Is capitalism past its use-by date?

Back in September 2012, I wrote a post on whether capitalism is a mode of production that just suffers a series of crises, booms or slumps, or is instead (or also) a system that will eventually break down and collapse when it passes it ‘use-by’ date.  I think I still hold to my tentative conclusions in that post
(http://thenextrecession.wordpress.com/2012/09/12/crisis-or-breakdown/).

In that post, I referred to a paper by Robert J Gordon, a professor at North-Western University entitled, Is US economic growth over? – see http://www.nber.org/papers/w18315 and http://www.voxeu.org/article/us-economic-growth-over.

In that paper Gordon argued that the rapid technological progress under the capitalist mode of production in the last 250 years is now over.  Growth in real GDP per capita, at least in the US economy, will be slower that in any extended period since the Civil War.   Gordon argued there are six headwinds that will slow future innovation: an ageing population in the mature economies; rising inequality; an increasing lack of competitive advantage for the mature capitalist economies; poorer education because public investment in education is being destroyed; increasing environmental regulations; and excessive debt. Gordon concluded that US real economic growth could fall to just an average 0.2% a year for the foreseeable future compared 2-3% of the past.

Whether those headwinds justify such slower economic growth is open to question.  Gordon suggested that capitalism drove the productive forces (and thus economic growth) upwards from about 1750 to 1950. But since then it has been in a downward spiral that no longer takes the productive forces forward. Capitalism, at least in the mature economies, has had its day.

Well, Gordon’s paper came in for a lot of flack from mainstream economics.  The arguments against Gordon centred round his claim that technological progress had come to an end.  Both arch Keynesian guru, Paul Krugman and arch Chicago neoclassical economist John Cochrane agreed that their “gut feeling” was that Gordon is too pessimistic about the future of technology.

As Gordon put it in a sequel paper to his 2012, just released (Gordon 050314), “A controversy about the future of U.S. economic growth was ignited by my paper released in late summer 2012.1 The debate began with my prediction that over some indefinite period of time into the future, perhaps 25 to 40 years, the growth of real per-capita disposable income of the bottom 99% of the U.S. income distribution would average 0.2% per year, compared to 2.0% per year in the century before 2007. This prediction set off a firestorm of controversy with commentary, blogs, and op-eds around the world.”

Gordon admitted that he was talking about the US and no other economies where the ‘headwinds’ may be less and agreed that “there is plenty of room for “catch-up growth” in the emerging markets of the world”.  And he was looking at potential growth not actual real GDP.

Gordon was criticised for underestimating the new technologies that will come into play in driving up productivity growth over the next few decades.  In his sequel paper, he says “the primary role of the headwinds in predicting slow future growth escaped notice in the initial round of controversy about innovation”  He retorts: “there is no need to forecast that innovation in the future will “falter,” because the slowdown in the rate of productivity growth over the past 120 years already occurred more than four decades ago. This sequel paper explains why the pace of innovation declined after 1972. The future forecast assumes that innovations in the next 40 years will be developed at the same pace as the last four decades, but reasons for scepticism are provided for that prediction.”

So Gordon claims that he does not need to predict poor innovation from here still to conclude that US economic growth is set to slow to a trickle over the next few decades.  Gavyn Davies, the Keynesian economist and former chief economist at Goldman Sachs, who now blogs for the Financial Times, agreed that the prospects for increased living standards for the average American household do not look good (The economic future of Americans – some arithmetic, http://blogs.ft.com/gavyndavies/2014/03/02/the-economic-future-of-americans-some-arithm).

Gordon predicts the real living standards of all but the top 1% in the income distribution will barely grow at all in the decades ahead and that this experience of the vast bulk of the population has been no better than that since 1973. Over the whole of that period, median real household income has actually risen by only 0.1% per annum.

However, Davies’ successor at Goldman Sachs, Jan Hatzius, is less pessimistic. Hatzius points out that the trend in college attendance continues to expand strongly, so he does not see why the contribution of education to productivity growth should decline.  Hatzius also reckons that the rise in the profits share cannot continue indefinitely, and cites evidence that the share of the top 1% in the wage distribution stopped rising in 1997. He therefore reckons that rising inequality will be much less of a factor in the decades ahead. Even so, as Davies points out, the resulting future growth in median household income is still only 1-1.5%.  This is what US capitalism offers most Americans at best, and that assumes no more major recessions or slumps.

But is technology and innovation really going to fail to deliver better growth over the next few decades?  The rise of robots and artificial intelligence is predicted by some to have an exponential effect in what has been called the ‘second machine age’ in Andrew McAfee and Erik Brynjolfsson’s influential book on the march of the robots. I intend to return to this issue in a future post.

But what cannot be denied is the productivity growth in the US and other major capitalist economies has been slowing since the 1970s – neoliberalism has failed to innovate.  US output per hour of work since 1972 has risen by only about 1.3% a year, apart from the brief dot.com boom in the late 1990s.  And real output growth per worker has slowed from a mediocre 2.4% a year (as Gordon recorded) in the last 20 years to just 1% a year over the past three years.

Many critics of Gordon’s view argue that this slowdown is temporary and is caused by the effects of the Great Recession and the cyclically weak recovery since.  Once capitalists start to invest more, productivity growth will recover to the previous trend.  The only problem with that argument is that there is still little sign of any significant return to the previous trend in business investment growth.

I did a quick analysis of US business investment growth.  In 2013, real spending on business investment in the US rose 3.8%, little more than half the rate achieved prior to Great Recession.  And what is especially noticeable is that spending on hi-tech innovatory equipment, the previously dynamic high growth sector with an average of 10-20% annual growth, is very weak, now growing at a pace slower than overall real GDP.

Hi-tech spending on both equipment and software has fallen as a share from 4.7% of US GDP in 2000 to 3.5% in 2013.  It is this area that is key to boosting productivity.  What is the reason for this slowdown in investment in new technology?  Well it appears to be that the cost of new equipment and software is just too high relative to the realised and expected return on those investments – in other words, the rate of profit is not high enough.

Kenneth Rogoff, of Reinhart and Rogoff fame (or infamy, see my post, http://thenextrecession.wordpress.com/2013/04/17/revising-the-two-rrs/), pitched in on Gordon’s predictions in a recent article (Malthus, Marx, and Modern Growth).  He agreed that there were obstacles to continuing the ‘previous success’ of capitalism.  There was environmental degradation; growing inequality within countries; aging populations that don’t work; and the risk of financial crashes. Yet he remained optimistic that capitalism can overcome these challenges.  After all, “so far, every prediction in the modern era that mankind’s lot will worsen, from Thomas Malthus to Karl Marx, has turned out to be spectacularly wrong… despite a disconcerting fall in labour’s share of income in recent decades, the long-run picture still defies Marx’s prediction that capitalism would prove immiserating for workers.  Living standards around the world continue to rise.”

Rogoff continues that technological progress has trumped obstacles to economic growth in the past.  “Will each future generation continue to enjoy a better quality of life than its immediate predecessor? In developing countries that have not yet reached the technological frontier, the answer is almost certainly yes. In advanced economies, though the answer should still be yes, the challenges are becoming formidable.”   So the mainstream economists remain broadly optimistic about the future of capitalism, despite Gordon’s prognostications – not surprisingly.

