring crises of capitalist production?  The left Keynesians think so.  But I have argued that inequality is inherent in a class society including capitalism and that is a symptom rather than a cause of capitalist crises or stagnation.  One paper at ASSA gave some support to that.  The paper found that the empirical evidence does not support the argument that inequality is a major drag on demand growth, except when offset by borrowing by lower income households. There does not appear to be a clear link between the rise in income inequality in recent decades, the financial crisis, or the slow recovery since then.”

In part 2 on ASSA 2017, I’ll discuss the state of modern mainstream economics as ASSA participants see it and the likely efficacy of economic policy in the new era of Trumponomics.

Optimism reigns

January 4, 2017

Global stock markets ended 2016 near record highs and have started 2017 in a similar vein. Optimism about global economic growth, employment and incomes has bounced.


The latest data on manufacturing, as measured by the so-called purchasing managers’ index (PMI), the view of companies on their sales, exports, employment and orders, show a rise in December across the board and particularly in Europe and the US. PMIs measure whether manufacturing companies think that their activity is expanding or contracting. Anything above 50 suggests expansion. In Europe, the PMIs suggest that manufacturing is now expanding at a record pace (from a low level), while the global average PMI has now reached levels not seen since 2013.

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Gavyn Davies, former chief economist at the infamous investment bank, Goldman Sachs, now blogs in the Financial Times and produces a measure of global economic activity with his Fulcrum Nowcast model. The latest monthly estimates show that economic growth has recovered markedly from the low point reached last March. Then fears of global recession were high. But Davies says now “not only were these fears too pessimistic, they were entirely misplaced. Growth rates have recently been running above long-term trend rates, especially in the advanced economies, which have seen a synchronised surge in activity in the final months of 2016.”

According to Fulcrum, the growth rate in global economic activity is currently running at 4.1 per cent, compared with an estimated trend rate of 3.8 per cent. This represents a vast improvement on the growth rates recorded in 2015 and early 2016, when growth dipped to below 2.5 per cent at times. The latest estimate for the advanced economies shows ‘activity growth’ running at 2.5 per cent, a rate achieved only rarely during the post-crash economic expansion.

JP Morgan investment bank is also more optimistic, if only a little. “Our global economic outlook calls for a 2.8% gain in global GDP in 2017 (4Q/4Q), a few tenths above potential. The year-ago rate bottomed out at 2.5% this year (during 1Q16-3Q16, we think), so the forecast represents a modest though still meaningful improvement over recent performance.” Goldman Sachs takes a similar view in its look ahead to 2017: “We expect global growth to improve modestly, from 2.5% in 2016 to 2.9% in 2017, with looser fiscal policy and still easy monetary policy in key countries.”  goldman-sachs-isg-outlook-2017

As I argued in my forecast for 2017, optimism that the world capitalist economy is now getting permanently out of its depressed state is driven by the possibility that the new US President Trump will activate a Keynesian-style fiscal stimulus of corporate tax cuts and infrastructure spending that will ‘pump-prime’ the US and other economies out their weak growth.

At the same time, China, having been close to a financial crash, according to mainstream economics this time last year, has steadied and is also picking up some traction. Indeed, China’s pick-up has confounded mainstream expectations that China’s seven-year credit boom, during which the debt/GDP ratio rose from 150% to 250%, would inevitably end in 2016. Almost all non-Chinese economists anticipated a significant slowdown, which would intensify deflationary pressures worldwide.

But the Chinese economy is a weird beast, not understood by mainstream (and even Marxist economists). President Xi may have endorsed in 2013 “the decisive role of the market,” but that hasn’t diminished the leading role of the state. As Aidan Turner put it recently, “Suppose that a full quarter of Chinese capital investment – currently running at around 44% of GDP – is wasted: that would mean China’s people are unnecessarily sacrificing 11% of GDP in lost consumption: but if the remaining 33% of GDP is well invested, rapid growth could still result. And, alongside obvious waste, China makes many high-return investments – in the excellent urban infrastructure of the first-tier cities, and in the automation equipment of private firms responding to rising real wages.”

Thus, according to Fulcrum, emerging economies are currently growing steadily at close to their 6 per cent trend rate, or 2 percentage points higher than achieved in 2015. They have therefore ceased to be a drag on the global expansion. No wonder stock markets are off to the races.

I won’t repeat myself with the arguments I presented against the view that capitalism has turned the corner and is entering a new boom period. I made these in my last post. But let me now add some caveats to the optimism of the banks, hedge funds and other financial institutions in investing our pension funds and savings in the stock market.

First, the expert financial consultants are notoriously wrong in their forecasts. Since 2000, they have predicted the S&P 500 would gain about 10% a year, grossly overshooting the market’s actual performance. And, on average, the consensus always has predicted annual gains, missing all five down years in that stretch. A study by CXO Advisory Group collected more than 6,500 forecasts from 68 so-called market gurus. More were wrong than right.

Second, in the last analysis, stock market prices depend on the expected earnings (profits) of companies. The ratio of the market valuation or price of the US stock market is now pretty high compared to profits by historic standards. When profits are set against the value of a company’s assets, the so-called return-on-equity for the top five listed companies in each industry is double that of the rest. And indeed, if you exclude the top five companies in each sector of US business, profitability (return on stocks purchased) is near 30 year-lows. In other words, earnings are concentrated in the very big oligopoly firms. Most American corporations are scratching a return.

And third, as I have pointed out before, corporate indebtedness has also been rising. A company’s value is measured by investors by its liabilities (net debt and stock value). Currently, those liabilities are at levels compared to earnings not seen since the dot.com collapse of 2000-1.

Finally, the US stock market relative to GDP is nearly back to the level seen just before the global financial crash in 2007-8. In other words, it is reaching extremes compared to the sales revenues and profitability of companies.


Stock prices are being artificially driven up by corporations using their profits to buy back their own shares or make higher dividend payments. According to research by WPP, a global communications firm, among companies listed on the S&P 500, share buybacks and dividends have exceeded retained earnings (that is, profits withheld by companies and generally earmarked for investment) in five of the six quarters up to June 2016. Moreover, the ratio of payouts and buybacks to earnings has risen from around 60 percent in 2009 to over 130 percent in the first quarter of 2016.

The locus of what is going to happen to the global economy over the next year or two is to be found in the US. This remains the largest and most productive economy in the world, including manufacturing, and of course so-called services and finance. And the ‘recovery’ after the end of the Great Recession in 2009 has been weakest in post-war US economic history.


US investment and consumption have still not recovered to levels relative to GDP seen before the Great Recession.


So my mantra of a Long Depression is confirmed by these figures – even for the US, which has had the best ‘recovery’ of the major capitalist economies.

