Explaining the last ten years: Keynes or Marx – who is right?

May 2, 2016

The latest economic data from the major capitalist economies do not make pretty reading.  The global slowdown, as measured in real GDP growth, is worsening.  The first reading for real GDP growth in the US, for the first quarter of 2016, delivered an annualised rise of just 0.5%, or 0.125% quarter over quarter.  If we compare the size of the US economy after taking into account changes in prices (inflation), with the first quarter of 2015, then the American economy is larger by just 1.9%.  That’s the slowest rate of expansion since early 2014. The US economy, the best of the major capitalist economies, is still just crawling along.

US real GDP growth

There was only one of the top seven capitalist economies (G7) apart from the US that was growing by more than 2% at the end of 2015.  It was the UK.  Now in the first quarter of 2016, the UK reported an expansion of just 0.4%, so that the British economy was larger by 2.1% compared to the first quarter of 2015.  And most forecasters are expecting that growth rate to slip below 2% yoy in the current quarter we are now in (April to June).

In the first quarter of 2016, the Eurozone group of economies grew faster than the US or the UK!  The Euro area rose 0.55% compared to 0.4% in the UK and just 0.125% in the US. The EU region as a whole rose 0.5%.  For the first time, Eurozone GDP in real terms has returned to its peak before the Great Recession – but three years after the UK and six years after the US!  Compared to this time last year, Eurozone real GDP is up 1.53%. However, Eurozone growth has also slowed from 1.58% yoy in Q3 2015 to 1.55% in Q4 2015 and now 1.53%. It’s just that the US and the UK economies have slowed even more.

EZ real GDP

Now readers of my blog will know ad nauseam that this rate of growth in the major economies is an indication that the world economy remains in what I call a Long Depression (Jack Rasmus calls it an Epic Recession), where trend real growth is much lower than the long-term average and well below the rate of economic growth before the onset of the Great Recession in 2008-9.  The latest quarterly figures for real GDP growth do no more than confirm that thesis.

Mainstream economics is reluctant to accept this view.  Not only do the major official economic forecasters like the IMF, the OECD and EU Commission, after announcing yet another year of slow growth, keep forecasting a revival for the next year, but the consensus view is that the slowdown will end and growth will recover.

For example, Keynesian economist and former chief economist at Goldman Sachs,Gavyn Davies, now runs a forecasting agency, Fulcrum.  Fulcrum and Davies told readers of the FT this week that, although real GDP figures are looking bad, GDP data look backwards, not forwards.  And looking forward, things are getting better.  Apparently, global activity is now only just below trend growth of 3.6% a year and the world economy has “again stepped back from the brink of outright recession”.  So not to worry.

Moreover, there has been a move to dismiss the validity of the idea of GDP altogether as an indicator of prosperity or the health of the capitalist economy.  The Economist magazine presented all the well-versed arguments for the weaknesses in the measurement of an economy using GDP: it does not measure the value of financial services properly, or the quality of new output and the gains of the new ‘disruptive technologies’ etc.

Many of these arguments may be right.  But it is no accident that the Economist wishes to dismiss the GDP measure only when it produces depressing results for capitalism.  And GDP does provide a reasonable benchmark for ‘economic change’ over the long term, if not for ‘economic welfare’, i.e. the value and quality of living for the average person.

So if we work with the GDP data as we have it, we find confirmation of my view that we are in a Long Depression.  The best measure of this, in my view, is real GDP (i.e. after inflation) per person.  Real GDP per capita takes into account any expansion of population that would explain some growth in GDP just because of more people.  This applies to countries like the UK where immigration from Europe has been considerable in the last ten years.

After a look at the data,I found that between 1998 and 2006, average annual growth in real GDP per person was much higher (1.5-2% a year) than between 2007 to now (under 0.5% a year) in all the major advanced capitalist economies.  The change was particularly sharp in the US, the UK and the Eurozone, but less so in Japan (where the population has been falling).  In Italy, real GDP per head has been negative since 2007 and France almost zero.  So for nearly ten years, real GDP growth has been depressed way below previous averages.

G7 real GDP per cap growth

In a recent post on his blogsite, British Keynesian economist, Simon Wren Lewis, now an adviser to the British opposition Labour Party, put up the question: how do we explain the last ten years of slow growth or depression?

According to Wren-Lewis, the cause of the depression is the after-effects of the Great Recession and the austerity policies of the governments subsequently.  The Great Recession was caused by a ‘lack of demand’ I suppose, although Wren-Lewis is not clear on this. But no doubt he would agree with that other prominent Keynesian economist, Joseph Stiglitz, another ‘advisor’ to the British Labour party, who stated baldly at the time (2009) that The lack of global aggregate demand is, in a sense, one of the fundamental problems underlying this crisis.     Lack of aggregate demand was the problem with the Great Depression, just as lack of aggregate demand is the problem today.”

Now I have argued in this blog that to say the cause of the Great Recession was due to a lack of demand is bit like saying that that the cause of the streets being wet today is because it is raining today.  That tells us nothing about why it is raining today and/or what causes rain to happen.  Describing the Great Recession as a lack of demand is just that, a description, not an explanation.

But Wren-Lewis goes onto to consider why the Great Recession has morphed into a Long Depression.  Apparently, it is partly because of the left-over effects of the Great Recession, but mostly because of ‘austerity’ measures by governments that has prolonged the recession instead of boosting government spending to get a recovery.

He admits that the last ten years have not turned out as the mainstream model might have expected, because this time, for some reason monetary policy has failed.  “Here it is helpful to go through the textbook story of how a large negative demand shock should impact the global economy. Lower demand lowers output and employment. Workers cut wages, and firms follow with price cuts. The fall in inflation leads the central bank to cut real interest rates, which restores demand, employment and output to its pre-recession trend.”

But this time, interest rates have been taken to zero with little effect: the economies are zero-bound so more drastic action is needed.  “We know why this time was different: monetary policy hit the zero lower bound (ZLB) and fiscal policy in 2010 went in the wrong direction.”  This was a similar conclusion that Keynes himself reached when his easy monetary policy option also failed in the early 1930s.

Well, Marxist economics could have told the Keynesians that easy money would not do the trick.  But it would also tell the likes of Wren-Lewis that ‘reversing austerity’ will not either.

The implication of the Wren-Lewis position and that of all Keynesian explanations of the last ten years is that if governments had never adopted ‘neo-liberal’ policies of austerity, there would never be any recessions. But what if the cause of the Great Recession and the subsequent Long Depression is not the product of a ‘lack of demand’ as such or ‘pro-cyclical’ government spending policies (austerity) but is caused by a collapse of the capitalist sector, in particular, capitalist investment.  And that investment collapsed because profitability in the capitalist sector fell, then the mass of profits fell, leading to investment, employment and incomes to fall, in that order.  Then it’s the change in profits that leads to changes in investment and demand (consumption), not vice versa, as the Keynesians argue.

I have presented evidence for this cause of the cycle of boom and slump on this blog on many occasions.  And to quote the latest empirical study by Jose Tapia Granados (a follow-up to this) “Data show that profits stop growing, stagnate, and then start falling a few quarters before the recession, when investment and wages start falling.” Tapia concludes that “The evidence is quite overwhelming that profits peak several quarters before the recession, while investment peaks almost immediately before the recession. Then profits recover before investment does, as illustrated by the investment trough that occurs around the end of the recession or the start of the expansion but following the profit trough for at least a few quarters”.

Currently, as I have shown, global corporate profits growth has dropped to near zero and in the US corporate profits are falling.  If this is sustained, investment will contract and the major economies will drop into a new recession. Indeed, the most telling figure in the latest US GDP results was for business investment. In the first quarter of 2016, that fell 5.9% annualised, the biggest quarterly fall since the end of the Great Recession. For the first time, business investment was smaller than this time last year (by 0.4%). And even taking into account investment in housing and government, total investment fell. The fall in business investment has been mostly in energy and mining as oil prices collapsed – energy investment is down 75% since 2014!

Personal consumption growth ticked along at 2.7% yoy. Many mainstream economists argue that this is what matters in an economy because 70% of the economy is consumption. But in a capitalist economy, it is investment that decides, in particular business investment. If the negative trend in business investment continues, the US economy will not escape another recession.

The weird irony of the Keynesian/Wren-Lewis position is to argue that reducing profitability and profits (and thus raising wage share) should benefit the capitalist economy by raising consumption.  Wren-Lewis notes the argument of fellow Keynesian Paul Krugman that high profit margins for US corporations might be a result of monopoly rents (control of the market) and if we get more ‘competition’, profit margins will fall to the benefit of all.  I have dealt with the bogus mainstream argument in an article for the Jacobin online magazine.

As Wren-Lewis puts it, if profit margins fall back, that would be “an optimistic story, because an additional demand stimulus would increase wage but not price inflation, and we would see rapid growth in labour productivity as firms reversed their earlier labour for capital substitution.

The Keynesian conclusion is that lower profits for capitalism will make capitalism work better because there will be more competition and less monopoly; and less profits means more wages and so more demand.  The Marxist conclusion is the opposite: lower profitability and profits will lead to lower investment and productivity growth and a prolongation of the depression.  Only a large destruction of capital values in a slump that restores profitability will create eventual recovery in a capitalist economy.

In effect, what the Keynesians want to see is an end to ‘neoliberal’ policies and their replacement by what used to be called ‘social democratic’ policies of government intervention to manage the capitalist economy and boost investment and demand.  With this sort of help, capitalism can be restored to provide prosperity for the majority, as it was in the Golden Age of the 1960s when Keynesian policies ruled supreme.

This is the argument that Keynesian Brad Delong and his fellow author Stephen Cohen argue in their new book, Concrete Economics.  It was also the argument presented by Brad Delong at this year’s conference of the American Economics Association (ASSA) when critiquing my own paper there on The Long Depression, the arguments of which he totally ignored.

It is a (Keynesian) myth that the brief Golden Age of fast growth, full employment and low inequality in the 1950s and 1960s was due to Keynesian economic policies.  As I have shown on this blog and elsewhere, that brief period of capitalist success (confined to the advanced capitalist economies) was due to relatively high profitability of capital after the world war and the relative strengthening of the labour movement in conditions of relatively full employment that forced concessions from capital.

The subsequent neo-liberal period was not the result of right-wing governments ‘changing the rules of the game’, to use Joseph Stiglitz’s phrasing, but the crisis of falling profitability that necessitated new reactionary policies and governments to restore profits at the expense of labour.  While profitability in the major economies remains near post-war lows, no amount of Keynesian monetary and fiscal policies will deliver a new ‘Golden Age’.

Brad Delong told us Marxist economists at ASSA that we are pessimists ‘waiting for Godot’, when capitalism can be made to work with the ‘concrete economics’ of Keynesian social democracy.  Well, the last ten years cast doubt on that view and the next few years will see who is right.

