Olivier Blanchard and the IMF in the depression

September 4, 2015

The G20 group of top economies meets in Turkey this weekend.  For the meeting, the IMF issued an update on the state of the global economy – and the IMF is worried.  It points out that global growth in the first half of 2015 was lower than in the second half of 2014, reflecting a further slowdown in emerging economies and a weaker recovery in advanced economies. Productivity growth has been persistently weak.

So, once again, the IMF has lowered its confidence in global growth, and yet, once again, expects a ‘modest’ pick-up in the 2nd half of this year and into 2016. But apparently the “risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.”

This G20 meeting was the last for the IMF’s chief economist, Olivier Blanchard, who is leaving to take up a lucrative new post with the mainstream economic think-tank, the Peterson Institute .  Blanchard gave an interview on the IMF blog that outlined his thoughts and reviewed his successes and failures.  French-born Blanchard, a former chairman of the economics department at the Massachusetts Institute of Technology, joined the IMF in 2008 at the height of global financial crash and in the depth of the ensuing Great Recession, just two weeks before Lehman Brother’s bank collapsed.

Blanchard

Blanchard is an eclectic mainstream economist extraordinaire, shuffling between neoclassical and Keynesian ideas as he sees fit – the perfect economic helmsman for the IMF as the institutional representative of international finance capital.

Blanchard says that “The crisis was a traumatic event during which we all had to question many cherished beliefs…. questioning various assumptions on the role of fiscal policy, including the size of fiscal multipliers, the use of unconventional monetary policy measures and macroprudential tools, capital flows and measures to control them, labour market policies and the role of micro and macro flexibility.“ In other words, everything has been questioned, except the causes of crises in capitalist production and accumulation.

No, that’s not fair. In the interview, Blanchard admits that it “would have been intellectually irresponsible, and politically unwise, to pretend that the crisis did not change our views about the way the economy works. Credibility would have been lost. So, rethinking, or pushing the envelope was not a choice, but a necessity.”

And what was the big rethink?  The big thing for the IMF during the Great Recession and the subsequent weak recovery was the size of what are called the ‘fiscal multipliers’, namely the degree of impact on economic growth and unemployment from imposing government spending cuts and tax increase to balance government books and reduce public debt in the middle of a major slump – the degree of ‘austerity’.  Blanchard is convinced that the fiscal multipliers are underestimated in a world of ‘zero-bound’ interest rates when monetary easing has little or no effect.  Correcting this was a great achievement of the IMF under his economic leadership.

The problem is that there is much counter-evidence that the fiscal multipliers are not much larger in recessions – in other words, the slump was not really a product of ‘too much austerity’, but of something else.  Anyway, even if Blanchard noticed that fiscal austerity made the slump worse than it might have been, did he advocate more fiscal spending by governments then?  No, he did not.  He just hinted that governments should not be so harsh.  That’s it.

The other thing that Blanchard reckoned where he ‘made a difference’ was in the Greek bailout discussions.  The IMF recognised that it had made a mistake in the first bailout in 2011 in not insisting on debt restructuring so that Greek public debt became sustainable.  They kept quiet about that.  Blanchard claims that “it made good sense to argue for debt relief first in private. We did. And when we thought our argument was not getting through, it made good sense to then go public.”  In future, the IMF would insist that private sector creditors (banks etc) also take a hit when restructuring public debt for a ‘distressed’ government wanting IMF ‘aid’.  Bit too late perhaps!

In the interview, Blanchard was also keen to emphasise that he had initiated discussions among mainstream economists about the nature, causes and remedies for the Great Recession and the Long Depression (as I call the weak recovery) afterwards.  He had launched three Rethinking Economics conferences under the auspices of the IMF.  And what did the great and good of assembled macroeconomists conclude?

Well, it was caused by naughty reckless bankers causing a financial panic (Ben Bernanke) or ‘financial shocks’ (David Romer) or it just happened (“my view is that it’s as if a cat has climbed a huge tree. It’s up there, and oh my God, we have this cat up there. The cat, of course, is this huge crisis. And everybody at the conference has been commenting about what we should do about this stupid cat and how do we get it down.”  said George Akerlof husband of current Fed chair Janet Yellen)!  At the time, Blanchard concluded that “we have a general sense of direction, but we are largely navigating by sight.”  By this, I think he really meant that economists are navigating blind, as there was no theory of what direction to take!  Indeed, Blanchard sums up: “There is no agreed vision of what the future financial architecture should look like, and by implication, no agreed vision of what the appropriate financial regulation should be.” In other words, no vision at all.

As Blanchard stated in the IMF interview: “The financial crisis raises a potentially existential crisis for macroeconomics.” Indeed!  He reckoned that mainstream economics must start to draw on old ideas from heterodox economics, namely “Hyman Minsky’s financial instability hypothesis. Kaldorian models of growth and inequality.” And even policy “that would have been considered anathema in the past are being proposed by ‘serious’’ economists: for example, monetary financing of the fiscal deficit.”  Also “some fundamental [neoclassical] assumptions are being challenged, for example the clean separation between cycles and trends” or “econometric tools, based on a vision of the world as being stationary around a trend, are being challenged.”

But it’s a mix for Blanchard: sticking to the mainstream and drawing on a few heterodox views about the damage caused by a debt-laden financial sector (Minsky) or rising inequality (Kaldor and, of course, now Piketty and Stiglitz).  Naturally, it goes without saying that the ideas of Marxist economics, of an irreconcilable contradiction between growth, employment and profitability under capitalist production is not part of Blanchard’s wider encompassing of ‘old ideas’.

Blanchard reckons that the experience of the Great Recession and Long Depression have led to “a clear swing of the pendulum away from markets towards government intervention” but “with much skepticism about the efficiency of government intervention”.  Well, he could have fooled me that mainstream economics and governments want more government and less markets.  And maybe the mainstream is right that government intervention won’t work anyway in restoring an economy – look at quantitative easing as an innovative monetary intervention.

As for the future, Blanchard hedges his bets.  It seems that the advance capitalist economies are going to suffer much lower growth “There is a good chance that we have entered a period of low productivity growth. There is a chance that we have entered a period of structurally weak demand, which will require very low interest rates.”  This is bad news for the strategists of capital, for which he is a leading economic consultant, as “low growth combined with increasing inequality, is not only unacceptable morally, but extremely dangerous politically”.

Blanchard offers no explanation about why market economies around the world are slowing down and delivering lower productivity growth and rising inequality.  But it is a moral dilemma, and even more worrying, ‘politically dangerous’ to capitalism.

So what does Capital do?  As Blanchard heads for his new job, he concluded that “there are no magical solutions: We have to be realistic as to what structural reforms are politically feasible, and what they can reasonably achieve.”  Great.

Australia: the lucky country

September 2, 2015

The FT published a piece over the weekend claiming that Australia is on track to surpass 26 consecutive years of growth, surpassing the record set by the Netherlands in the post 1945 period of capitalism.

Australia’s right-wing finance minister Joe Hockey was bullish, claiming that the slowdown in China would not damage the Aussie economy because there were big investments coming from the Chinese and other Asians that would keep the Australia’s record of avoiding a capitalist recession.

“Cassandras are loud, whereas optimists are getting on with the job. We are going to break the record and go beyond the Dutch,” he said. “Our growth is somewhere between 2 and 2.5 per cent and that’s with the biggest fall in the terms of trade in our history.”  The Netherlands enjoyed 26 years of economic growth between 1982 and 2008 on the back of discovery of North Sea oil. In comparison, Australia has enjoyed 24 years of uninterrupted growth.

However, that might be coming to an end.  The latest real GDP figures for Australia came out today.  Real GDP growth slowed to just 0.2% in Q2 2015, taking year-on-year growth down to 2%, the slowest rate since 2013.  The slowdown is driven by slowing demand from China for Australia’s raw materials.   The fall in net exports has taken 0.6% pts off growth.

Aus net exports

And it’s not strictly true that Australia had avoided recessions in the last 20 years or so.  If we measure Australia real GDP per head, then there was a contraction in 1990-1 and the Great Recession saw growth per head flatten out.  Even so, it is a pretty good record compared to any other major advanced capitalist economy.