Moreover, the duration of this US recovery is the fourth-longest, at 30 quarters of a year, only exceeded by the recoveries in the ‘golden age’ of the 1960s and the profitability boom periods in the ‘neoliberal era’ after the slumps of 1980-2 and 1991.


So the US is due for another slump on the law of averages, within a year or two.

But all mainstream economic forecasters rule out a new recession in 2017. The mantra is that recoveries ‘do not just die of old age’. Something must happen to stop them. As Goldman Sachs puts it: “Recessions in the US have been triggered by Federal Reserve tightening of monetary policy; by economic imbalances such as the bursting of the dot-com and housing bubbles in 2000 and 2008, respectively; or by external shocks such as the Arab oil embargo in 1973. The first two triggers are unlikely to occur in 2017, and the third, a shock, is not something that we can typically anticipate.”

GS goes on: “Historically, since WWII, the odds of a recession occurring over a 12-month period have been 18%. Our composite recession model, incorporating end-of-year financial and economic data, estimates the probability of a recession in 2017 at 23%.” So slightly higher than average. But “once we incorporate the likely passage of a fiscal stimulus package of tax cuts and infrastructure investments in the latter half of 2017, the probability of a recession this year declines to about 15%.”

The question is whether the optimism of markets and mainstream economists of an extended and permanent boom in global production based on fiscal spending and corporate tax cuts in America is justified. As I have argued in other posts, Keynesian-style policies have miserably failed in Japan to get that economy out of its long depression.

And I have argued that sustained growth depends on increased investment in productive sectors and that depends on corporate profits in the US rising, not falling as they have done up to the second half of 2016. This measure is ignored by Goldman Sachs, although not by others.

Trumponomics, in cutting corporate taxes and delivering tax breaks for infrastructure investment, might boost profits for some sectors. But as the data above show, the vast majority of US corporations are seeing the profitability in their investments falling, not rising. The odds of a new recession may be higher than Goldman Sachs thinks.

Forecast for 2017

December 28, 2016

It has now been eight years of what I have called a Long Depression, since the Great Recession started in January 2008 (see Recessions,depressions and recoveries 071215).  So, in looking ahead to 2017, I thought it might be necessary to check what my forecasts or predictions were in previous years.

I have been accused of calling a new slump every year on the basis that eventually I’ll be right. That’s a bit like claiming that the time is midnight when it is not, but knowing that it eventually will be.  So were my previous annual forecasts just parroting the view that a slump is just around the corner?  Well, at the end of 2011, I said that “2012 is likely to be another year of very weak economic growth in the major capitalist economies.  But it is not likely to see a return of a big slump in capitalism.”  At the end of 2012, I said “In 2013, economic growth in the major economies is likely to be much the same as in 2012 – pretty weak and below long-term averages. But 2013 is not likely to see a return of a big slump in capitalism.”  At the beginning of 2014, I said that “the change in profitability of capital in the US does not suggest a new recession in 2014. ”At the beginning of 2015, I reckoned that “The global economy remains in a crawl and will do so in 2015 for one good reason: the failure of business investment to leap forward. “And at the beginning of this year (2016), I said As for 2016, I expect much the same as 2015, but with a much higher risk of new global recession appearing….Even if a new global slump is avoided this year, that could be the last year that it is.”

That brings me to 2017.  When I made my 2016 forecast, the world economy seemed to be slowing down fast.  The US economy was nearly at a standstill, Europe’s ‘recovery’ remained weak and Japan appeared to have entered a new recession.  The US economy grew far less than expected in the second quarter of 2016.  Real GDP (that’s the value of national production after inflation is removed) increased at only a 1.2% yoy rate. And US business investment fell at a 9.7% annual rate, the third straight quarterly fall. Japan failed to grow at all in Q2 2016, a sharp slowdown from 2% growth in Q1.  And business investment there also collapsed.  Eurozone growth was still stuttering.  Above all, the talk was for a collapse in China’s economy because of excessive debt, bringing about an end to its miracle growth story.  As Gavyn Davies, former chief economist at Goldman Sachs and now a columnist for the FT, recently described the economic mood at the beginning of 2016: “At the turn of the year, there were forecasts of global recession in 2016. ….It was a bleak period.”

But as the year went on, the imminent collapse of the Chinese economy proved to be wrong – something I did predict.  Indeed, by the second half of the year, there were signs of a modest pick-up in growth as the Chinese authorities pumped more credit into the state banks and corporations and directed a modest expansion in fiscal spending.

Now I have argued ad nauseam that it is the profitability of the capitalist sector of economies that is the driver of investment and thus employment and incomes.  A sustained fall in profitability and in the mass of profits will eventually lead to a fall in investment after a year or so and then deliver a slump in the productive sectors of a capitalist economy, triggering in turn, a financial (credit) crisis.  That appeared to be increasingly likely in the first half of 2016 as corporate profits and investment fell.

But in Q3, corporate profits in the major economies staged somewhat of a recovery back into positive territory and the major capitalist economies appeared to avoid a further slide down in growth towards zero. Corporate investment remains weak but if profits were to continue rise, then investment too could pick up.  JP Morgan seems to think so.  In the past, the investment bank’s economists, like me, have highlighted the strong role profits played in driving the capital expenditure (capex) cycle. So “the recent stabilisation in global profit growth bodes well for capex, in this regard.” (JPM).


Financial markets in the last month or so have been buoyed by the possibility of a sustained economic recovery and also by the prospect of huge corporate tax cuts and infrastructure spending to be initiated by the new American oligarch president, Donald Trump, in 2017.  And America’s households also seem more optimistic about 2017.  The University of Michigan’s consumer sentiment index reached 98.2 in December 2016, the highest reading since January 2004.


This renewed optimism encouraged the US Federal Reserve in December to bite the bullet and risk raising its policy interest rate with aim of controlling credit and inflation, supposedly likely to rise next year.  So everywhere, mainstream economists are now forecasting an acceleration in economic growth.

Gavyn Davies summed this up: “there has been a marked rebound in global activity, and in recent weeks this has become surprisingly strong, at least by the modest standards seen hitherto in the post-shock economic recovery….. the first time that all of the major economies have been growing at above trend rates for several years”  So, says Davies, Overall, we can perhaps be hopeful, though certainly not yet confident, that the global economy will begin to overcome the powerful forces of secular stagnation next year.”

But is this optimism for 2017 justified?  After all, every year since the end of the Great Recession in 2009, the main international economic agencies, the IMF, the OECD etc, have forecast a rise in GDP growth, trade and investment.  And every year they have had to eat their words and revise their forecasts down.  Investment in the major economies is now some 20% below where the IMF forecast it would be back in 2007.


