Archive for March, 2019

The fantasy world of the Long Depression

March 22, 2019

This week, the US Federal Reserve Bank decided to stop raising its policy interest rate for the rest of 2019.  The Fed started hiking rates from near zero back in late 2016 on the grounds that the Long Depression (in economic growth, investment and employment in the US and in other major economies) was over.  As economies reached full employment and used up excess capacity in industry, wages rises and price inflation would accelerate, so it would be necessary to curb any ‘overheating’ with higher interest rates to slow borrowing and spending.  This policy of ‘normalisation’, as it is called, seemed to be justified after the Trump tax cuts were introduced in late 2017. Those measures led to a sharp rise in after-tax profits for US corporations and an apparent pick-up in US real GDP growth, reaching a 3% yoy rate at the end of 2018.  All looked well.

However, as I argued back in spring 2018, the global economy had actually peaked.  And now nearly one year later, forecasts for a continued ‘recovery’ have been reversed.  A year ago, the Fed had raised its real GDP growth forecast for the whole of 2018 to 2.7% and 2.4% for 2019.  Now at its March 2019 meeting, it has lowered its forecast for 2019 to 2.1% and just 1.9% for 2020, slowing again to just 1.8% in 2021 – well below the boasted 3%-plus that Trump claims his tax measures would achieve permanently.

So now the Fed is stopping its rate hiking and also ending its monetary tightening policy of running down its huge holdings of government bonds that it had built up as part of the ‘quantitative easing’ programme, launched in the Great Recession to save the banks and provide cheap money for investment.

What is happening?  Well, it always was a risk that hiking interest rates when economic growth and investment were weak would cause a stock market collapse and a new economic slump.  Now with US economic growth in the current quarter to the end of March likely to be no more than at a 1.5% annual rate and the Eurozone, the UK and Japan slipping back towards outright recession, the Fed has taken fright and put its normalisation policy into cold storage. So the Long Depression is not over after all.

The most startling difference, however, between the Long Depression and the Great Depression of the 1930s is that, in the last decade in the major economies, the official unemployment rate has dropped back to near record lows (in the US, UK, Japan).

And yet inflation has not spiralled upwards at all.  The trade-off between low unemployment and high inflation (as shown by the so-called Phillips curve), is a hallmark prediction of Keynesian aggregate demand theory. But it has not materialised.  The Phillips curve (ratio of the unemployment rate to the inflation rate) is nearly flat in most capitalist economies – there is little trade-off.

This is confounding mainstream economic thought and the policies of central banks, as I outlined in my previous post. “I don’t feel we have convincingly achieved our 2% mandate in a symmetrical way,” said Fed chair Jay Powell. “It’s one of the major challenges of our time, to have downward pressure on inflation”.

What seems to have happened is that, in the wake of the Great Recession, in an environment of low profitability on capital in most major economies, companies have opted to take on more labour rather than invest.  The new labour entrants are being employed in low-wage occupations, and/or on temporary and part-time contracts. 

For example, there are 17% of American workers only employed part-time, one-third more than in the 1960s.  The US official unemployment rate may be down but that is partly because many Americans of working age have disappeared from the labour market: to study, work informally or just live at home with the family.

And there has been a rise in self-employment – in the so-called ‘gig economy’. So, while skilled workers (in short supply) have begun to experience wage rises, the bulk of the non-management workforce in the US, the UK, Japan and Europe instead have seen significant periods of falling real earnings. While the average real GDP growth rate per person in the US has been about 1.5% since 2009, average hourly real earnings for most US workers have risen only 0.8% a year.

Thus there has been no ‘wage-push’ inflation and average real incomes have stagnated.  The capitalist sector has not increased investment in new machinery, plant or technology to a level that would lead to replacing labour or boosting the productivity of the existing workforce.  Whereas in the Great Depression of the 1930s, unemployment remained high up to the start of WW2 while productivity rose sharply; the opposite is the case in this Long Depression.

The latest estimate of global capital investment made by JP Morgan economists suggests that investment orders are falling and imports of capital goods have moved into negative territory.

In contrast, the US stock market heads back to new highs. We are now in an economic world where there appears to be a sort of ‘full employment’, but stagnant real wages (for most), low interest rates and inflation and above all low productive investment. Meanwhile corporate debt is rising fast globally as major companies issue bonds at low rates of interest in order to buy back their own shares and thus boost the company’s stock price and continue the party.

The Long Depression has become a fantasy world of rising financial asset prices, low investment and productivity growth, where nearly everybody can get a job (working part-time, temporary or self-employed), but not a living.

Secular stagnation, monetary policy and John Law

March 16, 2019

Last week, the prestigious Brooking Institution held a conference on the efficacy of monetary policy in stimulating and sustaining economic growth.  At the conference, Larry Summers, former US Treasury secretary and professor at Harvard University and Lukasz Rachel of the Bank of England, presented a paper that aimed to revive, yet again, the idea that the major capitalist economies are locked into ‘secular stagnation’: Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation.”

