The seven-year itch

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC ( He is frequently cited in economics reporting in major media outlets. He writes a weekly column for the Guardian Unlimited (UK), the Huffington Post, TruthOut, and his blog, Beat the Press, features commentary on economic reporting. Dean was cited by the Real Economics Review as one of the few economists that predicted the global financial crash of 2008, as he had been warning about the credit-fuelled housing bubble in the US. He often speaks at trade union and labour seminars presenting a Keynesian-style analysis and policy solutions to the current crisis.

Baker has just written a blog post in which he reminds us that it is now seven years since the Great Recession started across the major economies ( Looking at the US, he points out: “usually an economy would be fully recovered from the impact of a recession seven years after its onset. Unfortunately, this is not close to being the case now….It would still take another 7-8 million jobs to bring the percentage of the population employed back to its pre-recession level.” He continues: “it would take us more than four years to get back to pre-recession employment rates.” And “the economy is still operating close to 4% points. This translates into roughly $700 billion a year being thrown in the garbage because we don’t have enough demand in the economy. That comes to more than $2,000 per year for every person in the country”. And “If the economy sustains a 3% annual growth rate, it would take us close to four years to close the demand gap. And next to no one thinks the economy will be able to sustain a 3% growth rate for the next four years”.

It is a damning indictment. We could add to Baker’s list that, outside the US (an economy that has done better than most since the Great Recession ended in mid-2009), unemployment rates have hardly fallen from high levels in most of Europe, where GDP is still below the level of 2007 in many countries and GDP per person is even lower. Above all, real incomes for the average households have stagnated or fallen significantly in most counties including the US and the UK. So this is not a normal ‘recovery; it is not ‘a return to normal’ (see my post,

The question is: why has the Great Recession morphed into what I call a Long Depression? Baker reckons that it is “weak demand”. Baker: “The basic problem since the collapse of the bubble is finding a way to replace the demand that it had been generating.” Well, that is not entirely true if we mean weak consumer demand. As I have shown in many previous posts, household consumption did not fall hugely in the Great Recession and in most countries it has returned, as share of GDP to levels of 2005 as the OECD pointed out recently (

G7 demand

The other part of ‘demand’ is investment demand. Investment (both private and public) plummeted during the Great Recession – indeed, it is my argument that investment fell before and that led to the laying off of labour, the closure of old technology and the collapse of incomes and the slump. Investment remains seriously down from seven years ago. A new study by the Institute of International Finance, an international banking research group, provides new evidence for that (

The IIF study shows that total investment relative to GDP in the G7 economies stood at 19.3% in 2013 – a decline of 2.6 percentage points relative to 2007. Business investment (i.e. investment in machinery, equipment, transport, structures, and intangible assets) has been especially weak. In the second quarter of 2014, G7 private non-residential investment amounted to 12.4% of GDP, compared to the peak of 13.3% in 2008.

G7 private non-residential fixed investment

G7 investment

The question is: why did investment fall and why has it failed to recover and so get the major capitalist economies back up to previous levels and potential trend growth? Dean Baker says investment demand is weak because the economy is weak: “Firms don’t go on investment splurges in a weak economy.” But this is tautological. There is no explanation in this of why things are worse this time. Investment is the issue, as Baker says. But why?

It has been my argument that the major capitalist economies have been suffering from low profitability of capital plus a huge build-up in debt (household, corporate and public) that weighs down on the ability or willingness of capitalists to step up investment.

This is despite that fact that capital in all the major economies has been squeezing wages and reducing employment to get profit margins and the mass of profit up to record levels (ie raising the rate of surplus value as the main counteracting factor to low or falling profitability).
Deleveraging of debt (fictitious capital) has been minimal, indeed to the contrary, as central banks pump in more money to get interest rates down and stock markets booming in an attempt to stop economies slipping back into slump.

In a future post, I shall try to analyse the latest position on the US rate of profit now that we have the latest key data for 2013 and see if my proposition holds that profitability has failed to return to pre-crisis levels even in the US and is still below levels seen in the late 1990s. This is certainly the case for the UK and of course in most of the Eurozone and Japan.  But what is significant is that the mass of profits in the US has nearly stopped rising (see my post,

And indeed, according to the IIF, the huge cash hoards that the largest companies in the G7 economies built up by squeezing wages and jobs and not investing is also beginning to decline as companies buy back their own shares and pay out dividends to their shareholders.

G7 non-financial corporations’ net cash flows

G7 cash
Marxist economist Michael Burke has pointed out before that business investment has been falling in the major economies since the late 1990s (see And the IIF shows that, investment relative to GDP has exhibited a downward trend since the 1990s in Germany, UK, Japan, and Italy.

G7 total investment rates

G7 investment gdp
In my view, this is because the profitability of capital has fallen in the major economies since the peak of the late 1990s (see my post,

A proxy for falling profitability is the capital-output ratio. This measures the growth of new value compared to new investment. This ratio has been rising in most major economies since the 1990s, according to the IIF – in other words the value returned from investment has been falling. Compared to 2000, all the major economies (including the US but excepting Japan which has had a huge rising ratio for decades) now have higher capital output ratios.