But perhaps the agencies and economists are right this time and perhaps my forecast of a new slump (predicted by 2018 or so) is going to be proven wrong. Well, perhaps.  But consider this.  First, the so-called pick up in US economic growth is minimal.  If the current forecasts of the final quarter of 2016 are realised, then the overall growth rate for 2016 in the US will be just 1.5%, the slowest annual growth rate since 2012.  And growth in real GDP per person in 2016 will be the slowest since the Great Recession ended in 2009.

Second, much of this very modest growth has come from an expansion of household consumption and corporate borrowing (fuelled by very low interest rates and massive injections of credit).  US mortgage rates are at an all-time low and the housing market is booming again.  In Q3, personal consumption contributed two-thirds of the 3.5% (annualised) growth rate achieved by the US economy with trade and a build-up of stocks delivering the rest. Business investment contributed nothing.


Global debt sales (half by corporations) reached a record in 2016, matching levels not seen since before the global financial crash.  The money raised has gone into financial speculation, buying back company shares and in higher dividends to shareholders, thus boosting the stock and bond markets rather than productive investment.

But household consumption, although the largest part of national spending, does not drive growth.  And if the cost of borrowing on credit cards and mortgages is now set to rise as the Fed continues to hikes its floor rate during 2017, as planned, then consumption growth could begin to fall back.  The recovery in corporate profits is based on keeping productive investment and wages low (thus weakening productivity growth) and not on an expansion of investment, sales and revenues.  Moreover global growth is mainly coming from emerging economies like China (half of total growth).  Only one-quarter is coming from the major capitalist economies, with the US, Europe and Japan making negligible contributions.

Globally, corporate debt levels continue to rise faster than productive investment.  As the world’s leading bond investment company, PIMCO commented: “The low cost of financing with record-low interest rates simply made building up leverage tempting…This happens every economic cycle, but what makes this one special is the added incentive to issue debt at very low interest rates. (But) it sows the seeds of the next downturn or the next credit event.”


And there is now the prospect of more reductions in global trade as various international trade agreements bite the dust or flounder – while ‘the Donald’ talks of higher trade tariffs and walls.


One of the most graphic illustrations that the days of globalisation are over, making it more difficult for capitalism to get higher profits from the export of capital as profits fall at home, is the sharp fall in global capital flows – from over 25% of world GDP in 2007 to near zero now.  Banks have stopped lending to other banks and taken their money back, while investors are increasingly reluctant to buy the corporate bonds of other countries.


Rising interest rates, along with still high corporate debt, sluggish world trade and poor business investment, do not look like a recipe for economic recovery in 2017.  So 2017 will not deliver faster growth, contrary to the expectations of the optimists.  Indeed, by the second half of next year, we can probably expect a sharp downturn in the major economies.  Depending on whether this generates a new credit squeeze on weaker corporations and more pressure on banks. similar to that now being experienced in Italy, is difficult to judge.  But far from a new boom for capitalism, the risk of a new slump will increase in 2017.


The system is broken

December 25, 2016

In an end of the year piece, the biographer of John Maynard Keynes, economist Lord Robert Skidelsky writes that Let’s be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to full health or mired in “secular stagnation”? Is globalization coming or going?”

He goes on: “Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t.”

Skidelsky lays the blame for this on the state of macroeconomics – he reminds us of the now infamous visit of the British Queen Elizabeth to the London School of Economics at the depth of the Great Recession in 2008 when she asked a group of eminent economists: why did they miss this coming? (see my book, The Long Depression).  They replied that they did not know why they did not know!

Skidelsky goes on to consider various reasons for the failure of mainstream economics to see the crisis coming or now to know what to do about it.  One reason might be the concentration of economics education on unrealistic models and mathematical formulas, rather than grasping “the whole picture”. He reckons economics has cut itself off from “the common understanding of how things work, or should work.”  This analysis follows that recently argued by Paul Romer, the new chief economist at the World Bank, who, on resigning from academia, also attacked the state of macroeconomics today.

Skidelsky’s second reason is that mainstream economics views society as like a machine that can achieve equilibrium of supply and demand so that “deviations from equilibrium are “frictions,” mere “bumps in the road”; barring them, outcomes are pre-determined and optimal.”  What this fails to recognise, says Skidelsky, is that there are human beings operating in an economic system and they cannot be fitted into an equilibrium model or machine.  Mathematics then gets in the way of the big picture with all its human unpredictabilities and changes. What is wrong with economics, according to Skidelsky is that there is a lack of “broad education and outlook”.  Economists need to know about wider things in social organisation and behaviour and the history of human development, not just models and maths.

While Skidelsky’s arguments have more than an element of truth about them, he does not really explain why mainstream economics has become divorced from reality.  This is not a mistake of education or lack of recognition of wider social sciences like psychology; it is a deliberate result of the need to avoid considering the reality of capitalism.  ‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists Adam Smith, David Ricardo, James Mill and others.  But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), then economics quickly moved to deny that reality.  Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value and Say’s law replacing crises.

As Marx succinctly put it: Once for all I may here state, that by classical political economy, I understand that economy, which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use, but for the rest, confines itself to systematizing in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds.”

What is wrong with mainstream economics is not (just) that economists of today are too narrowly mathematical and focused on economic models – there is nothing inherently wrong with using maths and models – or that most economists do not have the wider “erudition and multiple talents” of the classical economists of the past.  It is that economics is no longer ‘political economy’, an objective analysis the laws of motion of capitalism, but an apologia for all the ‘virtues’ of capitalism.

The assumption of economics is that capitalism is the only viable system of human social organisation that will deliver the wants and needs of people.  There is no alternative.  Capitalism is eternal and it works as long there is not too much interference in markets from outside forces like government or from ‘excessive’ monopolies.  Occasionally, the task is to control ‘shocks’’ to the system (neoclassical view) or make interventions to correct ‘technical problems’ in capitalist production and circulation (Keynesian view).  But the system itself is fine.

Take Paul Krugman’s reaction to Skidelsky’s piece.  What upsets Krugman is the suggestion from Skidelsky that mainstream economics reckons that fiscal contraction (austerity) was necessary to “restore confidence” after the Great Recession.  Krugman, as the modern doyen of Keynesianism, disagrees with the biographer of Keynes.  Mainstream economics, at least the Keynesian wing, argued the opposite.  More government spending, not less, would have got the capitalist economy out of its depression.   This is basic macroeconomics, Krugman says.