According this thesis, there is a long-term stagnation in the major capitalist economies.  Despite central banks pushing interest rates down to zero or even below (so that bankers and capitalists are paid to borrow!); and despite central banks printing huge amounts of money to buy bonds and other financial assets (quantitative easing), real GDP growth and investment remain weak.  Although unemployment rates are officially near cycle lows in many countries, inflation is equally low, confounding the traditional Keynesian view that there is a trade-off between employment and inflation (the so-called Phillips curve).

Central bank monetary stimulation has failed, except to promote ‘credit bubbles’ and speculation in financial assets and property. For example, here are the conclusions of a recent study on the impact of the monetary injections of the ECB in Europe: “the efforts of the ECB to hit its inflation target would be more credible if there was convincing empirical evidence that its balance sheet policies are effective at stimulating output and inflation. Our recent research shows that this macroeconomic evidence is still lacking.”

And there is every prospect of another economic slump approaching in which central banks will be powerless to do anything as interest rates are already near zero and the balance sheets of central banks are already at record highs. “Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation. This raises profound questions about stabilization policy going forward.” (Summers and Rachel)

In the FT, Keynesian columnist Martin Wolf echoed the views of Summers and Rachel.  Interest rates are near all-time lows and if you follow the Fisher-Wicksell theory of a ‘natural’ rate of interest that enables full employment, then it now seems that the natural ‘private sector’ interest rate needed to achieve jobs for all who want them has be in negative territory.

Of course, this so-called natural rate is a dubious concept at best.  But even you accept the theory, as it seems many Keynesians want to do [“That is the root of our problem: the natural nominal rate of interest … today is less than zero, and so the Federal Reserve cannot push the market nominal rate of interest down low enough.” Brad DeLong], it just exposes the problem.  Monetary policy has not and will not work in restoring the capitalist economy to a pace of growth that delivers investment and thus sustains jobs at rising real wages.

Indeed, as I have pointed out before, Keynes also realised after the Great Depression continued deep into the 1930s, that his advocacy of low interest rates and even ‘unconventional’ monetary policy (buying government bonds and printing money) was not working: ““I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”.  In other words, there is no natural rate of interest low enough to persuade capitalists to borrow and invest if they think the return on that investment would be too low.  You can take a horse to water, but you cannot make it drink.

This week the Bank of Japan monetary committee met and threw up its hands in despair.  After years of central bank ‘unconventional’ monetary easing (buying government bonds to the tune of 100% of GDP!) by printing money, the huge injection of credit into the banks has had no effect in lifting the economy.  As Darren Aw, Asia economist with Capital Economics, remarked: “There is a good chance that Japan’s economy will contract again in Q1 2019, for a third time in five quarters”… Given this, the key question for the Bank of Japan is no longer when it might retreat from its ultra-loose policy stance but whether it can do any more to support the economy.” Thus the first of the PM Abe’s three arrows of economic policy (monetary easing, fiscal stimulus and neoliberal de-regulation) has failed.

Now it’s true that per capita GDP growth in Japan since the end of the Great Recession ten years ago is actually faster than in most other major capitalist economies.  But that is simply because Japan has a sharply falling population.  Real and nominal (before inflation) GDP has been virtually static.  National output has remained more or less the same but there are less people that generate and consume it.  Japan has the lowest working population as ratio to total population in the top 12 economies of the world.

And yet monetary easing is still pushed by Keynesians, especially the more radical ones from the post-Keynesian school, including those following Modern Monetary Theory (MMT).  If the state and/or central bank prints money, it can use that money to stimulate the capitalist economy to get it going.  Money is not so much the root of all evil but the genesis of all that is good, it seems.  This sentiment reminds me of the earliest exponent of the magic of money – or the ‘money fetish’, namely John Law, who around 300 years ago had a unique opportunity to apply money printing to put an economy on its feet.

Ann Pettifor, the left Keynesian exponent of magic money, has called John Law a “much maligned genius whose 1705 account of the nature of money cannot be bettered”.  This proto-Keynesian was the son of a wealthy Scottish goldsmith and banker. Law was born in Edinburgh, proceeding to squander his father’s substantial inheritance on gambling and fast living. Convicted of killing a love rival in a duel in London in 1694, Law bribed his way out of prison and escaped to the Continent.  There Law concentrated on developing and publishing his monetary theory cum scheme, which he presented to the Scottish Parliament in 1705, publishing the memorandum the same year in a tract, Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1705).

Law argued for a central bank to issue paper money backed by ‘the land of the nation’. Echoing the MMT (or is it the other way round?), Law proposed to “supply the nation” with a sufficiency of money. This would vivify trade and increase employment and production. Like MMT, Law stressed money is a mere government creation which had no intrinsic value. Its only function is to be a medium of exchange and not any store of value for the future.

Law was sure that any increased money supply and bank credit would not raise prices and expanding bank credit and bank money would push down the rate of interest (MMT again). To Law, as to Keynes after him, the main enemy of his scheme was the menace of “hoarding,” a practice that would defeat the purpose of greater spending.  So, like the late 19th-century German money fetisher Silvio Gesell, Law proposed a statute that would prohibit the hoarding of money.