Fred Moseley and Marx’s macro-monetary theory

April 29, 2016

In a previous post I reckoned that Anwar Shaikh’s magnum opus was probably the best book on capitalism this year.  Well, Fred Moseley’s 20-year work on his new book, Money and Totality, is probably the best on Marxist economic theory this year and for this century so far.

Fred Moseley is Professor of Economics at Mount Holyoake women’s college in Massachusetts and has been for decades. He is one of the foremost scholars in the world today on Marxian economic theory (as a theory of capitalism). He has written or edited seven books, including The Falling Rate of Profit in the Post-war United States Economy (1991), Marx’s Logical Method: A Re-examination (1993), Heterodox Economic Theories: True or False?(1995), New Investigations of Marx’s Method (1997), and Marx’s Theory of Money: Modern Appraisals (2004).

In Money and Totality, Moseley has made a major contribution to a clearer understanding of Marx’s method of analysis.  He shows that a Marxist analysis delivers money, prices and values integrated into a single realistic system of capitalism. Moseley shows that Marx had two main stages of analysis or theoretical abstraction. First, he analyses the production of surplus value in capital as a whole (Volumes 1 and 2 in Capital) and then he analyses its distribution through the competing sectors of many capitals (Volume 3). Marx starts with money so there is no need to ‘transform’ an underlying system based on value into a system based on prices.

At the beginning of the circuit of capital, money capital is taken as given or ‘presupposed’. So total value equals total prices in the ‘totality’ (this is what the title of the book alludes to – the subtitle for Moseley’s book is “A macro-monetary interpretation of Marx’s logic in Capital and the end of the transformation problem” a mouthful for most.  And all that happens with ‘many capitals’ is that the extra value (surplus value) created in each sector will be equalized by the market so that the rate of profit is equalized (or tends to equalize) across all sectors.  Total surplus value equals total profit but the prices of production vary in each sector to equalize profitability across all sectors.  And the whole circuit of capital is one that takes place over real time and is not completed hypothetically and simultaneously, as critics argue.

So there is one real capitalist system, advancing money in order to make more money, namely a profit (a surplus of value) over the money (or value in labour time) paid to the workforce and for the means of production (value contained in constant capital).  We do not start with a certain value of labour time or a certain amount of physical units of workers and technology and finish with that.  We start with money and we finish with money.

Yes, beneath the process of money making money, we can show that this happens through the exploitation of labour and the amount of exploitation or extra money made can be explained by the appropriation of surplus labour time (beyond that needed to keep workers alive and in production).  Thus money is value, or the form of value that we see.  Value explains money; surplus value explains profit.

When we go below the macro aggregates and consider individual prices of production for different products and individual profit rates for each capitalist, then values in labour time do not match prices.  This is the so-called “transformation problem”.  If labour is the source of all value and surplus-value, then one would expect industries with a higher proportion of labour to have higher rates of profit; but this is not the case in reality.

The critics argue that Marx attempted to resolve this contradiction with his theory of prices of production in Part 2 of Volume 3 of Capital, but he failed to solve the problem, because he ‘failed to transform the inputs’ of constant capital and variable capital from values to prices of production.  He left the inputs of constant capital and variable capital in value terms, and this is logically contradictory, because inputs in some industries are also outputs of other industries, and inputs cannot be purchased at values and sold at prices of production in the same transaction.  This was Marx’s crucial mistake, according to the critics.

Moseley argues that, contrary to the critics, that Marx did not ‘fail to transform the inputs from values to prices of production’ because the inputs of constant capital and variable capital are not supposed to be transformed.  Instead, constant capital and variable capital are supposed to be the same in the determination of both values and prices of production; C and V are taken as given as the actual quantities of money capital advanced to purchase means of pf productions and labour-power at the beginning of the circuit of money capital.

Marx solved this issue of the macro to the micro by showing that because individual capitals compete among each other, as a result, sectors with higher profitability get ‘invaded’ by other capitalists seeking to increase their profitability.  In so doing, profit rates tend to be equalised between sectors.  As Marx showed, this did not change the overall value created in an economy, but merely redistributed the surplus value over and above the cost of capital advanced from less efficient capitals to more efficient ones through the equalisation of profit rates across sectors.  This transformation solution was a brilliant one that Marx was very proud of.

“In Marx’s theory, total price = total value but individual prices = prices of production.  There is no contradiction with Marx’s logical structure of the two levels of abstraction” (Moseley, p39 note 13).   The logical approach of Marx is to look at the macro first to show how money makes more money and then look at the micro second to see how that extra money is distributed among many industries and capitals through competition and the equalisation of profitability.  The more efficient get a transfer of value from the less efficient through capitalist competition.  But profits come from the surplus value generated by the labour force employed in the whole economy and appropriated by capital as a whole.

This macro-monetary approach is a realistic view of capitalism.  The circuit and motion of capital starts with money and finishes with money.  It does not start with value (labour time) or with physical things (labour and means of production) and end with value or things.  So it does not need value or things to be converted or transformed into money.  There are not two ‘states of capitalism’ (one with values and one with money or prices).  Marx’s view is a single state system.  So there is no ‘mistake’ or logical contradiction in Marx’s explanation of the transformation of values into prices.  The so-called transformation problem of values into prices and money does not exist.

The mainstream critiques of Marx’s analysis make the mistake (deliberate or not) to argue that Marx had two logical analyses, first based on values which had to be transformed into prices.  They say, if you start with ‘inputs’ of labour and means of production measured in values (as they claim Marx does), surely you must convert these values into money prices?  And if you do so, then using simultaneous equations, you find that total values no longer equal total prices and/or total surplus value no longer equals total profit.  That’s because your original inputs in value will also be converted into prices.  Marx’s analysis is thus indeterminate or logically inconsistent.

This is the kernel of the critique first pronounced by Ladislaus von Bortkiewicz in the early 20th century, “the most frequently cited justification for rejecting Marx’s theory over the last century” (Moseley, XII).  This critique was enthusiastically adopted by mainstream economics as finally crushing Marx’s value theory of capitalism.  It was accepted by hosts of Marxist economists like Paul Sweezy and others, many of whom spent many years trying to reconcile Marx’s ‘mistake’ with a theory of capitalism or looking for an alternative interpretations of value theory – a “long 100-year detour”, as Moseley describes it.

The Bortkiewicz-Sweezy ‘standard interpretation’ of Marx’s value theory, as Moseley calls it, was destroyed with a seminal paper by the leading mainstream economist of the post-war period,  Paul Samuelson, the author of the major academic textbook on economics in my days at college.  Samuelson showed that if you started with two systems, one in values in labour time and one in prices, the labour values can be cancelled out and play no determination in the real world of prices.  Prices are then determined by the quantities of things produced and the demand for them (supply and demand).  “In summary, transforming from values to prices can be described as the following procedure, 1) write down the value relations; 2) take an eraser and rub them out; 3) finally write down the price relations – thus completing the transformation process”! (Moseley p 229.)  Samuelson’s sarcastic joke may have buried the ‘standard interpretation,’ but his own mainstream theory of prices was equally irrelevant. What determines whether the price of a car is $20,000 or $2,000? – it’s supply and demand.  But why $20,000 and not $2,000? – well, because the market says it is so (revealed preference of individual consumers).  Brilliant!

But as Moseley says, Samuelson was right about the standard interpretation.  If you interpret Marx to have two systems of capitalism, one based on values (in labour time or physical units) and another on prices, then you have to transform values into prices.  But why bother: values can be cancelled out.  Marx’s value theory then becomes a metaphysical unnecessary like the concept of God.  We can explain all in the universe without God and God explains nothing.

But Moseley takes the reader carefully and thoroughly through all the competing interpretations of Marx’s value and price theory, starting with the standard interpretation as expressed by the theory of Piero Sraffa, an epigone of Ricardo.  He shows not only that Sraffa’s approach of looking at capitalism as ‘the production of commodities by means of commodities’ is being unrealistic to the extreme[4]; it is also nothing to do with Marx’s analysis of capitalism as the process of money capital trying to make more money capital (pp. 230-243).

Sraffa ends up with a theory that implies capitalism can go on producing more things from things without any contradiction or limit – the example of automation (p233) shows that.  Marx’s own theory shows that there is an essential contradiction in capitalism between the production of things and services and the profitability of doing it for private capital.  That contradiction is real, explaining cycles of boom and slump, crises and the eventual demise of capitalism as a system.  Sraffa’s theory implies the universality of capitalism, Marx argues for its specificity.

Moseley then shows that other interpretations (Anwar Shaikh’s iterative way; the ‘New interpretation’; Rethinking Marxism etc.); all fail really to break with the standard interpretation and thus cannot resolve the apparent logical inconsistency (Bortkiewicz) or irrelevance (Samuelson) of Marx’s analysis.

However, it is somewhat different with the temporal single state interpretation (TSSI).  The essential points of the TSSI group of Marxist economists were summed up in another seminal work on Marx’s analysis from Andrew Kliman in 2007, with his book, Reclaiming Marx’s Capital.  Those points were that Marx’s theory is temporal.  Money advanced for means of production and the labour force are the initial capital, in time.  The production of commodities and their sale on the market come later.  So we cannot impute simultaneous equations in the conversion of value into prices, as the standard interpretation and others do.  Second, Marx’s theory is single state.  It is not a question of converting initial inputs (means of production and labour) as values into prices of production in the final commodity.  Capitalist start with money (prices of production) and end up with money (prices of production).  But they end up with a different value or price of production as explained by the exploitation of labour power, with its value ultimately measured in labour time in the whole economy.

The TSSI did provide the breakthrough in refuting the standard interpretation by returning Marx to the logic and reality of a money economy.  Moseley agrees.  However, he has two important disagreements with the TSSI.

First, Moseley reckons that TSSI makes prices of production as short-term movements that change with each production cycle to equalise profitability within sectors.  Moseley reckons that this cannot be right as prices of production are predetermined over the long term by the productivity of labour (new value) and the rate of surplus value in the class struggle (deciding the level of the real wage).  So prices of production only change if productivity and real wages alter.  Prices of individual commodities fluctuate around a ‘centre of gravity’ set by prices of production.  Indeed Moseley argues, that unless his interpretation of prices of production as long term centres of gravity for individual prices is accepted, then the two aggregate equalities (total price = total value and rate of profit = rate of surplus) would not hold over successive production periods, thus defeating the very objective of TSSI.

Second, Moseley disagrees that a temporal interpretation of Marx’s circuit of capital means that the cost price of the advanced money capital (for means of production and the employment of the labour force) is fixed and historic after production has commenced.  Moseley reckons that if the price of equipment and other means of production changes after production starts (as it does), it is still okay to revalue the value of the commodity produced to include the current cost of the means of production not the original cost.  So it is not necessary or correct to use historic cost in the measure of constant capital or in the profitability of capital.

