So the US Congress has forced a shutdown in a portion of federal government services. From yesterday, 800,000 federal employees will be laid off without pay. This affects about one-third of federal government spending, the rest is actually exempt and, of course, Congress has agreed to ensure that American soldiers on ‘active service’ will continue to be paid, but not civilians. So far, after two days of shutdown, according some estimates, US real GDP growth will be reduced by about by 0.1 percentage points at an annualised rate in this quarter, while a week-long shutdown would cost 0.3 percentage points. And remember that, in the third quarter, the US economy was growing at just 1.7% (see my post, https://thenextrecession.wordpress.com/2013/07/31/the-us-economy-bigger-but-not-healthier/). So a continued shutdown would begin to have a significant effect on real GDP growth.
The argument of some mainstream economists, no doubt easily seized upon by the tea party activists in the Republican party who are behind forcing this shutdown, is that smaller government and lower government spending is good news. After all, the loss in GDP will be really in unproductive government spending. Capitalist sector growth is unaffected. This is nonsense. Sure, overall government spending, whether financed by borrowing or taxes, is a negative to overall capitalist sector profits, but significant sections of the capitalist sector depend on government procurement of goods and services. This will now be suspended – they may be recovered later, but some losses for capitalist producers of government demand will endure. This leaves out, of course, the impact of the loss of government services on the poor and needy, namely the closure of federal health services and food stamps provision etc. But then that is just a ‘use value’ for people and not a reduction in ‘exchange value’ for capitalist production, which is all that matters.
But that is not the end of the risk of a new downturn in US economic growth. There is the looming issue of the federal government debt ceiling. This is the annual limit placed by Congress on the amount that the US government can borrow. Ironically, the debt ceiling was introduced during the First World War to help the federal government pay for the war. Up to then, every new piece of borrowing had to approved by Congress laboriously. To speed things up, Congress dispensed with considering every government bond issuance and just set a limit on how much outstanding debt there could be each year. But now, with total US government debt over $22trn in gross amounts (including state-guaranteed mortgage or so-called agency debt) and federal debt at over $16trn, the ceiling limit has become just that – a limit not a help.
As the government does not yet balance its books (although the deficit between revenues and spending is narrowing fast as spending has been held down and tax collection is rising, it is still about 4% of GDP), it must borrow the difference by issuing treasury securities (debt). Also the government must issue new debt to cover debt that is maturing and which must be repaid to those who bought its bonds. Well, the debt ceiling will be breached by 17 October at the latest and available cash for the federal government after that is estimated at $30bn, which would run out before the end of this month. And at the end of October, the government must repay about $70bn in maturing bonds or default on its debt.
A debt default would be a disaster for the government’s standing in global bond markets and lead to a sharp downgrading of its credit rating and so force up interest rates. it would also spill over into the rest of world as holders of US government debt, which includes most of the world’s central banks, governments and banks, would find themselves short of cash receipts that they were expecting and some may be unable to meet their own obligations. In addition, the US government would be forced to balance its budget for 2014, which started in October, and thus would have to impose a 20% cut in spending immediately. That would push the US economy back into recession very quickly.
Of course, this is not going to happen – I think. The Republican-controlled House of Representatives will have to agree with the Democrat-controlled Senate to raise the debt ceiling before Armageddon arrives. But the Republicans, controlled as they are by the tea-party crazies, may drag this right out to the edge of the cliff. What is behind this Republican intransigence to the point of closing down government services is partly a claim that the government is borrowing ‘too much’, partly a hatred of President Obama, but mostly a belief that Obama’s new healthcare reform is a move towards European-style ‘socialism’ and a welfare state. The tea party loonies thrive on the view of the petty bourgeois, small town suburban myth that the American dream is really about families working and doing things on their own without the ‘interference’ of big government. Even state-funded police forces and intelligence services against ‘terrorism’ are viewed with suspicion by some of the more extreme elements. A man and his gun (often illegal) is all that is needed.
I am reminded of the new film, Prisoners, now out in the US, where our hero is a small self-employed craftsman who believes in protecting his family himself, trains his son at an early age to use guns and ‘be strong’. His daughter is kidnapped by some crazies. He has no faith in the ability of the police to solve the case and get his daughter back. He decides to take the law into his own hands. This is a typical plot in many US movies, where the hero solves the issue without the support and often the hindrance of the authorities. But in Prisoners, the opposite is the outcome. His ‘going it alone’ leads to disaster.
The American dream of the individual overcoming all odds is, of course, an illusion. It is not ‘big government’ that is the problem of US capitalism, but ‘big business’. The banking crash, the Great Recession and the lack of jobs and investment is not the result of government but of the failure of the capitalist sector. Indeed, it is government and the ‘small’ people who have taken the burden of the crisis caused by banks and capital.
And yet when the Democrats take a very small step in trying to alleviate one of those burdens on people, the lack of affordable ‘on demand’ healthcare, it is the Republicans, backed by big business, medical insurance and the big pharma companies, and driven on by the tea party crazies, who decide to block an agreement on the 2014 budget unless Obama backs down on implementing his healthcare reform.
