Greece: the never-ending circle

May 24, 2016

The next stage in the never-ending tragedy that is the Greek economy takes place today. The Greek government meets with the EU leaders and the IMF to discuss what to do about the current ‘bailout’ programme of credit and its public sector finances.

Over the weekend, the ‘leftist’ Syriza government in Greece got through parliament yet another range of severe cuts in public spending, increased taxes and a programme of extended privatisations, in order to meet the demands of the Troika (the EU, the ECB and the IMF). In return, the Greek government will receive another tranche of funding as part of the third ‘bailout’ package designed to get Greece to repay its pubic sector debts and ‘recapitalise’ its banks.

The funds will be used partly to cover the arrears of payments to the health service and schools that the central government had run up in order to make its own books balance. But most of it will be used to pay back existing loans and interest owed to the ECB and the IMF. So more money is being borrowed from the Troika to pay the Troika in a never-ending circle of madness!

The Greek public debt burden arose for two main reasons. Greek capitalism was so weak in the 1990s and the profitability of productive investment was so low that Greek capitalists needed the Greek state to subsidise them through low taxes and exemptions and handouts to favoured Greek oligarchs. In return, Greek politicians got all the perks and tips that made them wealthy too.

This weak and corrupt Greek economy then joined the euro in 2001 and the gravy train of EU funding was made available.  German and French finance came along to buy up Greek companies and allow the government to borrow and spend. The annual budget deficits and public debt rocketed under successive conservative and social democratic governments. These were financed by bond markets because German and French capital had invested in Greek businesses and bought Greek government bonds that delivered a much better interest than their own. So Greek capitalism lived off the credit-fuelled boom of the 2000s that hid its real weaknesss.

But then came the global financial crash and the Great Recession. The Eurozone headed into slump and Eurozone banks and companies got into deep trouble. Suddenly a Greek government with 120% of GDP debt and running a 15% of GDP annual deficit was no longer able to finance itself from the market and needed a ‘bailout’ from the rest of Europe.

But the bailout was not to help Greeks maintain living standards and preserve public services during the slump. On the contrary, living standards and public services had to be cut to ensure that German and French banks got their bond money back and foreign investment in Greek industry was protected.

So through the bailout programmes, foreign capital was more or less repaid in full, with the debt burden shifted onto the books of the Greek government, the Euro institutions and the IMF – in other words, taxpayers and citizens. The Greek people were ultimately committed to meeting the costs of the reckless failure of Greek and Eurozone capital.

Last summer 2015, the ‘Greek crisis’ came to head. The newly-elected leftist Syriza government appeared to refuse to accept the austerity measures demanded by the Troika. Finance minister Yanis Varoufakis went into the lion’s den of the Eurozone group meetings to call for debt relief and a rejection of the austerity measures. Eventually, Syriza leader Tsipras called a referendum of the people to say yes or no to the terms of Troika, amid the cutting off of credit to the Greek banks by the ECB, the imminent threat of financial and economic collapse and dire threats from the German leaders and the Eurozone group. The Greek people amazingly (including to Tsipras) voted by 62% to say no to these threats and austerity. The No side won every constituency in Greece and Tspiras had a mandate to reject the Eurozone demands.

But he and most of the other Syriza leaders backed down. They could not see any alternative but to accept the Troika demands. As they saw it, otherwise, credit would be cut off, Greece would be thrown out of the Eurozone and the economy would plunge even deeper into depression. They decided to agree to Troika terms in return for the vague promise that, some time later, the EU leaders would agree to ‘debt relief’. This presumably meant that Greece would have to pay less back to its creditors (now mainly the EU official loans) and so would have some ‘fiscal space’ to end austerity and get the economy going again – on a capitalist basis.

This is what I wrote last August on the news that Syriza had agreed to the terms of the third bailout: “The economic uncertainty is whether, even if the Greeks follow the deal to the letter, it will work to reduce Greece’s public sector debt burden, restore economic growth and reduce unemployment and reverse the drastic fall in living standards.  The answer to that question is clear.  It won’t”

“The IMF is not prepared to provide any further credit as part of this bailout because it does not think that Greek public sector debt can be stopped from rising as a share of GDP and that the Greeks can ever service it by borrowing from the market.  In other words, the debt is ‘unsustainable’.”