In my post in September 2012, I reckoned that capitalism could get a further kick forward from exploiting the hundreds of millions coming into the labour forces of Asia, South America and the Middle East?  This would be a classic way of compensating for the falling rate of profit in the mature capitalist economies.  I have calculated before that the world rate of profit (not just the rate of profit in the mature G7 economies) stopped rising in the late 1990s and has not recovered to the level of the golden age for capitalism in the 1960s, despite the massive potential global labour force.  It seems that even the countervailing factors of foreign investment in the emerging world, combined with new technology, have not been sufficient to keep pushing up the world rate of profit, so far (see roberts_michael-a_world_rate_of_profit.).

I’ll be revisiting these measurements of the world rate of profit in a future post in the light of new work done by a young Marxist economist from Argentina.

Yes, crises are endogenous to capitalism because of the main contradiction within the capitalist mode of production, of accumulation for profit and not need.  But also it is possible for capitalism to recover and soldier on ‘endogenously’ when sufficient old capital is destroyed in value (and sometimes physically) to allow for a new period of rising profitability.  Capitalism can only be replaced by a new system of social organisation through conscious action of human beings, in particular by the majority class of people (the working class globally). Without such conscious action, capitalism can stumble on.

Maybe the mainstream economists will be proved right and the new technology in the pipeline will be applied by a resurgent capitalist revival to boost productivity and growth, but Gordon’s evidence suggests otherwise.

Ukraine: Hobson’s choice

The people of Ukraine are left with Hobson’s choice: either go with KGB-led crony capitalism from Russia or go with equally corrupt pro-European ‘democrats’.   The majority have opted for the latter because, at least for the moment, it means they can argue, protest and campaign without being kidnapped, shot dead or tortured.  But many are well aware that opting for the pro-EU parties does not mean the end of corruption or a further collapse in already pitiful living standards – Ukraine’s GDP is $175bn for a population of 45m, or about $3800 per person.  Ireland’s GDP is the same for a population of 6m, or $28,000 per person, eight times as much.

The collapse of the pro-Russian regime of Yanukovych is a big defeat for Russia national interests.  Putin sees Ukraine as a satellite of Russian crony capitalism.  As he once told the then-US President George Bush: “Ukraine is not even a state”.  In public, Mr Putin can’t bring himself to call Ukraine anything but a “krai”, the Russian word for territory.  He was determined to stop Ukraine coming under the wing of German-led European capitalism.  But his man, Yanukovych could not deliver.

Now the  pro-European bourgeois leaders in Kiev will prostrate themselves before the EU and IMF in order obtain ‘aid’.  These politicians are just as much in the hands of Ukraine’s billionaire oligarchs as the ousted pro-Russian government were.  As the German journal, Der Spiegel has explained (http://www.spiegel.de/international/europe/how-oligarchs-in-ukraine-prepared-for-the-fall-of-yanukovych-a-955328-2.html), two oligarchs, Akhmetov and Firtash, between them control over 90 MPs in the Ukraine parliament.  Akhmetov is worth $15 billion and is head of the holdings company System Capital Management, which controls more than 100 companies with some 300,000 employees.  They include metallurgical and pipe factories, banks, real estate firms, mobile phone enterprises and a large media company. He is the de-facto ruler of Donbass, the home of Ukrainian heavy industry and owns the football team Shakhtar Donetsk.

These oligarchs soon realised well before the current crisis that Yanukovych would not be around for much longer. They began carefully looking around for alternatives. Akhmetov opted for controlling the main bourgeois ’orange revolution’ party of imprisoned former prime minister, ‘goldilocks’ Tymoshenko, and is now supporting Arseniy Yatsenyuk, who took over the leadership of her Fatherland alliance when she was incarcerated and is set to be the new prime minister. Firtash, for his part, is backing Vitali Klitschko’s party UDAR. Firtash has placed people in Klitschko’s UDAR Party, a former head of the secret service, for example.

The oligarchs and the parties they are backing are now preparing an emergency plan for Ukraine, which will amount to getting dollars and euros from the IMF and the EU in return for a drastic programme of devaluation, austerity and ‘labour reform’.  The nation needs to borrow USD2bn by the end of this month and a further USD9bn by the end of the year just to keep up with government debt repayments. This money was due to come from Russia, which promised a total of USD15bn but, with that promise now off the table, it falls to the West to stave off Ukraine’s looming bankruptcy.  The government needs to raise USD9bn to cover payments to Gazprom and the IMF as well as its own maturing Eurobond issuance and loans. Then there is the current account gap of some USD13bn. And maturing debt from the bank and nonfinancial corporate sector adds a further USD8bn. Totting it all up, 2014 financing needs are around USD30bn, effectively double current FX reserves (see graph of FX reserves and external debt below.

The new government will devalue the Ukraine currency, the hryvnia, further – it has already collapsed – to try boost exports. Mainstream economists and government advisers argue that this is needed to “restore competitiveness”, which has been eroded by a 9% per annum rise in real wages since 2008 while industrial unit labour costs are up by almost 40% over the same period.  In other words, real wages must now be slashed by encouraging a sharp increase in inflation and cuts in employment.  The aim is to raise the profitability of Ukraine’s key export sectors, agriculture and steel.

What will the IMF demand?  It wants a 40% rise in energy prices with government subsidies removed.  It complains that these subsidies cost 7% of GDP a year so that Ukraine’s residents get cheap gas and heating during the bitter Ukraine winters. It wants an end to that. The IMF recent delegation to Ukraine said “upfront, meaningful, and broad-based tariff increases are essential for reducing large quasi-fiscal losses, attracting new investments, and improving governance”.  It will want to restructure the banks and it wants ‘fiscal consolidation’ which means “high budget expenditure should be reduced by rationalizing public procurement, restraining the growth in public sector wages and employment, and limiting pension indexation to inflation.”

The new government will go along with this.  Indeed, the prime minister elect has said that while it will mean hardship for the people and be unpopular, he was prepared to conduct ‘suicide politics’.  For these leaders, there is no alternative but to agree to the EU-IMF terms.  Yatsenyuk has already pledged the country to join the EU.

Ukraine could still stage a financial meltdown and a banking collapse.  More likely, the new government will be helped over the next few months with bridging loans until the IMF deal is struck.  Then the hardship for the people will really begin in earnest.  Ukraine’s foreign debt is about to double as it takes on new debt from the IMF and the cost of existing dollar and euro debt jumps as the hyrvnia is devalued.  This burden will be on shoulders of Ukrainians for a generation.

All this may be too much for the pro-Russian part of the country, already worried about the takeover by the pro-European Ukrainian politicians in Kiev, who they expect to discriminate against them.  As the map shows, in the Crimea and along the Russian border, most people are Russian speaking and supported Yanukovych.  Indeed, Crimea was part of Russia until Krushchev handed it over in 1954.  The country may yet split along these lines as the austerity and debt servicing bites.