But Americans badly need a proper healthcare service. The US spends 18 per cent of its gross domestic product on health against 12 per cent by the next highest spender, France. The US public sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada. US spending per head is almost 100 per cent more than in Canada and 150 per cent more than in the UK. But America’s mainly privately owned and funded healthcare sector is a miserable failure in terms of meeting people’s needs (although very profitable). US life expectancy at birth is the lowest of these countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher.
Under tremendous pressure from below, the Democrats finally got the nerve to push through Congress some limited reform of US healthcare. The Patient Protection and Affordable Care Act (dubbed ‘Obamacare’ by the Republicans) was signed into law back in March 2010, but is only now being implemented. It is not a universal healthcare service free at the point of demand and paid for out of taxation, as in the UK or in Europe. Instead, it is relies on providing government subsidies to existing private medical insurance schemes of employers alongside the government-provided Medicaid scheme for very poor.
Obamacare will help about 20 percent of Americans who are either uninsured or get insurance on the individual (or “non-group”) market. The idea is that anybody who makes more than the federal poverty line, but less than four times the poverty line ($94,200 for a family of four), can buy subsidised insurance. Those making less than 133 percent of the poverty line and living in a state that has accepted the Medicaid expansion can get Medicaid. The Congressional Budget Office expects that the Affordable Care Act will cover about 14 million of the uninsured in 2014 and 25 million by the end of the decade.
One of the really big changes that the health law makes is to eliminate the relevance of preexisting conditions altogether. This means that insurers won’t be allowed to ask about the existing health problems of applicants or charge more because of it.
The problem with Obamacare is manifold, however. The first is that it won’t even be applied in all states. The Medicaid expansion was made optional by the Supreme Court and only 26 states are likely to participate. And there are no subsidies for private insurance for people making less than the poverty line. Moreover, Obamacare still leaves about 30 million people uninsured, according to a new analysis in the journal Health Affairs. So still the most vulnerable will not have universal healthcare. Also Obamacare is to be paid for by cutting other health services. The first are cuts to Medicare reimbursements. These are cuts largely to the rates that we pay doctors who see Medicare patients, and also what we pay private insurers that cover these subscribers. The other big funding source are taxes on different health care industries like hospitals, insurance companies and, more relevant in recent days, medical device makers. And every American who does not take out Obamacare insurance will still have to pay a $95 tax penalty.
Obamacare is a botched measure that only helps a proportion of uninsured Americans. It is only a subsidy to buy private health insurance which means the money goes to the greedy hands of ‘big insurance’ and private hospitals and doctors. Millions will not be able to afford even the subsidised health premiums and will not qualify for the laborious medicaid schemes either. And the whole thing is to be paid for by reductions in other government spending and more taxes on lower income sectors. It is yet another example of the failure of capitalist schemes to provide basic needs.
The Affordable Care Act will raise taxes on investment income for people who earn more than $200,000. And here we get yet again the screams of the rich against taxation. This is the height of hypocrisy when the latest data reveal that US income inequality has reached new heights. University of California Professor Emmanuel Saez (http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf) analyzed recent IRS data and discovered that the incomes of the top 1% of Americans rose by 19.6% in 2012 while the income of the bottom 99% grew by only 1%. The result is that the top 1% accounted for 19.3% of total household income in 2012, their highest share since 1928. If capital gains are included, the top one percent’s income share has risen f rom 18.1% in 2009 to 22.5% in 2012. Indeed, the top 1% captured slightly more than half of the overall economic growth of real incomes per family over the period 1993-2010. And in the first year of economic recovery after 2009, the rich took 93% of the rise in household income!
This increase in inequality of income has taken place in all the major capitalist economies (see my post, https://thenextrecession.wordpress.com/2013/07/14/the-story-of-inequality/). And it is not just income inequality that has grown in the US and in other capitalist economies. In a recent paper (http://www.voxeu.org/article/capital-back), Picketty and Zucman found that the wealth-to-income ratios of rich countries have been increasing since the 1970s . In the top eight developed economies, according to official national balance sheets, aggregate private wealth has risen from about two to three times national income in 1970 to a range of four to seven times today. And the authors show that, looking at the very long run, the postwar decades – marked by relatively low wealth – appear to be a historical anomaly. High wealth-to-income ratios were the norm in Europe throughout the 18th and 19th centuries (see graph below). Then the world wars, low saving rates, and a number of anti-capital policies provoked a large drop in private wealth, from six to seven times national income to about two times in the aftermath of World War II. The wealth-to-income ratios have been rising ever since, to the extent that they appear to be returning to their 19th-century levels. Capitalism has not changed to reduce inequality anywhere – confirming Marx’s view that (relative) amiseration of the people would increase under capitalism (see my post, https://thenextrecession.wordpress.com/2010/01/10/20/).
The recent increase in inequality since the Great Recession as recorded by Saez is a product of the massive increase in the share of profit in capitalist production since the trough of the recession in 2009, mainly by holding down wages and employment, as the now familiar graph of the ratio of US corporate profits to GDP shows.