Aussi real GDP

The reason is fairly clear, I think.  Australia has been ‘lucky’.  It has been alongside the huge expansion in growth and trade in China and other Asian countries in the last 25 years during the period of ‘globalisation’.  As Hockey said, “Australia was uniquely placed to benefit from China and Asia’s long-term growth by exporting resources, agricultural produce and services to the region”.  Also the economy benefited from an influx of skilled labour through immigration from all parts but also immigrants who came with wealth of their own to invest.

This shows in the profitability of Australian capital.  I collated three measures of Australia’s profitability as a capitalist economy since the early 1980s and profitability has risen by 40-60% (but that’s not unlike many other capitalist economies during the so-called neo-liberal period).

Aussie ROP

But are the good times over? The latest GDP data might suggest this. Chinese economic growth has been dropping off and other Asian economies are in trouble.  Demand for Australia’s iron ore, coal and other minerals has weakened.  Australia’s trade account has been deteriorating and unemployment is rising.

Aussie exports

If you compare average real GDP growth per head since 2008, Australia’s per capita growth has slowed from 2.5% a year from 1992 to 2007 to exactly half that rate at 1.25%.  Australia did not escape the global Long Depression at least in the sense of lower growth.  Also, the profitability graph above does suggest that profitability may have peaked in the last ten years or so.

The argument of Hockey is that, although Australia’s mining industry may be falling back because of weakening Chinese demand, Australia can compensate for that through the services sector and foreign (Chinese) investment.  “Our services industry, which is 70 per cent of our economy, provides everything that the emerging middle class wants in healthcare, education, tourism and financial services,” he said. “It is starting to lift quite significantly.”

For the first time in 2013-14, China became the largest source of foreign investment in Australia, leapfrogging the US. Total investment in real estate was $74.6bn, up from $51.9bn a year earlier.  Hockey reckons that the boom in property investment was helping the economy’s transition from a decade-long mining investment boom by creating jobs in housing and apartment construction.  “It is helping to fuel a construction boom in Sydney, Melbourne, increasingly in Brisbane and I think we will see it spread around the country,” Hockey said, claiming that fast-rising house prices in Sydney and Melbourne were not a “bubble”.

It would be interesting to hear from Australian readers of my blog on how they see Australia’s economy panning out.

Getting out of the Jackson Hole

August 31, 2015

After the market turmoil last week, global stock markets have quietened down for now, although by most measures of stock price against corporate profits or earnings, stock markets are still ‘overvalued’.  Take one of the most perceptive measures, the ratio of the stock market value of the major companies in the US (S&P-500) versus previously booked profits (‘trailing earnings’ reported), i.e. the price to earnings ratio.  If we adjust that ratio for inflation and average it on a ten-year rolling basis, then the ratio is around 23, or some 25-30% above the historic average (see graph below).

US PE

So the stock market crash may have another leg yet.  That would be especially likely if the US Federal Reserve finally carries through its plan to hike its basic interest rate for the first time since the Great Recession began back in early 2008.  This basic rate is virtually zero and the Fed has added to zero rates and series of quantitative easing (QE) programmes over the past few years (printing money and buying government and mortgage bonds) to try and boost the economy and restore the banking system.  QE did the latter but failed to do the former.  Stephen Williamson,vice-president of the Federal Reserve Bank of St Louis, just issued a study in which he concludes : “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed – inflation and real economic activity. Indeed casual evidence suggests that QE has been ineffective.”

But until the stock market crash and the China slowdown, the Fed had been becoming confident that the US economy was recovering with GDP growth up and unemployment down.  It was getting ready to hike its interest rate.  The basic rate sets the rates for all others, like mortgages and loans to corporations.

The US second quarter real GDP figures were revised up last week. Now the stats say US real GDP rose 0.9% in Q2 instead of just 0.6% over Q1. That means the US economy was now 2.7% larger in 2015 so far than in 2014 at the same time.  That’s not bad compared to growth in the other major capitalist economies, although it is still below the long-term average for the US of 3.3% a year and well below rates of growth usually achieved in the ‘recovery’ period from a recession.

The Fed sees reasonably strong growth in the US, but weak growth everywhere else.  So the monetary policy committee of the Fed, which meets on 17 September, is in a dilemma.  Should it start to raise rates in order to ‘curb’ any possible future inflation as labour markets get too ‘tight’ and also restore control of credit markets; or should it wait until the rest of the world catches up or stops sliding back?

Every year at the end of August, central bankers of the world meet in Jackson Hole, Wyoming for a series of seminars on the state of the world economy, the latest economic theory and monetary policy (in the afternoons the bankers take hikes up the mountains of the Grand Tetons for philosophical meditation).  At Jackson Hole, eminent mainstream economists present papers to the bankers for discussion.  Last weekend, the subject of the seminars was Inflation dynamics and monetary policy.

This time, the head of the Fed, Janet Yellen, was not present and neither was the ECB chief, Mario Draghi.  So the keynote speech was delivered by Fed deputy chair, Stanley Fischer (Fed Official Fischer Leaves Door Open for September Rate Increase).

Fischer was all over the place.  On the one hand, he said that the Fed was preparing to raise interest rates soon because of the “impressive” growth of the domestic economy.  On the other hand, he suggested that the recent volatility of global financial markets could cause the Fed to hesitate, but only if it persisted. “We haven’t made a decision yet, and I don’t think we should,….We’ve got time to wait and see” (well, only two weeks!).  Some amount of uncertainty is inevitable. “When the case is overwhelming, if you wait that long,” he said, “then you’ve waited too long.”(!).  “The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is — more compelling, less compelling etc,”  So Fischer sums up: “”The economy is returning to normal. We’re not certain we are there yet.”

Make that of what you will.  The Fed seems to have no idea what to do.  The UK’s Bank of England has been even worse than the Fed in forecasting what would happen to the UK economy.  And on whether to hike rates, it is even more confused.  The UK economy has also been growing faster than most other major economies (although whether that is sustainable is doubtful).  Inflation is near zero (although there is some underlying pick-up coming).  But the UK is much smaller economy than the US and more subject to the weakness of growth in the Eurozone and China than America.  So that should weigh on any decision to hike in the UK.

But Mark Carney, the useless (and very expensive) BoE governor seems to have no idea what to do.  “Realisation of some of a downside risk previously identified by the MPC, if it persists, has to be weighed against ongoing domestic strength, underpinned by credible policy regimes and an increasingly robust financial system,” Carney argued.  As usual with Britain, the BoE will wait to see what America does.

And there is no doubt that,outside the US and possibly the UK, there is little sign of economic recovery.  On the contrary, things are getting worse.  According to the OECD, economic growth in the 34 major advanced capitalist economies grew by only 0.4% in the second quarter of 2015 from the first quarter – a deceleration from the 0.5 per cent quarter-on-quarter growth achieved in the first three months of this year. Of the world’s seven major economies, the UK was the fastest growing in the second quarter, achieving 0.7 per cent expansion. The US took second place with 0.6 per cent. Other developed economies did not do so well in Q2, with a 0.4 per cent economic contraction in Japan, a 0.2 per cent contraction in Italy and flat-lining growth in France. Year-on-year GDP growth for the OECD area remained unchanged at 2 per cent in the second quarter of 2015.

Last week, the US credit rating firm Moody’s cut its 2016 global economic growth forecast just ten days after its last forecast.  It put average growth in the top G20 world economies at 2.8 percent on average, versus the 3 percent it had forecast previously. It even revised down the US for next year: “We have revised our U.S. 2016 forecast down slightly as the negative impact of the stronger dollar seems more pronounced than we assumed previously,” it said cutting it to 2.6 percent from 2.8 percent.

My own latest estimate of global PMI, an average of the monthly business activity indexes for national economies, shows that, in August, emerging economies have entered contraction territory, dragging world business activity down to a two-year low. World business is still growing overall (index above 50), but a significant slowdown has appeared in the summer (of the northern hemisphere).

Global PMI August

Most worrying of all is the state of world trade.  The World Trade Monitor reports that world trade suffered its biggest fall in the six years since the financial crisis in the first half of this year.  Much of this year’s slowdown in global trade has been due to a halting recovery in Europe as well as a slowing economy in China.  The graph below compares world trade growth with industrial output growth.  Usually world trade grows much faster than industrial output so that national economies can gain from exporting if their domestic economy is weak.  But for the first time in 15 years, for several quarters in 2014, trade has grown more slowly than industrial output globally.  And the gap in trade growth and industrial growth has narrowed sharply since the Great Recession.