This latter point is very important in any empirical analysis of profitability in modern capitalist economies.  Andrew Kliman’s view is that historic cost measures must be used and anything else is a distortion of Marx’s measure of profitability.  And this makes a difference when we try to measure to the movement in the rate of profit in a major capitalist economy like the US.  Kliman’s measure shows a ‘persistent fall’ in profitability of US capital since 1945 without any significant rise, even during the so-called neo-liberal period from the early 1980s to now.  The current cost measure, on the other hand, shows a trough in the early 1980s and then a significant rise through to the end of the 1990s at least.  Which is right has led to different views on the health of US capitalism, the role of the financial sector and what causes capital investment to change.  However, perhaps the differences between the two measures are overdone because, as Basu shows, over the long term, since 1945, the two measures have tended to converge.

One implication of Moseley’s interpretation of Marx’s analysis as a macro-monetary one that starts with money and finishes with money, is that it is perfectly open to empirical verification. There is a view among some Marxist economists as eminent as Paul Mattick Jr for one, that it is impossible to measure empirically a Marxian rate of profit on capital and use official price data to evaluate trends in modern capitalism.  That is because value cannot be calculated from money prices and Marx’s theory of capitalism is a value theory.  We are left with just recognising that Marx was right because of the very occurrence of exploitation and crises.  This is a bit like saying that we cannot determine the existence of black holes in the universe because their mass is so great and gravity so strong that nothing comes out of them.  So we can only tell they exist because of the wobbles they cause in other objects in space nearby.

But if we interpret Marx’s as a single system, an actual capitalist monetary macro-economy, then it is perfectly possible (with all the caveats of measurement problems and data) to carry out empirical analysis to verify or not Marx’s laws of motion of capitalism.  Indeed, Marx did just that.  In 1873, Marx wrote to Frederick Engels that he had been “racking his brains” for some time about analysing “those graphs in which the movements of prices, discount rates, etc., etc., over the year, etc., are shown in rising and falling zigzags.” Marx thought that by studying those curves he “might be able to determine mathematically the principal laws governing crises.” But he had talked about it with his mathematical consultant, Samuel Moore, who had the opinion that “it cannot be done at present.” Marx resolved “to give it up for the time being.”

Times have moved on and now we have lots more data and better methods of analysing it.  Testing theory and laws with evidence is now the name of the game.  Fred Moseley allows us to do that with confidence that we are testing a logical and consistent theory that is verifiable empirically.

A more substantial review by me of Fred Moseley’s book can be found in Weekly Worker here.

Keynes and Bretton Woods -70 years later

April 23, 2016

It’s 70 years to the week since John Maynard Keynes died.  And with 70 years gone, the copyright on all Keynes works has now expired. Keynes is the most famous and influential mainstream economist ever.  And he has bred a whole school or wing of economics called Keynesianism.  And 70 years later, Keynesianism continues to drive the economic thinking on the left of the labour movement internationally.  That was revealed again only this month by the latest lecture in the UK Labour opposition series of New Economics seminars – this time by Paul Mason.

Mason is a well-known British broadcaster, journalist and formally a Marxist of sorts.  He is author of a book entitled Post-capitalism, which critiques capitalism and suggests an alternative society ahead.  But Mason, the Marxist, in his contribution, presented a clearly Keynesian view of the state of the British and world economy and offered policy solutions that Keynes himself would have advocated had he been there.  Actually, he probably would not have attended as he was never a supporter of the Labour party or the working class.  For him, Labour was “a class party and the class is not my class.  The class war will find me on the side of the educated bourgeoisie.” (Skidelsky p371). For more on Marx and Keynes, see Contributions of Keynes and Marx

Mason presented a set of economic policies entirely in line with the views of the current left-wing leadership, including government spending for investment, keeping the central bank independent of democratic control and a people’s bank for investment funded by printing money.  Indeed, Mason favoured funding the private capitalist sector to boost investment rather than by direct government spending; “And in a highly marketised economy, targeted money drops into the private sector can actually shape the structural reforms we need better than targeted changes in state spending.”  So the capitalist mode of production is not to be replaced, but instead, we must look for ways to make it work better. Keynesian economics and policy options still rule some 70 years later, even among ostensible Marxists.

To remember Keynes’ 70th birthday, some other Keynesians recently reminded readers of the British Guardian newspaper (that bastion of Keynesian economic thought) that in 1944, a year or so before Keynes died, he had led the British negotiating team in reaching an agreement with the Americans and others on setting up a new world economic order after the end of the war.  That came to be called the Bretton Woods agreement.

The authors of this Guardian piece, former advisers to the American Democratic party, held up the Bretton Woods agreement as one of the great successes of Keynesian policy in delivering the sort of global cooperation that the world economy needs to get out of its current depression.  What is needed, you see, is for all the world’s major economies to get together to work out a new agreement on trade and currencies with rules to ensure that all countries work for the global good.  The aim of global cooperation now, as they put it, was to “steer away from an economic system marked by rising inequality, environmental devastation and a lack of accountability, we need to do what Keynes tried to do 70 years ago: imagine a different kind of Bretton Woods.”

Clearly our two Democrat Keynesians are right that “The need for a different kind of worldview has never been clearer. This is revealed by a look at any of the problems of our age, from climate to inequality to social exclusion… Designing a new global economic framework requires a global-scale conversation.”

But is Bretton Woods an example of the way to achieve this world order and can it be done when the very process of capitalism is one of competition and rivalry between imperialist economic powers?  I’m afraid that this sort of utopianism is what we often get from Keynesians.  It was expressed in Mason’s contribution and that of Joseph Stiglitz in a previous lecture in Labour’s New Economics series.

Anyway, the idea that Bretton Woods is a model for global cooperation on trade, inequality, currencies and economic welfare is ridiculous. Even the Guardian authors admit that the 1944 agreement was nothing of the kind. According to them, Keynes found that his “foresighted idea for a new institution to more equitably balance the interests of creditor and debtor countries was rejected”.  Instead, the authors tell us that “What we got instead was the IMF, structural adjustment policies and more than half a century of largely unnecessary pain and suffering for the world’s poorest countries.”

So not so great then.  But the authors are also disingenuous.  Keynes did not lead the British delegation at Bretton Woods to achieve more equality and greater cooperation among major economies for the benefit of all, including the poor nations of the post-war world.  He went there to ensure that British capital’s national interests were protected in a new world where America would rule.

As Keynes’ biographer, Robert Skidelsky, pointed out, Keynes’ aim was to get the best deal for Britain, as a major borrower of capital funds, from America, as the major lender of capital.  “The British wanted a scheme that enabled them to borrow without strings, the Americans one which would lend with strings.  Keynes presented the debtors perspective and White (American negotiator) the creditors”. P671  Skidelsky describes the Bretton Woods negotiations as a grab for American funds: “what the delegates did understand was that there was a cache of American dollars available and they wanted as much as possible for themselves” p764.  Yes, very idealistic.

Skidelsky sums up the outcome. Naturally, the Americans got their way because of their economic power. Britain gave up its right to control the currencies of its former empire, whose economies now came under the control of the dollar, not sterling (p817).  In return, the Brits got credit to survive – but with interest charged.  Keynes told the British parliament that the deal was not “an assertion of American power but a reasonable compromise between two great nations with the same goals; to restore a liberal world economy”. P819. In other words, the capitalist economy.  The other nations were ignored, of course.

Bretton Woods was no Keynesian success story but a benchmark for American imperialist hegemony.  America established its economic rule at Bretton Woods.  The dollar was fixed to gold and became the world’s dominant currency for trade and credit. To control the new world economic order, the IMF and the World Bank were set up under American control and housed in Washington.  American dollar capital poured into Europe (Marshall Plan) and Japan in order to restore capitalist industry there, so that these war-destroyed economies could buy American exports in dollars.

But Bretton Woods did not save world capitalism indefinitely. The agreement with its fixed exchange rates, dollar supremacy and international institutions run by the US appeared to work during the Golden Age of 1946-65 mainly because the profitability of American capital after the war was very high, and also rose quickly in Europe and Japan, with its cheap surplus labour and new American technology.

America’s economic hegemony began to slip as its relative trade and growth superiority slid from the mid-1960s onwards in the face of the cost of the Vietnam war, and Franco-German and Japanese trade success.  When the US economy no longer ran a trade surplus but instead a widening deficit, the dollar came under pressure and eventually came off its quasi-gold standard in the early 1970s, signalling the end of the Bretton Woods era.

With the collapse of profitability of capital in the major economies from the mid-1960s, everybody fought for trade share, devaluing their currencies. The IMF had to try and force various governments with financial crises to maintain fixed rates with the dollar through austerity (‘internal devaluation’).  In the ensuing neo-liberal era from the 1980s onwards, trade tariffs were reduced to benefit America, but ‘globalisation’ of capital led to the rise of Japan, Korea and China as competitors in world markets to the US and Europe.  The Keynesian dream of ‘two great nations’ organising global cooperation and a new world economic order was no more than that: a dream.

The chart below shows that American exported capital globally in the post war period.  But eventually American capital had to fund it not by a trade surplus, but by borrowing.  American companies continued to invest abroad profitably and Japan and Europe recycled their trade surpluses into dollar bonds, thus keeping the cost of borrowing cheap for America.  This was a great way for the US to sustain profitability through its dollar hegemony.

US external borrowing

“Essentially, the US economy has been able to borrow cheaply from the rest of the world, and then invest those funds in companies around the world. The average return on equity over sustained periods of time is higher than the return on debt. The gap has been between 2.0 and 3.8% per year since 1973.”   Pierre-Olivier Gourinchas discusses this pattern in “The Structure of the International Monetary System,”.

The reality that is not recognised by Keynesian economics when it considers the world economy is that, under capitalism, development may be ‘combined’ (globalisation, trade pacts etc) but it is also ‘uneven’ (inequality, credit monopoly etc), as the example of Bretton Woods shows.  The Guardian authors want a new kind of Bretton Woods along the lines of the ideas of Keynes, they say.  This is an illusion under capitalism and one that even Keynes did not hold himself.

Jack Rasmus and systemic fragility

April 18, 2016

Jack Rasmus is an author of many books on the global economy, a broadcaster and an economic advisor to America’s Green Party.  In his new book, Systemic fragility in the global economy, Rasmus proposes a radical thesis that the world economy is engulfed in a ‘systemic fragility’ not seen before.

As is evident to most commentators, the world economy has made the weakest recovery after a slump in post-1945 history.  And the last slump was an ‘epic recession’, as Rasmus named it in his previous book, Epic Recession: prelude to global depression.  It was also truly global, spreading to Asia, Latin America and Africa, much more than even the Great Depression of the 1930s.