But it is not just the squeeze on labour that has driven up profits and increased inequality. It is also the policies of pro-capitalist governments and central banks. Governments have generally followed policies of forcing down government spending, raising taxes on employees and cutting services in pursing fiscal ‘austerity’ to reduce costs for the capitalist sector and keep interest rates low. So central banks have taken up the task of trying to stimulate the capitalist economy with a flood of cheap money and liquidity. But most of this liquidity has not led to an expansion of productive investment or in the productive sectors of the capitalist economies. Investment levels remain well below pre-crisis peaks and real GDP growth remains well below trend growth before the Great Recession.
Take the UK. The proportion of total expenditure accounted for by spending on investment has fallen from an average of 13.5 per cent in 2007 to an average of 10.9 per cent during 2012 and to 10.4 per cent in the second half of 2013.
This liquidity, as we have explained in numerous posts, has been ‘invested’ by the banks and other credit intermediaries into unproductive sectors like real estate and into ‘fictitious capital’ like stocks and bonds. As a result, the stock market has rocketed and house prices are rising at near double-digit rates in the US and other countries. The main reason that the Fed did not go ahead with its plan to’ taper’ its purchases of government bonds and ‘agency’ debt last month as it had promised was the rise in mortgage rates that had taken place since it announced the tapering plan last April (see my post, https://thenextrecession.wordpress.com/2013/09/19/tapering-maybe-not/). The Fed’s policy has meant that the banking sector is not lending on this cheap credit to the real or productive sectors of the economy. As I have argued before, the big corporations already have cash but won’t invest and the small corporation are loaded with debt and cannot borrow. So bank lending in the US is slowing up.
And in Europe, it is contracting at a faster pace!
In this fictitious world, the rich are gaining most as it they that own the stock and are buying up the property – street by street in Detroit or New Orleans). As Saez’s data show, if you include capital gains in income (see figure above), the inequality of income is even greater.
We get the same approach to recovery in the UK where the Conservative coalition has launched a plan to help home buyers by providing government money and guarantees for mortgages with as little as 5% deposit down for residential property worth up to £600k. Speculative investors are piling in to take advantage of this government scheme. In London, house prices are rising at near 10% a year and buy-to-let purchases are booming.
There is confusion about why capitalists are not investing much compared to the huge profits they seem to be stacking up Profits are at a record high in the US and companies are piling up cash mountains. But as I have explained in previous posts, profits are not the same as profitability and cash mountains are not profits but accumulated reserves that must be set against accumulated debt held by companies (see my post, thenextrecession.wordpress.com/2013/09/17/nobodys-investing/).
There is no real drop in overall debt in most capitalist economies. The latest flow of funds data from the US Fed show a fall in the debt of households and, given the sharp rise in property and stock values, a significant rise in the net wealth of households, although as we have seen these gains are sharply concentrated in rich households. But there has been no fall in non-financial corporate debt and of course in government debt. They are both rising, if at a slower pace. Debt deleveraging has not been sufficient to allow companies to start significant investment in new capacity.
Now it is true that sentiment in the capitalist sector about future growth seems to be picking up all round. The purchasing managers indexes (PMIs) that I follow as high frequency indicators of activity in capitalist economies would suggest better times might be ahead.
But real data on economic growth, manufacturing output and investment don’t confirm that. And above all, profitability remains below the peak level before the crisis began in 2007. I have measured the fall in UK profitability in previous posts (https://thenextrecession.wordpress.com/2012/05/01/the-uks-weak-recovery-and-profitability/). I made a stab at updating the position for US profitability from the latest Federal Reserve data. This is what I found.
The graphs shows that the rate of profit for non-financial corporations (a crude proxy of the productive sector of US capitalism) up to the end of 2012, with profits measured against the cost of tangible fixed assets and employee costs and then measured against the additional inclusion of net corporate debt (net worth). It shows that the rate of profit has nearly recovered to its pre-crisis peak in 2006 against tangible assets but when net debt is included, the rate of profit is starting to fall away. US corporations are not going to get back to pre-crisis levels of profitability. There is more work to be done on analysing the data and I shall return to this in future posts, but initial evidence does not suggest that US corporate profitability is on the march upwards.
So the prospects for faster economic growth and a sustained recovery in the major advanced capitalist states remains questionable, at best. And it is a world phenomenon. Take world trade. As former Goldman Sachs chief economist and now FT blogger, Gavyn Davies recently pointed out (http://blogs.ft.com/gavyndavies/2013/09/29/why-world-trade-growth-has-lost-its-mojo/), world trade is in serious doldrums. Normally, world trade growth is about twice the rate of global real GDP. Between 1990-2008, global real GDP rose 3.2% a year, while world trade volume rose at 6% a year. However since 2008, world trade has grown more slowly that real GDP and the share of exports in world GDP has fallen for the first time in 25 years – since the deep recession of the early 1980s. Protectionism – the imposition of tariffs and other restrictions on imports is rising (stalling further globalisation) – and the decline in world trade relative to GDP since 2008 has probably knocked down GDP growth by 1% point. It’s another indicator of the Long Depression that the major economies have entered.
So the risk (however small) that the US Congress could push the US government into a default in its debt only adds to the probability of another global slump down the road.