Now here we are, getting on for a year later, and Greece remains in economic recession.  The Greek economy contracted 0.4 percent on the quarter in the first three months of 2016 after growing by a meager 0.1 percent in the previous period. Compared with the same period a year earlier, the non-seasonally adjusted GDP shrank for the third quarter in a row by 1.2 percent, accelerating from a 0.7 percent fall in the last three months of 2015. So, since the Syriza government backed down, Greece has fallen back again into recession.

greece-gdp-growth-annual

Unemployment remains well above 20% and is double that for youth unemployment. Average real wages are still falling; pensions have been cut yet again and public services remain in tatters. And Greece is taking the brunt of the influx of refugees from Syria and the Middle East.

The Syriza government has done everything it has been asked of by the Troika in making the Greek people pay for the failure of Greek capitalism. And yet the EU leaders have still not agreed to ‘debt relief’. Indeed, they are talking of only considering it once the austerity measures in the latest bailout have been implemented in full and the programme comes to an end in 2018. In the meantime, the Greek government is supposed to run a budget surplus (before interest payments on loans) of 3.5% of GDP a year for the foreseeable future. That is a level way higher than any other country in the EU and way higher for so long than any other government has achieved ever!

No wonder the IMF considers this approach as unsustainable. The IMF executives have a mandate not to lend money to any country that it does not think can pay it back – simple. And the IMF analysts reckon that applies to Greece. (http://www.imf.org/external/pubs/ft/scr/2016/cr16130.pdf)

“Even if Greece, through a heroic effort, could temporarily reach a surplus close to 3.5% of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy making institutions and projections suggesting that unemployment will remain at double digits for several decades.” IMF.

So the IMF wants the EU leaders (who own most of the debt) to agree to ‘debt relief’. The EU leaders stubbornly refuse as they think it would set a precedent for Eurozone governments to get away from ‘honouring’ their obligations and would look bad in particular to the German electorate with a general election only 18 months away and the Eurosceptic parties there gaining ground.  This is an irony considering that in 1953 Germany was allowed to write off the debt it owed to the Allied Powers after the second world war.  That was done to get Germany to return to the capitalist fold and allow economic recovery.  But not for Greece in 2016.

Today, the IMF and the EU leaders meet with the Greek negotiators. The IMF has repeated it would take part in Greece’s €86bn bailout only if its European partners could prove “the numbers add up”.

The IMF reckons that without debt relief, Greece’s public sector debt to GDP ratio (the measure everybody follows) would not fall even with further austerity. Indeed, it would rise from around 180% now to nearly 300% by 2060 – in a ‘snowball’ effect where debt is repaid with more debt and interest payments keep rising on top.

Greece’s gross financing needs, or GFN, (the money it would need to service its debt pile) would soar to 67.4 per cent of total economic output. That compares to financing needs of just 18.5 per cent today. With sufficient ‘debt relief’, Greek public debt could finally start to fall, the IMF claims. Even so, the debt ratio would still be above 100% over 40 years from now!

And what is this ‘debt relief’. Well, the IMF suggests “payment deferrals” until 2040 – which would mean Greece would pay none of the costs of servicing any of its bonds or loans for the next 24 years. This would mean extending the grace period on its existing European Financial Stability Fund loans by another 17 years, ESM loans another 6 years, and loans owed to member states by 20 years. In total, these measures would help reduce the country’s payments bill by 4.5 per cent of GDP over the next 24 years, according to the IMF.

An additional proposal is to extend the life on the loans owed to Greece’s fellow member states (known as the Greek loan facility) by 40 years, from their current maturation date of 2040 to 2080 instead. And loans issued by the eurozone’s emergency bailout fund – the European Financial Stability Facility – would be extended by 24 years from 2056 to 2080 and from the permanent European Stability Mechanism (Greece’s largest single creditor) by another 20 years, also taking them up to 2080. Combined, the IMF calculates such measures would help keep the cost of servicing Greece’s total loans below 20 per cent of GDP by 2060.