He then goes onto to claim that austerity is “strongly correlated with economic downturns”.  Actually the evidence for that claim is weak indeed, as I have shown in various places on my blog and in papers (published and upcoming).  The great Keynesian solutions of easy money, zero interest rates and fiscal spending have come well short of delivering an end to the depression when they have been tried (and all three have been tried in Japan).  Krugman, of course, tells us that they have not been tried, at least not enough.  Policymakers refused to use fiscal policy to promote jobs; they chose to believe in the confidence fairy to justify attacks on the welfare state, because that’s what they wanted to do. And yes, some economists gave them cover. But that’s a very different story from the claim that economics failed to offer useful guidance. On the contrary, it offered extremely useful guidance, which policymakers, for political reasons, chose to ignore.”

In my view, policy makers may have chosen to ignore fiscal spending to solve the ‘technical problem’ of the Long Depression partly “for political reasons”.  But there are also very good economic reasons for arguing that in a capitalist economy, increased government spending and running budget deficits would not get an economic recovery if the profitability of capital is low.

Skidelsky mentioned the other great blindspot of mainstream economics: the claim that the free movement of goods and capital, globalisation, works for all.  Angus Deaton,winner of the Nobel Prize for economics in 2015, is an optimistic defender of globalisation.  Deaton’s 2013 book The Great Escape argued that the world we live in today is healthier and wealthier than it would otherwise have been, thanks to centuries of economic integration. In an interview in the FT, Deaton says that “Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result”.

I have discussed Deaton’s arguments in previous posts.  Deaton represents all that is best in mainstream economics now, as he looks at the big issues: globalisation, robots, inequality and human health and happiness.  He is now worried about the threat of robots for labour’s share, the growing inequalities from “rent-seeking” and the deteriorating health of Americans from over use of drugs pumped into them by pharma companies.  He reckons that happiness effectively peaked once a person was earning the equivalent of $75,000 a year.”  Of course, most don’t have even that, as Deaton knows.  But he remains confident that capitalism is the best system of social organisation as it has taken a billion people “out of poverty” over the last 250 years. So capitalism works, even if its apologists ignore its workings and cannot explain when it does not work.

The FT interviewer left Deaton and wandered back to his car “There is a limp, wet parking ticket stuck to my windscreen, a $40 fine. I smile. I’m also drawn back to the advice Deaton offered when I first sat down and mentioned my fear of a looming ticket.  “I’m sure you can get out of it,” the Nobel laureate told me. “Just tell them the system was broken.”

Well, the system is broken and the economists cannot get us out of it.


Top ten posts of 2016

December 23, 2016

As has become customary at the end of the calendar year, here are the top ten most popular posts from my blog for this year.  Topping the list was my review post of Anwar Shaikh’s magnum opus, Capitalism: competition, conflict and crises.  The fact that this was the most popular post is a credit to Shaikh’s magisterial book and also to the serious attitude that my blog readers take to Marxist economics.

As I said in the post, Shaikh’s book is a product of 15 years work.  A theory of ‘real competition’ is developed and applied to explain empirical relative prices, profit margins and profit rates, interest rates, bond and stock prices, exchange rates and trade balances.  Demand and supply are both shown to depend on profitability and interact in a way that is neither Say’s Law nor Keynesian, but based on Marx’s theory of value.  A classical theory of inflation is developed and applied to various countries.  A theory of crises is developed and integrated into macrodynamics.

In the post, I concentrated on Shaikh’s view on the causes of crises under capitalism and highlighted that he had a position is similar to my own on the causes of capitalist crises, the nature and existence of depressions, and the role of Kondratiev and profit cycles.  In a later post, however, I raised criticisms of his position on Marx’s theory of value,, particularly his attempt to reconcile Ricardo with Marx on value.  In my view, there is no reconciliation possible between Marx’s value theory and that of Ricardo and Sraffa.  There is also no unification possible between Marx’s law of profitability as the underlying cause of recurrent crises and slumps and the post Keynesian/Kalecki view of a ‘profit-wage share’ economy.  And there is no meeting between Marx’s view of profitability and credit in modern capitalism and those who hold that finance creates value and that ‘financial speculation’ lies at the centre of capitalist crises.  Shaikh stands for Marx on most of these issues but seems want to build a bridge to other side too.

The second most popular post was also a book review – of John Smith’s Imperialism in the 21st century, in many ways ground-breaking in its analysis of modern imperialism.  Smith shows that capital in the North restored much of the fall in its profitability in the 1970s on the back of the exploitation of the South in the 1980s onwards: “surplus-value extracted from these new legions of poorly paid workers helped to dig the capitalism system out of its hole in the 1970s”.

Smith firmly dismisses the idea that is prominent among mainstream and heterodox economics alike that the global financial crisis and the Great Recession were financial in origin. Smith reckons that gross domestic product (GDP) as a measure of value hides the fact that much of the US GDP is not value created by American workers but is captured through multinational exploitation and transfer pricing from profits created from the exploitation of the workers of the South.

Smith argues that the exploitation of the workers of the South is less through an expansion of absolute and relative surplus value and more through driving wages below the value of labour power (super-exploitation).There was a vigorous debate on my blog over whether Smith was right about this as the dominant characteristic of modern imperialism. That debate continues.

Smith’s view of imperialist exploitation is complemented by Tony Norfield’s book showing how the imperialist financial centres capture the value expropriated from the periphery.  My post on Norfield’s also made the top ten. A key part of Norfield’s book is to weave in facts like that about modern imperialism with a Marxist analysis of the role of finance capital.  And Norfield is incisive in illuminating the nature of the modern British economy.  I have described Britain in the past as the world’s largest ‘rentier’ economy.  That’s an old-fashioned French word for an economy based on sucking up ‘rents’ through the monopoly ownership of capital (or land) from the profits of the productive sectors.  Both the sectors exploit labour but the rentier economy relies on its financial and legal monopoly to take a share of the surplus value of productive capitalist sectors appropriated from labour. This gives British capital its important role in modern imperialism, but also its Achilles heel in any global financial crash or in the shock of Brexit.

The third most popular post in 2016 was on whether Marxist economic theory better explains what had happened in the last ten years than Keynesian economics, which remains the dominant thinking among leftist organisations. Leading Keynesian Brad Delong told us Marxist economists at the annual American Economics Association Conference in San Francisco last January that we are like pessimists just ‘waiting for Godot’, when capitalism can be made to work with the ‘concrete economics’ of Keynesian social democracy (the title of DeLong’s new book this year). Well, the last ten years cast doubt on that view and the next few years will see who is right.