There is an alternative to the Hobson’s choice offered by capitalism to Ukraine’s people.  A real people’s government would take over the interests of the oligarchs who stole Ukraine’s wealth in the first place.  It would seize funds to meet the needs of ordinary people on heating, education and public services.  It would revoke the debts owed to Russian and Western banks and demand that the IMF write off its loans so that Ukraine could start without the heavy burden of debt.  Ukraine remains a key agricultural exporter and also a low-cost steel producer.  If the banks and major export sectors were in the government’s hands and not those of oligarchs (and foreign private equity companies in the future), then a national plan could be implemented.

Of course, this is not going to happen as nobody with influence in the country advocates this.  Instead, it is Hobson’s choice for Ukraine.

ADDENDUM:  see this piece for a perceptive and balanced analysis, in my view.

http://peopleandnature.wordpress.com/2014/02/26/ukraine-1-yanukovichs-end-is-a-beginning/

Comment from new Ukraine PM.

The International Monetary Fund is sending a mission to Kiev for talks on Tuesday with government officials who are seeking a multi-billion-dollar bailout.  Arseniy Yatseniuk, Ukraine’s prime minister, said: “This government will meet any IMF conditions,” including greater exchange rate flexibility and removing unsustainable subsidies on household utility consumption “for a simple reason … we don’t have any other options”.

Is the UK’s investment strike over?

The final data for UK GDP in Q4 2013 were released today.  Real GDP rose 0.7% over the third quarter, making 1.8% for the whole year, the best rate since the start of the Great Recession.

Much has been made in the media and government as well as mainstream economists about the dramatic recovery in the UK economy in the last year.  And these figures have added to that optimism, especially as business investment rose 2.4% in Q4 over Q3, making a rise of 8.5% over this time last year. That sounds good.

As one mainstream economist, George Buckley of Deutsche Bank put it: “This provides some hope that the recovery is gaining breadth”.  Another Chris Williamson of survey data firm Markit, said: “Economists have been busy revising up their forecasts for 2014, with the Bank of England in a particularly bullish mood, expecting growth of 3.4 per cent. Such optimism is looking warranted, given the current strong survey data, and the details of the fourth-quarter GDP report.”

But hold on.  As another commentator put it: “The key to the improved performance of the economy is whether companies will unleash their pent-up cash reserves and embark on a long-awaited investment spree.”  Yes, is the investment strike by the business sector really over?  When you look closer at the investment data, things don’t look so rosy.

Sure, business investment has increased for four consecutive quarters.  However over the medium term, investment is essentially flat.

Moreover, this is in cash terms.  Relative to the size of UK GDP, business investment has been in a long-term downward trend since 1999, with only a brief pick-up during the credit and property boom of 2005-7.

Sure, business investment as a % of GDP has now moved up 5.5% from its trough of 7.4% of GDP at the end of 2012, but the ratio of investment to GDP is still 27% below its peak level at the beginning of 2008 when the Great Recession began.  There’s a long way to go before it can be claimed that the investment strike by Britain’s business sector is over.

IMF solution to depression – more of the same

The G20 economy and finance ministers met in Sydney Australia over the weekend and announced that the G20 would aim to raise the global growth rate by 0.5% pts per year, so boosting world output by 2% or $2.25trn from where it is expected to be in 2018.  In November, the G20 will meet again in Brisbane, Australia to outline the actual measures that are supposed to achieve this faster growth rate.

How is this to be done?  Well, a support paper produced by the IMF outlined the strategy IMF paper for G20 meeting in Sydney.  Basically, it boils down to more neo-liberal policies of deregulation of markets, particularly in services like finance, insurance and business services; labour market ‘reform’ around cutting pension spending, increasing employer power to hire and fire and reducing job rights; and more infrastructure spending, mainly by governments providing work for private sector construction companies to be paid for by cuts in welfare spending.

In other words, it will be more of the same policies that presided over and did not avoid the global financial collapse and the Great Recession in the first place.  The IMF reckon that the world economy grew only 3% last year and is expected to grow 3.75% this year and 4% in 2015.  But as its paper says: “However, five years since the Great Recession, output remains far below the  longer-term trend  level, especially in  advanced economies. In 2013 (per capita) output losses relative to trend amounted to 8 percent for the G-20 as a whole, with a higher loss in advanced deficit economies (11 percent). Trade volumes (real exports and imports) remain well below trends as well. Notably, the recovery has also been much slower than was anticipated in the wake of the crisis: the G-20’s 2013 real GDP level was 2 percent below the downside scenario projection prepared for the 2010 Mutual Assessment Process.”

Worse, the IMF reckoned that the world economy would remain in a very weak recovery and never recover the losses from the Great Recession unless action was taken by governments.  “Importantly, going forward, the WEO baseline  projections for the medium term suggest permanent crisis-related  output losses for the G-20 as a whole, driven by large losses for advanced economies where potential growth is envisaged to remain generally weak.”  Indeed, the graph shows that the output loss for the G20 as a whole is widening not narrowing.

The IMF also confirmed the view expressed many times on this blog that the key factor in the global slump was a collapse in investment rather than the crude Keynesian view that it was the lack of consumer purchasing power.  “A demand-side decomposition of output losses shows  that  investment in the G-20 remains well below  longer-term trend, by 18 percent. The losses are especially large for advanced deficit economies but also significant in advanced surplus and emerging deficit economies. For the G-20 as a whole, consumption is only mildly below trend; however, this masks regional variation, with consumption depressed in advanced deficit economies and above trend in emerging economies.”

The IMF went on to say that the cause of the weak recovery also lay with what appeared to be a permanent slowdown in capital accumulation.  Apparently, the ‘cleansing effect’ of the bankruptcies and liquidation of weaker capitals from the Great Recession had not been enough to restore investment levels:  “the scarring effect of the crisis (for instance, difficult-to-reverse misallocation of capital over pre-crisis booms, reductions in research and development spending) may have dominated its cleansing effect (the fact that  the least productive firms are forced first out of  business). The slowdown in capital accumulation will also affect potential growth negatively .”

Of course, the IMF paper does not explain why the cleansing effect has not been enough.  This blog has argued that it is because profitability in the major economies has not recovered enough and the dead weight of fictitious capital remains as a burden on new investment.  A new slump will probably be necessary to clear this.  Instead the IMF advocates more of the same in economic policy.  First, central bank monetary injections must continue: “Monetary policy should continue supporting demand in advanced economies in  view of the still large output gaps and ongoing fiscal consolidation.” 

The IMF recognises that fiscal consolidation (a nice phrase for policies of austerity in cutting government spending and welfare benefits) has contributed to the slow recovery, but it still goes on to support further austerity: “gradual fiscal consolidation should proceed in the medium term”.

But the main way that the IMF sees the world economy recovering back to trend growth is through ‘structural reforms’ or supply-side reforms that have been pursued in the neo-liberal period up to the Great Recession.  What is needed, says the IMF, is more of the same.  First, “product market reforms can boost productivity by increasing competition and/or  improving the business environment.”  What do these ‘reforms’ consist of?  According to the IMF, product market reform means a “20% reduction in regulation in services industries”, while labour market reform means a “20% reduction in the strictness of employment protection legislation”. It means easing “overly restrictive employment protection legislation”, increasing the labour force participation rate by increases in childcare spending and pension reforms (i.e cuts) and “in some cases reductions in unemployment benefit  average replacement rates”.