The IMF also proposes that Greece should pay no more than 1.5 per cent of its GDP every year to service the costs of its ESM/EFSF loans until 2045. The fund proposes this be done by swapping current expensive short-term bonds with higher interest rates, with longer term paper with lower repayments.

All these ideas are not really debt relief in the sense of actually writing off the debt. Such a move is taboo. Greece must honour its ‘debts’. In reality, these propoals would mean that the debt would be perpetually ‘rolled over’ to the future and interest payments would be reduced to the minimum. The IMF wants these measures of debt relief to start now while the Euro leaders, led by Germany, want to push them back to after 2018.

But even these measures of debt relief won’t work unless the Greek economy starts to grow again.  How can the Greek economy be made to grow? I posed three possible economic policy solutions last summer. There is the neoliberal solution currently being demanded and imposed by the Troika. This is to keep cutting back the public sector and its costs, to keep labour incomes down and to make pensioners and others pay more. This is aimed at raising the profitability of Greek capital and with extra foreign investment, restore the economy. At the same time, it is hoped that the Eurozone economy will start to grow strongly and so help Greece, as a rising tide raises all boats. So far, this policy solution has been a signal failure. Profitability has only improved marginally and Eurozone economic growth remains dismal.

The next solution is the Keynesian one. This means boosting public spending to increase demand, cancelling part of the government debt and for Greece to leave the euro and introduce a new currency (drachma) that is devalued by as much as is necessary to make Greek industry competitive in world markets. The trouble with this solution is that it assumes Greek capital can revive with a lower currency rate and that more public spending will increase ‘demand’ without further lowering profitability.

But the profitability of capital is key to recovery under a capitalist economy. Moreover, while Greek exporters may benefit from a devalued currency, many Greek companies that earn money at home in drachma will still be faced with paying debts in euros. Many will be bankrupted. Already over 40% of Greek banks loans to industry are not being serviced. Rapidly rising inflation that will follow devaluation would only raise profitability precisely because it will eat into the real incomes of the majority as wages failed to match inflation. There would also be the loss of EU social funding and other subsidies if Greece is also ejected from the EU and its funding institutions.  This solution has been rejected by the Greek government and most of its people too.

The third option is a socialist one. This recognises that Greek capitalism cannot recover to restore living standards for the majority, whether inside the euro in a Troika programme or outside with its own currency and with no Eurozone support. The socialist solution is to replace Greek capitalism with a planned economy where the Greek banks and major companies are publicly owned and controlled and the drive for profit is replaced with the drive for efficiency, investment and growth. The Greek economy is small but it is not without an educated people and many skills and some resources beyond tourism. Using its human capital in a planned and innovative way, it can grow. But being small, it will need, like all small economies, the help and cooperation of the rest of Europe.

This solution has never been posed by the Syriza leaders.  So the EU leaders and the Syriza government will continue trying to meet the demands and targets of the Troika in the vain hope that European capitalism will recover and grow and so allow Greeks to get some crumbs off the table.

There may be some deal on ‘debt relief’ from the discussions. But it will still mean that Greece has an unsustainable burden of debt on its books for generations to come, while living standards for the average Greek household fall back below where they were before Greece joined the Eurozone. And another global recession is fast approaching.

Labour’s new economics – not so new

May 22, 2016

Over 1000 people packed into a London college to take part in a day of analysis of the state of the British economy.  And hundreds had been turned away.  This was a conference called by the new left-wing leadership of the opposition Labour party in Britain.  The hardworking and dedicated activists within the Labour party that had backed Jeremy Corbyn, the new leftist leader, had turned out in droves to discuss with due intent what is wrong with capitalism in Britain and what to do about it. It was an unprecedented event: the leadership of the Labour party calling a meeting to discuss economics and economic policy and allowing party members to discuss.

Labour’s finance leader, John McDonnell opened the conference by saying the aim of the various sessions was to see how Labour could “transform capitalism” into delivering a “fairer, democratic sustainable prosperity shared by all”.  We needed to “rewrite the rules” of capitalism to make it work for all.  He argued the British capital was failing to invest for growth and jobs.  We needed to break with the ‘free market’ ideology of the neo-liberal agenda and “reshape the narrative” with “new economics”.

