Prospects for 2012

2011 was a pretty awful year for the major capitalist economies.  At the beginning of the year, most mainstream economic forecasts asserted that the major capitalist economies would continue to accelerate their recovery from the Great Recession of 2008-9 through 2011, with real GDP growth rising to about 3% on average.  However, by the end of the year, we now know that the US economy will achieve little more than 2% real growth (the OECD says 1.7%); the core of Europe around Germany did better; but the UK will fail to grow even by 1% and southern Europe has slid back into a contraction of anything between -1% (Spain and Italy) to -6% (Greece) – as the euro debt crisis and fiscal austerity destroyed economic activity. Japan, after an earthquake, a tsunami and the consequent nuclear disaster, has sunk back (down 0.3% in 2011).

The large emerging economies of India, Brazil, South Africa and China are also slowing fast.  India is now growing at only 5% a year, down from 9% at the beginning of 2011, China is slipping towards 7% from 10%, while Brazil has dropped back under 4%.  These growth rates are still much higher than the mature capitalist economies, but given that the emerging economies need to absorb a massive influx of agricultural peasants into the cities for urban employment, the emerging economies need to grow fast in order to create sufficient jobs.

The picture for 2012 looks little better, except maybe for the US and Japan – relatively.  The OECD forecasts that the Eurozone will stagnate at best, but even the US and Japan will grow at below average trend rates.

And the overall employment of the labour force in the advanced capitalist economies is worsening, not improving, despite the limited recovery of those economies since the Great Recession.  The unemployment rate is still near 9% in the US on official figures, but in reality is much higher if those who have given up looking for work are included (25m Americans are out of work or are unable to find it).  In the UK, unemployment rises by the month, as it does in the main European economies, with the exception of Germany.   The OECD predicts that unemployment in the advanced capitalist economies will rise in 2012 to reach nearly 50m, a near 50% rise over 2007 before the Great Recession.

But the biggest sore is the level of youth unemployment.  Never since the Great Depression has the unemployment rate in the OECD economies among those aged 15-24 years been so high.  The data are truly appalling, with youth unemployment rates varying from a minimum of 20% up to 40% plus in Greece and Spain.

‘Normally’, after a generalised slump in the major capitalist economies, as in 1974-5, or 1980-2 or 1991-2, or 2001, there is an accelerated recovery in economic activity, usually well above the long-term average growth rate set by the rise in labour productivity and employment growth.  That’s because there is a large ‘reserve army of labour’ available to work at low wage rates and there is plenty of ‘spare capacity’ to put into motion in machinery and plant, with less competitors in the market place after bankruptcies and closures.

But since the trough of 2009, the major capitalist economies have generally failed to achieve even their former long-term average growth rates and some of them are still contracting.  Why is that?  What is different this time? I outlined what these differences were when reviewing the prospects for 2011 (see my post, Profits and investment in the economic recovery, 29 December 2010).

There are two differences.  The first is that the rate of profit in the largest and most important capitalist economy, the US, is still in its downward phase that, I assert, began in 1997 (see my various posts).  Since US profitability peaked in 1997, that rate has not been surpassed and the subsequent peak in  2006, even after a massive credit boom, was still lower than in 1997.  That has reduced the incentive of the productive sectors of capitalism (manufacturing, transport and services), at least in the advanced capitalist economies, to make new investments and employ more labour over the period since 1997 compared to the period 1982-97.  Indeed, it is my view that the declining trend in the US rate of profit since 1997 was the underlying or ultimate cause of the Great Recession in 2008-9 (see my book, The Great Recession and subsequent papers).

However, US corporate profits have now surpassed the level of the previous peak in 2006-7 in absolute terms, so investment has been recovering from the depths that it fell to in the trough of 2009.  Indeed, by the end of 2011, business investment was rising at a 14% annual rate and had provided one-third of the recovery in real GDP in the US economy since the Great Recession ended.  Even so, business investment growth is still weak compared to the huge rise in corporate cash flow and profits.  Most cash-rich US corporations are hoarding their money – indeed corporate investment as a ratio of corporate profits has not been as low in over 60 years.

The massive rise in US corporate profits since mid-2009 has been achieved by reducing the wage bill and other payments to the labour force (health insurance and pensions). Labour ‘compensation’ as a share of GDP has fallen to a 50-year low.  Labour incomes have been partially supported by government transfer payments (public benefits), now accounting for 12% of aggregate labour income compared with just 7% in 2007.  Households have also been running down what savings they have and borrowing more (if they can) to support necessary spending.