G7 capital–output ratio

G7 capital output

Dean Baker in his post goes on about the need for ‘more demand’ which he sees coming from government spending “We can spend more on infrastructure, on education, on retrofitting buildings to make them more energy efficient and reduce greenhouse gas emissions.” Or through work-sharing to get unemployment down: “increased family leave, sick days, and vacation. This is the secret to Germany’s low unemployment rate. The average work year there is more than 20% shorter than in the US.” But he admits this won’t happen. No government is planning to boost government spending, on the contrary; or introduce work sharing.

Actually that is not entirely true. The IMF, the OECD and others are calling for programmes of infrastructure spending to replace the failure of business to invest. And the EU leaders have announced a new Europe-wide investment plan. The EU projects claims to create 1.3m new jobs over three years, by ‘seeding’ €21bn in public money to ‘spark’ €307bn ($383bn) of additional private investment. This is nonsense, of course. The public money had already been earmarked for projects in previous EU budgets so it is not new money but merely a transfer to this scheme. And it is very unlikely to inspire businesses to join in a public-private initiative. The EU Commission itself estimates that the annual investment gap in Europe stands between €230-370bn, while the plan only offers €€100bn a year for three years.

Anyway, the question is whether even a Keynesian-style government spending programme, either directly through public works or through subsidies to the capitalist sector, would deliver faster growth or full employment. It is a Keynesian illusion that it would. Such projects may boost the profits of those companies that get the contracts to build, but at the expense of the rest as they face the cost of higher government borrowing and taxes that will be needed to pay for it (see my post More likely what is ahead is another slump in the major economies rather than a sustained recovery and a new period of expansion.

4 thoughts on “The seven-year itch

  1. So far as I know, Dean Baker never withdrew his approval of beginning to privatize U.S. Social Security pensions:

    Andy Stern: Invest Social Security Funds In Wall Street
    By Ryan Grim, Huffington Post, 06/30/10

    Andy Stern, a key member of the deficit commission, is pushing to invest a significant portion of the Social Security trust fund in private companies through the stock market, the former labor leader told HuffPost.

    Allowing Social Security to invest some of its fund does have some progressive backing. “I don’t think it’s necessarily a bad idea,” said Dean Baker, an economist with the liberal-leaning Center for Economic Policy and Research. “If he’s talking about getting money out of the trust fund for that purpose, I could live with it. You’d get a higher return now that stocks are falling.”

  2. “Anyway, the question is whether even a Keynesian-style government spending programme, either directly through public works or through subsidies to the capitalist sector, would deliver faster growth or full employment. It is a Keynesian illusion that it would. Such projects may boost the profits of those companies that get the contracts to build, but at the expense of the rest as they face the cost of higher government borrowing and taxes that will be needed to pay for it..”

    That is undoubtedly true for some periods, but not for others. For example, in the 18th century, Britain had a debt to GDP ratio of 250%, compared with just 70% today, but not only did this not prevent the accumulation of capital and production of surplus value, but according to Marx it was a primary factor in bringing it about!

    “The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury.”

    Far from that state debt reducing profits in general at that time, it was a primary driver in creating them, as Marx describes, and the consequence then was that the higher level of economic growth sharply reduced the debt to GDP ratio.

    Similarly, in 1945 Britain had a debt to GDP ratio of 250%, but again Britain borrowed large amounts of money-capital, which was used to develop social capital, in the shape of infrastructure, of schools and healthcare systems etc. required by capital to produce the labour-power it needed. Some of that capital was used to rationalise staple industries such as coal and steel, which had suffered a starvation of investment by private owners for decades. State capitalism was able to sack tens of thousands of miners and other workers from these industries, and replace them with machines as part of that process in the 1940’s, 50’s and 60’s.

    Once again far from this leading to a reduction in profits for capital in general during that period, it led to the opposite. The 1950’s and 60’s were a period of rapid growth and capital accumulation.

    The point is not that such primary accumulation of capital by the state can never work, or that it must always result in a fall in the rate of profit leading to a reduction in accumulation, but that contrary to the Keynesians beleif, it cannot ALWAYS have that function. It depends on the conjuncture of the long wave.

    In a period of long wave boom, where there are lots of areas into which capital can expand, and where the rate of profit is high, it can work, because as demand rises capital tends to move into these new areas and accumulate. In periods of long wave downturn, where there is a lack of such new openings for capital it does not work, because capital responds to increases in aggregate demand, not by additional investment, but by raising prices, so inflation rises.

    In fact, as Marx sets out for some functions only such state capitalism is rational. The rate of turnover for forestry, for example, is so extended Marx says, that it has never been profitable for private capital, and has always been a function of the state. More recently, the space industry would never have started had it not been for state capitalism, and now that it has been developed it is becoming an increasingly profitable area of investment for private capital. A similar thing applies to the nuclear energy industry.

  3. Michael, the problem with Baker’s assessment, and it’s a problem that hampers yours, is that overproduction is nowhere taken into account.

    Capitalism is certainly not suffering from a lack of investment, per se. Too much investment, too much production; all previous accumulation, all existing production are the millstones around its neck.

  4. Yes, not much sign of a new period of expansion. This has been the promise since the end of the postwar boom in the early 1970s. And it hasn’t happened in the West, only in the BRICS and they are now brushing up against the fact that ultimately capital itself is the limit to capital(ism).

    You’re doing a sterling job, Michael.

    (from Redline blog)

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