Amazingly Law found a supporter for his theories in the regent of France. The regent, the Duke of Orléans, set up Law as head of the Banque Générale in 1716, a central bank with a grant of the monopoly of the issue of bank notes in France. He was made the head of the new Mississippi Company, as well as director-general of French finances. The Mississippi Company issued bonds that were allegedly “backed” by the vast, undeveloped land that the French government owned in the Louisiana territory in North America.

This scheme eventually led, not to a booming economy, but instead to a speculative financial bubble where bonds, bank credit, prices, and monetary values skyrocketed from 1717 to 1720.  Finally, in 1720, the bubble collapsed and Law ended up as a pauper heavily in debt, forced once again to flee the country.  Law was not so much a ‘much maligned genius’ but more “a pleasant character mixture of swindler and prophet” Karl Marx (1894: p.441).  What the Law debacle showed was that the state just issuing money cannot replace the ‘real economy’ of production and trade. Money alone does not create investment or production.

Of course, modern Keynesians (unless they are of the MMT variety) do not promote unending printing of money for governments and the private sector to spend.  That’s because they have been forced to recognise; as John Law found in 1719-20; and as Keynes found in 1933; and as Abe in Japan has found now; and the secular stagnationists also accept, printing money does not work if capitalists and bankers hoard that money or switch it into speculative investments in financial assets.

So what’s the answer?  Well, as Martin Wolf puts it: “The credibility of the “secular stagnation” thesis and our unhappy experience with the impact of monetary policy prove that we have come to rely far too heavily on central banks. But they cannot manage secular stagnation successfully. If anything, they make the problem worse, in the long run. We need other instruments. Fiscal policy is the place to start.”  Yes, it’s back to fiscal stimulus.  But will that work either?

Last year President Trump launched a fiscal stimulus of sorts by cutting taxes for the rich and the big corporations.  It boosted after-tax profits in 2017 sharply and real GDP growth ticked up a little towards 3% a year.  But that boost has been all too fleeting.  US real GDP growth is heading back down to below a 1% rate in this quarter and business investment is also turning down.

One of the policy arrows of Abenomics in Japan was fiscal stimulus.  Indeed, there is no major economy that can match Japan for its government running permanent budget deficits (MMT-style).

Japan: annual budget deficits to GDP (%)

This should be the policy dream of MMT and other post-Keynesians.  But it has not worked in Japan.  Japan has ‘full employment’, but at low wages and with temporary and part-time contracts for many (particularly women).  Real household consumption has risen at only 0.4% a year since 2007, less than half the rate before.  So fiscal stimulus has not worked in Japan which remains in ‘secular stagnation’.

And it did not work in the Great Depression of the 1930s.  After dropping monetary easing as the policy answer to the depression, in the Los Angeles Times on 31 December 1933, Keynes wrote: ‘Thus, as the prime mover in the first stage of the technique of recovery, I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and is not merely a transfer through taxation from existing incomes. Nothing else counts in comparison with this.’   Deficit-financing was the answer.

The Roosevelt regime ran consistent budget deficits of around 5% of GDP from 1931 onwards, spending twice as much as tax revenue.  And the government took on lots more workers on jobs programmes (MMT-style) – but all to little effect.  The New Deal under Roosevelt did not end the Great Depression.  Keynes summed it up “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions,” (from The New Republic (quoted from P. Renshaw, Journal of Contemporary History  1999 vol. 34 (3) p. 377 -364).

Wolf recognises that fiscal policy may also not work. “It is of course essential to ask how best to use those deficits productively. If the private sector does not wish to invest, the government should decide to do so.” So if the ‘private sector’ (ie the capitalist sector) won’t increase investment rates to boost growth despite negative interest rates and despite huge government money injections funded by money printing, the government will have to step in do the job itself, apparently.

Thus, the Keynesian/MMT answer is to act as a backstop to capitalist failure. But the capitalist sector dominates investment decisions and it makes those on the basis of potential profitability, not on the cost of borrowing. Keynes saw it as politically impossible to ensure sufficient investment through government spending – and he was right in a way. Only complete control of the capitalist sector could enable governments to ensure full employment at decent wages. At this point, I’m tempted to repeat the comment of left Keynesian Joan Robinson to MMT/Keynesians: “Any government which had both the power and will to remedy the major defects of the capitalist system would have the will and power to abolish it altogether”.

Neoliberalism: not so bad?

March 12, 2019

I don’t really like the term ‘neoliberal’ because it is used lazily as an alternative to pro-capitalist policies or even to the word ‘capitalism’ itself. In doing so, it causes confusion in explanations about trends and failures in capitalist development.  What flows is the argument that if ‘neoliberalism’ is ended, then we can return to ‘managed capitalism’ or social democracy’, neither of which, in my view, should be used to suggest something different from the capitalist mode of production itself.

And if leftists continue to use ‘neoliberalism’ as a term to replace capitalism (or as some nasty ‘free market version), they open the door to the sort of nonsense that economic journalist Noah Smith concocted last week, as expressed in his Bloomberg piece: “Neoliberalism should not be a dirty word on the left”.

In his piece, Smith argues that by attacking neoliberalism,“Too many people forget the contribution markets have made to human well-being.”  He justifies the success of neoliberalism (as defined by him as capitalist market forces and policies that support such) with three main stylised facts.