It is this phenomenon that Rasmus wants to explain in his new book.  Rasmus cites nine fundamental economic trends that underlie what he considers caused this growing fragility.  Basically, they consist of a massive injection of liquidity (money and debt) starting with central banks worldwide and spreading as debt through the financial system, households and government. “In short, key variables of  liquidity injection, debt, a shift to financial  asset investing, a slowdown in real asset investment, disinflation and deflation in goods and services trends, financial system restructuring, labour  market restructuring, and declining effectiveness of central bank monetary policy and government fiscal policies on historical multipliers  and interest rate elasticities all together constitute the major trends underlying the long run deepening of fragility within the system” (from Rasmus’ summary of his book in The European Financial Review, February-March 2016, pp 13-20 – EFR from now on). These trends now interact with each other, creating a new systemic fragility in modern capitalism.

Rasmus reckons that mainstream economic theory has completely failed to account for this fragility; or forecast any crises like the Great Recession; or explain the ensuing depression.  As a result, their policy responses: a monetary policy of low interest rates or ‘quantitative easing’; and/or fiscal macro-management, have dismally failed to revive the world economy.  Indeed, they may have retarded it.  “The conceptual toolbox of contemporary economic  analysis  is  deficient.  Anomalies in the global economy today abound and multiply, with insufficient explanation.  Systemic Fragility is offered as an alternative conceptual framework for explaining how  real  and  financial  variables mutually determine each other and lead to instability and is the outcome of  dynamic interaction within and between three fragility forms – financial, consumption, and government.” (EFR).

But Rasmus is not only damning about mainstream economics.  He maintains that heterodox theories of crises in the post-1970s world economy have also been found wanting.  The followers of Keynes and Marx come in for criticism.  The Keynesians are at fault because they have lost the essence of Keynes’ insight into the instability and uncertainty found in a monetary and financially-dominated economy.

Even Hyman Minsky, whose ground-breaking work in the 1980s on the role of debt in creating financial fragility would seem to pretty close to Rasmus’ own thinking, did not fully grasp the nature of the modern financial economy. “Minsky variables are incomplete. Level of debt alone is insufficient. Cash flow is too narrow a concept. And T&C is far more complex today than it was a quarter century ago. The dynamic interactions – i.e. the feedback effects enabled by transmission mechanisms – intensify the overall fragility effect.  Moreover, the intensity due to interactions or ‘feedback effects’ varies with the phase and condition of the business cycle”. (EFR).  For my view on Minsky, see here.

The Marxists (called the ‘Mechanical Marxists’ by Rasmus) also fall short because they see crises as originating in the ‘real economy’, in production through weakening profitability.  They fail to see that crises now originate in the financial/credit sector and flow into production, not vice versa.  “Marxists should focus more on investment, aka capital accumulation, and not on the determinants of investment.  Investment/capital accumulation is the crux of Marx’s analysis, not the FROP.” (EFRIndeed, modern Marxists have fallen behind Marx himself, who in his later years began to argue that the credit/financial system was key to crises rather than the level or movement of the profitability of capital in production.

As a ‘Mechanical Marxist’ myself, I would beg to differ.  In my view, Marx did not change from his view that the law of the tendency of the rate of profit to fall was “the most important law of political economy”, contrary to the views of German Marxist Michael Heinrich, which Rasmus seems to accept.

Moreover, Rasmus reckons that Marx’s law of value is now an inadequate foundation for understanding the workings of modern capitalism.  The ‘mechanical’ Marxist law of the tendency of the rate of profit to fall is out of date, or only ‘half-correct’, as a cause of crises because of “fundamental structural changes that have occurred in the global financial system and in labour markets in the 21st century.” (EFR) Marx’s law of profitability does not incorporate financial instability and the expansion of debt.  So it cannot be a full and coherent explanation of crises in the 21st century – and indeed of the current long depression.

Again I would disagree.  Marx’s law of profitability explains the role of credit and debt in a capitalist economy. Credit is clearly essential to investment and the accumulation of capital but, if expanded to compensate for falling profitability and to postpone a slump in production, it becomes a monster that can magnify the eventual collapse. Yes, financial fragility has increased in the last 30 years, but precisely because of the difficulties for global  capital to sustain profitability in the productive sectors in the latter part of the 20th century.

According to Rasmus, Marx’s formula for capital accumulation M-C-M’ should be extended because the financial sector now generates extra profit (M-C-MM’) through value created by the financial sector.  “Marx in Vol. 3 raises the notion of secondary exploitation that occurs after production in the sphere of circulation. So when I raise that, it’s really in agreement with Marx. Marxists have to broaden their notion of exploitation”.(EFR)  But, in my view, this would mean leaving Marx’s value theory, which distinguishes between productive and unproductive labour.  And that would be a step back in understanding capitalism.  Profits from exchange are fictitious profits. They are real for the finance capitalists, but fictitious for the economy as a whole because they are a simple redistribution of profits from the productive value-creating sector.

Rasmus’ view is similar to David Harvey’s concept of the ‘secondary or realisation’ part of the circuit of capital as being key to crises.  I have criticised this view in detail here and here and here.  If we look for the causes of crises in the ‘secondary circuit’ of the financial sector (or in a ‘financialised’ capitalist sector), we shall miss the fundamental contradictions of the capitalist mode of production.

Is Rasmus right that the cause of modern capitalist crises is to be found in a ‘systemic financial fragility’?  Or are the mechanical Marxists right that the cause of crises is still to be found in the contradictions within productive capital?  There is a correlation between financial crises and profitability.  But as Rasmus says, A correlation exists in the data, but what is the direction of causation?  One could just as clearly argue that the acceleration of finance forms of capital is a causation of the decline of profitability from real production”. (EFR).

To help decide, we need to look at the evidence.  Rasmus provides the reader with a comprehensive account of the ‘financialisation’ of the major capitalist economies in the neo-liberal period after the crisis of the 1970s.  But his account is descriptive rather than empirical.  And it is difficult to test the validity of any theory, especially a new one, if there are no data to back it up.  Moreover, there is plenty of empirical evidence to back the contrary view of the mechanical Marxists that it is profitability that drives productive investment and it is collapsing productive investment that causes slumps.

At the end of the book, Rasmus presents three important equations for this theory of systemic fragility.  These equations could be filled in with data to test his argument.  But, as Rasmus says, at the moment, his theory of systemic fragility is not a finished product but very much a work in progress.  In the meantime, the book is certainly a thought-provoking contribution to an understanding of the fragility of modern capitalism.  It’s a ‘must read’ in a year that is generating a whole new range of radical and Marxist books on capitalism and its laws of motion.

Opening the Panama Canal

April 12, 2016

The leak of the so-called Panama Papers has certainly set the cat of popular disgust among the pigeons of the super-wealthy global elite.  But, of course, pigeons can fly away.

The Panama papers contain 11.5 million confidential documents that provide detailed information about more than 214,000 offshore companies listed by the Panamanian corporate service provider Mossack Fonseca, including the identities of shareholders and directors of the companies.

An anonymous source using the pseudonym “John Doe” made the documents available in batches to German newspaper Süddeutsche Zeitung beginning in early 2015. The information documents transactions as far back as the 1970s and eventually totalled 2.6 terabytes of data.  Given the scale of the leak, the newspaper enlisted the help of the International Consortium of Investigative Journalists, which distributed the documents for investigation and analysis to some 400 journalists at 107 media organizations in 76 countries.

Law firms generally play a central role in offshore financial operations. Mossack Fonseca, the Panamanian law firm whose work product was leaked in the Panama papers affair, is one of the biggest in the business. Its services to its clients include incorporating and operating shell companies in friendly jurisdictions on their behalf.] They can include creating complex ‘shell company’ structures that, while legal, also allow the firm’s clients to operate behind an often impenetrable wall of secrecy. The leaked papers detail some of their intricate, multi-level and multi-national corporate structures.  Mossack Fonseca has acted on behalf of more than 300,000 companies, most of them registered in financial centers which are British Overseas Territories.  The firm works with the world’s biggest financial institutions, including Deutsche BankHSBCSociété GénéraleCredit SuisseUBSCommerzbank and Nordea.

The documents show how wealthy individuals, including public officials, hide their money from public scrutiny.  The papers identified five then-heads of state or government leaders from ArgentinaIcelandSaudi Arabia, Ukraine, and the United Arab Emirates; as well as government officials, close relatives, and close associates of various heads of government of more than forty other countries. The British Virgin Islands is home to half of the companies.

Reporters found that some of the shell companies may have been used for illegal purposes, including fraud, drug trafficking, and tax evasion.  Igor Angelini, head of Europol‘s Financial Intelligence Group, also recently said that the shell companies used for this purpose also “play an important role in large-scale money laundering activities” and also corruption: they are often a means to “transfer bribe money”. The Tax Justice Network called Panama one of the oldest and best-known tax havens in the Americas, and “the recipient of drugs money from Latin America, plus ample other sources of dirty money from the US and elsewhere”

The most shocking thing about the Panama papers is not the likely criminality and drug laundering, but that it is legal.  It is legal in most countries to set up an ‘offshore’ account for a company or trust as long as the directors are not ‘resident’ in the country where taxes should be paid. The company may be subject to local taxes but these are minimal or non-existent.  So if you run a fund and it is registered in Panama or Luxembourg and all the revenues go into that company even if they were earned in the country of origin, no tax is paid at home.  Of course, if you take the money out and put it in your home bank account, you are supposedly then liable to tax.  But it can stay ‘offshore’ until you retire abroad etc, or you can use it to buy property or diamonds abroad.

According to The Guardian, “More than £170bn of UK property is now held overseas. … Nearly one in 10 of the 31,000 tax haven companies that own British property are linked to Mossack Fonseca.” British property purchases worth more than £180 million were investigated in 2015 as the likely proceeds of corruption — almost all bought through offshore companies – according to Land Registry data obtained by Private Eye .

The British Overseas Territories like the British Virgin Islands or Jersey operate for these purposes and it’s the main source of revenue for these islands.  In the US, Americans can set up an ‘offshore company’ in Delaware or other states like Nevada – they don’t even need to go to Panama.  Two-thirds of the purchases were made by companies registered in four British Overseas Territories and Crown dependencies which operate as tax havens – Jersey,Guernsey, the Isle of Man and the British Virgin Islands (BVI).

The British Overseas territories play an important part in the role that British imperialism has developed as the global financial centre and conduit for international capital flows (see my post).  These old colonies in the Caribbean were “encouraged” to develop a financial services industry, by allowing the former colonies to benefit from tax treaties with the UK (and thereby access to the global financial system), while making their own arrangements regarding the local taxation of offshore shell companies.

As I have pointed out before in this blog, large global corporations with many operations can switch their tax liability around the world to find the lowest tax burden through special companies set up in these tax havens.  Barclays has 30-plus of such ‘shell companies’ to avoid tax.  In his devastating book, Treasure Islands, tax havens and the men who stole the world, Nicholas Shaxson exposes the workings of all these global tax avoidance schemes for the big corporations and how governments connive in it or allow it.