In the post I argued that the cause of the Great Recession and the subsequent Long Depression is not the product of a ‘lack of demand’ as such or ‘pro-cyclical’ government spending policies (austerity) but is caused by a collapse of the capitalist sector, in particular, capitalist investment.  And that investment collapsed because profitability in the capitalist sector fell, then the mass of profits fell, leading to investment, employment and incomes to fall, in that order.  Then it’s the change in profits that leads to changes in investment and demand (consumption), not vice versa, as the Keynesians argue.

At the beginning of 2016, the world economy was looking pretty weak and there was much talk that a growing debt crisis in China was likely to lead to a major crash there, which would then spread globally.  But in a post that proved popular, I questioned the doom-mongering about China and also the size of the impact that China would have on the major capitalist economies. I argued that the US remains the pivotal economy for a global capitalist crisis, particularly as it dominates in financial and technology sectors.  In 1998, the emerging economies had a major economic and financial crisis but it did not lead to a global slump.  In 2008, the US had a biggest slump in its economic post-war history and it led to the Great Recession.  In my view, this weighting still applies.  That proved right, at least for 2016.

One of the big politico-economic events of 2016 was the referendum vote in Britain to leave the European Union.  My post on the day after Brexit got a lot of hits. I got it wrong, having expected a vote to remain in the EU. I had got two previous predictions right: that Scotland would vote to stay in the UK and that the Conservatives would win the 2015 UK general election, but I did not get a hat trick in 2016,  as former Conservative PM David Cameron’s wild political gamble did not come off.  In the post, I analysed the reasons why there was a vote for Brexit and looked at the possible economic impact. That impact has still to be felt both for the UK and for world trade.

The other major political event of 2016, of course, was the surprise victory of Donald Trump for the US presidency, despite polling more than 2m votes less than his Democratic opponent Hillary Clinton.  In a post directly after the result, I again analysed the reasons for Trump’s victory.  I said that, like the vote of the Brits for Brexit, against all expectations, a sufficient number of voters in America (mainly white, older and in small businesses or working in failing industries in smaller central US states) overcame the vote of the youth, the more educated and better-off in the big cities along the coasts.

But it was not so much a working class vote for Trump because hardly more than 50% or so of eligible voters turned out to vote.  A huge swathe of people never vote in American elections and they constitute a sizeable part of the working class.  The most significant issue (52%) for voters, when asked at the booths, was the state of the US economy, with terrorism next (but well down at 18%) and immigration (the Trump card) even lower.  So Trump won because he claimed he could improve the conditions of those ‘who have been left behind’ by globalisation, failing domestic industries and crushed small businesses.

Stock markets are now riding high on expectations that Trump can boost the US economy.  But in the post, I argued that Trump had been handed a poisoned chalice and the US economy would not recover.  Trump would not be able to deliver and his big business cabinet would do in the opposite of what those ‘left behind’ want.  We shall see in 2017.

One of the features of Brexit and Trump events is that it heralds the end of the great neo-liberal era of globalisation and ‘free trade’.  My post on the end of globalisation made the top ten.  It critiqued the views of Keynes in the 1930s and his modern epigone Brad Delong (again!) in claiming that capitalism has been the most successful mode of production in human history and it would be again. Instead, I argued that capitalism is really past its use-by date.  One indicator is that ‘globalisation’ (the spread of capitalism’s tentacles across the world) has ground to a halt.  And growth in the productivity of labour, the measure of future ‘progress’, has also more or less ceased in the major economies.

More short term, a key question for me and it seems my readers, was whether the world economy is heading for another slump.  In a post written early in the year, Can we avoid the coming recession?, I presented the facts as I saw them and offered a cautious forecast that a new economic recession was “due and will take place in the next one to three years at most.” I said that maybe there won’t be one in 2016 (as it has proved)… “But the factors for a new recession are increasingly in place: falling profitability and profits in the major economies and a rising debt burden for corporations in both mature and emerging economies.”

And finally there is my post on how unequal the world is, according to annual study by Credit Suisse, which makes the top ten every year.  This year was no exception, with the finding that the top 1% of the adult wealth holders in the world own 51% of all global personal wealth, while the bottom half of adults own only 1%.  Indeed, the top 10% of adults own 89% of all the world’s personal wealth!  This is a record.

In the past 12 months, global wealth has risen by 1.4% and so it has barely kept pace with population growth. As a result, in 2016, the mean average wealth per adult was unchanged for the first time since 2008, at approximately $52,800.  This mean average tells you that the vast majority of the world’s adults have way less wealth than that.  On average, wealth did not rise, while inequality between rich and poor rose again.

That’s the message of 2016 from my posts: continued depression for the majority and more for the tiny elite.


Best books of 2016

December 21, 2016

I thought I would remind myself and blog readers of what seemed to me were the best books on economics published this year.  The criteria for me were whether the book added any new idea or understanding of developments in modern capitalism or in Marxist economic theory. Yes, I know, very boring with no jokes or stories involved.

Let start with those books that looked at the activities of finance capital and imperialism in the major economies and globally.  In his excellent new book, Finance Capital Today, French Marxist Francois Chesnais analysed in detail the key developments in modern finance and the causes of the global financial crash in 2008.

As Francois says in a comment to my blog,  “Today not enough surplus value is being produced to re-launch the accumulation process and the amount that is serves to consolidate the accumulation of dividend and interest bearing assets by banks, funds and individuals (financial accumulation) and so the claims on this already very insufficient amount of surplus value. This has led both to the dead-end of the quasi-zero long term interest rate regime, which not simply the outcome of quantitative-easing and to the endless small shocks in the global financial system. Of course government debt and the resulting pro-rentier, pro-cyclical austerity policies only aggravate this situation but they do not explain it and their reversal would not solve capitalism’s basic problem.”  Tony Norfield provides a really comprehensive and positive review of Chesnais’ book on his blog site.

And of course, in 2016, Tony published his own analysis of modern capitalism with The City: London and the Global Power of FinanceNorfield brings us key insights into understanding the nature of modern financial systems and what role they play in the working (or non-working) of capitalism.  Tony defines as imperialism where a small number of countries dominate world markets through their multi-national corporations, which can be both making things, providing services and financial, or often all three.  Financial privilege is a form of economic power, enabling imperialist countries to draw upon resources and value created elsewhere in the world.   Finance and production in 21st century capitalism are inseparable – “they are close partners in exploitation”.  Norfield also reveals the large role of British capitalism in imperialism.  Britain is second only to the US in the importance of its financial sector globally and in some areas like foreign currency trading it leads. In a way, Britain is the world’s largest ‘rentier’ economy.  For that reason alone, the Brexit referendum vote puts the future of London as the centre of global finance capital in jeopardy.