The first is that “Market liberalization in countries such as India and China seems to have precipitated a shift to faster growth, while trade and investment links with rich countries have helped these and other developing countries tremendously.”  So China’s growth miracle is a product of neoliberal policies of ‘market liberalisation’, presumably introduced by Deng in the late 1970s and supplemented by foreign investment and China joining the World Trade Organisation (WTO).

This story has been perpetuated by many mainstream economists.  But it does not hold water.  Yes, China opened up sectors of the economy to foreign investment and the market, particularly in agriculture.  But the bulk of investment and foreign trade was still controlled by the state and state corporations; and capital controls were in force.  The state was everywhere in the operation of the economy.  So was China’s success really a product of neoliberalism?  See my post on this misconception here.

The second argument is that neoliberal policies have “helped pull a billion people out of desperate poverty, and billions more are on the way to becoming middle class.”  This is yet another myth offered by the apologists for global capitalism by the likes of Microsoft billionaire, Bill Gates, among others. Smith follows in those footsteps to justify ‘neoliberalism’.

Anthropologist Jason Hickel has provided an excellent refutation of this claim that global poverty is being solved and falling fast, thanks to capitalism.  Much depends on how to define poverty.  Hickel:  “If we use $7.40 per day, we see a decline in the proportion of people living in poverty, but it’s not nearly as dramatic as your rosy narrative would have it. In 1981 a staggering 71% lived in poverty. Today it hovers at 58% (for 2013, the most recent data). Suddenly your grand story of progress seems tepid, mediocre, and – in a world that’s as fabulously rich as ours – completely obscene…. “And if we look at absolute numbers, the trend changes completely. The poverty rate has worsened dramatically since 1981, from 3.2 billion to 4.2 billion, according to World Bank data. Six times higher than you would have people believe. That’s not progress in my book – that’s a disgrace.

In his pursuit of praise for neoliberalism (in reality capitalism) Smith has elsewhere tried to trash Hickel’s arguments that global poverty has not really declined.  But, as usual, Smith and others who take his line, ignore the key fact that the fall in global poverty levels, whatever the threshold points chosen, is mostly down to the massive reduction in poverty levels in China – a country that can hardly be considered having an economy that operates on neoliberal free market forces (although Smith seems to claim it does!).

Of the billion that Smith cites, there are over 800m Chinese who have been taken above the poverty threshold in the last 30 years.  Sanjay Reddy looked at the poverty data excluding China. He found “modest decreases in total poverty headcount or even increases, sometimes sizable, especially at higher poverty lines & over longer periods, more marked in certain regions.”

Smith supplements his argument for neoliberalism by arguing that in the last 30 years “progress in the developing world has been impressive — something for which neoliberalism probably deserves a lot of credit — but it is far from complete; most of South Asia is still very poor, and much of Africa is just beginning to industrialize.” Indeed, far from complete.  The inhabitants of Nigeria, Africa’s most populated country or those of the Congo can tell Smith that progress in their countries has not been “impressive” at all. And not just there.  According to Ha-Joon Chang, a Cambridge economist, during the 1960s-and-70s per capita income in Sub-Saharan Africa was around 1.6% per annum; however, after they were imposed with a neoliberal economic model by the West, during the 1980s and 90s, per capita income fell to only 0.7% per year.

What industrialisation that has taken place in recent decades (beyond just basic resource and agro commodity production) in Africa is mainly due to the investment being offered and applied by China – the opposite of Smith’s model of neoliberalism, in my view.

Smith also argued that “neoliberal policies might have led to faster productivity growth in the 1990s and early 2000s” in the advanced capitalist economies.  You see “The spurt of growth is commonly attributed to the information-technology boom, but that boom might not have been possible if the US had more strictly regulated emerging industries in order to protect favored incumbents.”  This is just speculation without evidence.  Whatever “spurt” in productivity took place in the hi-tech boom of the 1990s, it was still way less than in the pre-neoliberal period of the 1950s and 1960s (see graph).

Moreover, it has been the state that has sparked much of that ‘innovation’ back in the 1960s and after, Mariana Mazzacuto, in her book, The Entrepreneurial State, explains thatthe real story behind Silicon Valley is not the story of the state getting out of the way so that risk-taking venture capitalists – and garage tinkerers – could do their thing. From the internet to nanotech, most of the fundamental advances – in both basic research but also downstream commercialisation – were funded by government, with businesses moving into the game only once the returns were in clear sight. All the radical technologies behind the iPhone were government-funded: the internet, GPS, touchscreen display, and even the voice-activated Siri personal assistant.”

Contrary to Smith’s neoliberal view, state-owned industry and economic growth often go together – “the seldom-discussed European success story is Austria, which achieved the second highest level of economic growth (after Japan) between 1945 and 1987 with the highest state-owned share of the economy in the OECD.” (Hu Chang).