As for infrastructure investment, the IMF recognises that there are huge social needs here globally.  But it sees such investment being carried out by the private sector using taxpayer money: “countries could also foster higher involvement of the private sector in the  provision of infrastructure services, including through PPPs, (private and public partnerships)” to raise such investment by just 0.5% pt over two years.  And how is this to be paid for?  Well, by “a reduction  in general transfers”, which means welfare spending and other social subsidies.

So there we have it. The IMF notes that the leading G20 economies have not restored the huge losses in output suffered during the Great Recession and economic growth is still well below previous trend growth.  The main reason is the failure of the capitalist sector to invest enough to get economies going.  The answer that the G20 leaders have adopted to overcome this failure is to increase deregulation, reduce workers’ rights in employment and increase public spending on infrastructure to be carried out by private construction companies and to pay for this by cutting welfare spending further.

This is a continuation of the policies that have already failed.  Moreover, there is little likelihood that they will even be adopted in any coordinated way by the world’s governments.  For labour, that is just as well.  In the meantime, the misery will continue.

Getting out of the crisis – more exploitation, more emigration

There are two ways a capitalist economy can get out of slump.  The first is by raising the rate of exploitation of the workforce enough to drive up profits and renew investment. The second is to liquidate weak and unprofitable capital (i.e companies) or write off old machinery, equipment and plant from company books (i.e. devalue the stock of capital).  Of course, capitalists attempt to do both in order to restore profits and profitability after a slump.  This is taking a long time in the current crisis since the bottom of the Great Recession in mid-2009.

Progress in devaluing and deleveraging the stock of capital and debt built up before is taking time and even being avoided by monetary policy.  But progress in raising the rate of exploitation has been considerable.  I took a look at the EU’s AMECO database to see if I could measure the progress by different capitalist economies in squeezing wages and raising the rate of exploitation.

I used the AMECO database measure of adjusted wage share, defined there as compensation per employee as percentage of GDP at factor cost per person employed.  In effect, this is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year.  I calculated the percentage change in that share since it peaked at or during the crisis (the peak for each country in wage share was mainly in 2009, although there were exceptions).

I found that every capitalist economy had managed to reduce labour’s share of the new value created since 2009.  Labour has been paying for this crisis everywhere.

Not surprisingly, it has been the workers of the Baltic states and the distressed Eurozone states of Greece, Ireland, Cyprus, Spain and Portugal who have taken the biggest hit to wage share in GDP.  In these countries, real wages have fallen, unemployment has rocketed and hundreds of thousands have left their homeland to look for work somewhere else.  That has enabled companies in those countries to sharply increase the rate of exploitation of their reduced workforce, although so far that has not been enough to restore profitability to levels before the Great Recession and thus sustain sufficiently high new investment to get unemployment down and these economies onto a sustained path of growth – now after five years and in some cases seven.

The major economies of Japan and the US have also achieved a ‘moderate’ reduction in wage share, which is helping to restore profitability. What is worrying for the capitalists of Italy or France is the failure to raise the rate of exploitation much at all.  This failure is slowing the pace of return to profitability – no wonder Italy’s economy continues to grind down and France is stagnant.   And clearly Slovenian capitalism needs to do more to reduce wage share there if it is to recover profitability – at least as much as Portugal, Ireland or Romania.

In all these countries, governments are preparing an agenda of ‘labour market reform’, spending cuts and privatisations designed to hit labour’s share in the national output – there is more misery to come.  Italy’s new Blairite leader, Matteo Renzi is pledged to such neoliberal measures.  France’s Francoise Hollande has had a Damascene conversion to a neo-liberal agenda and Slovenia’s ‘social democrat’ coalition is preparing similar measures.

But it is not just the politicians of austerity that have driven or aim to drive down labour’s share.  Government policy based on the Keynesian ‘alternative’ of debt restructuring and devaluation of the currency has led to the same result.  Iceland’s supposedly Keynesian policies have produced a larger fall in labour’s share than in austerity Spain or Portugal (see my post, http://thenextrecession.wordpress.com/2013/03/27/profitability-the-euro-crisis-and-icelandic-myths/).

One of the striking contributions to the fall in labour’s share of new value has been from emigration.  I have reported before on this important factor in turning things round for the smaller capitalist economies in the Baltic states and Ireland (http://thenextrecession.wordpress.com/2012/09/30/can-austerity-work/).  But now it has become an important contribution to reducing costs for the capitalist sector in the larger economies like Spain.  Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal and North Africa.  Now that has been completely reversed.

Hundreds of thousands of migrants are heading back home every year, and the country’s overall population is falling for the first time since records began. Spain’s population jumped from 40m in 1999 to more than 47m in 2010, one of the most pronounced demographic shifts experienced by a European country in modern times. The surge was almost entirely the result of migrants from countries such as Ecuador, Bolivia, Romania and Morocco. The number of foreigners living in Spain increased eightfold in just over a decade, while their share of the population soared from less than 2 per cent in 1999 to more than 12 per cent in 2009.

Now, increasingly, they are leaving Spain altogether. In 2008, one year after the start of the crisis, Spain still recorded 310,000 more migrant arrivals than departures. That number fell to just 13,000 the following year before turning negative in 2010. In 2012 there were more than 140,000 more departures than arrivals, and the pace of the exodus is picking up fast. According to the national statistics office, the foreign-born population now stands at 6.6m, down from more than 7m just two years ago.

This net emigration acts a safety valve for Spanish capitalism – unemployment would be even higher without it.  It helps the capitalist sector get down labour costs without provoking a social explosion.  However, over the longer term, this spells deep trouble for capitalist expansion in Spain.  There remains a huge overhang of unfilled real estate from the property boom that triggered the crisis in Spain.  A falling population means that this form of unproductive capital will continue to weigh down Spain’s recovery.  And with a public sector debt to GDP ratio hitting 100%, there will be fewer workers to extract value to service that debt.

Unless the productivity of the smaller labour force can be raised, Spain’s growth rate will be limited.  German capitalism has succeeded to some extent in coping with a falling population (see my post, http://thenextrecession.wordpress.com/2013/09/22/german-capitalism-a-success-story/).  Spanish capitalism will be less able.  After all, most of the people emigrating are the skilled and more productive parts of the workforce.  They are going to Germany, France, the US, even Latin America.  Maybe they will return as many did in the Baltic states or Ireland after past recessions ended.  But given the length of this Long Depression, this time could be different.

Tendencies, triggers and tulips

At the 3rd seminar of the International Institute for Research and Education (IIRE) in Amsterdam, I presented a paper entitled, Tendencies, triggers and tulips, with the subtitle, The causes of the crisis: the rate of profit, overaccumulation and indebtedness. Presentation to the Third seminar of the FI on the economic crisis

The main purpose of my paper was to argue that, following Marx, we must look beneath the surface events of a slump or financial crash like that of great tulip futures contracts of 1636 in Amsterdam or the property bubble, credit crunch and global financial collapse of the Great Recession of 2008-9 to the underlying deeper causes that can explain the recurrence of crises under capitalism.  Each crisis, crash or slump may have a particular visible cause, but any proper scientific analysis of events must reveal deeper causes that best explain these recurrences and even predict future ones.