While Tony Norfield’s book looked at modern imperialism from the apex of finance capital, John Smith, in his Imperialism in the 21st century, looked at it from the point of view of billions living under the grip of imperialism in what used to be called the Third World and is now called the ‘emerging’ or ‘developing’ economies.  There was quite a debate on my blog during the year on John’s view that it was the ‘super-exploitation’ of wage workers in the ‘South’ that is the foundation of modern imperialism.  That only helped to emphasise the importance of John’s book.

The role of finance in causing instability in modern capitalism was the theme of Jack Rasmus’ intriguing book, Systemic Fragility in the Global Economy. Rasmus reckons that mainstream economic theory has completely failed to account for this fragility; or forecast any crises like the Great Recession; or explain the ensuing depression.  But Jack is not only damning about mainstream economics.  He maintains that heterodox theories of crises in the post-1970s world economy have also been found wanting.  The followers of Keynes and Marx come in for criticism.  The Keynesians are at fault because they have lost the essence of Keynes’ insight into the instability and uncertainty found in a monetary and financially-dominated economy.  His book is certainly a thought-provoking contribution to an understanding of the fragility of modern capitalism.

The various theories or explanations of the cause of crises under capitalism from a Marxist or radical perspective were brought together in a collection of papers entitled The Great Financial Meltdown cleverly edited by Turan Subusat.

Turan provides an excellent introduction and summary of the views of top Marxist scholars.  It includes a debate between David Harvey and myself on the relevance of Marx’s law of profitability to crises.  Turan argues that the causes of crises under capitalism and, in particular, the recent global financial crash and subsequent Great Recession, can be considered from three angles: is there a systemic underlying cause of crises (the falling rate of profit or underconsumption); or is it conjunctural (each crisis has a different cause); or is it the result of policy decisions (eg the neoliberal agenda, financial deregulation etc)?

The failure of mainstream economics to have any useful part to play in such discussion was exposed Ben Fine in two volumes, called Microeconomics and Macroeconomics: a Critical Companion, Fine (along with co-author Ourania Dimakou) delivers a comprehensive critique of all mainstream economic theories and models.  This makes it an invaluable antidote to the conventional poison of marginalism and general equilibrium theory in microeconomics; and Say’s law and the denial of crises or slumps in macroeconomics.

Fine makes the point that macroeconomics has shifted from theory to models.  Mathematical models replaced theory, with models to be tested ex-post.  What is wrong with mainstream modelling is the lack of realism in the starting assumptions.  Fine goes through the famous accelerator-multiplier Keynesian model that shows the instability of capitalism but does not show why.  Fine goes onto analyse the counter-revolution against Keynes’ more radical model of instability and how the mainstream has castrated that into a model that moves to equilibrium given the assumptions of falling prices and wages – indeed, a synthesis with neoclassical theory.  Growth models are divorced from short-run fluctuation models.

It is interesting to compare Fine’s critique with that of Paul Romer, a mainstream economist, also lays into the state of macroeconomics in his paper The trouble with macroeconomics, Romer says that the explanation of crises under capitalism as just being the result of ‘exogenous shocks’ to an inherently harmonious process of economic growth is useless. If you just keep adding possible ‘imaginary shocks’ to explain sharp changes in an economy, “more variables makes the identification problem worse.”  As Romer points out, “solving the identification problem means feeding facts with truth values that can be assessed, yet math cannot establish the truth value of a fact. Never has. Never will.

Two great books on the big issues of modern capitalism: rising inequality and falling productivity and growth, were produced by non-Marxists.  In his book, Global Inequality, former World Bank chief economist Branco Milanovic shows that global inequality has increased since the early 1980s, when ‘globalisation’ got moving.   Rising inequality is the result the drive of capital to reduce labour’s share and raise profits and to the recurrent and periodic failures of capitalist production.  Growth of incomes has been concentrated in China, and to a lesser extent and more recently, India.

The most controversial economics book among the mainstream in 2016 was Robert J Gordon’s The rise and fall of American growth.  In his book, the accumulation of research over the last decade, Gordon concludes that the great new productivity-enhancing paradigm that is supposedly coming from the digital revolution is actually over already and the future robot/AI explosion will not change that.  On the contrary, far from faster economic growth and productivity, the world capitalist economy is slowing down as a product of slower population growth and productivity.

Balanced against Gordon are a myriad of techno-optimists and economists who reckon that the world is on the brink of a productivity explosion driven by robots, artificial intelligence, genetics, and a range of new ‘disruptive technologies’ – disruptive in the sense that traditional jobs and functions are going to disappear and be replaced by robots and algorithms.  The optimists argue that, since the time of Thomas Malthus, eras of depressed expectations like our own have inspired predictions of doom and gloom that were proved wrong when economies turned up a few years down the road.

Providing a balanced view of the impact of technology under capitalism is a short but great book, The Bleeding Edge, by Bob Hughes.  Hughes graphically outlines in a series of chapters that, if technology was controlled by public organisation and in common (or as he prefers, following Kropotkin, the thoughtful anarchist, in ‘mutual association’), then huge strides in innovation could be made.  He provides a host of examples for solving global warming, reversing environmental destruction, reducing wasteful production and protecting natural resources, including flora and fauna.

Finally, but by no means least, I come to the two great books of Marxist economic theory released this year.  Anwar Shaikh says he is not a Marxist but a ‘classical economist’.  In his magisterial 1000-page Capitalism: Competition, Conflict, Crises, Shaikh explains that his “approach is very different from both orthodox economics and the dominant heterodox tradition.”  He rejects the neoclassical approach that starts from “Perfect firms, perfect individuals, perfect knowledge, perfectly selfish behavior, rational expectations, etc.” and then “various imperfections are introduced into the story to justify individual observed patterns” although there “cannot be a general theory of imperfections.

Shaikh emphasises that it is profit under capitalism that drives growth and there are cyclical fluctuations in profitability.  These are expressed in business and fixed capital cycles inherent in capitalist production.  Crises are normal in capitalism.  The history of market systems reveals recurrent patterns of booms and busts over centuries, emanating precisely from the developed world.  The key crises under capitalism are ‘depressions’, such as that of the 1840s, the “Long Depression” 1873-1893, the “Great Depression” of the 1930s, the “Stagflation Crises” of the 1970s and the Great Global Crisis now.

Shaikh reckons that on the surface, the last crisis, the Great Recession, looks like a crisis of excessive financialization. But this fails to identify the real cause of the crisis.  Keynesians and Post Keynesians argue that the cause of the current crisis is inequality and unemployment, so there is a need to maintain a stable wage share and to use fiscal and monetary policy to maintain full employment. But Shaikh argues that such policies would not work because, at least in the US, the post-Keynesians have got the causes of the crisis wrong, the cause of which is the movement in profitability – the dominant factor under capitalism.