Smith claims neoliberal reforms in the labour market helped to achieve lower unemployment rates in places like Germany. “Germany suffered high unemployment in the 1980s and 1990s, thanks to its rigid labour market regulations; eventually, it eased those restrictions, which substantially lowered the unemployment rate.”  Here he refers to the infamous Haartz labour reforms that introduced a tiered employment system, putting millions into low wage programmes that boosted German industry’s profitability while keeping real wage incomes stagnant.

About one quarter of the German workforce now receive a “low income” wage, using a common definition of one that is less than two-thirds of the median, which is a higher proportion than all 17 European countries, except Lithuania.  A recent Institute for Employment Research (IAB) study found wage inequality in Germany has increased since the 1990s, particularly at the bottom end of the income spectrum. The number of temporary workers in Germany has almost trebled over the past 10 years to about 822,000, according to the Federal Employment Agency.  In my view, this is not the best example of the ‘success’ of neoliberal policies, at least not for labour.

It is ironic that Smith pushes the policies of the ‘free market’ at a time when all the trends in the current neoliberal world show slowing growth in real GDP, productivity and investment, along with stagnant real wages and rising inequality.

And yet, Smith presses on with the argument for neoliberal policies to “restrain social democrats’ more ambitious impulses” and “to protect the US economy’s entrepreneurial private sector, and to make sure that technological progress and international trade don’t get forgotten.”  In other words, he  reckons that we need to balance, against the urgent need for decent public services, proper labour rights and conditions, control of the corrupt and unproductive finance sector and the avoidance of disastrous economic slumps, the fundamental (neoliberal) aim to raise the profitability of the capitalist sector.  Because we must not ‘forget’ the “contribution of markets to human well-being.”

Demographic demise

March 8, 2019

There is one outstanding statistical feature of 21st century capitalism.  Capitalism is increasingly failing to develop what Marx called the “productive forces” (namely the technology and labour necessary to expand the output of things and services that human society needs or wants).  As measured by gross national product in all the economies of the world (or per person), world capitalism is finding it more and more difficult to expand.

When Marx and Engels wrote the Communist Manifesto 170 years ago, they proclaimed the productive power unleashed by the capitalist exploitation of labour power, based on using more and more means of production (machines, technology etc) to replace human labour, while extending its tentacles to all parts of the globe.  Indeed, the rapacious drive for profit has led to an uncontrolled destruction of nature and of the earth’s resources that has polluted the planet.  And now, fossil fuel production has caused an increasingly irreversible global warming that is changing the earth’s climate, bringing with it extreme weather and disasters.

Last year global GDP among the world’s 195 nations hit a record $85trn.  Remarkably, three-quarters of this was accounted for by just 14 economies – the lucky few with an individual GDP in excess of $1trn.

The global population also hit a record last year of 7.6bn.  That’s a doubling in less than half a century.  The working age population (WAP) has reached 5bn, but this is mainly outside the top 12 economies (ie G14 minus India and Brazil).

In the major capitalist economies, output is now expanding much more slowly than ever before.  As Alan Freeman has shown in a recent paper, “economic growth of the industrialised North has fallen continuously, with only brief and limited interruptions, since at least the early 1960s. The trend is extremely strong and includes all major Northern economies without exception.” The_sixty-year_downward_trend_of_economi (1)

As Freeman concludes, “we face, not merely a decline in the GDP growth rate of one country (for example, the United States, whose decline has been studied more exhaustively) but of an entire group – the advanced or industrialised countries – whose growth rates follow  the same trend and indeed, have converged. The trend observed is thus highly likely to be systemic – accounted for by the structure of the world economy as a whole – than being a result of the problems or vagaries of one particular country.”

Capitalism is not fulfilling its only claim to fame –expanding the productive forces.  It is exhausted.  Alongside that, inequality of wealth and income in the major economies is widening, poverty levels and the gap between rich and poor countries and people is widening.  And nature and the climate are severely damaged.

Economic growth depends on two factors: 1) the size of employed workforce and 2) the productivity of that workforce.  On the first factor, there is a demographic demise.  The advanced capitalist economies are running out of more human labour power.  As for the second factor, the productivity growth of the employed workforce is slowing.

For the first time since the emergence of capitalism as the dominant mode of production globally, the largest economies – the G12 — saw their collective working age populations (WAP) decline. And this decline will accelerate, according UN Population Division forecasts.

Of the 14 economies with $1trn or more GDP, there are only two – India and Brazil – where the working age population will grow over the next generation.  The other 12 will experience a decline in their workforce.  It’s possible that increased immigration from more populous regions could enable the US, the UK, Canada and Australia to expand their workforce for a while – although the governments in all these countries want to cut back immigration.  In Japan, Germany and Italy even immigration will not stop the fall.  In South Korea, Germany and Italy, excluding immigration, the workforce will fall by 1% a year over the next ten years.  So, other things being equal, that is 1% a year of potential GDP growth.

As a result, these leading capitalist economies will have ageing workforces and an increasingly dependent non-working population.  Currently, among the biggest economies, people of working age (15-64 year olds) typically account for 65% of the total population.

Japan’s rapidly ageing population, however, shows the way forward.  By 2030, the ratio of WAP/total population will decline everywhere.  For those countries unable to “import” skilled working-age people, it will decline precipitously.