There are three ways that somebody (person or corporation) can get their tax down or pay none at all.  They can lie about their earnings (tax evasion); they can employ batteries of accountants to come up with schemes that are designed for no other purpose but to avoid paying tax (tax avoidance); or they can simply refuse to pay (tax compliance).

One of the most notorious cases of refusing to pay tax that is due under the law has been that of the global mobile telephone corporation, Vodafone.  It owed the UK government under the current tax laws £6bn in taxes because it had salted away profits in a tax haven subsidiary (registered in Luxembourg) purely to avoid paying UK taxes.  The law was clear.  The UK government pursued the company for the money but at the last minute, the leading UK tax official at the time did a secret deal with Vodafone for the company to pay just £1.2bn over five years.  The reason given for the deal when it was exposed was that it was a ‘good cash settlement’.  But that’s only because Vodafone was fighting every inch of the way through the courts to avoid a settlement (although it was about to lose).

How many of us would get such a deal if we refused to pay tax due? Yet there are 190 similar disputes going on with UK companies who have put profits in tax havens to avoid paying.   And these companies are now using the Vodafone precedent as a reason for refusing full payment.

According to the Tax Justice Network, around £25bn is lost through tax avoidance schemes in the UK, while up to another £70bn is lost through tax evasion by large companies and rich individuals.  Also, because of the lack of tax staff, another £26bn goes uncollected.  This £120bn would be more than enough to avoid the huge cuts in government spending and extra taxes on average households implemented by the UK government with which it claims that we are ‘all in it together’.

The rotten irony is that the very people in accounting firms organising these tax avoidance scams get jobs in the government tax collection departments to chase tax avoiders!  Edward Troup, the boss of the UK’s Revenue & Customs (HMRC), the government department overseeing a £10m inquiry into the Panama Papers, was a partner at a top City law firm Simmons & Simmons that acted for Blairmore Holdings and other offshore companies named in the leak, when the firm had contacts with Mossack Fonseca.

Troup, who described taxation as legalised extortion in a 1999 newspaper article, built a career advising corporations on how to reduce their tax bills before leaving Simmons & Simmons to join the civil service in 2004.  While working in the City, Troup led the opposition to reforms put forward by the then UK prime minister Gordon Brown to curb corporate tax avoidance in 1999, putting out a press release headed: “City lawyers call on government to withdraw proposals to tackle tax avoidance.” He criticised the proposed laws for giving “wide-reaching” powers to the Inland Revenue.

Of course, tax breaks for corporations and the rich along with tax increases for the average household and the poor are not confined to the UK.  International Monetary Fund (IMF) researchers estimated in July 2015 that profit shifting by multinational companies costs developing countries around $213 billion a year, almost 2% of their national income.  The Tax Justice Network estimates the global elite are sitting on $21–32tn of untaxed assets.

Thomas Piketty has pointed out that, in 2014, the LuxLeaks investigation revealed that multinationals paid almost no tax in Europe, thanks to their subsidiaries in Luxembourg. Piketty pointed out that, in many areas of the world, the biggest fortunes have continued to grow since 2008 much more quickly than the size of the economy, partly because they pay less tax than the others. In France in 2013, a junior minister for the budget calmly explained that he did not have an account in Switzerland, with no fear that his ministry might find out about it. It took journalists to reveal the truth.

Piketty’s economic colleague, Gabriel Zucman, recently published a book showing that $7.6 trillion in assets were being held in offshore tax havens, equivalent to 8% of all financial assets in the world.  In the past five years, the amount of wealth in tax havens has increased over 25%.  There has never been as much money held offshore as there is today.

In the US, few big companies actually pay the official 35 percent corporate tax rate. Profits are up 21 percent since 2007, while corporate America’s total tax bill has dropped 5 percent.

US corporate taxes

The best known trick is so-called tax inversions: US companies can move their headquarters abroad, avoiding the taxman while keeping executives stateside, scoring government contracts, and taking full advantage of public benefits for employees. Walgreens, which makes a quarter of its money from Medicaid and Medicare, proposed moving to Switzerland last year, only to change plans following a public outcry.

US inversions

And guess where ‘inversions’ were first started?  Panama!  Tax inversion was pioneered in 1983, when the construction company McDermott International changed its address to Panama to avoid paying more than $200 million in taxes. The tax lawyer who masterminded the “Panama Scoot” was later immortalized in an operetta performed for his colleagues.  The 13-minute operetta, Charlie’s Lament, told how the party’s host, John Carroll Jr., invented a whole category of corporate tax avoidance and successfully defended it in a fight with the Internal Revenue Service. The lawyers sang:

The Feds may be screaming,
But we all are beaming
’Cause we’ll never pay taxes,
We’ll never pay taxes,
Never pay taxes again!

Inversions aren’t the only way to dodge the taxman. Foreign profits of US corporations aren’t taxed until they are “repatriated,” so companies can hoard earnings in subsidiaries or divisions abroad. (Ireland just shut down the “double Irish” offshoring trick used by Apple, Google, Twitter, and Facebook.) Between 2008 and 2013, American firms held more than $2.1 trillion in profits overseas—that’s as much as $500 billion in unpaid taxes.

US tax revenues

American corporations are making billions in record profits, but 60 of the nation’s largest companies are parking 40% of their profits offshore in an effort to escape US taxes, a survey by the Wall Street Journal reveals.  In US president Obama’s last budget for 2016, he proposes to stick a one-time “transition toll charge” of 14 percent on the more than $2 trillion in corporate earnings parked overseas, regardless of whether they’re brought back stateside. The estimated $280 billion in tax revenue would be earmarked for upgrading highways and infrastructure.  The proposed one-time tax is aimed at just one of the various loopholes and maneuvers that domestic businesses use to offshore their profits, beyond the reach of Internal Revenue Service.  Congress may block this.

Apart from greed, there is a very good economic reason for a tax system that benefits corporations and the rich and hits the average family and the poor.  Lowering the corporate tax burden has been a big part of counteracting falling profitability of capital in the major economies.  Look at the trend in the effective tax rate on US corporations compared to the effective tax rate on their employees.  The effective tax rate is a measure of what is actually paid compared to income rather than the headline tax rate.  Whereas in the 1950s, US corporations paid an effective tax rate of around 40-45% of profits by the 1990s, that rate had fallen to 30-35%.  In the last decade, it dropped further to under 25% and reached an all-time low in 2009 at the depth of the Great Recession.  In his latest budget, the UK Chancellor George Osborne announced a further cut in corporation tax to a record low for G7 countries of 17% by the end of this current parliament.

The trend is clear: corporations are being taxed less and less to preserve their profitability.  In contrast, the effective personal income tax on employees has remained pretty steady at about 35%.  Less tax for capitalists and more tax for workers.

US tax rate

While corporations and wealthy individuals pay less tax at home and salt much of their gains in tax havens abroad, the rest of us have had to pay for the loss of these tax revenues.  As the effective rate of US corporation tax plunged, income taxes on households were static until the Great Recession led to unemployment and falling incomes.  Median income in the United States is down 8.5% since 2000.

US median incomes

And the wealth of US families has fallen sharply since 2007 and is roughly back to where it was 24 years ago.

The bottom 90% of Americans have seen their overall income drop, while low interest rates and quantitative easing have dramatically helped the top 10%. If the super-rich actually paid what they owe in taxes, the US would have loads more money available for public services.

What needs to be done?  In the UK, the government should end the tax-haven statuses of the overseas territories.  Companies there must pay the same taxes as in the UK.  If the poorest in these tiny enclaves suffer loss of income, then the UK government can compensate them.  Governments should agree to an international agreement to end tax havens like Panama and impose economic sanctions against them if they won’t.  Above all, the tax avoidance operators must be taken over.  We need to take into public ownership and control the major banks and financial institutions that dominate the globe and encourage and provide services for the rich and corrupt elite (as revealed in scandal after scandal).  This would provide not only extra tax revenue to meet the real needs of people in public services and investment, it would also enable banking and finance to be put to use as a public service in providing credit for investment.

Of course, such measures will be vigorously opposed by most current governments and their rich backers and ignored by most left opposition movements.  But without such measures, the Panama story will continue.

Apples and pears: the Economist on profits

April 9, 2016

A number of readers of this blog have remarked or asked me to comment on a recent article in the Economist magazine that asserted that both profits and even the return on capital or profitability in the US are at “near-record highs”.  As quoted, “The past two decades have seen most firms make more money than they used to. And more firms have become very profitable”.

Economist on profits

This would seem to be in contradiction to the assertions and evidence continually made by me in this blog and elsewhere that US profitability has been in secular decline since 1945 and is near post-war lows not highs.

US rate of profit

This contradiction can be resolved in several ways.  The first is what one blog reader pointed out: we are comparing apples with pears; the second is that we are comparing harvests of apples and pears at different times; and third, we are looking at the best apples, and not the bulk of the rotten ones.

On apples and pears: it is obviously true that US corporate profits are higher in absolute terms than they were 30 years ago.  US national output is higher, the population is higher, employment of labour is higher, investment is higher.

Of course, the Economist is not so crude as to measure the health of the US economy in absolute profits.  This is what it said: “The last year has seen a slight dip in aggregate profits because of the high dollar and the effect of the oil price on energy firms. But profits are at near-record highs relative to GDP and free cash flow—the money firms generate after capital investment has been subtracted—has grown yet more strikingly. Return on capital is at near-record levels, too (adjusted for goodwill). The past two decades have seen most firms make more money than they used to. And more firms have become very profitable.”

Now some of this is true.  Corporate profits to GDP are still near post-war highs.  But this measure is not a measure of profitability against capital.  Profitability of capital invested is measured as profits divided by the value of stock of the means of production owned and used by corporations and the cost of employing the labour force to use them.  In Marx’s formula, this is s/c+v.  Profits to GDP is really the share of value created going to capital and is much closer to the Marxist rate of surplus value, s/v.  That’s why it is possible to have high corporate profits to GDP and low profitability of capital.  Which is more relevant to how well US capitalism will do is open to discussion: is it the apples of profit share or the pears of profitability?

The Economist purports to measure the profitability of capital too with its ‘global return on capital’.  However, this is a measure not of the profitability of the stock of capital in US corporations but the annual rate of return on invested capital (including financial assets) domestically and globally by US corporations, as compiled by the McKinsey Institute.  That annual return, according to the graph, was actually flat until 2002 and then rocketed.  That reflects US corporations’ investment returns from buying its own shares and investing in foreign assets in the period since 2002, not the overall profitability of US capital stock in productive assets.  Again, it is a matter of debate whether the Marxist measure of profitability is more relevant than the rate of return on American capital as defined by McKinsey.