Fred Moseley’s book Money and Totality is a profound defence of Marx’s value theory and its relevance to the laws of motion in modern capitalism.  Moseley takes the reader carefully and thoroughly through all the competing interpretations of Marx’s value and price theory and shows that a Marxist analysis delivers a single realistic system of capitalism.  If we interpret Marx’s as a single system, an actual capitalist monetary macro-economy, then it is perfectly possible (with all the caveats of measurement problems and data) to carry out empirical analysis to verify or not Marx’s laws of motion of capitalism. Testing theory and laws with evidence is now the name of the game.  Fred Moseley allows us to do that with confidence that we are testing a logical and consistent theory that is verifiable empirically.

Oh, I forgot.  There is also my book, The Long Depression.

The elephant in the room

December 19, 2016

A review of The Bleeding Edge by Bob Hughes, New Internationalist, £10.99.

This is a very good book, which stands above many others in the ever-growing genre that looks at the role and impact of the new technologies of robots and artificial intelligence on the future of human social organisation. As Betsy Harmann, Professor of Development Studies at Hampshire College US, says in the book’s blurb: “Rejecting both apocalyptic pessimism and techno-optimism, Hughes provides a compelling map to the future in which information technologies are harnessed for the common good.”

Bob Hughes taught digital media at Oxford Brookes University, but he is also an activist, particularly for the rights of migrants, co-founding a campaigning organisation, No One is Illegal UK in 2003.  Danny Dorling, Professor of Geography at Oxford University, writes a foreword in which he argues that “technology is neutral.. how we use technology is up to us.  The machine is not in control, corporations and politicians are… it has not been artificial intelligence that has made our world more unequal.  It has been us.” This is Hughes’ message.

Hughes starts by arguing that technological progress has gone hand in hand with the development of capital.  As a result, computers, electronics, intellectual ideas have been converted into private property for profit, leading to “entrenched inequality”.  Yes, capitalism has been the social system under which massive technological progress has been made, reducing the material inputs and time it takes to deliver goods and services people need.  But this has been at the expense of growing inequality and the rapacious destruction and wasteful use of natural and human resources.

As Dorling says in his foreword, “profit maximisation is the anathema for true innovation.” Echoing Mariana Mazzucato in her book, The Entrepreneurial State, which shows how many key technological developments were not the results of capitalist innovation or ‘animal spirits’ but the product of state funding and public scientific research that were then ‘commodified’ by capitalist corporations like Apple, Microsoft or Google.

But Hughes also gives us excellent examples of the way that capitalism and the drive for profits distorts (and delays) innovation from meeting the needs of people.  Kodachrome, the first mass market film launched in 1935 (p32) did not come from research by capitalist corporations but from two musicians working in their spare time at the kitchen sink.  No corporation spent time and money trying to see if manned flight could be achieved; it was done by two Wright brothers on their own.  It is the same story with xerography (later privatised into Xerox), or disk memory (later IBM).  These advances were achieved by individuals in their own time and often in face of opposition from their employers who preferred research for a quick buck than for innovation.

One of the most famous was Colossus, the world’s first true programmable digital computer, which was developed by engineers in the state-owned British Post Office during WW2.  These pioneers were then consigned back to mundane jobs after the war and computer development was stunted for decades by corporate neglect.  A Brookings Institute study found that 75% of computer development funding had come from the state in 1950 – after which corporations did little to develop this exciting innovation, delaying its impact until well into the 1980s.

Hughes then gives us a chapter on the development of technology in class societies going back to the feudal period, arguing that it was the “takeover of egalitarian societies by unequal ones” that held back technological development.  It is here and really throughout the book, that I have my biggest disagreement.  Inequality or an “unequal world” is the bugbear for Hughes.  But this is an imprecise concept.

Inequality has existed for most of human civilisation, but it is driven by the control and distribution of surplus labour and output by a tiny elite.  The history of human social organisation after the primitive communism of hunter-gatherer societies has been the history of classes, to paraphrase Marx.  Inequality is a thus a product of class society; it is not the cause of it.  Thus it is the capitalist mode of production that has incentive to turn technology toxic, not ‘inequality’ as such.  If you were go through Hughes’ text and replace the words “inequality” or “unequal society” with the word “capitalism”, the picture of causality would be clear.

Making ‘inequality’ the enemy of technical progress smacks of the same ambiguity as found in such books as The Spirit Level, a book that has had wide success. That book argues that there are “pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, (and) encouraging excessive consumption”.  But the real contradiction is not between an unequal society and technical progress, but between technical advances to boost the productivity of labour and the profitability of capital.

Hughes covers excellently the damage that capitalism (sorry, unequal societies) do to life expectancy, height, violence, the environment etc, just as the Spirit Level did.  These are chapters not be missed.  Hughes concludes that “inequality is the elephant in the room” that nobody likes to mention (p111).  Actually many refer to rising inequality now (as Thomas Piketty, the modern economist of inequality, put it in the interview: “I believe in capitalism, private property, the market” — but “how can we tackle inequality?” ).  But few (including Piketty) attach its cause to the capitalist mode of production. That is the real elephant in the room.  By delineating inequality, there is a danger that the elephant will be mistaken for a mouse.

Hughes graphically outlines in a series of chapters that, if technology was controlled by public organisation and in common (or as he prefers, following Kropotkin, the thoughtful anarchist, in ‘mutual association’), then huge strides in innovation could be made.  He provides a host of examples for solving global warming, reversing environmental destruction, reducing wasteful production and protecting natural resources, including flora and fauna.

Planning for need is not only necessary; Hughes shows that it now clearly viable with modern computer techniques like big data, artificial intelligence and quantum computers (see chapter 12 for an excellent account of the so-called ‘calculation debate’ of the 1980s that was supposed to show that planning was impossible because of the millions of decisions involved and therefore socialism was infeasible).  Indeed, Hughes reveals that during its brief rule, the socialist government of Salvador Allende in Chile, actually developed Cybersyn, a project that showed the possibility for harnessing digital computing to plan for social need.

In his final chapter, Utopia or Bust, Hughes discusses the key contradiction for the technology of the future. “Automation under capitalism (here the true elephant is mentioned) is less to relieve drudgery than to relieve manufacturers of some of their wage bills and reduce their reliance on skilled workers” (p310).  Automation under capitalism stunts individual ideas and innovation.  And it is also wasteful e.g. building roads rather than public transport and communications (“when you look at the hours a car can save you and the hours spent paying for it.. a worker has to dedicate each year about two months of work”) (p320).  Airplanes can be more ecologically friendly and more comfortable and useful if they just went slower (p322).  Labour saving devices to reduce toil in the home (washing machines) actually have increased the time spent on child care (nearly 30 hours a week for a woman, the same as in 1900! – p324).  Communal developments would save time and toil for housework – and so mainly for women.  Yet, as Hughes says, the “capitalist world seems specifically designed to eliminate communal activity” (p326).