Then there is the productivity of that declining workforce.  If productivity growth could be accelerated, then this could compensate for the contraction in the workforce and so sustain real GDP growth.  But global productivity growth is slowing.

Over the last 40 years and especially in the last 15, there’s been a broad-based slowdown in output per hour worked across the major economies.  For the G11 (excludes China), it’s currently running at a trend rate of just 0.7% p.a.

Russia’s productivity level is falling, while that of Italy and the UK is hardly moving.

If we add together the potential growth in the workforce and the growth in productivity of that workforce, we can get a forecast of potential real GDP growth over the next ten years.  And remember, this assumes no new slumps in investment, employment and production from a crisis in capitalist production.

Without net immigration, real GDP across the G11 bloc will expand by less than 1% a year, with Australia doing best at 0.9% a year, while Russia and Italy could suffer an annual shrinkage of a similar proportion.  With immigration, Australia’s potential annual growth could reach the heady heights of 1.7% a year, but everybody else would have a sub-1% growth rate. Even allowing for some skilled immigration from outside, it’s unlikely that real GDP growth for the G11 bloc as a whole would exceed 0.5% p.a!

But why is productivity growth in the major economies falling?  The productivity puzzle has been debated by mainstream economists for some time now.  The ‘demand pull’ Keynesian explanation that capitalism is in secular stagnation due to a lack of effective demand to encourage capitalists to invest in productivity enhancing technology.  Then there is the supply-side argument from others that there are not enough effective productivity-enhancing technologies to invest in – the day of the computer, the internet etc, is over and there is nothing new that will have the same impact.

But there is also another very simple explanation.  Evidence shows that productivity growth is mainly driven by capital investment, which replaces labour with machines – the machines boost the output of each worker using the technology and also reduce the number of workers needed.  There are three factors behind productivity growth, the amount of labour employed, the amount invested in machinery and technology and the X-factor of the quality and innovatory skill of the workforce.  Mainstream growth accounting calls this last factor, total factor productivity (TFP), measured as the unaccounted for contribution to productivity growth after capital invested and labour employed.

In the case of the US, all three factors were at their strongest in the ‘hi-tech’ decade of the 1990s, but in the 2000s, the contribution of capital investment and labour employed dropped and since the Great Recession and in the subsequent Long Depression, all three factors have declined.

Part of the decline in US capital and labour investment can be laid at the door of increased globalisation as American companies went overseas for their factories and activities.  But investment to GDP has declined in all the major economies and since 2007 (with the exception of China).

In 1980, both advanced capitalist economies and ‘emerging’capitalist ones (ex-China) had investment rates around 25% of GDP.  Now the rate averages around 22%, or a more than 10% decline.  The rate fell below 20% for advanced economies during the Great Recession.

Indeed, productivity growth is also slowing in the so-called emerging economies like China, Brazil and India.

Why is investment in new technology so sluggish and thus failing to restore productivity growth?  The main reason for low investment in capitalist economies is that capitalists do not think it is profitable to invest in new technology to replace labour. Indeed, in the post Great Recession period, in many major economies like the US, the UK, Japan and in Europe, companies have preferred to keep their labour force and employ new workers on more ‘precarious’ contracts with fewer non-wage benefits and part-term or temporary contracts.  That is revealed in very low official unemployment rates alongside low investment rates.  Thus productivity growth is poor and overall real GDP growth is below-par.

The way to restore productivity growth and so get economies growing at a rate that can meet the demands of people for decent homes, education, health, and renewable energy is boost investment in new technology and the labour skills to go with it and distribute the gains to all.  But here lies the contradiction in capitalist production.  Production for profit not need.  And increased investment in technology that replaces value-creating labour leads to a tendency for profitability to fall.  So the need to expand and develop the productive forces comes into conflict capitalist accumulation.  And resolving that contradiction through slumps that raise profitability or by increased exploitation of the global workforce is getting much more difficult.

world rate of profit – average of 14 major economies (profits as % of fixed assets)

The global workforce available to exploit is not growing so fast and while there are still reserves of labour in Africa (eg Nigeria etc) and Asia, in the developed capitalist economies, the workforces are set to shrink; while productivity growth through more investment in technology cannot compensate if profitability continues to press downwards over time.

Macro modelling MMT

March 3, 2019

“The accounting identities equating aggregate expenditures to production and of both to incomes at market prices are inescapable, no matter which variety of Keynesian or classical economics you espouse. I tell students that respect for identities is the first piece of wisdom that distinguishes economists from others who expiate on economics. The second? … Identities say nothing about causation.” James Tobin, leftist Keynesian 1997

Money is ultimately a creation of government—but that doesn’t mean only government deficits determine the level of demand at any one time. The actions and beliefs of the private sector matter as well. And that in turn means you can have budget surpluses and excess demand at the same time, just as you can have budget deficits and deficient demand.”  Jonathan Portes (orthodox Keynesian).