Moreover, the McKinsey measure reflects the profitability of the largest and most profitable US corporations.  As the Economist piece explains, taking its data from the McKinsey Institute annual corporate valuation report, there is a huge variance in profitability among US companies, with the lion’s share going to the top four firms in each sector of US industry and services.  As the Economist says, profitability is highest and has risen most in the more oligopolistic sectors.  “Revenues in fragmented industries—those in which the biggest four firms together control less than a third of the market—dropped from 72% of the total in 1997 to 58% in 2012. Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24% to 33%.”   So some apples are doing very well, but many apples are in a sorry state.

Actually, the Economist does not like this monopolistic development in the US corporate sector: it wants ‘more competition’.  More competition would mean lower profitability but would also drive corporations to be more efficient.  “High profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. If companies capture more profits than they can spend, it can lead to a shortfall of demand. This has been a pressing problem in America. It is not that firms are underinvesting by historical standards. Relative to assets, sales and GDP, the level of investment is pretty normal. But domestic cash flows are so high that they still have pots of cash left over after investment: about $800 billion a year.

Much of this argument is nonsense.  As I have explained in a recent article in the Jacobin magazine that took up similar arguments by Goldman Sachs: “Goldman Sachs’s declaration that falling profit margins are a measure of the “efficacy” of capitalism and a return to “normal” sounds pretty hollow.  It disguises the real issue.  High profit margins are masking a broader decline in corporate profitability and the depressing likelihood that an economic recession — and its inevitable negative impact on working people in lost jobs, incomes and homes— is once again on the horizon, only eight years after the end of biggest slump in the American economy since the 1930s..This is the real measure of capitalism’s efficiency for the 99%.”

It’s not that profits are so high that they cannot be spent; it’s that corporations don’t want to invest because profitability is too low and debt is too high.  It’s not true that the level of US business investment is “pretty normal”.  As a share of GDP, since the 1980s, it has been steadily falling and its growth is now slowing.

US business investment to GDP

Moreover, corporate profits in the US are now falling and if this continues, business investment will drop, not rise as the Economist thinks.  I have shown before how the correlation and causal connection flows from profits to investment.  This something that even mainstream investment pundits like Albert Edwards have noticed recently (see Edwards’ graph below).

US profits and investment

As for cash piles, I have discussed the nature of these cash reserves in posts before: they are concentrated in the very large US multi-national and relative to overall financial assets and rising debt, these cash reserves are not particularly large.

US corporate cash

Corporate cash piles among the largest US multi-nationals go alongside rising corporate debt for the majority.

US non-financial corporate debt to GDP (%)

US corporate debt

I have shown this in several posts and the risk of corporate debt defaults will rise as profits and profitability falls.  Losses on bonds from defaulted companies are likely to be higher than in previous cycles, because U.S. issuers have more debt relative to their assets, according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates, the proceeds have to cover more liabilities.

Leverage levels have been rising as more US companies use borrowings to refinance existing liabilities, buy back shares and take other steps that do not increase asset values.

US debt leverage

And global corporate debt is rising too.  According to McKinsey, at the end of 2007 the global stock of outstanding debt stood at $142 trillion. Then in 2008 the financial world fell apart. Less than seven years later, in mid-2014, there is an additional $57 trillion in global debt, and the data this year is going to show that we’ve hit another record high. Debt as a percentage of GDP is even higher now than it was in 2007: 286% vs. 269%. Total debt grew at a 5.3% annual rate from 2007–14. But corporate debt grew even faster at 5.9% annually.

The global corporate default ratio has climbed to its highest level in seven years, led by oil and gas companies. This month saw four new major corporate defaults, which took the overall tally to 40 for 2016, ratings agency Standard & Poor’s said. That’s the highest year-to-date default tally since 2009. Of those, 14 defaults came from the oil and gas sector and a further eight from the metals, mining, and steel sector. The overall default tally for the same time last year was 29.  Companies in the US saw the biggest default rate with 34, with five in the emerging markets.

I referred to the McKinsey study in a previous post.  What McKinsey (MGI Global Competition_Executive Summary_Sep 2015) found was that “the world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end”.  According to McKinsey, the global corporate-profit pool, which currently stands at almost 10% of world GDP, could shrink to less than 8% by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years!

From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labour, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a share of global GDP from 7.6% to almost 10%.

But McKinsey reckons that profit growth is coming under pressure. This could cause the real-growth rate for the corporate-profit pool to fall from around 5% to 1%, to practically the same share as in 1980, before the boom began.   According to McKinsey, margins are being squeezed in capital-intensive industries, where operational efficiency has become critical.  Meanwhile, some of the external factors that helped to drive profit growth in the past three decades, such as global labour arbitrage (globalisation) and falling interest rates, are reaching their limits.

So, in a way, the Economist is out of date.  Corporate profits as a share of GDP are falling and are set to fall further over the next decade.  The apple harvest will be less each year.  The boom days of the ‘neoliberal’ period of 1980 to 2007 are over.  As I have shown in previous posts, global corporate profit growth has ground to a halt and in the US corporate profits are not only falling as a share of GDP, but also in absolute terms.

Far from a reduction of ‘too high profits’ being a good thing in boosting ‘competition and efficiency’ as the Economist claims, falling US corporate profits and profitability will herald a drop in investment and increase of corporate debt defaults and so lay the foundations for a new economic slump.

Capitalism and Anwar Shaikh

April 4, 2016

The most important book on capitalism this year will be Anwar Shaikh’s Capitalism – competition, conflict, crises.

As one of the world’s leading economists who draws on Marx and the classical economists (‘political economy’, if you like), Anwar Shaikh has taught at The New School for Social Research for more than 30 years, authored three books and six-dozen articles.  This is his most ambitious work.  As Shaikh says, it is an attempt to derive economic theory from the real world and then apply it to real problems.  Shaikh applies the categories and theory of classical economics to all the major economic issues, including those that are supposed to be the province of mainstream economics, like supply and demand, relative prices in goods and services, interest rates, financial asset prices and technological change.

Shaikh says that his “approach is very different from both orthodox economics and the dominant heterodox tradition.”  He rejects the neoclassical approach that starts from “Perfect firms, perfect individuals, perfect knowledge, perfectly selfish behavior, rational expectations, etc.” and then “various imperfections are introduced into the story to justify individual observed patterns” although there “cannot be a general theory of imperfections”.  Shaikh rejects that approach and instead starts with actual human behavior instead of the so-called “Economic Man”, and with the concept of ‘real competition’ rather than ‘perfect competition’. Chapters 3 and 7-8 emphasize that.  It is the classical approach as opposed to the neoclassical one.

The book is a product of 15 years work, so it has taken longer to gestate than Marx took from 1855 to 1867 to deliver Capital Volume one.  But it covers a lot.  All theory is compared to actual data in every chapter, as well as to neoclassical and Keynesian/post-Keynesian arguments. A theory of ‘real competition’ is developed and applied to explain empirical relative prices, profit margins and profit rates, interest rates, bond and stock prices, exchange rates and trade balances.  Demand and supply are both shown to depend on profitability and interact in a way that is neither Say’s Law nor Keynesian, but based on Marx’s theory of value.  A classical theory of inflation is developed and applied to various countries.  A theory of crises is developed and integrated into macrodynamics.  That’s a heap of things.

It’s not possible to cover all the aspects of the book in this short review post.  But readers can follow in detail Shaikh’s arguments through a series of 21 video lectures that cover each chapter of the book.  These can be quite technical in part, but are worth the effort of concentration.  See Lecture 15 in particular for an overall summary of capitalism – this lecture is essential viewing for all interested in a theoretical understanding of capitalism. There are also short interviews with Shaikh on the main message of his book.

In this post, I want to focus on what Shaikh has to say about crises under capitalism and in particular how we can identify at what stage capitalism is currently going through.

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

The crisis was preceded by a long fall in the rate of profit. The neoliberal attack on labour from 1980s suppressed wage growth and reduced the wage share in order to stabilize the rate of profit.  The enormous fall in the interest rate in the 1980s that fuelled credit expansion and massive debt finance also served to raise the net (or enterprise) rate of profit.  So Keynesian fiscal policy by itself may pump up employment, but it will not restore growth.  For growth, it is necessary to raise the net rate of profit and interest rates are already at lows (even negative).

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

Shaikh revives the concept of long waves in capitalist production, something first identified by the Russian economist Kondratiev and which Shaikh first cited in a paper in 1992 (shaikh92w).  According to Shaikh, Kondratiev’s main point is that business cycles are recurrent and “organically inherent” in the capitalist system.  They are also inherently nonlinear and turbulent: “the process of real dynamics is of a piece. But it is not linear: it does not take the form of a simple, rising line. To the contrary, its movement is irregular, with spurts and fluctuations”.

Kondratieff believed that Depressions were linked to Long Waves: “during the period of downward waves of the long cycle, years of depression predominate, while during the period of rising waves of a long cycle, it is years of upswing that predominate”.  In a paper that Shaikh presented in 2014 (Profitability-Long-Waves-Crises (2)), he brings up to date his analysis on this, which is also developed in Capitalism. 

Shaikh reckons Kondratiev’s long waves have continued to operate, especially clear when measured by the gold dollar price: the key value measure in modern capitalism. He reckons that prices of commodities became a poor indicator of Kondratiev cycles in the post-war period of the 20th century and now looks to the gold price.  In my analysis, first outlined in my book, The Great Recession, I find that the movement of interest rates also provides a very good proxy indicator of Kondratiev waves because it follows the movement in production prices.

Readers of my blog and other papers will recognise that Shaikh’s position is similar to my own on the causes of capitalist crises, the nature and existence of depressions, and the role of Kondratiev and profit cycles.

K-cycles table

In my view, it is no accident that both of us made reasonably early (and independent) predictions of the Great Recession of 2008-9.  Shaikh made his in 2003; I did so in 2005, when I said: “There has not been such a coincidence of cycles since 1991. And this time (unlike 1991), it will be accompanied by the downwave in profitability within the downwave in Kondratiev prices cycle. It is all at the bottom of the hill in 2009-2010! That suggests we can expect a very severe economic slump of a degree not seen since 1980-2 or more”  (The Great Recession).

I shall return to other aspects of Shaikh’s book in future posts.

Anwar tells me that you can buy his book for only $38.50 from Oxford by using the codes on the very bottom line of the back of the Oxford brochure. And for anyone under 30, the e-book is only $30 from Amazon.







Is finance fit for purpose?

March 31, 2016

That was the question addressed by Yanis Varoufakis (YV) and Anastasia Nesvetailova (AN) at the next in the series of New Economics lectures organised by the British Labour Party.  Both speakers are members of Labour’s Economics Advisory Council which includes luminaries like Joseph Stiglitz and Mariana Mazzucato.