The paper briefly looks at the explanations for crises or slumps offered by mainstream economics.  Neoclassical equilibrium economics either denies there are crises, or ignores them, or explains them as random or exogenous shocks to the harmonious growth of markets.  Keynesian economics, both its more orthodox and heterodox versions, recognises that capitalism has inherent flaws.  But these are to be located in the financial sector, not the production sectors of capitalism.  And the ‘technical malfunction’ in the financial sector can be dealt with by utilising the right macro policies.  Through macromanagement, the capitalist system can avoid serious systemic crises and eventually progress to a rich and leisure-based society in the long run.

The paper dismisses these explanations and their more recent variants, namely that the Great Recession was a consequence of falling wage income and workers’ consumption leading to lack of effective demand; or that growing inequality of income and wealth in the neoliberal period led to insufficient purchasing power and/or excessive debt, creating credit bubbles that eventually burst.  These alternative explanations are not consistent theoretically in explaining recurrent crises and are not borne out by empirical evidence.

The paper argues that Marx’s own theory of crises under capitalism, embedded in his law of the tendency of the rate of profit to fall (which he considered was the most important law of political economy), provides the most compelling explanation of recurrent crises. The paper presents empirical evidence from the US, Europe and even the world, to justify the argument that it is tendential downward pressure on the rate of profit that is the underlying cause of crises.  After all, the capitalist mode of production is production for private profit, not for social need.  This is the basic contradiction that underlines crises.  Capitalist corporations produce things or services to make money; they are money-making machines, first and last. The key to recurrent crises is the recurring inability of capitalist companies to extract sufficient value and surplus value from labour to sustain further investment to make money. And Marx’s law of profitability explains why that happens.

So profit, or the lack of profit, is at the heart of an explanation of capitalist crises.  The paper presents a diagrammatic representation of the cycle of profit growth that reveals the recurrence of crises, as below.

Marx’s law provides an explanation of the ultimate cause of crises.  The law is at the deepest level of abstraction, of capital in general.  At a shallower level, of capital in competition with other capitals, which depends on where capitalists are directing the surplus value that they have appropriated, the triggers for a new crisis can be very different.  In 1636 in Amsterdam it was futures contracts in tulips; in 2008, it was shadow banking, derivatives of mortgages and a property bubble.  In 1638, the crisis only affected parts of Europe; in 2008, the world crashed.

Another feature of the 2008-9 Great Recession was the prior huge expansion of fictitious capital (credit or debt), particularly in the financial sector, that made the crash even deeper than others.  The paper discusses the size of that debt, both public and private, in the major economies and the Sisyphus-like task of deleveraging that debt before capitalism can restore a level of profitability that would make it possible for capital accumulation to resume at least a trend rate.  That has not happened yet and so the major economies are really in a Long Depression similar to that of the 1880s and 1890s, or the Great Depression of the 1930s.

The paper ends with a brief discussion of long waves or cycles in capitalism (a fuller account of this can be found in my paper, Cycles in capitalism).  Many dismiss the idea of long cycles because the empirical evidence is dubious and there are few data points to work on statistically.  I argue that there is merit in the concept of long cycles.  Using the profit cycle as the base, it is possible to develop an analysis that incorporates both the very short ‘working capital’ cycles (Kitchin) up to the very long waves of innovation and production first associated with the leftist Russian economist, Kondratiev in the 1920s – as the graph below tries to draw.

If this hypothesis is right, then I argue that the major capitalist economies are currently in a Long Depression because they are in the ‘winter’ phase of the Kondratiev cycle which exhibits both depressed or falling prices of production and a phase of falling profitability.  Some Marxists who accept the existence of long waves or cycles, like the late Ernest Mandel, reckon that this downphase is endogenous to capitalism, but there can be no recovery unless there is an exogenous event like a world war or a revolution in a major economy.  I don’t see why that should be the case.  The Long Depression of the 1880s eventually came to an end without world war or revolution; and would the Great Depression of the 1930s have gone forever if there had been no world war?

That argument was disputed at the IIRE seminar.  But the main criticism of my paper was that it was too schematic in concentrating on the rate of profit as the ‘sole’ cause of crises. What about important events like the fall of the Soviet Union in the late 1980s, the rise of China and globalisation and the qualitative change in the financial sector in the last 20 years so that the trajectory of capitalism is now set by a parasitic, unproductive financial sector in the countries of imperialism.  Marx’s law of profitability is too didactic an answer.  Well yes, but as the paper tried to argue, Marx’s law of profitability is at the ultimate level of abstraction like Newton’s law of gravity and not at the surface level like tulip contracts or financial instruments of mass destruction.

The 100th anniversary of the Great War of 1914-18 is with us.  Can we explain the cause of the war by the assassination of Arch Duke Ferdinand, the heir to Austro-Hungarian empire in Sarajevo (like the collapse of Lehmans bank in 2008); or by the accidental mistakes of foreign secretaries in their ‘peace’ negotiations (or by financial deregulation and the credit crunch in 2008); or should we look instead at the growing imperialist rivalry between the major European capitalist powers to divide and control the rest of the world as colonies after the end of the Long Depression (or in the Great Recession, to the fall in profitability and the rise in fictitious capital from 1997 onwards)?

Surely, the dialectical answer is that there are both an ultimate and proximate cause(s).  Every crisis may be different in its characteristics, but crises in capitalism are recurrent and thus need to (and can) be explained by the same underlying cause, just as the law of gravity explains why an apple falls, even though the immediate cause may be because the wind may have knocked it off the tree.

Tulips in Amsterdam

I am presenting a paper on Tendencies, Triggers and Tulips at the 2014 Economic Seminar of the International Institute for Research and Education in Amsterdam, Holland on Friday.

I shall be reporting back on this seminar where there are several leading Marxist economists speaking.

Apparently, you can follow the seminar from a live feed, starting Friday 14 February at:

http://www.ustream.tv/channel/iire-economy-seminar-2014

The programme can be found here:

http://www.4edu.info/index.php/IIRE_Economy_Seminar_2014

Time for Noah’s Ark again?

The world is experiencing extreme weather.  In the US, California’s drought is the worst in 100-years while the East Coast faced a massive snowstorm with freezing temperatures. On the other side of the world, Australia continues to deal with intense summer heat and droughts, causing major bush fires. There has been severe winter flooding in the UK and Europe; extreme cold and snow in the Eastern US and Japan and so on.

Now this may just be random, outliers in the normal distribution of weather conditions, or it could be that the globe is reaching a peak in a cycle of weather, or it could be the ever-growing impact of climate change as the world heats up.  In fact, it could be all three, as the first two possible causes can be considered as immediate or cyclical and the last (climate change) as structural or ‘ultimate’.  The facts speak.  Since 1997, the world has experienced the 13 warmest years ever recorded out of 15, according to the UN.  June 2012 marked the 328th consecutive month with a global temperature above the 20th century average.  In 2013, extreme weather events included several all-time temperature records.  Snow cover in Europe and North America was above average, while the Arctic ice was 4,5% below the 1981–2010 average.