What was this new economics?  Well, I’m afraid it was not new but really a rehash of old Keynesian arguments and policy proposals.  As McDonnell said, the aim was to “transform capitalism” with new rules and state intervention, not to replace it.

The key note speaker at the conference was left Keynesian Cambridge University economist Ha-Joon Chang.  He delivered an entertaining and amusing presentation, the gist of which he had already written in an article for the British liberal Guardian newspaper that week.  Chang presented a compelling argument that the strategy adopted by previous right-wing and Labour governments of weakening manufacturing and industry in favour of finance, property and other unproductive services (in other words, turning Britain into a rentier economy) was a big mistake.

British capitalism was failing to compete in world markets with a record high deficit on trade with the rest of the world – see graph below (all graphs in this post have been researched by me and are not those of any speaker).

bop

And its people had seen no rise in real incomes for eight years since the global financial collapse.  British economic strategists reckon that the UK economy did not need a thriving industrial base and could rely on its financial services – just like Switzerland.  The irony was that Switzerland is actually the most industrialised economy in the world, as measured by manufacturing output per person (see below).

manuf peer head

In contrast, British manufacturing has been in fast decline as a share of total output among major capitalist economies.

uk manuf

Chang reckoned Labour should aim to boost industry, R&D and investment, because those sectors can raise productivity for all sectors and incomes.  But he did not expand on how that was to be done in an economic world where banks and hedge funds rule, loans are made for property, while businesses hold back from investment.

In the finance workshop, the poverty of analysis and policy was very evident.  The main speakers were Frances Coppola, who has worked as an economist in many banks and now runs a blog on economics; and Anastasia Nesvetailova, who is a professor at the City of London university on finance and has spoken before at the series of ‘new economics’ meetings run by the Labour party.  Both speakers basically told hundreds before them that the regulation of the banks  would not avoid a future financial crash – indeed by making regulation ‘too tight’, it was strangling the ability of the banks to lend.  A financial transaction tax would not work either in controlling risk-taking by banks, particularly in new finance areas outside regulation.  Breaking up the big banks or separating their speculative operations from basic banking would not work either. Indeed, nothing would work to avoid yet another crash in the future: “we just had to prepare for one”!

So our finance experts had not a clue what to do. Staring them in the face was the obvious answer.  If the big banks are still engaged in risk activities, in greedy laundering and in paying grotesque salaries to their top executives, despite regulation, why not take them into public ownership under democratic control so that banking becomes a public service for the people to help investment and growth? This policy move was never even considered by these banking experts and yet Britain’s own firefighters union have produced an analysis showing why it was the best way forward, which was formally approved by the trade union federation.  I was told that state-owned banks would not work because they are corrupted by politicians – sure, as opposed to privately-owned banks that are as pure as snow.

At least in the session on fiscal and monetary policy, Michael Burke provided a coherent account of how the weak economic recovery in the major economies including the UK was not due to a lack of consumer demand as the Keynesian ‘experts’ keep arguing, but to one major factor: the failure of business to invest. The graph below for the UK shows how it was investment that collapsed in the Great Recession not consumption. It was the same story in all the major economies.

investment and concumption

The large companies were hoarding cash, small business were just hanging on and governments were cutting back on public sector investment.  Indeed, British capital has the lowest level of investment to GDP of the major capitalist economies (see black line in graph below).

investment to gdp

Weak and even falling investment had lowered growth rates and so held down incomes.  The answer was a new plan for growth based on public investment.

The conclusion of the day’s conference screamed out to me.  The capitalist sector had caused the crash, not the public sector.  But the public sector had to pay with increased debt and a reduction in the role of the state as support for growth and as a safety net for those who lost their jobs, homes and incomes.

So instead of trying to “transform capitalism”, Labour needs to develop a programme to replace capitalism by bringing into public ownership the major banks and business sectors under democratic control to be integrated into a plan for investment in people’s needs not profit.  Instead, Labour’s advisers and experts offered just some old ideas that had been tried and failed before to direct or regulate capitalism to make it work better.  No new economics there.

 

Monopoly or competition: which is worse?

May 17, 2016

In a recent article, Joseph Stiglitz, former chief economist of the World bank, Nobel prize winner in economics and now adviser to the British Labour Party, reckons that we are in a new era of monopoly and this is a the key cause of extreme inequality of income and wealth, inefficiency and low productivity growth and general stagnation in the major economies.