The question posed could have been answered simply.  The financial sector in the UK and elsewhere does little or nothing for the majority of people in providing loans and support for businesses and households.  From that point of view, finance is not ‘fit for purpose’ as the global financial crash proved.  Instead, the City of London and Wall Street operate to make ‘money out of money’ through ‘financial engineering’ in the world of “the casino”, as YV quoted Keynes in his address.

Our first speaker, AN, who is a professor of political economy at the City University in London and an expert in financial economics, recognised that finance is not fit for purpose in the sense that it is mostly engaged in reckless speculative activities.  But according to AN, banks are no longer the culprits; it is the non-banking sector (i.e. financial institutions that don’t take customer deposits) like investment banks, hedge funds and private equity.  They operate through opaque networks that cannot easily be regulated.  AN reckoned that regulation of banking did not work before the Great Crash.  But the revised and improved international regulations, as in Basel 3, only deal with the banks and not the large ‘shadow banking ‘sector that operates without the restraints of collateral and capital requirements.  So we now have ‘too much’ regulation of the banks to the point that they cannot operate with loans for investment and growth but still no proper regulation of the non-banking finance sector.

What’s the answer?  According to AN, what we need is ‘smart regulation’.  Apparently this meant getting ‘independent’, ‘non-ideological’ expert regulators who knew what they were doing.  However, as AN admitted, this did not look likely to emerge.  Indeed, AN seemed to suggest that as the UK’s financial sector was so important and we could not do without it, and as regulation could not work with all the forms of financing, then we would have to live with the finance sector as it is – at least until ‘smart regulators’ came along.

YV was more forthright in telling the audience that, yes, finance was more complex now, but what was needed was to separate ‘plain vanilla envelope’ banking that provided finance for homes and businesses from ‘speculative investment’ banking using derivatives and other financial ‘innovations’ to make money and which eventually caused the banking collapse.  YV’s form of regulation was to raise the capital requirements of the banks to very high levels (say, 20% of assets compared to 3-4% now) so that they could not engage in speculation and also use the law to separate off the speculative activities of banks, as the Glass-Steagall Act had done in the US (but later abolished by the likes of Larry Summers under President Clinton in 1999).  This would protect the taxpayer from future crashes.  This contrasted with AN’s view that such regulation would bring the finance sector to a halt.

AN said that finance was necessary for an economy to grow.  This comment seemed surprising: of course, finance and credit is necessary for investment – houses cannot be paid for in one go and investment projects cannot always be funded in one year.  But do banks in Britain do anything useful in this regard?  British banks have loans outstanding worth about 160% of UK GDP.  But 35% of these loans went to other financial institutions, 42.7% went to households for mortgages and another 10.1% went to commercial real estate and construction. Manufacturing received just 1.4% of the total!  UK banking’s principal activity is just leveraging up existing property assets.

I was surprised that neither Varoufakis nor Nesvatailova mentioned the work of current Bank of England deputy governor, Andy Haldane.  He has shown in various studies the unproductive nature of finance capital. Finance “could [not] be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.” (Haldane).

The truth is that the likes of Goldman Sachs, JP Morgan, Merrill Lynch and the investment banking wings of the big banks along with the hedge funds and asset management companies offer no value whatsoever.  They are just giant betting machines sucking up the funds of households and productive sectors to make money.  The best thing would be to take them over, close them down and ‘restructure’ their wildly overpaid staff into useful work in proper banking or other industries.

But no, both speakers assumed that the task was to ‘regulate’ the finance sector to make it ‘fit for purpose’.  What we were offered by the speakers was either ‘smart regulation’ (AN), whatever that might really mean, or ‘Chinese walls’ between lending and speculation (YV), harking back to the days of Fed chief Volcker in the 1980s and more recently to the Vickers report on UK banking.

There was no mention of turning the financial sector into a service for the people, like the health service or public transport.  And there was no mention of the best and only method to achieve that – not ‘regulation’, but through public ownership and control of banking and major financial institutions. Indeed, back in 2013, when discussing what to do about the Cypriot banks that were on their knees during the debt crisis then, YV advocated taking over the banks with taxpayers money and then, once they were back on their feet, selling them off again to private investors i.e re-privatising them.

This is exactly what the British Conservative government is doing now with the partly-nationalised failed banks of RBS and Lloyds that the government was forced to take over in the bailout of 2008.  The only difference was that YV would only sell them off at a profit, while the current UK government is selling them off at a loss to the taxpayer.  But YV still opted for fixing up the banks and then putting them back into the hands of private profit.

Contrary to ‘regulation’, in this blog and elsewhere I have presented the case for a publicly-owned banking and financial system to provide a proper service for people, without speculation and without grotesque salaries and bonuses.  See my paper to the Slovenian Labour Institute and the pamphlet for the UK’s Fire Brigades Union on the banks.  That would make the finance sector ‘fit for purpose’.

But public ownership and control is still ignored even in the leftist debates of New Economics, it seems. Nevertheless, as the City of London Corporation hosted the event (!), at least we got free wine and canapés afterwards.

Cheap money, low oil prices and corporate debt

March 28, 2016

Stock markets have rallied in the last month, buoyed by the decision of the European Central Bank to plough yet more credit into the banks and lower further its policy interest rate.  This was followed by the US Federal Reserve Bank’s monetary policy committee deciding not to raise its policy rate, claiming that it was worried about the state of global economy.  Investors loved this and interest rates fell to below zero for some bonds.  Now every financial institution is able to borrow as much as it wants for less than nothing.

So stock markets shot up, although they are still below the level of last summer.  But there is little to indicate that the so-called real economy globally is improving – on the contrary.  Global manufacturing output, as measured by investment bank, JP Morgan, is growing at only a 2.2% a year, less than half the usual trend, with the global manufacturing activity index (called the purchasing managers index – a survey of company intentions) hovering on the line (50 in the table below) between growth and contraction.  If the PMI is right, then world manufacturing output is heading below 1% a year.

JPM Global

The key economy globally remains America.  And last Friday, the final estimate for US real GDP in Q4 2015 was released.  In the last quarter of 2015, the US economy expanded at a 1.4% annual rate and was up just 2% from the last quarter of 2014 and 2.4% for the whole year of 2015 compared to 2014.  This is a better rate of growth than in the Eurozone or Japan, both at 1%.  But it is still very weak.  And there are signs that America’s economy is slowing down from even that low rate.  The Federal Reserve Bank of Atlanta has a pretty accurate forecasting tool for US economic growth.  As of last week, its GDPNow forecast for the first quarter of 2016 (finishing this week) is for just a 1.4% annual rate of growth, the same as achieved at the end of 2015.

The European Central Bank has warned that the global economic recovery has weakened, meaning 2016 will be “challenging” – particularly in emerging markets.  In its latest economic bulletin, the ECB says that global trade seems to have “lost momentum again” at the turn of the year – a worrying sign.

Readers of my blog know that I consider that business investment is the main driver of economic growth in a capitalist economy, not spending by households. According to JP Morgan’s economists, global equipment spending has decelerated significantly over the course of last year.  Business investment globally (excluding China) was growing at just 2% at the end of 2015, barely enough to replace existing ageing plant and equipment.  And JP Morgan reckons capital spending is growing at less than 1% a year globally in the first quarter of this year. Business investment fell 2.1% in the last quarter of 2015, the first quarterly decline for over three years.

JPM global capex

Behind the slowdown in corporate investment globally is the slowdown in corporate profits.  I have tracked corporate profits growth in five major economies: the US, Japan, Germany, UK and China.  The mean average annual growth of corporate profits for these major economies looks like this.

Global profits growth

Globally, corporate profits stopped rising at the end of 2015.  The situation is even worse in America.  US corporate profits plunged 7.8% in Q4 2015 after a fall of 1.6% in the third quarter – so two consecutive quarterly falls. These are first two consecutive falls since the Great Recession of 2008. Compared to the last quarter of 2014, US corporate profits are 11.5% lower in the last quarter of 2015. Over the whole of 2015, corporate profits fell 3.1% compared to 2014.

US corporate profits growth

Profits of top 500 US companies (those included in the S&P 500 index) fell 0.8% in 2015 from 2014 and were down 1.8% in the fourth quarter compared with a year earlier, according to analytics firm Estimize.  JP Morgan reckons that “earnings growth is expected to be negative year over year in Q1 and Q2 of 2016 as earnings weakness spreads beyond energy”.

All this suggests that the global capitalist economy is slowing towards outright contraction.  But not all agree.  Gavyn Davies in the FT reports that the ‘Now forecast’ of his company Fulcrum Asset Management see better news.  “Just when it all seemed very bleak, the global economy has shown some tentative signs of a rebound in recent weeks. The improved data significantly reduce recession risks in the near term…..This month, however, the data have failed to co-operate with the pessimists. Global activity growth has bounced back to 2.6 per cent, compared to a low point of 2.2 per cent a few weeks back. Much of this recovery has occurred in the advanced economies, with our nowcast for the United States showing a particularly marked rebound after more than 12 months of progressive slowdown.”

On the other hand, the IMF has hinted heavily that it will next month lower its 3.4 per cent growth forecast for the global economy with one of the main reasons being the failure of cheap oil to deliver a widely anticipated fillip to major economies.  New IMF chief economist, Maurice Obstfeld reckons that historically low oil prices could trigger a series of corporate and sovereign defaults across the world. “The possibility of such negative feedback loops makes demand support by the global community — along with a range of country-specific structural and financial-sector reforms — all the more urgent.”

This would explain why many corporations are now having growing difficulty in servicing their debts, even though central banks have driven interest rates on debt to an all-time low. The energy industry, until the oil prices started plummeting, was regarded as one of the most profitable sectors.  From 2006 to 2014, the global oil and gas industry’s debts almost tripled, from about $1.1tn to $3tn, according to the Bank for International Settlements. The smaller and midsized companies that led the US shale boom and large state-controlled groups in emerging economies were particularly enthusiastic about taking on additional debt.

It was a classic bubble, says Philip Verleger, an energy economist. “It was irrational investment: expecting prices to rise continually. Companies that borrowed heavily when prices were high are going to have a very tough time.”  From 2004 to 2013, annual capital spending by 18 of the world’s largest oil companies almost quadrupled, from $90bn to $356bn, according to Bloomberg data. But the expectations of sustained high prices have vanished: crude for 2020 delivery is $52 a barrel.  The oil price is now where it was in 2004, but most of the debt that was taken on in the boom years is still there.

Falling oil prices have hit other markets as risk appetite declines, says Hyun Song Shin, chief economist at the BIS. “When the credit cycle turns, you have a combination of higher volatility and tighter credit conditions,” he says. “It’s not the losses but the possibility of loss, and financial institutions pre-emptively cutting their exposure.”

The contrast between how stock market values and the state of the real world is starkly revealed in the stock price of the world’s leading producer of industrial equipment, Caterpillar and the its actual global sales.  The Caterpillar stock price looks like this.