The increasingly abstruse debate among economists (mainstream, heterodox and leftist) continues on the validity of Modern Monetary Theory (MMT) and its relevance for economic policy.  The debate among leftists went up another gear with the publication of leftist Doug Henwood’s fierce critique of MMT in Jacobin here. Leading MMTer Randall Wray angrily responded to Henwood’s attempted demolition here. And then from the heart of MMT land, Pavlina Tcherneva, program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute replied to Henwood in Jacobin.

In the mainstream, Paul Krugman had a go, with a response from Stephanie Kelton.  Kelton is a professor of public policy and economics at Stony Brook University, Long Island New York. She was the Democrats’ chief economist on the staff of the U.S. Senate Budget Committee and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders.

Although this debate is getting very arcane and even nasty, it is not irrelevant because many leftists in the labour movement have been attracted by MMT as theoretical support for opposing ‘austerity’ and for justifying significant government spending to obtain full employment and incomes.  In particular, the radical wing of the Democrat party in the US has used MMT to support their call for a Green New Deal – arguing that more government spending on the environment, climate change and health can easily be financed by the issuance of dollars, rather than by more taxes or more government bonds that would raise public debt.

I won’t pitch into the MMT debate as above as I have already spent some ink in three posts trying to critique the theory and policy of MMT from a Marxist viewpoint, with the aim of working out whether MMT offers a way forward to meeting ‘the needs of the many’ (labour) over the few (capital).  And for me, that is the ultimate purpose of such a debate.

All I would add on the current debate among Keynesian, Post-Keynesians and MMTers is that MMTers argue with orthodox Keynesians over whether government spending can create the money to finance it; or taxation and borrowing is needed to create the money to fund government spending.  But as post-Keynesian Thomas Palley puts it: “government spending and taxation occur simultaneously so creation of money via money financed deficits and destruction of money via taxation also occur simultaneously. It is a pointless exercise to try and determine which comes first.”  Marxist analysis would agree.

Instead, in this post I want to look at MMT’s macro model.  In the twitter debate that is viral (at least among economists and activists!), critics of MMT have sometimes argued that MMT is just a series of vague assertions without any rigorous model.  This riled Kelton.  She immediately posted a paper written in 2011 by Scott Fullwiler of Warburg College, another MMT leader (who also recently commented on one of my blog posts).  In this paper, Scott outlined the MMT macro model in some detail.

Basically, he starts off with a Keynes/Kalecki post-Keynesian macro model of aggregate demand.  This model is simply an identity.  There are two ways of looking at an economy, by total income or by total spending and they must equal each other.

Thus National Income (NI) = National Expenditure (NE).

Following the ‘Keynesian Marxist’ Michal Kalecki, we can break this down into:

(NI) Profits + Wages = (NE) Investment + Consumption.  Now there are two sorts of income and two sorts of spending.

If we assume that all Wages are spent then and all Profits are saved, we can delete Wages and Consumption from the identity.  So

Profits = Investment

In the MMT version from Scott, he puts the same macro identity differently, with Investment on the left side of the equality.  Thus.

Investment = Profits

Why?  Because, as we shall see, all post-Keynesian theory argues that it is Investment that leads Profits, not vice versa.

But Scott re-expands the parts on the right-hand side to look at flows, so that wages that are saved are added back with profits to get Private Saving (so assuming some household saving); and he also adds in Government saving (taxation less spending) and Foreign Saving (net imports or current account deficit).

Thus Profits as a separate category disappears into Private Savings and we get:

Investment = Private Saving + (Taxation – Government Spending) + (Imports – Exports)

But then Scott also dispenses with the separate category Investment and converts it into Private Saving less Investment or the Private Sector Surplus.  So now we have Private Sector Savings (Wages saved plus Profits less Investment).  So Scott continues:

Private Sector Surplus = Government Deficit + Current Account Balance

Or

Private Sector Surplus – Current Account Balance = Government Deficit

This is the key MMT identity.  It argues that if the Government deficit rises, then assuming the Current Account balance does not change, the Private Sector Surplus (Wages saved +Profits less Investment) rises.  The MMT conclusion (assertion) is that increasing the Government deficit will increase the Private Sector Surplus . And if we exclude Wages saved (the MMT identity does not) and the Current Account balance, then we have:

Net Profits (ie Profits after Investment) = Government deficit

And we can conclude that Government deficits determine Net Profits ie Profits less Investment.

In the paper Scott then presents a time series graph comparing US Private Net Saving (remember this includes Household net saving) with Government deficits and concludes that “It shows how closely the private sector surplus and the government sector deficit have moved historically, which isn’t surprising given they are nearly the opposing sides of an accounting identity.”

But then Scott says: “What we notice (from these graphs) is that the current rise in the government’s deficit is creating net saving for the private sector.”  But is that how to view the causal direction of these macro identities?  The post-Keynesians reckon that the causal connection is that Investment creates Profits or in the MMT version Government deficits create net profits (private saving).  But in my view, the causal direction of this identity is in reality the opposite, namely that Marxian theory says that Profits create Investment, because Profits come from the exploitation of labour power.

Let us go back to the basic Kalecki identity, Profits = Investment, with Investment back on the right hand side.  Investment (which disappeared in Scott Fulwiller’s model) can be broken down to Capitalist investment and Government investment.