Stiglitz argues that the classical and neoclassical schools of economics assumed ‘competitive markets’ where all companies were on a ‘level playing field’.  This meant that owners of capital received profits that matched their contribution to an increase in output, their ‘marginal product’.

This rosy view is dismissed by Stiglitz.  In reality, who gets what in society is dependent on ‘power’.  Large companies can dictate prices in markets to small companies and can dictate wages to labour where they have no collective power (trade unions).  This ‘monopoly’ (over markets for commodities and labour) is what is ruining capitalism, argues Stiglitz.

Clearly, there is more than an element of truth in this perspective of capitalism.  The balance of forces in the struggle between capital and labour determines the share of income created by labour between profits and wages.  And it’s also true that large companies can often fix prices and market access to gain a lion’s share of sales and profits.

Indeed, Marx forecast over 160 years ago that the competitive struggle for profits between capitals and recurrent crises in production would lead to greater concentration of capital in the hands of a few and the centralisation of capital in financial sectors, intimately connected to the state itself.

Stiglitz cites a very recent account of market concentration in the US carried out by the US government.  The report found that in most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top 10 banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010.

Stiglitz concludes “today’s markets are characterised by the persistence of high monopoly profits”.  Stiglitz thus calls for ‘government intervention’ to reduce the power of monopolies and presumably create an environment for more competition so that there is “efficiency and shared prosperity”.  But this begs the question: is ‘competitive capitalism’ any more likely to deliver better economic growth, higher productivity from the labour force (efficiency) and less inequality than ‘monopoly capitalism’?

The answer to the question is partly met by pointing out the illusion that there ever was a great ‘competitive capitalism’ that grew fast without crises and distributed incomes and wealth on a ‘fairer basis’.  Capitalism became the dominant mode of production globally with all the warts of monopoly, state support and firm suppression of labour power already there.  There never was a level-playing field and, globally now, despite the competitive struggle for markets, there are different levels of monopoly or imperialist power.

But the other contradictory side of the answer to the question is that competition has not disappeared.  Stiglitz dismisses the view of Joseph Schumpeter that monopolies are eventually undermined by new competitors with new technologies or new products and markets.  Yet, as Marx showed, the development of ‘monopoly’ super-profits become an incentive for new capital to flow in (if it can break through the tariff, scale and other cartel barriers).  And that happens all the time: from publishers to Amazon; from British industry in the 19th century to German and US industry in the 20th; to Chinese manufacturing in the 21st.

After all, monopoly power is really oligopoly (a few large companies) and oligopoly can exhibit fierce competition, nationally and internationally.  The real cause of inequality is not monopoly but the increased exploitation of labour by big capital since the 1980s in the effort to reverse falling and low profitability experienced in the 1970s.  And the real cause of ‘stagnation’ and low productivity growth is not monopoly but the failure to invest, not only by large ‘monopolies’ but also by smaller capitals suffering from low profitability and high debts.  In other words, it is not monopoly that is the problem per se, but the weakness of the capitalist mode of production where investment and employment is only for profit.

This Stiglitz ignores.  As a result, his solution of government intervention to reduce inequality and create a more ‘level playing field’ for ‘competition’ among capitalist companies is utopian (you can’t turn the capitalist clock back) and unworkable (it would not achieve greater equality or better growth).

Ironically, there is another study that Stiglitz has not noticed that shows the rise in US inequality has coincided with the decline of large companies that used to employ hundreds of thousands or even millions of workers and their substitution by much smaller companies.  The share of large employers in total US employment went down simultaneously with the increase in US income inequality.  This study shows that is the decline in the power of labour through out-sourcing and globalisation that has driven up inequality in incomes.