World trade and IP growth

Mainstream economics is divided about whether it is a good idea for the Fed and the BoE to start to raise rates or not.  The Keynesians like Larry Summers and Paul Krugman reckon it would seriously damage consumer spending and investment and cause another credit crunch.  They would prefer to keep the credit bubble going with cheap money forever, along with some more government spending on infrastructure etc, to avoid ‘secular stagnation’.  Summers wrote that “a reasonable assessment of current conditions suggest that raising rates in the near future would be a serious error”.

On the other hand, the Austrian school of economics as represented by the Bank for International Settlements (BIS), reckon that to keep fuelling the credit bubble with cheap money and QE is presaging yet another financial crash down the road as debt in all the major economies is still too high.  Credit bubbles lead to ‘malinvestment’ and low productivity.  It is better to keep government spending curbed and to hike rates so that money is not spend on useless projects and the credit bubble is ‘pricked’.

In its annual report the BIS raised fears that unending printing of money and credit injections was creating financial and property asset ‘bubbles’ that would eventually burst and renew the financial crash of 2008.  Jaime Caruana, head of the BIS, said the international system “is in many ways more fragile than it was in the build-up to the Lehman crisis”. 

Both sides are probably right and wrong.  The Keynesians are probably right that tightening monetary policy when inflation is low and global growth is weak could well trigger another stock market crash.  But they are wrong to ignore the dangers of ‘permanent’ credit bubbles and high debt in causing crashes too (after all, what about the global financial crash of 2007).  The Austerians (Austrians) are right that permanent credit bubbles are ‘unproductive’ and risk financial crashes, but they are wrong to think that cutting government spending and making borrowing costs higher when investment and growth is so low would not also risk a new recession.

What both sides never consider is why economic growth, investment and prices are so low.  They ignore the role of profitability in capitalist economies  – although it is self-evident really that capitalism wont ‘recover’ unless profitability does.  Globally, that has not happened in the major economies, with the exception possibly of the US.  And even there, profitability is still below the peak of the late 1990s.  In 2014, US profitability hardly moved and now growth in the mass of US profits (not the rate) is slowing to a trickle.  Last week along with the revised GDP figures, the date for corporate profits in Q2 2015 were released. Profits were up slightly on the quarter but are nearly 2% down on this time last year.

US corporate profits August

The slowdown in profits in the US is mirrored in China too, where industrial profits are now contracting.

Chinese profits

And if we look at global corporate profits (five major economies as compiled by me), there is little growth at all.

Global corporate profits August

When profit growth slows, investment slows.  When profits fall, investment follows (I recently estimated that for the US,  the correlation between changes in the rate of profit and investment was 64%; second, the correlation between the mass of profit and investment was 76%; and third, the correlation between the rate of profit (lagged one year) and the mass of profit was also 76%.) The Great Recession saw a significant fall in investment, much more than consumption.  Since the end of the Great Recession and in the ‘recovery’ investment growth has remained well behind trend in the major economies.

Real investment lag

At the same time, the overall debt burden for the major economies has increased.

Advanced economy debt

And most important, corporate debt is still on the rise (partly because of cheap money and low rates for borrowing).  If profits start to fall that will put an extra burden on debt servicing for companies.

US NFC debt

So if the Fed hikes rates in September or later, it is likely to increase the risk of a new stock market slide and more important a new slump, something that I have warned about before. Getting out of the Jackson Hole won’t be easy.

Robots and AI: utopia or dystopia? – part two

August 29, 2015

In my first post on Robots and AI, I dealt with the impact of these new technologies on future employment and productivity.  I raised the contradiction that develops within the capitalist mode of production between increased productivity achieved through new technology and falling profitability.

In this second part, I want to consider the impact of robots and AI seen through the prism of Marx’s law of value under capitalism.  There are two key assumptions that Marx makes in order to explain the laws of motion under capitalism: 1) that only human labour creates value and 2) over time, investment by capitalists in technology and means of production will outstrip investment in human labour power – to use Marx’s terminology, there will be a rise in the organic composition of capital over time.

There is no space here to provide the empirical evidence for the latter.  But you can find it here (crisis and the law for BOOK1-1).  Marx explained in detail in Capital that a rising organic composition of capital is one of the key features in capitalist accumulation. Investment under capitalism takes place for profit only, not to raise output or productivity as such.  If profit cannot be sufficiently raised through more labour hours (i.e. more workers and longer hours) or by intensifying efforts (speed and efficiency – time and motion), then the productivity of labour (more value per labour hour) can only be increased by better technology.  So, in Marxist terms, the organic composition of capital (the amount of machinery and plant relative to the number of workers) will rise secularly.  Workers can fight to keep as much of the new value that they have created as part of their ‘compensation’ but capitalism will only invest for growth if that wage share does not rise so much that it causes profitability to decline.  So capitalist accumulation implies a falling share to labour over time, or what Marx would call a rising rate of exploitation (or surplus value).

The ‘capital-bias’ of technology is something continually ignored by mainstream economics.  But as Branco Milanovic has pointed out, even mainstream economic theory could encompass this secular process under capitalist accumulation.  As Milanovic puts it:  “In Marx, the assumption is that more capital intensive processes are always more productive. So capitalists just tend to pile more and more capital and replace labor….. This in Marxist framework means that there are fewer and fewer workers who obviously produce less (absolute) surplus value and this smaller surplus value over an increased mass of capital means that the rate of profit goes down. …..

“The result is identical if we set this Marxist process in a  neoclassical framework and assume that the elasticity of substitution is less than 1. Then, simply, r shoots down in every successive round of capital-intensive investments until it practically reaches zero. As Marx writes, every individual capitalist has an interest to invest in more capital-intensive processes in order to undersell other capitalists, but when they all do that, the rate of profits decreases for all. They thus work ultimately to drive themselves “out of business” (more exactly they drive themselves to a zero rate of profit).

Milanovic then considers the robot technology: “Net income, in Marxist equilibrium, will be low because only labor produces “new value” and since very few workers will be employed, “new value” will be low (regardless of how high capitalists try to drive the rate of surplus value). To visualize Marxist equilibrium, imagine thousands of robots working in a big factory with only one worker checking them out, and with the useful life of robots being one year so that you keep on replacing robots continuously and thus run enormous depreciation and reinvestment costs every year.  The composition of GDP would be very interesting. If total GDP is 100, we could have consumption=5, net investment=5 and depreciation=90. You would live in a country with GDP per capita of $500,000 but $450,000 of that would be depreciation.”

This poses the key contradiction of capitalist production: rising productivity leads to falling profitability, which periodically stops production and productivity growth.  But what does this all mean if we enter the extreme (science fiction?) future where robotic technology and AI leads to robots making robots AND robots extracting raw materials and making everything AND carrying out all personal and public services so that human labour is no longer required for ANY task of production at all?

Let’s imagine a totally automated process where no human existed in the production. Surely, value has been added by the conversion of raw materials into goods without humans? Surely, that refutes Marx’s claim that only human labour can create value?

Robot man

But this confuses the dual nature of value under capitalism: use value and exchange value.  There is use value (things and services that people need); and exchange value (the value measured in labour time and appropriated from human labour by the owners of capital and realised by sale on the market).  In every commodity under the capitalist mode of production, there is both use value and exchange value.  You can’t have one without the other under capitalism.  But the latter rules the capitalist investment and production process, not the former.

Value (as defined) is specific to capitalism.  Sure, living labour can create things and do services (use values).  But value is the substance of the capitalist mode of producing things.  Capital (the owners) controls the means of production created by labour and will only put them to use in order to appropriate value created by labour.  Capital does not create value itself.

But in our hypothetical all-encompassing robot/AI world, productivity (of use values) would tend to infinity while profitability (surplus value to capital value) would tend to zero.  Human labour would no longer be employed and exploited by Capital (owners).  Instead, robots would do all.  This is no longer capitalism.  I think the analogy is more with a slave economy as in ancient Rome.

In ancient Rome, over hundreds of years, the formerly predominantly small-holding peasant economy was replaced by slaves in mining, farming and all sorts of other tasks.  This happened because the booty of the successful wars that the Roman republic and empire conducted included a mass supply of slave labour.  The cost to the slave owners of these slaves was incredibly cheap (to begin with) compared with employing free labour.  The slave owners drove the farmers off their land through of a combination of debt demands, requisition in wars and sheer violence.  The former peasants and their families were forced into slavery themselves or into the cities, where they scraped a living with menial tasks and skills or begged.  The class struggle did not end.  The struggle was between the slave-owning aristocrats and the slaves and between the aristocrats and the atomised plebs in the cities.