Profits = Capitalist investment + Government investment

Under the Kalecki causation, increasing government investment (by deficits, if you want) will raise Profits (and for that matter, wages too through more employment and wage rates – the post-Keynesian identities just refer to Private Saving and (importantly) do not break that out into Wages saved and Profits).

Thus Profits + Wages saved = Private investment + Government investment

But what if the Kalecki causation is back to front?  What if Profits lead Investment, not vice versa.  Then the identity is:

Profits (because Wages are spent) = Investment (comprising Capitalist investment and Government investment).  We can expand this to cover external flows so that:

Domestic Profits + Foreign Income = Capitalist investment + Government Investment + Foreign Inward Investment

Now assume both Domestic Profits and Foreign Income are fixed. What will happen if Government Investment rises?  Private Investment will fall unless foreign inward investment rockets.

How can government investment/spending be increased without Private (capitalist?) investment falling (being crowded out)?  By running budget deficits, say the post-Keynesians (and MMT).  Borrowing could be done by issuing government bonds (orthodox Keynesian) or by ‘printing money’ ie increasing cash reserves in banks (MMT).  Issuing bonds may reduce Private Investment to boost Government investment, but the credit created would stimulate overall Investment.  Printing Money (MMT) would raise Investment without reducing Private Investment (magic!). MMT/Keynesians will say if Government Investment is not funded by taxes on Domestic Profits but by borrowing with bonds or printing money, then it will not affect profits.  Marxists would say that this is ‘fictitious’ investment that must deliver higher profit at some point. 

All this is because identities do not reveal causation and it is causation that matters.  For the Keynesians, it is the right hand side of the equation (Investment) that causes the left hand side (Profits); namely, that it is capitalist investment and consumption that creates profit.  For MMTers, it is a variant of the same, but netted: Net government investment/spending (deficits after taxes) causes Net Private Savings (Profits and Saved wages after investment).

But in the real world of capitalist production, this is back to front.  Profits lead Investment, not vice versa; and Net Private Savings enable Government deficits not vice versa.  The graphs offered by Scott in his paper of the time series of deficits and net private surpluses can be interpreted with just that causality.  What I read from the first graph is not that the current rise in the government’s deficit is creating net saving for the private sector” (Fullwiler), but the opposite: higher net savings (profits after investment) will produce a higher government deficit or lower surplus.  In other words, when capitalists hoard/save and won’t invest, and that is particularly the case in recessions, then government deficits rise (through lower tax revenues and higher unemployment benefits).  And Scott’s graphs show that the US government deficits reach peaks in all the post-war US recessions and are at their lowest in boom times.

Indeed, if I do the correlations between the government balance and net private savings, there is indeed a very small inverse relation of 0.07; in other words, a larger government deficit is correlated (weakly) with a net private savings surplus.  But if I do the correlation between the government balance and GDP growth, there is a small positive correlation.  In other words, more government surplus/less deficit aligns with more GDP growth, the opposite of the Keynes/Kalecki causation, which suggests that it is growth that leads government balances, not vice versa (see the Portes quote above).

Any causation is also modified by the external account.  Scott’s second graph including the current account shows that a persistent current account deficit (net foreign inflows) from the 1980s helped to fund US government deficits, even though the private sector surplus disappeared in the 2000s.  So the main MMT causation argument is further muddied by foreign income.

We can only really better understand the causal connections if we have Investment isolated and Profits isolated. You see, contrary to the Keynesian/post-Keynesian/MMT view, the Marxist view is that “effective demand” (including government deficits) cannot precede production.  There is always demand in society for human needs.  But it can only be satisfied when human beings do work to produce things and services out of nature.  Production precedes demand in that sense and labour time determines the value of that production.  Profits are created by the exploitation of labour and then those profits are either invested or consumed by capitalists.  Thus, demand is only ‘effective’ because of the income that has been created, not vice versa.

Because the Keynesians/post-Keynesians have no theory of value, they do not recognise this and read their own identity the wrong way round. From a Marxist view, profits are the causal variable.  So if profits fall, then either investment, or capitalist hoarding or the government deficit must fall, or all three.

What is the evidence that profits lead investment and government deficits and not the other way round, as the Keynesians argue?  This blog has provided overwhelming empirical support to the Marxist causal direction. See my paper here which compiles all the compelling empirical research (including my own) that supports the Marxist view that, in a capitalist economy, profits lead investment, which in turn drives GDP growth and employment, while government deficits have little influence.

If the Keynes/Kalecki causation direction is right, then all that we need to do to keep a capitalist economy going is to have more government budget deficits.  If the MMTers are right, all we need to achieve permanent full employment is permanent government deficits (subject to some possible inflation constraint).  What the orthodox Keynesians and the MMTers disagree about is whether these deficits (of government spending over taxes) can and should be financed by issuing government bonds for banks to buy or by the central bank printing money.

The more important question, however, is what drives a capitalist economy.  It is the profitability of capitalist investment that drives growth and employment, not the size of a government deficit. The Keynes/Kalecki/MMT macro models hide behind identities and turn them into causes.  But identities “say nothing about causation” (Tobin).  It’s profits, not government spending, that call the tune.