Northern Hemisphere weather extremes have been linked to the Arctic sea ice melting.  In January alone, 11233 weather-related deaths were reported in India.  Bangladesh faced the lowest temperature since country’s independence.  In Europe, last summer’s weather was bizarre.  Finland and most of Northern Countries got the highest temperatures in Europe during May and June, while Western- and Middle Europe faced much cooler weather and even their wettest May and June ever.  Overall, prolonged heat waves in the Northern Hemisphere set new record high temperatures.

There’s little doubt that climate change is contributing to the extreme weather disasters we’ve been experiencing (see my post,
http://thenextrecession.wordpress.com/2013/09/28/climate-change-and-capitalism/).  
Numerous studies, such as the US  NOAA’s 2011 State of the Climate report, shows the clear links between extreme weather and human-induced climate change.  In the UK, the media is bouncing about the extreme levels of rain and wind hitting the island and causing significant and prolonged flooding.  The UK Met Office, the body that forecasts the weather, announced that climate change was likely to be a factor in the extreme weather that has hit much of the UK in recent months: “all the evidence suggests there is a link to climate change” and “there is no evidence to counter the basic premise that a warmer world will lead to more intense daily and hourly rain events.”  The UK Met office said there had been the “most exceptional period of rainfall in 248 years”.

Climate models are forecasting increased episodes of flooding for the UK under climate change conditions.  According to the UK Met Office, four of the wettest five years have occurred since 2000, a statistic made all the more remarkable given the drought between 2010 and 2012. Peer-reviewed scientific research, performed by academics in collaboration with RMS scientists, found that climate change increased the likelihood of the floods that impacted England and Wales in the year 2000 in which 10,000 homes and businesses were flooded due to heavy autumn precipitation.  And Britain’s Rowntree Foundation study,
http://www.jrf.org.uk/sites/files/jrf/urban-flood-risk-full.pdf)
found that this was a direct result of the physical principle that a warmer atmosphere holds higher amounts of water vapour and UK regional climate models predict increased winter rainfall (especially in the north and west) and more intense, highly localised summer rainfall (especially in the south and east). These predictions also accord with recent changes in rainfall over the period 1961–2006 which have seen many parts of the UK affected by severe and highly damaging floods.  The study concluded “Whilst no single flood can unequivocally be attributed to climate change, there is evidence that the probability of floods (in this instance, the regional floods affecting England and Wales in 2000) is increasing as a result of anthropogenic greenhouse gas emissions.”

But while the  British press gushes about the sorry state of a few thousands people in the richer and leafier parts of England like Somerset or Surrey, the most damage from extreme rainfall, flooding and wind is likely to be in the poorer urban areas.  As the Met Office put it: “there is now little doubt that a warmer and wetter UK will experience more floods with greater impacts in urban areas.”  In particular, there is the increased risk of pluvial flooding.  River banks overflowing is called fluvial flooding; pluvial flooding is when  combined systems (storm water and foul water sewers) are overwhelmed, the foul water sewers surcharge onto the streets. The resulting flood is a mixture of surface water and untreated sewage which produces a more severe health hazard.

Pluvial flood risk accounts for approximately one-third of flood risk from all sources in the UK.  Approximately 2 million people in UK urban areas (settlements with a population over 10,000) are exposed to an annual pluvial flood risk of 0.5 per cent or greater (‘1 in 200-year’ event).  An additional 1.2 million people in urban areas could be put at risk by 2050 from a combination of climate change (300,000) and population growth (900,000).  Settlements across the UK with higher rainfall also tend to have greater levels of social deprivation.

As one blogger
(http://flipchartfairytales.wordpress.com/2014/02/08/floods-if-youre-far-enough-from-a-river-youre-safe-right/)
put it: “The Environment Agency has taken its fair share of blame for the flooding misery in Somerset , but there is an industry which has escaped criticism. And unlike the quango, it’s not short of a billion or two. Step forward the privatised water industry which has a key role in dealing with our storm and sewage water. In the last six years water companies have made £11 billion in profits from our water bills, surely enough to have stopped its customers from having raw sewage flooding into their homes and down their streets every time there is a heavy downpour.  Dispatches has been investigating the role of the water companies in the country’s recent flood problems and while Somerset have been dealing with record rainfalls and storm surges many homes across the country have been dealing with another consequence of the deluge: sewage flooding into their homes and down their streets.  When it rains heavily, our underground infrastructure can become overwhelmed and raw sewage can get discharged onto our streets , rivers and to a growing number of unfortunate people into their homes. According to the Consumer Council for Water, complaints from homeowners about sewer flooding are up by 50% compared to last year.”  (http://www.channel4.com/programmes/dispatches/articles/all/water-companies-and-floods)

The private sector and the private water management monopolies that are supposed to provide decent water and sewage facilities are not not up to the task.  Profit for shareholders comes before service to the public.  As a result, basic infrastructure investment in sewage and water, roads, rail etc is inadequate – and yet the world, including the richer capitalist countries, is facing increased risk of ‘natural disasters’ as the global climate changes and, with it, the weather conditions.

Every year there is a major disaster in the emerging economies, with thousands dying and hundreds of thousands losing their homes and livelihoods.  But the media only remembers the events that hit the rich economies. The most infamous was the Katrina hurricane, the bursting of the levees and the flooding of the homes of the poor in New Orleans.  Not only did the federal and local governments fail to act quickly and efficiently, we now know that warnings of such a calamity had been voiced years before.  But instead of spending more to upgrade the levees, federal and state governments actually cut back on such infrastructure funding. After all, such spending was of no value to rich living up on their hilltop homes.

It’s the same story in the current flooding crisis in the UK.  In November 2012, the government announced plans to spend £120 million (US$183 million) on flood defences, split between new areas targeted for protection and speeding up protection already being built.  But this came after a period of budget cutting, with government climate advisers in the summer of 2012 noting a 12% decrease in flood defence spending from the previous year. Construction began on 93 new flood defences in February 2013 with a government pledge of an additional £2.3 billion (US$3.5 billion) until 2015.

Despite this activity, some of the largest projects, like the £80 million (US$122 million) coastal defence at Rossall, Lancashire, are to protect from storm surge rather than the pluvial flooding  that dominated 2012’s losses. According to the RMS UK Inland Flood Model, an annual flood loss of £1.2 billion (US$1.8 billion) can be expected approximately once every decade. The RMS model also estimates that only 50% of the average annual loss (AAL) comes from major river flooding, with the other half from small river and stream flooding, flash flooding, pluvial flooding, and localized heavy precipitation.

Even the classical economist of capitalism and the so-called guru of free markets, Adam Smith recognised the need for public spending in infrastructure because the private sector could not do it.  In his Wealth of Nations.  Smith explained: “The first and last duty of the sovereign is that of erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society are, however, of such a nature that the profit could never repay the expense to any individual.” And Smith meant by this “good roads, navigable canals, harbours and education”.