Roman slaves

A modern science fiction can be found the recent Elysium movie.  In this movie, the owners of the robots and modern technology have built themselves a complete space planet separate from the earth.  There they live a life of luxury off the things and services provided by robots and defend their separated lives with their robot armies.  The rest of the human race lives on earth in a dire state of poverty, disease and misery – an immiseration of the working class who no longer work for a living.

Elysium

In the Elysium world, the question would remain: who owns the means of production? In the completely automated planet, how would the goods and services produced by the robots be distributed in order to be consumed? That would depend on who owns the robots, the means of production. Suppose there are 100 lucky guys on the robot-run planet. One of them may own the best robots and so appropriate the whole product. Why should he share it with the other 99? They will be sent back to the Earth. Or they might not like it and will fight for the appropriation of some of the robots.  And so, as Marx put it once, the whole shit begins again, but with a difference.

All will depend on how humanity would get to a completely automated society. On the basis of a socialist revolution and common ownership, the distribution of the output produced by the robots can be controlled and distributed to each according to his/her needs. If society operates on the basis of a continuation of the private ownership of the robots, then the class struggle for the control of the surplus continues.

The question often posed at this point is: who are the owners of the robots and their products and services going to sell to make a profit?  If workers are not working and receiving no income, then surely there is massive overproduction and underconsumption?  So, in the last analysis, it is the underconsumption of the masses that brings capitalism down?

Robot takeover

Again, I think this is a misunderstanding.  Such a robot economy is not capitalist any more; it is more like a slave economy.  The owners of the means of production (robots) now have a super-abundant economy of things and services at zero cost (robots making robots making robots).  The owners can just consume.  They don’t need to make ‘a profit’, just as the aristocrat slave owners in Rome just consumed and did not run businesses to make a profit.  This does not deliver an overproduction crisis in the capitalist sense (relative to profit) nor ‘underconsumption’ (lack of purchasing power or effective demand for goods on a market), except in the physical sense of poverty.

Mainstream economics continues to see the rise of the robots under capitalism as creating a crisis of underconsumption.  As Jeffrey Sachs put it: Where I see the problem on a generalised level for society as a whole is if humans are made redundant on an industrial scale (47% quoted in US) then where’s the market for the goods?”  Or as Martin Ford puts it: “there is no way to envision how the private sector can solve this problem.  There is simply no real alternative except for the government to provide some type of income mechanism for consumers” .Ford does not propose socialism, of course, but merely a mechanism to redirect lost wages back to ‘consumers’, but such a scheme would threaten private property and profit.

A robotic economy could mean a super-abundant world for all (post-capitalism as Paul Mason suggests); or it could mean Elysium. FT columnist, Martin Wolf put it this way: “The rise of intelligent machines is a moment in history. It will change many things, including our economy. But their potential is clear: they will make it possible for human beings to live far better lives. Whether they end up doing so depends on how the gains are produced and distributed. It is possible that the ultimate result will be a tiny minority of huge winners and a vast number of losers. But such an outcome would be a choice not a destiny. A form of techno-feudalism is unnecessary. Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them”.  It’s a social ‘choice’ or more accurately, it depends of the outcome of the class struggle under capitalism.

John Lanchester is much more to the point:  It’s also worth noting what isn’t being said about this robotified future. The scenario we’re given – the one being made to feel inevitable – is of a hyper-capitalist dystopia. There’s capital, doing better than ever; the robots, doing all the work; and the great mass of humanity, doing not much, but having fun playing with its gadgets…There is a possible alternative, however, in which ownership and control of robots is disconnected from capital in its current form. The robots liberate most of humanity from work, and everybody benefits from the proceeds: we don’t have to work in factories or go down mines or clean toilets or drive long-distance lorries, but we can choreograph and weave and garden and tell stories and invent things and set about creating a new universe of wants. This would be the world of unlimited wants described by economics, but with a distinction between the wants satisfied by humans and the work done by our machines. It seems to me that the only way that world would work is with alternative forms of ownership. The reason, the only reason, for thinking this better world is possible is that the dystopian future of capitalism-plus-robots may prove just too grim to be politically viable. This alternative future would be the kind of world dreamed of by William Morris, full of humans engaged in meaningful and sanely remunerated labour. Except with added robots. It says a lot about the current moment that as we stand facing a future which might resemble either a hyper-capitalist dystopia or a socialist paradise, the second option doesn’t get a mention.”

Robots dystopia or utopia

 

But let’s come back to the here and now.  If the whole world of technology, consumer products and services could reproduce itself without living labour going to work and could do so through robots, then things and services would be produced, but the creation of value (in particular, profit or surplus value) would not.  As Martin Ford puts it: the more machines begin to run themselves, the value that the average worker adds begins to decline.” So accumulation under capitalism would cease well before robots took over fully, because profitability would disappear under the weight of ‘capital-bias’.

The most important law of motion under capitalism, as Marx called it, would be in operation, namely the tendency for the rate of profit to fall.  As ‘capital-biased’ technology increases, the organic composition of capital would also rise and thus labour would eventually create insufficient value to sustain profitability (i.e. surplus value relative to all costs of capital).  We would never get to a robotic society; we would never get to a workless society – not under capitalism.  Crises and social explosions would intervene well before that.

And that is the key point. Not so fast on the robot economy.  In the next and final post on the issue, I shall consider the reality of the robot/AI future under capitalism.

 

Market turmoil

August 24, 2015

As I write on Monday 24 August, stock markets around the world are taking another plunge.  Most markets have already fallen by 10% in the last month.  Why is this happening?

EM stocks

The reasons are clear.  The Chinese economy, now officially the largest in the world (at least as measured by the IMF’s rather weird purchasing power parity method), is slowing fast.  Every bit of data coming out of China shows a worsening situation for manufacturing output, investment, exports and, above all, the purchase of raw materials from other countries.  The drop in demand from China for basic commodities has caused a huge drop in commodity prices (the prices for oil, food, iron, coal, industrial metals etc).  This drop in prices means less export sales for the likes of Brazil, Australia, Indonesia, Argentina etc.  Also the Chinese are not buying so many BMWs, luxury handbags, machine tools, cars etc at home and abroad.  That’s bad news for Europe and Japan, as well as the US.

Commodity prices

The other cause is that, in addition to the global slowdown in so-called ‘emerging economies’, economic recovery in the ‘mature’ capitalist economies remains weak and in some cases looks to have run out of steam.  The US economy has done the best since the end of the Great Recession in mid-2009.  But it is still managing barely more than 2% real GDP growth a year and its manufacturing sector is dropping back.

The Eurozone economy is barely growing and that is only because Germany, the main economic powerhouse, has been able to recover somewhat.  The rest of the Eurozone is stagnating and in some cases (Finland, Greece), it is still contracting.

Japan, supposedly set to boom under the policies of ‘Abenomics’, named after the Japanese prime minister Abe’s measures of cheap money from the central bank, government spending and neo-liberal reforms of labour rights, has failed to recover much at all.  Strong and sustained economic growth in the major capitalist economies remains a mirage.

Another problem is the very strong dollar.  Banks and financial institutions worried about economic growth elsewhere and looking for higher profits in a safe economy have flooded into buying dollar assets.  And as the oil price falls (and it is priced in dollars), more capital has flowed into dollars to compensate.  But this has led to a sharp fall in the value of other currencies.  Many corporations around the world have borrowed in dollars and get revenues in their national currencies.  So corporate debt bills in emerging economies are rising.  Many corporations see less revenue growth ahead but bigger debts.  So there is a serious prospect of a corporate debt crisis.

Debt EM and DM

This exposes a big truth about the global ‘economic recovery’, such as it is, since 2009.  It has been mainly based, not on investment in productive sectors to raise productivity and employment, but in fictitious capital, buying back shares, buying government and corporate bonds and property.  Cheap and unending money from central banks in their quantitative easing (QE) programmes has restored the banking system, but not the productive part of the capitalist economies.

Even central bankers are starting to doubt whether QE has done much good. Stephen Williamson,vice-president of the Federal Reserve Bank of St Louis, has just issued a study in which he concludes : “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed – inflation and real economic activity. Indeed casual evidence suggests that QE has been ineffective.”