The ‘internal’ break-up of large company (Fordist) employment into small contractors is the key feature of Stiglitz’s world of ‘monopoly’. In other words, what workers in America need is not the break-up of monopolies to create small companies in competition but trade unions.  The monopoly power that matters is that held by capital over labour.

new report this week from the Labor Center at the University of California, Berkeley, found that a third of production workers — non-managers working on factory floors and in related occupations — earn so little that their families receive some form of public assistance such as food stamps or the Earned Income Tax Credit. Many of those workers are temps, who account for a growing share of factory employment. The median wage for a manufacturing production worker, according to separate data from the Bureau of Labor Statistics, was $16.14 an hour in 2015, below the $17.40 an hour for all workers

The average manufacturing production worker in Michigan earns $20.80 an hour, vs.$18.86 in South Carolina, according to data from the Bureau of Labor Statistics.  Why do factory workers make more in Michigan? In a word: unions. The Midwest was, at least until recently, a bastion of union strength. Southern states, by contrast, are mostly “right-to-work” states where unions never gained a strong foothold. Private-sector unions have been shrinking , but they are stronger in the Midwest than in most other parts of the country. In Michigan, 23 percent of manufacturing production workers were union members in 2015; in South Carolina, less than 2 percent were.

Unions also help explain why the middle class is healthier in the Midwest than in the Southeast, where manufacturing jobs have been growing rapidly in recent decades. A new analysis from the Pew Research Center this week explored the state of the middle class in different parts of the country by looking at the share of households making between two-thirds and double the national median income, after controlling for the local cost of living. In many Midwestern cities, 60 percent or more of households are considered “middle-income” by this definition; in some Southern cities, even those with large manufacturing bases, middle-income households are now in the minority.

The power of capital over labour has produced post the Great Recession in America millions of households in permanent jeopardy of slipping into outright poverty. A Federal Reserve survey that found 47% of Americans wouldn’t be able to cover an unexpected $400 expense without borrowing or selling something. The Gallup Good Jobs Index measures the percentage of the adult population that works 30+ hours a week for a regular paycheck. It stood at 45.1%. In the US, 62.8% of the civilian noninstitutional population participates in the labor force, and 5% are unemployed, while Gallup tells us only 45.1% have what it considers a “good job.” These aren’t directly comparable datasets, but a rough estimate suggests that maybe a fifth of the labor force is either unemployed or have less-than-good jobs.

People who lose jobs in a recession experience a variety of long-lasting effects. Their new jobs often pay them lower wages, and it takes years for them to reach their previous earnings peak. These people are less likely to own a home; they experience more psychological problems; and their children perform worse in school. This is called ‘wage scarring’.

wage scarring

About 40 million Americans lost their jobs in the 2007–2009 recession. Only about one in four displaced workers have got back to pre-layoff earning levels after five years, according to University of California, Los Angeles economist Till von Wachter. A pay gap persists, even decades later, between workers who experienced a period of unemployment and similar workers who avoided a layoff. People who lost a job during recessions made 15-20% less than their nondisplaced peers after 10 to 20 years.  And these people will reach retirement age with little or no savings. They will either keep working or they will live frugally.

The April jobs report showed a staggering 16% unemployment rate for teenagers ages 16–19. This sample includes only those who were actively looking for jobs, so these aren’t full-time students. They have either dropped out, or they want to work while in school.  And there is the surprisingly higher death rate among middle-aged whites in America. That rate is the direct result of increased suicides and abuse of drugs and alcohol – all part of the psychological depression process. Over the past decade, Hispanic people have been dying at a slower rate. Black people have been dying at a slower rate; white people in other countries have been dying at a slower rate.

mortality rates

Yes, monopoly (more accurately oligopoly) power has increased in the last 150 years since Marx forecast that the capitalist mode of production would lead to increased concentration and centralisation of capital.  And that shows that capitalism is in its late stage of development and so must be replaced by ‘social monopoly’.  But that also means that a return to competition by government regulation, as Stiglitz implies, would not work; either to renew the power of capitalist development or to reduce inequality.

The permanent damage to millions of people’s lives in America, one of the richest capitalist economies in the world and the ‘land of the free’ is not the result of monopoly, but of the failure of capitalism to deliver enough things and services that people need, affordably.  Yes, the rich elite sit atop their huge companies and banks ‘earning’ massive salaries and bonuses and hedge fund managers and bankers reap big capital gains.  But the vast majority of Americans are struggling to make ends meet precisely because of ‘competitive capitalism’ and its failures.

US economy slows: too much saving or too little investment?