But even so, the recovery is very weak compared to previous cycles because the rate of profit, although it has recovered too, remains relatively low historically. In 2012, we can expect US corporate profits to rise further in nominal and even real terms, but at a slower pace than in 2011 and for the rate of profit to start to drop.  That does not mean a new economic slump in 2012.  The history of US capitalism since 1945 suggests that, as the corporate rate of profit falls, eventually the overall mass of profit will peak and fall back, but it can take a lag of some three years or so.  That suggests a new crisis of production in the US around 2014 onwards – but not yet.  Nevertheless, 2011 has confirmed that capitalism is really in a long depression similar to that of the 1880s and 1890s that is different from the ‘normal’ cycle of slump and recovery experienced in the crisis period of 1965-82 or the ‘boom’ period of so-called neo-liberalism of 1982-97.

In the other major capitalist economies, profitability also slumped in the Great Recession, but it seems that the recovery in profits has been weaker than in the US corporate sector.  In the UK, corporate profits are still not back to their peak of 2007 (see my post, UK: the best laid plans of mice and George Osborne, 29 November 2011).  The same probably applies to most of the European economies and to Japan (I shall provide some data in a future post).

The other reason for the relatively slow and weak recovery from the Great Recession (with growth rates so low that they do not increase employment in any appreciable way) is to be found in the proximate cause of the Great Recession, namely the huge rise in debt or credit (or what Marx called fictitious capital) that delayed the underlying crisis in capitalist production and stimulated the unprecedented bubble in housing and property in the US and elsewhere.  Household debt rose to record levels relative to income and the real value of property – indeed in the US it rose 50% as a share of GDP from 1997 to 2007.   In the top seven capitalist economies, total non-financial sector debt has doubled to 300% of GDP from 1980.  In the US, the debt ratio reached 250% in 2007 from 190% in 1997, now a debt burden of $120,000 for every American.

The Great Recession was a necessary process under capitalism, first to restore the rate of profit in the productive sectors by reducing the cost of real capital (plant, machinery and wages) through company collapse, unemployment and a stoppage of investment; and also to liquidate the cost of debt or fictitious capital through bankruptcy or default. Corporations have stabilised or ‘deleveraged’ (reduced) their debt, while also boosting profitability in production.  Households find deleveraging much more difficult – because reducing debt means defaulting on their mortgages and losing their homes or being unable to meet bills because they can no longer borrow.  US household debt has fallen only a little (5%), while household wealth in the form of home values and cash, bonds and stocks has plummeted.  US net household wealth to income is down 20% from its peak in 2006.

Overall debt including that run up by governments has hardly moved. That’s because when corporations and households deleverage, they stop investing or consuming as much.  That stops an economy from growing as fast.  The banking collapse forced governments to bail out the financial sector and the ensuing economic slump forced governments to support the unemployed and provide other limited social transfers.  So governments had to borrow more because tax revenues slumped in the recession. Government debt rose as the private sector deleveraged, leaving the overall debt level pretty much unchanged.  In the US, overall debt is still rising.  Since peaking in 2007, US household debt to GDP has fallen 7%, corporate debt is static, but government debt to GDP has jumped 50%.  Foreign debt has also risen, so overall debt has actually risen by 9%.

This burden of debt weighs down on the productive sector of the capitalist economy in two ways.  First, the cost of servicing the debt (paying interest and any principal repayments) increases as a share of corporate or household income, even though interest rates are at rock bottom levels – at least for those who can borrow.  But many smaller companies and households cannot because they have no assets to borrow against and banks have sharply tightened their criteria for credit. For governments, it means that the servicing of debt, i.e paying the bondholders (the banks and other rich investors) their interest, eats into available money for health, education and other government spending designed to raise the productivity of the workforce.  Over 20% of US federal government spending goes on servicing federal debt.

And second, the increase in government spending begins to encroach on the private sector’s ability to make profit, both through increased taxation and also through competing with the private sector in various areas of investment. Of course, pro-capitalist governments bend over backwards to reduce that burden through cutting corporate taxes (and shifting the burden of taxation onto households and to any spending by households).  Indeed, during the Great Recession, most large corporations paid little tax as they claimed their losses against future tax charges.  But even so, over the long term, if government debt keeps rising or does not fall, it will become an albatross around the capitalist sector, reducing its ability or willingness to invest.  That is why debt matters, contrary to the view of the Keynesians, who see government spending (through borrowing or not) as the way out of recession.

Indeed, the history of capitalism shows that if debt reaches high levels, the burden of this debt, because it cannot create new value but instead sucks away new value that is created in the productive sectors of capitalism, will cause a reduction in economic growth over the long term and as we have seen, even provoke a financial crash.  Sure, debt can be financed through new growth and new profits, or by ‘cheating’ the creditors through rising inflation, so that the real value of the debt falls.  But it will be at the cost of faster economic growth.  I shall return to this issue in more detail in a future post.