Debt has not been reduced overall and but extended in the corporate sectors of the major economies.  There is still a huge layer of fictitious capital, as Marx called it.  It is this that is now collapsing.  It appears that global investors are beginning to realise that the ‘recovery’ is fictitious and is only on yet another credit-fuelled mirage.

The supporters of the latest credit bubble, like Ben Bernanke, the former head of the US Federal Reserve, and Larry Summers, the ‘secular stagnation’ guru , are worried.  In the FT today, Summers writes that “a reasonable assessment of current conditions suggest that raising rates in the near future would be a serious error”.

The Federal Reserve had been set to start to hike interest rates at the end of this year because the US economic recovery was now assured.  I have stated in previous posts here the risk that this posed to the global economy if it was still in what I call a Long Depression (not the same as secular stagnation).  Summers too is concerned.  But what does he propose that the US policy makers do about it?

Summers simply calls for a continuation of the low interest rate policy that has so far signally failed to restore economic growth and instead has merely fueled a credit boom and rising inequality of income and wealth.  “Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have only seen during economic crises.”  So it’s cheap money forever for Summers.  Summers does say that there should be other measures: “such as steps to promote public and private investment”.  But he provides no explanation of how investment is to raised by the capitalist sector in an environment where profitability is turning down globally despite the credit bubble.  And where is the public investment?

The capitalist system needs to be cleansed of the fictitious capital built up under the policies of Bernanke and Summers and the central banks of the UK, Japan and now the ECB.  It needs to deleverage not leverage more.  The stock market is recognising that.  Of course, ‘deleveraging’ would mean another major global slump to devalue capital and restore profitability in the productive sectors.  That is the future that is getting closer.

Robots and AI: utopia or dystopia? part one

August 23, 2015

I did a recent post on Paul Mason’s new book, Postcapitalism, which argued that the internet, automation, robots and artificial intelligence were creating a new economy which could not be controlled by capitalism. According to Mason, new forces are at work that were replacing the old class struggle between capital and the proletariat, as Marx saw it, with a network of communities.  Technology and the network would lead to a post-capitalist (socialist?) world that could not be stopped

I disagreed that the new technology would replace the ‘old forms’ of class struggle or for that matter regular and recurrent economic crises under capitalism would dissipate towards a high productivity, low working day as capitalism ‘withered away’.

But this debate has encouraged me to do something that I have been wanting to deal with in more detail for some time.  Namely, what are the implications of these new technologies for capitalism?  In particular, are robots and artificial intelligence set to take over the world of work and thus the economy in the next generation and what does this mean for jobs and living standards for people?  Will it mean socialist utopia in our time (the end of human toil and a superabundant harmonious society) or capitalist dystopia (more intense crises and class conflict)?

It’s a big subject.  So let me first make a few definitions.  By robots, I mean machines that can replace human labour through the use of computer programmes that direct the movement of machine parts to carry out tasks, both simple and increasingly complex.

The International Federation of Robotics (IFR) considers a machine as an industrial robot if it can be programmed to perform physical, production-related tasks without the need of a human controller. Industrial robots dramatically increase the scope for replacing human labour compared to older types of machines, since they reduce the need for human intervention in automated processes.   Typical applications of industrial robots include assembling, dispensing, handling, processing (for instance, cutting), and welding – all of which are prevalent in manufacturing industries – as well as harvesting (in agriculture) and inspecting of equipment and structures (common in power plants).

Industrial robotics has the potential to change manufacturing by increasing precision and productivity without incurring higher costs. 3D printing could generate a new ecosystem of companies providing printable designs on the web, making everyday products endlessly customizable. The so-called ‘Internet of Things’ offers the possibility to connect machines and equipment to each other and to common networks, allowing for manufacturing facilities to be fully monitored and operated remotely. In health care and life sciences, data driven decision-making, which allows the collection and analysis of large datasets, is already changing R&D, clinical care, forecasting and marketing. The use of big data in health care has led to highly personalized treatments and medi­cines. The infrastructure sector, which had no gain in labour productivity in the last 20 years, could be greatly enhanced by, for example: the creation of Intelligent Transportation Systems, which could massively increase asset utilization; the introduction of smart grids, which could help save on power infrastructure costs and reduce the likelihood of costly outages; and efficient demand management, which could dramatically lower per-capita energy use.

Which of these emerging technologies have the greatest potential to drive improvements in productivity? McKinsey Global Institute (MGI) (2013) reckon that ‘technologies that matter’ are technologies that have the greatest potential to deliver substantial economic impact and disruption in the next decade. Those that make their list are rapidly advancing (e.g. gene-sequencing technology); have a broad reach (e.g. mobile internet); have the potential to create an economic impact (e.g. advanced robotics) and have the potential to change the status quo (e.g. energy storage technology). MGI estimates that the economic impact of these technologies – derived from falls in their prices and their diffusion and improved efficiency – to be between $14 and $33 trillion per year in 2025, led by mobile internet, the automation of knowledge work, the internet of things and cloud technology.

John Lanchester in a brilliant essay summed this up (Lanchester): “Computers have got dramatically more powerful and become so cheap that they are effectively ubiquitous. So have the sensors they use to monitor the physical world. The software they run has improved dramatically too. We are, Brynjolfsson and McAfee argue, on the verge of a new industrial revolution, one which will have as much impact on the world as the first one. Whole categories of work will be transformed by the power of computing, and in particular by the impact of robots.”

By artificial intelligence (AI), is meant machines that do not just carry out pre-programmed instructions but learn more new programmes and instruction by experience and by new situations.  AI means in effect robots who learn and increase their intelligence.  This could happen to the point where robots can make more robots with increasing intelligence.  Indeed, some argue that AI will soon surpass the intelligence of human beings.  This is called the ‘singularity’ – the moment when human beings are no longer the most intelligent things on the planet.  Moreover, robots could even develop the senses and form of human beings, thus being ‘sentient’.

But before we get into science (or science fiction?), let us consider first things first.  If robots and AI are fast on their way, will this mean a huge of loss of jobs or alternatively new sectors for employment and the need to work fewer hours?

In recent work, Graetz and Michaels looked at 14 industries (mainly manufacturing industries, but also agriculture and utilities) in 17 developed countries (including European countries, Australia, South Korea, and the US)  They found that industrial robots increase labour productivity, total factor productivity, and wages.  At the same time, while industrial robots had no significant effect on total hours worked, there is some evidence that they reduced the employment of low skilled workers, and, to a lesser extent, also middle skilled workers. Full paper here .

So in essence, robots did not reduce toil (hours of work) for those who had work, on the contrary.  But they did lead to a loss of jobs for the unskilled and even those with some skills.  So more toil, not less hours; and more unemployment.

Two Oxford economists, Carl Benedikt Frey and Michael Osborne, looked at the likely impact of technological change on a sweeping range of 702 occupations, from podiatrists to tour guides, animal trainers to personal finance advisers and floor sanders.  Their conclusions were frightening: According to our estimates, about 47 percent of total US employment is at risk. We further provide evidence that wages and educational attainment exhibit a strong negative relationship with an occupation’s probability of computerisation…. Rather than reducing the demand for middle-income occupations, which has been the pattern over the past decades, our model predicts that computerisation will mainly substitute for low-skill and low-wage jobs in the near future. By contrast, high-skill and high-wage occupations are the least susceptible to computer capital.’  Lanchester summed up their conclusions: “So the poor will be hurt, the middle will do slightly better than it has been doing, and the rich – surprise! – will be fine.”

Lanchester makes the point in his essay that the robotic world could lead, not to a ‘post-capitalist’ utopia but instead to a ‘Pikettyworld’ “in which capital is increasingly triumphant over labour.”  And he quotes the huge profits that the large techno companies are making.  “In 1960, the most profitable company in the world’s biggest economy was General Motors. In today’s money, GM made $7.6 billion that year. It also employed 600,000 people. Today’s most profitable company employs 92,600. So where 600,000 workers would once generate $7.6 billion in profit, now 92,600 generate $89.9 billion, an improvement in profitability per worker of 76.65 times. Remember, this is pure profit for the company’s owners, after all workers have been paid. Capital isn’t just winning against labour: there’s no contest. If it were a boxing match, the referee would stop the fight.”

But looking at the profits of companies that have seized the value created by labour in the new sectors is not necessarily a guide to the health of capital as a whole.  Is capitalism as a whole having a new lease of life as a result?  After all, overall investment growth is very low in the current long depression and productivity growth as a result also.  See my posts on productivity and investment.