May 11, 2016

Anyway you look at it, the US economy is slowing down.  Indeed, real GDP growth in the US based on the last quarter (Q 2106) has slowed to 1.9% year over year, not much above the rate of growth in the Eurozone. The decline in growth is the product of a decline in investment.  The investment drag is clear with GFCF in the Eurozone outpacing its US equivalent for the last two quarters.

Real GDP

Total investment in the US is now making no contribution at all to the expansion of the economy.  See how the green part of the bars below has disappeared.

Contributions to GDP

As I have shown before, this weak investment mirrors the deterioration in corporate profitability, which is now falling in the US.

Corporate profits growth

The productive sector of the US economy has particularly weakened and is now heavily contracting – in contrast to weak but steady growth in the Eurozone.

Industrial production growth

Most commentators argue that this is due to temporary hit to the energy sector following the collapse in oil prices.  But even if you exclude energy production, US manufacturing output is crawling along.

Manufacturing output growth

Alongside slowing real output, inflation in prices of goods and services has disappeared in both the US and the Eurozone.  Deflation is still close – another indicator of the long depression in the major economies.

Falling inflation

But here is the real irony that should confound the Keynesians who reckon that the cause of the depression is the failure of governments raise spending to compensate for ‘weak demand’.  Since 2008, the US economy has grown faster than the Eurozone.  And yet in the US government spending has made a negative contribution to that growth while, despite all the talk of German-imposed austerity, government consumption has provided a net boost to real GDP in most European countries since the crisis broke.  In other words, there has been more ‘austerity’ in the US than in Europe and yet the US economy has recovered better from the Great Recession!

The graph below shows that since 2008, the US economy has grown 10.8% but government spending (yellow bar) has shrunk, while the German economy has risen only 5.5% with government spending contributing over 2% pts of that.  Even ‘austerity’ UK has seen more government spending in its recovery.

GDP breakdown

Nevertheless, the Keynesians continue to claim that this low growth world is due to the lack of fiscal and monetary injections into the economy and has nothing to do with the underlying problems of the capitalist economy: low profitability, high debt and weak investment and poor productivity growth.  Only this week, Martin Wolf told us, yet again, that weak growth in the Eurozone is due to the failure of Germans to spend or invest rather than save.  Germany needs to absorb its ‘excess savings’ by spending to get Europe and the world going.

This is nonsense.  As I explained in some detail in a previous post, there is not a global savings glut that needs to be absorbed.  And German corporate savings as a share of GDP are not particularly high compared to other countries.  The issue is low investment, yes.  But why?  Wolf seems to think it is due to ignorant, rigid attitudes in Germany and elsewhere.  But the objective reason is low profitability from future investments and existing relatively high corporate debt.  Another way of looking at this is to say that it is a ‘supply-side’ problem, not one of the lack of demand.

An argument in these terms has broken out between the Keynesians and the neo-classical wing of mainstream economics.  A new paper by some top Keynesian economists, couched in extremely obtuse mathematical models, seeks to show that the current weak US economy is due to the inability of central banks to get interest rates low enough to stimulate investment.  The US economy is ‘zero-bound’ and so we have ‘secular stagnation’.  This is the Summers-Krugman explanation of this long depression.

In response, neoclassical economist John Cochrane has shown that these assumptions are just unrealistic.  “I read this paper as a brilliant negative result. It shows just how extreme the implicit assumptions are behind the policy blather. It shows just how empty the idea is, that our policy-makers understand any of this stuff at a scientific, empirically-tested level, and should take strong actions to offset the supposed problems these buzzwords allude to”. Cochrane’s alternative view is simple, he says.  Interest rates are low because inflation is near zero.  Growth is low because productivity growth is low.  Productivity growth is low because investment growth is low so the productive potential of the US economy has fallen back.  This is much closer to the Robert J Gordon explanation of the depression.

The policy conclusion of the Keynesian position is to pump yet more money into the banks and the economy (helicopter money next) and for governments to launch spending programmes.  The neoclassical supply-side policy position is to make companies more efficient by cutting wages and employment and reduce the ‘regulation’ of the capitalist companies to allow the ‘market’ to work; while cut government spending to reduce the level of debt.

Neither option has worked or will work.

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.


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