So 2012 is likely to be another year of very weak economic growth in the major capitalist economies.  But it is not likely to see a return of a big slump in capitalism.  The US capitalist economy will rise on some further increase in profits and investment, but probably by no more than 2%.  Europe will struggle to grow much more than 1% in real terms, as Germany expands by 2% but southern Europe contracts, at least in the first half of the year.  Asia will grow, but below previous long-term average rates.  Unemployment will stay near its recession highs.

More struggle to make ends meet for the majority, with average real incomes likely to decline for another year and small businesses struggling to make much profit; more misery for the unemployed and those on benefits,; but continued slow recovery for the larger capitalist businesses – that’s the prospects for 2012.

8 thoughts on “Prospects for 2012

  1. Increased Gov spending now though could [as Keynes would prescribe]be reversed when the conomy regained its pre crisis trend growth or some other defined level of growth. This would limit the rise of debt and plausibly reduce it eventually to some sustainable level. After all, levels of Gov debt were much higher than they are now after the war and this did not impinge on growth back then.

    1. Paul
      Yes, if growth returns, then debt can be paid down or serviced more easily, as incomes rise. Then increased public spending is more affordable for capitalism (although capitalists still wont like it!).

      The problem is that if debt gets very high, it curbs the ability for the productive, employment sectors of capitalism to grow, slowing the process of recovery. Recessions are there to devalue capital, including fictitious capita, by bankruptcy and default on debt. But if the debt is high, it takes a very big recession and the recovery is slower.

      The post-war debt argument has been raised by Keynesians, like Paul Krugman. I’m going to deal with this issue in a future post. Suffice it to say now that, I think the post-war boom was so powerful that the debt (ratio) was significant. This time it’s different.

      Anyway, the idea of Keynes that the government spends to help capitalism out of recession and then stands back once capitalism is going well is based on the view that capitalist production is just fine and must be in the driving seat, except when it drives off the road and nearly kills us all.

      1. I’m not fully in agree with the sentence “Keynes wants to save Capitalism, full stop”. Surely he wanted this, but he imagined a new form of market economy, where Government is not a witness, but the husband, and liberty (also the individual initiative in economy) is the wife.
        In “Am I a liberal?” and a lot of other essays and books (also in the last chapter of General Theory) JMK designed a pragmatic idea of planning as condition to have freedom and individual initiative.
        A “third way”, but not a “middle way” and very different from the Blair’s one (that was a Thatcherism with a bit of pink).
        John Maynard was a Keynesian, not a New or Post Keynesian 🙂

  2. Increased Gov spending now could be reversed when growth returns though. As Keynes would have prescribed. After all, we had much higher levels of Gov debt after the war and this did not impinge on growth for some two decades.

  3. Great post, and thanks for all of the great posts over the last year. I have two small questions, both in regards to the relevance of debt to the productive sector:

    1. Why does the cost of servicing the debt increase as a share of corporate income if interest rates are at rock bottom?

    2. Can you give an example of ways in which the increase in public spending is currently competing with the private sector? This makes sense theoretically but I’m trying to think of an instance of this that I’ve heard about…

  4. Servicing debt includes two components: the interest cost and the repayment of the debt. Even if the interest-rate is low, if you repay the debt by taking out another loan, or roll it over as it is called, and also increase your borrowing as well, then the next time you have to repay, the burden is even greater, despite low interest rates. Companies and governments try to reduce that burden by borrowing at longer maturities or refinancing at lower interest rates. But if the overall level of debt rises sufficiently, then the servicing costs will also eventually rise. US households found that their servicing costs to income rose to 18% (I think) at the peak of the housing boom despite relatively low interest rates. That’s because mortgages included a repayment component as well as interest. I’ve got an interest only mortgage!

    Public sector investment when it is done through public sector corporations usurp the role of the private sector. In the UK, this was prominent in the utilities: water, electrics, gas, telecoms, even steel in the 1960s and 1970s. Thatcher got rid of that. Also, infrastructure projects and council services, as well as health and education, are public sector activities that could be done by the private sector. Increasingly, it is the aim of capital to take these back from the public sector. As you know, the public sector is being turned into a giant commissioning agent to provide what are supposedly ‘public services’ but are actually outsourced to the private sector to make a profit.

    In the US, the struggle of private insurance and pension funds to block state-run insurance, and state-run health services is a prime example of where public spending would compete with the private sector.

  5. Public debt is mostly irrelevant. It is private debt that is the problem, and the US of today is quite different than it was in 1945.

    My construction-worker grandfather bought a new car for cash in the early 1950’s. No one in the U.S. working class can do that now, they have to go in debt and get financed.

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