Robots do not do away with the contradictions within capitalist accumulation.   The essence of capitalist accumulation is that to increase profits and accumulate more capital, capitalists want to introduce machines that can boost the productivity of each employee and reduce costs compared to competitors.  This is the great revolutionary role of capitalism in developing the productive forces available to society.

But there is a contradiction.  In trying to raise the productivity of labour with the introduction of technology, there is process of labour shedding.  New technology replaces labour.  Yes, increased productivity might lead to increased production and open up new sectors for employment to compensate.  But over time, a capital-bias or labour shedding means less new value is created (as labour is the only form of value) relative to the cost of invested capital.  There is a tendency for profitability to fall as productivity rises.  In turn, that leads eventually to a crisis in production that halts or even reverses the gain in production from the new technology.  This is solely because investment and production depend on the profitability of capital in our modern mode of production.

So an economy increasingly dominated by the internet of things and robots under capitalism will mean more intense crises and greater inequality rather than super-abundance and prosperity.  In my next post on this subject, I’ll consider whether the world of robots making robots with ever-increasing intelligence  – and perhaps eventually no human labour employed – would end the law of value and recurrent crises under capitalism.

Greece: it’s unsustainable

August 14, 2015

So the Greek parliament has approved the terms of the Memorandum of Understanding (MoU) with the Euro credit institutions for a third bailout deal valued at €86bn over three years (Greece MOU).  The terms of the bailout funding commit the Greek government to a new round of austerity measures, including pension cuts, tax increases, a ‘fire sale’ of state assets, a reduction in labour rights and an end to minimum wage rises and a reversal of public sector re-employment.

No wonder about 32 Syriza MPs voted no to the deal and another 11 abstained.  That means that the Tsipras government would not command a majority in parliament in any confidence vote if that rebellion was repeated.  Tsipras plans an emergency Syriza conference in September and then will probably call a general election for the autumn.  That adds a new political uncertainty to the implementation of this deal.

But that is not the only uncertainty.  The economic uncertainty is whether, even if the Greeks follow the deal to the letter, it will work to reduce Greece’s public sector debt burden, restore economic growth and reduce unemployment and reverse the drastic fall in living standards.  The answer to that question is clear.  It won’t.

The IMF is not prepared to provide any further credit as part of this bailout because it does not think that Greek public sector debt can be stopped from rising as a share of GDP and that the Greeks can ever service it by borrowing from the market.  In other words, the debt is ‘unsustainable’.  And in its latest analysis, the EU Commission experts also agree with the IMF.

Here is the summary statement from the IMF released just today on the Greece’s public sector debt sustainability: “Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”  That could not be clearer (IMF on Greek debt).

So the Greeks are being subject to further severe austerity in trying to run surpluses on the government account (before interest payments) rising to 3.5% of GDP by 2018 – to no avail.  Indeed, the IMF says in its statement that “Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so”,  Yes, the IMF says, it  is decades of austerity!

Both the IMF and the EU Commission reckon that the Greek government debt ratio, currently around 180% of GDP, will probably rise to over 200% of GDP  before there is any sign of a fall and will anyway stay well above any level that is considered ‘sustainable’.  So the whole thing is a waste of time and pain.  No wonder German finance minister Schauble wants to forget it and let Greece take a ‘holiday’ (for at least five years) from the euro – see my post, https://thenextrecession.wordpress.com/2015/07/26/grexit-de-long-and-the-wages-of-sinn/.

Greek debt

Of course, this partly depends on what is considered ‘sustainable’.  As I have shown in previous posts, the interest to be paid on the current Greek public debt is quite low, just 2% of GDP.  So if the Greek economy grows by an average of 2% a year over the next three years, and assuming that the government balances its books from now on, then the annual debt servicing costs can be covered without any rise in debt to GDP,
https://thenextrecession.wordpress.com/2015/07/19/the-euro-train-going-off-the-rails/.

But that is a big ‘if’.  It’s true that the Greek economy actually grew 1.4% yoy in Q2 2105, but that was before the impact of the closure of the banking system in July and the squeeze on credit for businesses.  The IMF reckons that the debt bailout programme agreed also assumes that the Greek economy will “go from the lowest to among the highest productivity growth and labor force participation rates in the euro area”.  How likely is that given the austerity measures?  Even the so-called labour reforms planned (trade union rights, cuts in public sector employment, pension rights etc) won’t deliver.  Indeed, as I have pointed out before, IMF researchers have found no evidence that such neo-liberal labour reforms deliver any improvement in growth
(http://touchstoneblog.org.uk/2015/04/labour-market-deregulation-when-the-facts-change/
and Box 3.5 in
http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c3.pdf).  And yet, both the Euro institutions and the IMF insist on these measures. Of course, these labour ‘reforms’ are not really about improving efficiency and productivity, but more about squeezing labour and boosting profit share.

The other escape clause for Greek debt could be if Eurozone economic growth were to accelerate and thus revive the Greek economy, as a rising tide lifts all boats.  But the signs of regional growth much above 1% a year are not good.  The latest Q2 data out today showed both Germany, France, Italy and the Netherlands slowing, so that Eurozone GDP expanded only 0.3%.

Eurozone recovery

And anyway, the Eurogroup and its credit institutions, as well as the IMF, want the debt ratio to fall and for their previous loans to be paid back. The target for 2030 is a 60% of GDP limit for all Eurozone members.  But even if Greek governments apply austerity right through to then, the Greek public debt to GDP will still be above 100%.

Moreover, there is no way the Greeks can ‘return to the market’ to raise money to repay the IMF and the Euro institutions at a 2% interest rate.  The market will charge at least 6%, according to the IMF, and that is impossible for the Greeks to pay.  So this ‘bailout’ would have to be followed by another and another, as far as the Greek and German eyes can see.

That is why there is all this talk of ‘debt relief’.  This could mean actually cutting the debt outstanding in cash terms, similar to the deal that Germany got in 1953, in ‘writing off’ the debt it owed to the Allied Powers after the second world war.  That was done to allow Germany to return to the capitalist fold and allow economic recovery.  But no such ‘haircut’ is being considered for Greece.  The German leaders do not want to tell their electors that Germany must accept a haircut on its portion of the loans to Greece.  The IMF has proposed a 30% haircut but that would only get the debt down to 120% of GDP – and the IMF and the ECB will not consider any haircut on their outstanding loans.

The other option is to reduce further the interest charged on the loans and extend the period of repayment and the maturity of the loans even further.  Already, the existing Euro institution loans do not start to be paid back until 2022.  One proposal is that the old loans and the new bailout loans repayments be pushed back for 30 years or even longer.  In effect, to use the economic jargon, this would lower the ‘net present value’ of the debt to such a low level that Greece could fund the debt costs each year ‘sustainably’.  The debt would ‘perpetually’ rolled over.  The Euro institutions would get their interest but never be repaid any of the principal in successive bailouts.

Such a solution remains on the table and will depend, it seems on the Greek government, whatever its complexion in the autumn, keeping to the terms and schedule of the MoU, as reviewed by the ECB, the International Monetary Fund (IMF), the European Commission and the European Stability Mechanism (ESM), the newcomer making it a ‘quadriga’, not a Troika any longer.  This is Greece’s third macro-economic adjustment programme in five years, after the first in 2010 and second in 2011.  It looks just as likely to fail as the last two in restoring Greek ‘debt sustainability’, let alone economic growth, employment and living standards.

What is the alternative?  I outlined some options in my July post: https://thenextrecession.wordpress.com/2015/07/05/no-but-what-now/.

From crucifixion to resurrection?

August 11, 2015

John Cunliffe at the UK’s Bank of England has tried to sum up the impact of the global financial crisis in 2008-9 and what steps have been taken by monetary authorities globally since then to avoid another (http://www.bis.org/review/r150810c.htm).

In his speech to City of London types, Cunliffe starts by remembering that Roman Emperor Tiberius adopted similar monetary easing measures back in 33 AD when there was a similar financial crash.  This was also the year of ‘Our Lord’ being crucified and resurrected (according to  gospel legend).

Cunliffe is not fully convinced that the global financial system of 2015 has been fully resurrected though.  He points out that following each previous financial crisis, steps were taken to avoid another, but each time the financial sector slipped back into its ‘old ways’.