The American Society of Civil Engineers has continually complained that America’s infrastructure is rotting away.  It found that one in five American bridges were “structurally deficient”.  While the number of miles travelled by cars and trucks had doubled in the past 25 years, highway lane miles had risen only 45%.  Demand for electricity had increased by 25%, but the construction of new transmission facilities had fallen by 30%.  This deterioration had lost 870,000 jobs that could have been secured with new projects, while the costs of moving goods had risen significantly. The ASCE reckoned that there was $100bn of potential work available. Instead the US Congress plans to cut such spending by 35% over the next six years.

More extreme weather is on its way and the risk of calamity involving millions is rising sharply.  To avoid this, we can rely only on uninterested private monopolies and governments engaged in cutting back on so-called ‘discretionary’ public spending.  It’s another consequence of the dominance of the capitalist mode of production.  There is a UN summit in New York on climate change and the weather in September.  We may have to rebuild Noah’s Ark before then.

Greece cannot escape

At the end of January, finance officials from the Troika (EU Commission, ECB and the IMF) and the finance ministers of Germany and France held a secret meeting to discuss what to do about Greece.  Greek government officials were not invited.  They were trying to figure out how to tackle two issues threatening to unsettle the fragile economic recovery in Greece and the broader euro zone;  1) how to press the Greek government to forge ahead with unpopular ‘structural reforms’; and 2) how to scramble together extra cash to cover a shortfall in the country’s financing for the second half of the year, estimated at €5-6bn.  The meeting was inconclusive.

But what is clear is that on its own Greece cannot escape the debt deflation trap that it has descended into. Gross public and private debt relative to GDP has risen to record proportions and is still rising. Greek companies have the highest debt to equity ratio of modern economies at 235%, more than twice the eurozone corporate average. These debt ratios are rising partly because the deficit on Greek government budgets is only just been closed, but mainly because nominal GDP growth remains non-existent while the cost of servicing debt continues to rise.

And another liquidity crisis is approaching just as the Euro elections take place.  Greece faces a large maturity of government bonds in May of €11bn. And yet the IMF hasn’t disbursed any promised aid to Greece since last July and is now €3.8bn behind in its scheduled aid payments under the current bailout package. The IMF insists on having a clear view of the country’s finances 12 months ahead and this condition hasn’t been met.   The cruel irony is that Troika funds go to the Greek government through an ‘escrow’ account (not controlled by the government) to be used to pay government creditors who turn out to be other EU governments and banks!  So hardly any of the bailout funds touch the sides of the Greek economy and the people.

The Greek coalition of the conservative New Democracy and the formerly social democratic PASOK (the government is now reduced to just two parties with a three-seat majority) is making lots of noises about how the government budget is now in balance; that no more austerity is necessary and that Greece might even be able to raise funds from the global bond market this year.  Sure, the government has managed to obtain a surplus (before interest payments on debt) in 2013 of €812m.  But the idea that Greece is out of the grip of austerity and will avoid a debt deflation crisis is hogwash.

For a start, this budget ‘surplus’ was only possible through extreme austerity cuts on government spending.  Tax revenues still fell short of target.  More important, as a recent OECD (not part of the Troika) report argues
(see here, http://www.oecd.org/greece/greece-2013.htm),
the economic depression that began in 2009 shows no sign of abating. The OECD expects a contraction in real GDP of another 0.4% this year.  Given that prices are deflating at around 3% a year currently, that means a contraction in nominal GDP of close to 4%, driving up the debt ratio in simple mathematical terms.

Currently, the public debt ratio is over 180% of GDP and the economists of OECD predict that by 2020 Greece’s debt pile will still stand at the astronomical level of 157% of GDP in contrast to 124% that Troika is expecting. And even the Troika’s target is still double that set for Euro member states to meet by the end of next decade.  The OECD reckons that the Greek public sector must run a surplus of 4.5% of GDP from now in order to get its debt ratio down to the Troika target.  The OECD reckons that won’t be achieved until 2018.  The reality is that further austerity for another five years is both politically impossible and economically futile. Greece will never do it.

What is the alternative then?  Well, up to now Keynesian economists and many on the left have advocated that Greece needs to break with the euro and the German-led Troika bailout packages.  Greece should restore the drachma and then devalue to boost exports and inflate away the real value of debt.  In short, Greece should ‘do an Argentina’ and default on its public debts.  Two-thirds of the outstanding Greek government debt is held by the Eurozone bailout mechanisms and the IMF.  The other third is mainly held by the Greek banks.

Two things spring from this alternative policy.  First, was the Argentina option of 2002 a success?  In previous posts, I rejected this option (of voluntary devaluation)  because the experience of Argentina was partly exceptional and would eventually prove unsuccessful (see
http://thenextrecession.wordpress.com/2012/05/10/eurozone-debtmonetary-union-and-argentina/).
If the euro crisis is a crisis of capitalism and not just a problem of the euro as a ‘too strong’ a currency, then devaluation and debt default on its own would only be a temporary palliative for Greek capitalism – and no more pallatable for working people than euro-defined austerity, as it would mean hyperinflation and a collapse of businesses laden with euro debt.  The current renewal of Argentina’s crisis has confirmed that prognosis
(see my post,
http://thenextrecession.wordpress.com/2014/02/03/argentina-paul-krugman-and-the-great-recession/).

Paul Krugman was one leading Keynesian economist (along with some Marxists) who advocated this ‘solution’ for Greece.  But having seen his solution/prediction of euro collapse and Greek default fall short, he has started to moved to the opposite.  ”So is the euro crisis over? No — it’s not over until the debt dynamics sing, or perhaps until the debt dynamics sing a duet with internal devaluation. We have yet to see any of the crisis countries reach a point where falling relative wages are generating a clear export-led recovery, or in which austerity is actually paying off in falling debt burdens.  But as a europessimist, I do have to admit that it’s now possible to see how this could work. The cost — economic, human, and political — will be huge. And the whole thing could still break down. But the ECB’s willingness to step up and do its job has given Europe some breathing room.”

And it’s true that for the Eurozone as a whole, if there is no political upheaval that overthrows pro-austerity governments (as we are seeing possible only in tiny impoverished Bosnia right now), then eventually enough capital value will be destroyed through bankruptcies, unemployment and an investment strike to raise profitability in surviving Eurozone corporations and the ‘whole crap’ can start again – after huge human cost, as Krugman says.

However, I am not sure that even this is possible for Greek capitalism, which is not just on its knees but is prostrate with life support mechanisms not working.  It’s true that the crushing of the living standards and wage earnings of Greek households is making Greek industry more ‘competitive’ – labour costs per unit of (falling) production have dropped 30% since 2010.

But the task of turning the Greek economy by its own devices is probably just too much.  Just look at the level of debt in the public sector that Greece is burdened with compared to other Eurozone states and compared even to where it was back at the end of Great Depression of the 1930s (1938).   Greece is on its own.

General government gross debt (% of GDP)

Source: IMF (2013) and OECD (2013).

The Euro elections approach and current opinion polls in Greece suggest that the leftist SYRIZA party will lead in the vote and take the most seats.  It is also likely to take control of local government in the major cities.  So the pressure is mounting on the coalition and its policy of complying with Troika austerity measures in return for bailout funds to cover government debts and bail out Greek banks.  The coalition is now talking about amending the Euro election rules for party votes to try and reduce the chance of defeat by SYRIZA.