Caterpillar stock

But world retail sales for Caterpillar look like this.

Caterpillar sales

Rising stock markets and very, very cheap credit; but low energy prices, rising corporate debt, slowing economic growth and falling investment and profits.  Something must give.

Brexit: stay or leave?

March 24, 2016

The UK’s referendum on European Union membership takes place three months from today.  How Britons vote will have an impact not just on Britain but also on Brussels.  The ‘capital’ of the European Union is under pressure from the terrorist bombings, but Brexit would open up fault-lines in the EU ‘project’ itself.  There could be implications for the survival of the European Union if one of its largest members should opt to leave.  It sets a precedent that could be followed.

“Should I stay, or should I go”.  The Clash

Should the British people vote to leave or stay in the European Union in the referendum in June?  Before anybody answers that question, they ought to consider this.  Whether Britons vote to leave or not is relatively small beer compared to the growing risk of a new world economic slump.  That will have much larger consequences for the British people than Britain leaving the EU.   Look at the damage that the Great Recession did to the major economies (graph below).


Some very pessimistic estimates have put the cost of leaving the EU for the UK economy at 10% of GDP. Some very optimistic estimates have put the gain from leaving at 10%.  Even if this were the case, either way, that margin would still be less than the loss of income per person already caused by the Great Recession and the very weak economic recovery since, which currently stands at 14%.  Open Europe, a think-tank that is itself neutral on the issue, reckons that, at worst, were the UK to leave the EU, its GDP would be 2.2% lower in 2030 than it would have been were the UK to stay in. And at best, it would be 1.6%  higher.

brexit impact

Anyway, it is not a question what is ‘best for Britain’, but what is best for the British people.  There’s a difference.  Would British big business benefit from leaving the European Union, some 40 years after joining the club?  Remember, right up to the global financial crash in 2007 onwards, the talk among the circles of British capital was whether to join the Eurozone or not, not whether to leave the EU.  Very few thought the latter would benefit British capital.

Since the global financial crash and the ensuing Euro debt crisis, the view has changed.  Today, the euro area is grappling with sluggish growth, the fallout from the euro crisis and an influx of refugees and migrants (and now terrorism – something previously aimed at Britain and the US). So, from the point of view of British capital, the gains from EU membership have begun to look less convincing.   Would British capitalism now do better outside the EU?  The answer is that it depends, but on balance, probably not.

Sure, much of the original gains in removing trade, investment and labour barriers within the EU have been exhausted.  But what would improve if Britain left? The EU institutions are certainly not holding the UK back from selling globally.  Could Britain do better than Germany in world markets if it were outside the EU?  Germany has a world trade volume that is more than three times the UK figure, but it is suffering from the economic slowdown in China right now.  So why would British capital do better than Germany by opting for Asia or America over Europe for exports or investment? Indeed, the Asian emerging economy crisis may break just as Britain votes to leave the EU trading area.

There is a myth pushed by the EU-leavers that Britain can negotiate just as good trade terms as they had within the EU without all the EU regulations and budget funding for EU institutions.  But the experience of European countries like Norway or Switzerland that have negotiated such agreements shows that with any trade deal comes obligations and conditions.  Norway and Switzerland must abide by all EU single market standards and regulations, without any say in their formulation. They must agree to translate all relevant EU laws into their domestic legislation without consulting domestic voters. They contribute substantially to the EU budget. And they must accept unlimited EU immigration, resulting in a higher share of EU immigrants in the Swiss and Norwegian populations than in the UK!  So overall, for British capital, there would be little difference outside than being in the EU, assuming it can negotiate a similar arrangement that Norway and Switzerland have.

Also, European Economic Association (EEA) members such as Norway do not belong to the EU’s customs union. Consequently, Norwegian exports must satisfy ‘rules of origin’ requirements in order to enter the EU duty free and the EU can use anti-dumping measures to restrict imports from Norway, as occurred in 2006 when the EU imposed a 16% tariff on imports of Norwegian salmon.  Also, EEA members effectively pay a fee to be part of the Single Market. In 2011 Norway’s contribution to the EU budget was £106 per capita, only 17% lower than the UK’s net contribution of £128 per capita (House of Commons 2013). So becoming part of the EEA would not generate substantial fiscal savings for the UK government and taxpayers.  The UK’s contribution to the EU budget, after rebates, is not particularly high per head of population and low as % of GDP compared to other EU members.

eu budget

The key interest of British capital is to preserve its hegemonic global position in financial services – and with the UK outside the EU that could come under threat.  Britain’s specialisation in services – not only finance, but also law, accountancy, media, architecture, pharmaceutical research and so on – makes entry to the EU single market critical. If Britain refuses similar EU trading conditions to those made with Norway, its service industries could be locked out of the single market. The French, German, and Irish governments would be particularly delighted to see UK-based banks and hedge funds shackled by EU regulations, and see UK-based businesses involved in asset management, insurance, accountancy, law, and media forced to transfer their jobs, head offices, and tax payments to Paris, Frankfurt, or Dublin.

As it is, even within the EU, Britain is one the least regulated countries in the world, as previous Labour and Conservative governments have boasted.  So getting rid of any EU regulations by leaving would have little added value for British capital.  Anyway, even outside the EU, the UK would still be subject to 700 international treaties, as a member of the UN, WTO, NATO, IMF and World Bank, and subscribe to a swathe of nuclear test ban, energy, water, maritime law and air traffic treaties. The idea that leaving the EU would lead to a golden era of UK sovereignty and self-determination, is, it is fair to say, far-fetched at least.  National sovereignty is a relative concept in modern imperialism.

EU states may also try and usurp the UK’s position as the EU’s most popular destination for foreign direct investment. Over the past 15 years, the UK has received more than 20% of inward EU FDI, but without full access to the EU’s internal markets, future FDI flows into car factories or financial services hubs might be redirected and create jobs elsewhere in the EU.

foreign investment

So if Britain votes to leave the EU, it is unlikely to get as good trade and investment terms as before and Britain will still have to agree to most EU regulations and contributions, but without any say.  And it could lose ground in financial services and in inward investment from America and Asia.  Only if ‘freedom’ from EU institutions were to produce a sharp increase in productivity, investment and trade with the rest of the world, would these losses be overcome.  On balance, that seems unlikely.

Indeed, in the short term, the uncertainty over the terms of any negotiations will mean a big reluctance of British capitalists to invest and for foreign investors to hold British financial assets.  The pound sterling has already weakened and it would fall even more with a vote to leave.  Any losses in investment and trade will add to losses in employment. Sure, maybe after two years of negotiations and, with perhaps further economic collapses in the Eurozone that threaten the Euro project itself, British capital might appear more attractive and the decision to leave the EU might seem right.  But that’s a big if.

Would the majority of British people gain or lose from Britain leaving the EU?  Britain’s Trade Union Congress (TUC) reckons that there are benefits for British workers from the EU.  In a report, the TUC cites rights such as paid annual leave and fair treatment for part-time workers may be in danger that could be rolled back by a Conservative government (UK Employment Rights and the EU).  “These are wide-ranging in scope, including access to paid annual holidays, improved health and safety protection, rights to unpaid parental leave, rights to time off work for urgent family reasons, equal treatment rights for part-time, fixed-term and agency workers, rights for outsourced workers, and rights for workers’ representatives to receive information and be consulted, particularly in the context of restructuring.  And without the back-up of EU laws, unscrupulous employers will have free rein to cut many of their workers’ hard-won benefits and protections”.

But the TUC exaggerates.  EU laws and directives like the 48-hour working week are hardly worth the paper that they have been written on, with many exemptions for employment sectors for example, like junior hospital doctors on a 72-hour week or the practice of many employers to get employees to sign a ‘waiver’ on working hours and conditions.  The point is that most of our working conditions are determined by national laws and by the class struggle at the workplace, not by EU laws.  Those battles have not been hindered or helped much either way by EU employment laws.

Even this isn’t the whole story, though, as it has become much more difficult in the UK for workers to enforce any employment law. The introduction of employment tribunal fees has seen a sharp drop in the number of cases being brought. As an employer in the UK there isn’t much employment law to fall foul of but, even if you do, the chances of being prosecuted for it are pretty remote.

Then there is the question of immigration.  Leaving the EU would supposedly allow Britain to block cheap labour from eastern Europe flooding into the country and lowering wages and conditions.  Or so the argument goes.  But any trade deal with the EU would involve free movement of EU labour as Norway and Switzerland must do.

Reducing immigration will not improve the situation for working people already in the UK.  Migrants often fill the gaps in the labour market that Britons won’t or can’t fill.  To take one example, strawberries, are now available in the shops for much longer. They are picked by migrant workers who return to Eastern Europe at the end of the season.  Care work is another industry heavily populated with migrant labour. Migrants often perform low paid, dirty work that British workers would be reluctant to perform.

It’s true that mass immigration can also cause pressure on education, housing and social services, particularly for working class people. But the actions of the Conservative government in reducing public spending, privatising schools and the NHS has a much bigger effect on services.

So whether Britain is in or out of the European Union will make little difference to the majority of people in the UK.  What does matter is the health of the economy, the level of wages and employment and the state of public services. That does not depend on Britain’s membership of the EU.

The euro debt crisis in Greece, Portugal, Spain, Italy etc is mainly to do with the crisis in capitalism since 2007 and not really to do with the institutions of the EU, cumbersome, bureaucratic and undemocratic as they are; or to do with the policies of the EU leaders for Europe.  The neo-liberal, pro-austerity measures applied by the EU Commission are the very same policies adopted by the national governments of Europe on their people.  EU policy is no more neo-liberal and pro-big business than is the policy of successive British governments of the last two decades, Conservative or Labour.

That’s something the Greek people recognised last year.  In their referendum on whether to accept the Troika ‘bailout’ last July, despite huge pressure from the EU leaders and Greek capitalism, the Greeks voted no because they opposed further austerity.  But the vast majority of Greeks still wanted to stay in the EU and even keep the euro currency.  For them, the issue was not ‘in or out the EU’, but ‘yes or no’ to further cuts in living standards.

Leaving the EU would probably be marginally bad for British capital and there would be little or no gain for British Labour.  But the debate is a total distraction and an irrelevance from the issues that do affect people’s lives, the crisis in global capitalism and what to do about it.  Under global capitalism, no one country can protect its citizens from pollution, climate change, economic slumps and world wars.  That needs global cooperation and policy action by socialist governments – something we don’t have.  Avoiding the damage from another major global slump, which is now on the horizon, however the British people votes in June, is way more important.

Two years ago, I made three predictions: that the Conservatives would be re-elected in the general election in May 2015; that the Scots would vote against independence from the UK; and that the British would vote to stay in the EU.  So far, it is two out of three.  I expect the third prediction to be confirmed by the end of June.


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