In the credit bubble that began back in 1997 (a reaction, in my view, to falling profitability in the productive sectors of the UK economy), “the stock of domestic lending by UK banks in the UK grew enormously from 95% in 1997 to 170% of GDP in 2008. The stock of non-property lending to companies as a proportion of GDP, however, grew only modestly from 19% in 1997 to 23% in 2008. Meanwhile, mortgage lending increased from 45% to 70% of GDP; lending to real estate tripled from 5% to 15% of GDP; and lending to the UK non-bank financial sector – including institutions like hedge funds, securities dealers and insurance companies – shot up from 25% of GDP to 60%. And these numbers do not count the explosion in UK-owned banks’ overseas exposures which more than quadrupled between the end of the 1990s and 2008.”

Cunliffe goes on: “Nor did this increase in lending drive a commensurate increase in economic growth in this particular credit cycle. Over the period 2000-2007 GDP growth averaged little more than its long-run average of around 2.8%. In fact, business investment over the period averaged just 1.3% a year and it appears that most of this was related to commercial real estate.”

He concludes that: “In other words the massive increase in the stock of lending – an increase of £1.7 trillion in absolute terms – did not lead to very much of an increase in productive investment at all.” 

And Cunliffe summed up the damage that the last global financial crash caused to the UK economy, among others.  “Seven years on and output per person has only just reached its pre-crisis level. We have not even recovered the pre-crisis rate of annual growth in productivity of around 2.3% and the level of productivity of our economy is around 15% lower than it would have been on pre-crisis trends. There is now a growing body of evidence on the very damaging impact of financial crises on the productive capacity of economies.” 

This is not good, says Cunliffe, “Strong sustainable growth requires not only a strong and vibrant financial system; it requires the controls and safety buffers to ensure that the dynamics of the system do not generate periods of illusory growth and prosperity followed by periods of destruction of the same.”

So since 2008, have global monetary authorities got their act together?  Well, Cunliffe reckons that “the financial system has come a long way since the time of Emperor Tiberius. While we have relearned some familiar lessons in recent years, we have also learned some new ones. We have had to develop a new regulatory framework, macroprudential institutions like the FPC and new policy approaches.”

So things are better and we have gone from the crucifixion of the real economy to resurrection?  He still sounded unsure.  “The implementation of the detailed reforms will inevitably throw up unforeseen effects in particular places and where it is justified we will need to revisit issues. But we should be careful about talking about turning back the overall regulatory dial or trying to trade off the risk of financial instability for short term growth.”

Indeed, “macroprudential policy is still a work in development. Over the past few years much of the FPC’s work has been learning by doing. As we learn, we will have to set out clearly and publicly the development of our overall policy framework – how resilient we believe the system needs to be, how we think about macroprudential risk, what risks we believe fall into the domain of macroprudential and how we will use our policy instruments.”

So next time will be different?  We need more research…

The great productivity slowdown

August 8, 2015

The productivity of labour is an important ingredient of the rate of real GDP growth.  What happens to productivity (output per worker or output per worker per hour) is important for mature capitalist economies because real GDP growth can be considered as made up of two components: productivity growth and employment growth.  The first shows the change in new value per worker employed and second shows the number of extra workers employed.

In mature economies, employment growth has been slowing for decades.  So faster productivity growth is necessary to compensate.  In Marxist terms, that means slowing growth in absolute value (and surplus value) must be replaced by faster growth in relative new value (or surplus value). See my post,
https://thenextrecession.wordpress.com/2014/01/20/productivity-deflation-and-depression/.

In the first quarter of 2015, US productivity fell at a 3.1% annual rate.  For all of 2014, productivity grew by a modest 0.7%, even less than the 0.9% productivity gain in 2013.  From 1995 to 2000, US productivity rose at average annual rates of 2.8%, reflecting in part the boost the economy received from the internet boom.  But since 2000, productivity has slowed to annual rates of 2.1%.

The productivity slowdown is being replicated in all the major economies.  The US Conference Board, which follows productivity growth closely, found that global labour productivity growth, measured as the average change in output (GDP) per person employed, remained stuck at 2.1% in 2014, while showing no sign of strengthening to its pre-crisis average of 2.6% (1999-2006).

The Conference Board reckons that the lack of improvement in global productivity growth in 2014 is due to several factors, including a dramatic weakening of productivity growth in the US and Japan, a longer-term productivity slowdown in China, an almost total collapse in productivity in Latin America, and substantive weakening in Russia.

Labour productivity in the mature capitalist economies grew by only 0.6% in 2014, slightly down from 2013 when it was 0.8%.  Productivity growth in the US declined from 1.2% in 2013 to 0.7% quoted above in 2014, whereas Japan’s fell even more from a feeble 1% to negative territory of -0.6%.  The Euro area saw a very small improvement in productivity —from 0.2% in 2013 to 0.3% in 2014.

For 2015, a further weakening in productivity is projected, down to 2%, continuing a longer-term downward trend which started around 2005.  Despite a small improvement in the productivity growth performance in mature economies (up to 0.8% in 2015 from 0.6% in 2014), emerging and developing economies are expected to see a fairly large slowdown in growth from 3.4% in 2014 to 2.9% in 2015.  The decline is primarily a reflection of the continuing fall in growth and productivity in China, but also includes the negative growth rate of Brazilian and Russian productivity

In the US, the ECRI, an economic research agency, argues that: “With productivity growth and potential labour force growth both averaging ½% a year, trend real GDP growth is converging to 1% a year.”

The ECRI goes on: “Recoveries have been weakening due to declines in growth in output per hour (i.e., productivity), growth in hours worked, or both. Taken together, they add up to real GDP growth. It’s just simple math….So, unless there’s good reason to believe that productivity growth will revive, trend GDP growth may very well stay stuck in the 1% range for years to come. If so, growth slowdowns could much more easily push growth below zero, leaving very little room for error. Is the Fed ready?”

What the productivity growth figures show is that the ability of capitalism (or at least the advanced capitalist economies) to generate better productivity is waning.  Thus capitalists have squeezed the share of new value going to labour and raised the profit share to compensate.  But above all, they have cut back on the rate of capital accumulation in the ‘real economy’, increasingly trying to find extra profit in financial and property speculation. Look at the growth in the accumulated stock of capital in the advanced capitalist economies.  This is a measure of the level of productive investment – it’s grinding to a halt.

Net capital stock

Take the UK. British real economic output is only about 3% higher than at the beginning of 2008.  Yet labour input (hours worked adjusted for schooling and experience) is up 11% and the real value of the UK’s net capital stock has grown only 6%.  So underlying productivity has plunged in the last seven years.

A recent paper by the National Institute of Economic & Social Research (NIESR) suggests that the UK’s productivity fall may be due to widespread weakness in TFP within firms.  And that seems to be because British companies prefer to employ cheap and temporary labour rather than invest in training to raise skills and utilise new technology.  This goes back to the ‘hand car wash’ argument, where cheap labour means that firms don’t need to invest in equipment. Instead new and existing firms just find ways of profiting from the ready supply of cheap labour.

UK productivity composition

Indeed, a recent IMF paper concluded that labour market ‘deregulation’ (part-time, zero hours contracts, temporary, easy hire and fire etc), introduced as part of neo-liberal policies over the last few decades, may have raised profits but has done nothing to improve productivity and might even have made it worse.

An important debate is taking place inside the US Federal Reserve on the reasons for this slowdown.  John Fernald, an economist at the Federal Reserve Bank of San Francisco, has argued that the slowdown started before the financial crisis and was associated with the end of the information-technology driven boom of the 1990s.  David Wilcox, director of the Federal Reserve Board’s research and statistics division, argued with colleagues in a 2013 paper that the slowdown was associated with the 2007-2009 recession and a drop-off in new business formation and in productivity-enhancing investment by firms.

The Wilcox story is the more hopeful one.  If the productivity slowdown is associated with the recession, then presumably its effects will eventually wear off and growth can get back on a faster path without causing inflation.  The Fernald story is troubling.  If productivity was really in a downtrend before the crisis, then Americans might be stuck with an economy prone to serial growth disappointments for the foreseeable future.

Now it has been countered by some mainstream economists that productivity growth is not being captured properly in the data.  Capital investment growth is not really declining in the major economies.  Much of the apparent slowdown only reflects lower relative prices of investment goods compared to consumer goods and services.