At the end of the book, Hughes asks “dare we demand equality?” and he calls for the ‘banning of inequality’.  But is this the way to pose the issue?  Technology is indeed the handmaiden of the social order controlling it.  Inequality is the result of that social order.  What is needed is the removal of that social order and its replacement by what used to be called socialism (not ‘post-capitalism’ or ‘equality’).  Then technology can flourish for all and inequality itself will fade.  The demand we must dare for is the common ownership and control of technology, not ending the unequal distribution of its fruits.

The Fed takes the risk

December 15, 2016

This week, the US Federal Reserve raised its benchmark interest rate for 0.5% to 0.75% for just the second time since the financial crisis of 2008, arguing that the American economy was expanding “at a healthy pace”.  The Fed’s monetary committee also indicated that it planned to hike its policy rate at least three times in 2017 on the grounds that economic growth, employment and inflation were picking up and President-elect Trump’s proposed policies of cutting corporate taxes and boosting infrastructure spending could accelerate US economic recovery.  “My colleagues and I are recognizing the considerable progress the economy has made,” said Janet Yellen, the Fed’s chairwoman, “We expect the economy will continue to perform well.”

There is a certain irony in Yellen’s statement given that this time last year, in hiking the policy rate for the first time in nine years, she made a similar declaration of confidence in the economy and then economic growth slowed to a trickle and the Fed postponed any further hikes.

The US economy has expanded on average by only 2% a year since the end of the Great Recession in 2009.  The unemployment rate has dropped to more or less the same level as before global financial crash, but investment and productivity growth has been very weak.

Back last December, I raised the question that, given weak business investment hiking interest rates might push a layer of US companies into difficulty and trigger a new recession or slump.  Indeed, that was why the Fed held off further hikes during this year.

So are things that much better that this risk of rising interest rates triggering a recession is now over? Well, Yellen described the rate increase as “a vote of confidence in the economy.”  And the justification for this comes from somewhat improved figures of real GDP growth in the third quarter of this year, at a 3.2% annual rate. However, the pick-up was all in housing and inventories (building up stocks not sold), while business investment stayed flat.  And on a year-on-year basis, US real GDP was higher by only 1.6%, while business investment contracted by 1.4%.

However, after falling in Q2, corporate profits rose in Q3, up 6.6% compared to Q2 and higher by 2.8% from Q3 2015.  So it could be argued that the US economy is doing better in the second half of 2016 than in the first half, which was dire. House prices have surpassed their pre-recession peak and consumer confidence is at a new high.

US corporate profits August

Globally, corporate profits also picked up in the third quarter of 2016.  A weighted average of five key economies, US, China, Japan, Germany and the UK) saw profits rise by over 5% yoy.  Along with rising business activity indicators in the US and Europe, it seems that the major economies have staged a bit of a recovery in third quarter. But global business investment growth remains weak.

There are two risks that could undermine Yellen’s confident forecast (for the second time.  The first is that rising interest rates will lead to increased costs of servicing corporate and household debt that cannot be funded through extra profits or real incomes in households.  So default rates on debt obligations will rise.

There has been no real reduction in the build-up of private-sector debt in the major economies that took place in the early 2000s and culminated in the global credit crunch of 2007. That accumulated debt took place against a backdrop of favourable borrowing conditions—low interest rates and easy credit. Between 2000 and 2007, the ratio of global private-sector debt to GDP surged from about 140% to 163%, according to the IMF.


Public sector debt mushroomed after the global financial crash to bail out the banks and fund spending on unemployment and other benefits. The average level of public debt to GDP rose from 34% pts to roughly 90% – a post-1945 record.  Combined with private-sector debt, the level of total nonfinancial borrowing to GDP in the advanced capitalist economies is actually higher today than it was in 2007.

In the emerging economies, after the Great Recession the increase in private sector debt has been massive. China is in a league of its own, with a 96%-pt increase in its ratio to 205% of GDP.  Even excluding China, the figures are still big, up 25% pts and at 92% of GDP for emerging economies.  Indeed, the increase in the private debt to GDP ratio in the emerging economies outside China now exceeds what took place in the DM in the 2000s expansion.

Most of this extra debt is the result of corporations in these countries borrowing more to increase investment, but often in unproductive areas like property and finance.  And much of this extra borrowing was done in dollars.  So the Fed’s move to raise the cost of borrowing dollars will feed through these corporate debts.

Moody’s, the US credit monitoring agency, reckons that there is now $7trn of global government debt that will face downgrades for risk of default because of rising costs of financing if the US dollar stays strong and global interest rates start rising during 2017.  That’s 16% of total global public debt.  In 2016 anyway, there were 35 credit downgrades for country debt.

Nevertheless, stock markets in the major economies head towards new highs on the expectation that the major economies are on the road to sustained recovery and that Trump’s policies will stimulate spending and boost corporate profits next year.

I have already put huge question marks against the likelihood that Trump can achieve fast and sustained economic growth in the US with his policies.  And I am not the only doubter.  I have already referred to the views of Deutsche Bank and JP Morgan on likely economic recovery in the US in 2017.

Now huge private equity fund, Bridgwater Associates, is also doubtful about the expected economic recovery.  Its founder, Ray Dalio, reckons that “This is not a normal business cycle; monetary policy will be a lot less effective in the future; investment returns will be very low.”  Echoing the view presented, ad nauseam, on this blog, Dalio identifies a “short-term debt cycle, or business cycle, running every five to ten years but also a “long-term debt cycle, over 50 to 75 years.”  He comments “Most people don’t adequately understand the long-term debt cycle because it comes along so infrequently. But this is the most important force behind what is happening now.”  Dalio reckons that debt growth has outstripped the income growth in the form of profits and interest necessary to service the current levels of debt.  Easy money and low central bank rates cannot counteract the rising costs of debt servicing for long.

Now in 2017, it seems that the floor of interest rates globally, set by the Fed’s policy rate, is set to rise, if the Fed sticks to its plan to hike three more times and again in 2018.  At the same time, oil prices are set to rise, assuming the OPEC oil producers stick to their plan to cut production.  That will increase fuel prices and cut into corporate profits.  And if the dollar stays strong against other major currencies, the servicing of dollar debt globally will jump, putting many corporations into difficulty.


So the relative recovery in global corporate profits and economic activity in the last part of 2016 may not last in 2017.