The Troika wants the conservative government to survive.  It does not want to be faced with a SYRIZA-led government refusing to implement the current bailout terms and wanting to revise them. So it is discussing how to provide extra funds for the coalition to keep them going and avoid either default or even more austerity that could break the Greek camel’s back.  The Germans don’t want to cough up any more money but they will probably agree to relax the terms of repayment of debt, perhaps by rolling over that debt perpetually – after all the UK did not pay all its war debts back to America until 2002!  But just relaxing the repayment burden does not restore Greek capitalism.  Unless the Eurozone leaders write off the loans to Greece and/or the region as a whole makes a dramatic economic recovery in the next year or so and this revival ‘trickles down’ to Greece, Greek capitalism will remain imprisoned.

Waste, bear markets and fictitious capital

Today’s jobs figures from the US were not promising.  Net new jobs rose 113,000, much less that expected and well below the average for 2013 of about 180,000 a month.  But the data are heavily mixed up by revisions to the time series, weather and confusions over how many people have just given up looking for a job at all.  Perhaps the best guide to what is going on is provided in this graph.

It shows that US employment levels are now close to the previous peak back in 2007, but it has taken six years to get there, two years longer than any previous recovery, and of course in that time those of working age have grown in number. Six years of way less than full employment is a huge waste of skills, energy and livelihoods for millions of Americans.

Indeed, this Long Depression has been permanently wasteful of the potential exertion of human ingenuity.  Output growth in this recovery has been slower than in either of the past two recoveries, despite the much larger decline in output during the recession. There is no sign of any reduction in the enormous gap that has opened up between actual output and trend.  The cumulative loss of output relative to potential will approach $6 trillion in 2014, or almost $20,000 for every man, woman, and child in America.

The best measure of economic recovery is not a rise in gross domestic output but in GDP per capita. Germany, whose population is shrinking, is the leader among G7 economies on that measure, followed by Japan. The US and Canada are behind and the UK is only better than struggling Italy.

And the latest high frequency data on the US economy and others that I usually post each month show no particular sign of faster growth, as of January 2014.  My measure of US economic activity – the combined measure of manufacturing and services – for January shows that the US economy continues on a low-growth path.

The even more frequent, but more unreliable, weekly ECRI indicator is also in that range – although it seems to be moving up.  By the way, ‘boom’ conditions would imply real GDP growth faster than the long-term trend (for the US at about 2.5% a year).  Neither indicator is showing that yet, although that is the consensus forecast for the US this year.

If we look at the rest of the world, it’s a mixed picture.  Everywhere is growing, but the pace of growth is slightly up for the world measure, but slower in the US, the UK (down from a previous fast pace of recovery) and China.  The Eurozone and Japan were accelerating a little in January.  Anything above 60 would suggest ‘boom’ conditions.

It seems that stock market investors are getting worried.  The stock market is really a barometer of opinion on the prospects for profits (after taxes and interest paid).  In 2013, the US stock market jumped 30% from the end of 2012.  The 2013 gain brought the cumulative increase in the stock price index to 170% since the trough of March 2009.  That would suggest increased confidence in corporate profitability and, as this blog has shown on many occasions, that confidence was justified by the sharp increase in the mass of profits in the US, in particular, over that period.

But I still reckon that this is what is called a bear market, namely one when stock prices are generally weak and/or falling (see my previous post from last year, http://thenextrecession.wordpress.com/2013/03/30/its-still-a-bear-market/).  Why do I say that?  Well, look at the US stock market against GDP – a measure used by the world’s most successful investor, Warren Buffet.

Although the stock market has made huge strides since the trough of 2009, it is still (in GDP terms) well below the extravagant peak of 2000 and only just back to the level of 2007 and no higher than in 1998.

Another measure of the stock market’s value is what is called Tobin’s Q, named after the leftist economist James Tobin.  Tobin’s Q measures the market value (or capitalisation) of the stocks of the major corporations against the replacement value of the tangible assets.  Tobin’s Q shows that the bear market still rules.

Yet another measure of the stock market’s value relative to the production of real value is its price to corporate earnings after inflation.  Gary Shiller has developed such a measure smoothed out for a ten-year average.  Again it’s the same story.

You can see that the huge recovery in stock prices since March 2009 is still not really significant relative to the fall in prices after 2000 and relative to corporate earnings or the value of corporate assets.  And you can see that the bull and bear markets follow with a little lag the upward and downward movements in profitability in post-war US capital accumulation.  This current bear market reflects the downward trend in profitability since the late 1990s (interspersed with short bursts up) in most major economies.

Since the beginning of this year, world stock markets have been weakening. Indeed, the US S&P 500 index posted losses in nine of the past thirteen business days, registering a cumulative decrease of 5.2% by 5 February.   What is this telling us about profits and the ‘real’ economy?  Either investors are just ‘taking profits’ temporarily, as it is called, or they are beginning to lose confidence in the future profitability of the capitalist sector.

There are reasons for investors to be worried.  First, the huge boom in the stock markets in the last four years is way above even the substantial rise in the mass of profits in many major economies since the trough of 2009.  Using Shiller’s data, you can see that the return (in corporate earnings) against investing in the stock market rose to highs by late 2011.  But since then it has been falling back as stock prices rose much faster than earnings could keep up.

What has kept things going has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world, with zero short-term rates and quantitative easing (buying financial assets with credit injections).  The gap between returns on investing in the stock market and the cost of borrowing to do so has never been higher, on Shiller’s data.

These gains are mostly fictitious, driven by low interest rates and credit expansion.  Emerging economies also experienced a boost to growth (and inflation) from the transfer of these cheap funds to their markets.  But as I outlined in a recent post
(https://thenextrecession.wordpress.com/2014/01/25/emerging-market-crisis/),
the expansion there is now being revealed as fictitious too, as growth slows in the large emerging economies and as the Fed starts to reduce its injections of credit into the financial sector globally.

The World Bank has recently published an estimate of the impact of quantitative easing.  It found that 60% of the increase in private capital flows from advanced capitalist economies to emerging ones in the recent recovery was due to central bank credit injections and not based on improved corporate earnings.

The World Bank data also show that the flow of foreign direct investment globally relative to investment domestically has not recovered – and we know that investment domestically in most major economies remains in a slump.

Stock markets may have been booming but tangible investment in the productive sectors of capitalism has not.

Why? Well, the United Nations Commission on Trade and Development (UNCTAD) published its World Investment Report recently (wir2013_en) and revealed that the problem is due to a failure in the recovery of returns on corporate investment globally.  Yes, profitability on investment in productive sectors of the world in 2011 (the latest data available) was some 20% below where it was before the global financial crash and the Great Recession for the advanced capitalist economies – and 15% down for the world.  Note doubt it recovered a bit more in 2012 and 2013, but it will still be below pre-crisis levels in most of the world.

The recent turn down in global stock markets may be the result of investors beginning to reckon that the investment party is over and the world economy has reached a peak in the pace of this weakest ever economic recovery.