In the US, over the past two decades, prices of equipment have risen much less than the GDP deflator.  When correcting for this price effect, the fall in US non-residential investment to GDP ratios is much less pronounced.  The phenomenon is even more noticeable in IT investment.  If IT prices had risen at the same rate as overall prices, IT investment would now be nearly 1.2% of GDP higher than recorded, putting US total investment closer to 20% of GDP, levels last achieved back in the 1990s.

US hidden IT investment

So the argument goes; you only have to look around to see that technological advance is making lives easier and quicker; and within companies, productivity-enhancing innovatory technology is taking place at an accelerating pace.  The age of artificial intelligence is fast coming.  And it’s just this sort of investment that is low in cost and requires a low threshold to deliver increased productivity.

Over the last 20 years, capex has been increasingly going into hi-tech, R&D and cost-saving equipment and less so into ‘structures’, long-term investment in plant and offices.  In 1995, R&D was 23% of US business investment and structures were 21%.  Now the R&D share is 31% and structures are unchanged.

Neoclassical economics likes to use a measure of productivity called total factor productivity (TFP).  This supposedly measures the productivity achieved from innovations.  Actually, it is just a residual from the gap between real GDP growth and the productivity of labour and ‘capital’ inputs.  So it is really a rather bogus figure.  But the argument goes; maybe capex (investment) may have been growing slower, but ‘capital productivity’ has been rising because that enigmatic component, total factor productivity, has been rising, even if the data on investment growth show a slowdown.

The trouble with this argument is that the data on TFP do not show any sort of pick-up that would be expected from the great new IT revolution that is under way.  The latest Conference Board data show that the growth rate of global TFP continues to hover around zero for the third year in a row, compared to an average rate of more than 1% from 1999-2006 and 0.5% from 2007-2012.  Indeed, most mature economies show near zero or even negative TFP growth.  In China, TFP growth has turned negative and in India it is just above zero, while in Brazil and Mexico TFP growth continues to be negative.

So it is more likely that productivity growth has really slowed because the impact of innovations is still not enough to compensate for the failure of capitalists in most economies to step up investment.  Indeed, it is not the pure technology of the Internet and ICT by itself which increases productivity and economic growth. Nobel Economics Prize winner Robert Solow already noted in a famous phrase in 1987, six years after the beginning of the mass introduction of personal computers into the economy, that computer technology was not speeding up US productivity growth: ‘You see the computer age everywhere but in the productivity statistics.’

This has not changed. In 1980, the year before introduction of the modern personal computer, US annual TFP growth was 1.2% (5yr rolling average). By 2014, US TFP was still only 1.2%. Therefore 34 years of revolutionary technological developments in the Internet and ICT had led to no increase in US productivity!  The data therefore clearly shows that technological advance in the internet and ICT sector alone do not lead to productivity increases.

US productivity and capex

There was one phase during the 34 years of the internet and ICT revolution when US economic efficiency sharply increased. In the period leading to 2003, US annual productivity growth reached its highest level in half a century – 3.6%. This was explained by a huge surge in ICT-focused fixed investment. US investment rose from 19.8% of GDP in 1991 to 23.1% of GDP in 2000, fell slightly after the ‘dot com’ bubble’s collapse and then reached 22.9% in 2005. The majority of this investment was in ICT. After this, US investment fell, leading to the sharp productivity slowdown.

The way in which US labour productivity followed this surge in capital investment is clear from the chart. The correlation between the growth in investment and the increase in labour productivity three years later was 0.86, and after four years 0.89 – extraordinarily high. When capital investment fell, this was followed by a decline in labour productivity – showing clearly it was not ideas or pure technology that had caused the productivity increase.

In other words, productivity growth still depends on capital investment being large enough.  And that depends on the profitability of investment.  As argued ad nauseam in this blog: there is still relatively low profitability and a continued overhang of debt, particularly corporate debt, in not just the major economies, but also in the emerging capitalist economies (see
https://thenextrecession.wordpress.com/2014/09/30/debt-deleveraging-and-depression/; https://thenextrecession.wordpress.com/2013/12/04/cash-hoarding-profitability-and-debt/).

Under capitalism, until profitability is restored sufficiently and debt reduced (and both work together), the productivity benefits of the new ‘disruptive technologies’ (as the jargon goes) of robots, AI, ‘big data’ 3D printing etc will not deliver a sustained revival in productivity growth and thus real GDP.

The emerging market crisis returns

August 1, 2015

The business media is full of the meltdown of the Chinese stock market, the credit bubble and impending crash in the Chinese economy.  But less well announced is the dangerous economic slowdown and already unfolding debt crisis in ‘emerging economies’ in general.

Chinese equities

So for the first time since the emerging market crisis of 1998, all the large so-called BRICS (Brazil, Russia, India, China and South Africa) are in trouble.  And so are the next range of ‘developing’ economies like Indonesia, Thailand, Turkey, Argentina, Venezuela etc.

Previously rising commodity prices in oil, base metals and food led to fast growth in many of these economies.  This in turn led to a flood of capital from advanced capitalist economies by banks and companies looking for higher profits than available in their economies.

But the commodity boom has collapsed.  Global commodity prices continue to plunge. Bloomberg’s commodity price index, tracking gold, crude oil and other raw materials, is down to its lowest point since 2002. It has fallen by 40% since 2011.  It’s another indicator of the long depression and deflationary pressures in the world economy (see my post: https://thenextrecession.wordpress.com/…/the-spectre-of-de…/).

That’s partly because of the Great Recession and the weak recovery afterwards has reduced demand for energy and industrial materials.  And it is partly because the biggest consumer of these goods, China, has seen its economy slow in growth from double digits to (just) 7% a year or even lower.  Inflation in many top economies has given way to deflation in prices (in Europe and Japan).

The latest ‘flash’ estimates of business activity globally, based on the so-called purchasing managers indexes, show that emerging economies are now contracting for the first time for over two years.

Business activity index June

Unemployment across emerging markets has risen sharply this year, reversing a six-year slide, even as it has continued to fall in developed countries.  Across emerging markets, unemployment has risen to 5.7 per cent, from a cyclical low of 5.2 per cent in January, the sharpest rise since the global financial crisis, according to figures compiled by JPMorgan.

EM unemployment

During the emerging market boom, capital flowed into the emerging economies and corporations in Asia and Latin America ran up large debts.  Now the money is flowing out, not in and profits are falling as prices for commodities and sales of even for hi-tech goods are falling.  Investors pulled a net $4.5bn from EM funds in the week through July 30, according to data from EPFR, compared with $3.3bn a week earlier. A total of $14.5bn has now been redeemed from EM funds over the past three weeks alone.

em and comm

And currencies across Asia are dropping like stones.

EM currencies

And the US is poised to raise rates in September, so emerging markets could suffer further instability as the cost of servicing that debt rises in dollar terms.  A debt crisis is emerging.

The latest data on foreign exchange reserves show a sharp fall in dollar reserves. The reserves of emerging market governments have slumped as these governments experience declining trade surpluses and weak domestic economies, leading to a flight of money.   The IMF’s COFER figures, the measure for FX reserve data, show that emerging-market reserves have dropped for three successive quarters, from a peak of $8.06trn at end Q2 2014 to $7.5trn by end Q1 2015. These analysts reckon that emerging-market reserves have fallen $575bn since the middle of last year, the sharpest decline in 20 years.  Capital is fleeing these ’emerging economies’ as their real GDP growth slows and investment drops off.

EM FX reserves

Investment bank JP Morgan reckons that the debt of non-financial corporations in emerging economies has surged from about 73% of GDP before the financial crisis to 106% of GDP as of 4Q14. This 34%-point increase is enormous, averaging nearly 5%-points per year since 2007.  In previous research, the IMF has found that an increase in the ratio of credit to GDP of 5%-points or more in a single year signals a heightened risk of an eventual financial crisis. Many emerging market economies have registered such an increase since 2007. Hence the conclusion of the credit analysts, S&P, that “we have reached an inflexion point in the corporate credit cycle”.

Alongside rising debt are falling profitability and consumer demand in emerging markets outside China.

EM profitability

Falling commodity prices for emerging economy exports, rising corporate debt, falling profitability and demand, significant capital outflows and the probability that the US Fed will hike rates this autumn/fall and increase debt servicing costs. It’s a concoction for a serious crash/slump in the great ‘growth’ story of the ’emerging’ economies.


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