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A profits recession?

July 14, 2019

This week, we get the first US company reports on earnings for the second quarter of 2019.  And it looks as though there will be the first back-to-back drop in overall earnings since the mini-recession of 2016.  S&P 500 companies are expected to report an average earnings fall of 2.8 per cent in the second quarter, according to data provider FactSet, following a 0.3 per cent dip in the first three months of the year.

Much is made of the large profits that the top tech companies, the so-called FAANGS, make.  But this hides the situation for the majority of US companies.  Those with a market value of $300m to $2bn look set to experience a 12% drop in earnings from this time last year after a 17% drop in Q1 2019.  So small to medium size American companies are suffering a sharp profits decline.

And even with the larger companies, profits are not as good as portrayed.  That’s because earnings per share have been boosted by the large companies buying back their own shares (same earnings but with less shares available).  Net share buybacks are expected to contribute 2.1 percentage points to EPS growth in the second quarter, according to analysts at Credit Suisse. US companies snapped up more than $1tn of their own stock last year, a record figure, driven by the Trump tax measures.

Underlying this decline in profits are higher wage costs as fuller employment forces companies to concede wage increases to keep skilled workers – it’s a different story with the less skilled outside the tech sector.  Also the cost of other non-labour inputs (energy, raw materials etc) are rising.  So profit margins (profits per unit of production) are falling.  Analysts expect non-financial companies to report net margins of 10.8 per cent in the second quarter, down from 11.5 per cent in the year-ago quarter, according to figures cited by BofA analysts. “We have been highlighting risk to margins from rising input costs for companies that don’t have pricing power, as well as for labour-intensive companies and sectors amid rising wages, and we expect full-year net margins to contract to 11.2 per cent in 2019 ex-financials from 11.7 per cent in 2018,” they add.

The strong US dollar has also meant that US export companies are finding it more difficult to sustain sales growth.  S&P 500 companies are forecast to report a 3.7 per cent increase in revenues, which would be the weakest growth since the third quarter of 2016.

Materials companies, the sector with the most sensitivity to China and the fallout from the ongoing trade war between Washington and Beijing, are expected to have had the toughest time in the second quarter. DuPont and Freeport-McMoRan are expected to be the biggest contributors to the sector’s earnings slump, according to FactSet. The sector is projected to report a 16 per cent year-on-year decline in earnings and a 14.9 per cent drop in revenues.

Most important, even the tech sector will experience an 11.9 per cent fall in earnings and a 1.1 per cent drop in revenues.  This is important because it is this sector above all that has driven profits growth in American companies over the period since the Great Recession.  If the FAANGS show a decline on profits, then American capital is in trouble.

As James Montier, the post-Keynesian economist at GMO, the large asset fund manager, points out, real earnings growth in the corporate sector has been below the rate of real GDP growth even after the significant boost from the financial engineering from share buybacks.  According to Montier, when you dig down into the market you find that a staggering 25-30 per cent of firms are actually making a loss.

In Montier’s view, “the US is witnessing the rise of the “dual economy” — where productivity growth is reasonable in some sectors, and totally absent in others. Even in the sectors with good productivity growth, real wages are lagging (wage suppression is occurring). All the employment growth we are seeing is coming from the low productivity sectors. On top of this, the paltry gains in income that are being made are all going to the top 10%. This is not what a booming economy should feel like.”

There is a segregation of the US economy into sectors with reasonable productivity growth and those with no productivity growth at all. The single biggest driver of productivity is manufacturing, with information and wholesale trade scoring respectably as well. On the least productive side there’s transportation, accommodation, education and healthcare. What’s more, in the laggard group, zero productivity growth has gone hand in hand with zero real wage growth.

Not that this historic non-profitability has stopped investors from piling into even more loss-making opportunities. According to Montier, some 83 per cent of IPOs (new stock issues) this year have come to the market with negative earnings. He stresses:”This is a higher percentage than that seen even at the height of the tech bubble!”

So the stock market rolls on upward to more record highs, floated by the expectation of yet more cheap or near zero cost money from the Federal Reserve.  But beneath the hype, the reality is that profits are falling for many US companies, and over a quarter are making loss – in effect, they are ‘zombie companies’.

It is the same story in Europe and Japan. If the profits crash materialises and is sustained through the year, a sharp fall in investment and eventually employment and spending will follow, despite the stock market boom – in effect a new recession.

Greece: completing the vicious circle

July 8, 2019

So the full circle is completed.  The corrupt pro-business conservative New Democracy party in Greece that was ousted by the anti-capitalist Syriza party in 2015 has been returned to office in yesterday’s general election, with an outright majority over all other parties.

New Democracy party got just under 40% of the votes cast. Syriza under Alexis Tsipras got just under 32% of the vote. The voter turnout was just over 57%, the lowest rate since the end of military rule in 1974, suggesting huge disillusionment with all parties.  The Syriza vote share was down only 3.5% from the last election in 2015, but the New Democracy share rose from 28% to 40%. The small parties (including the Syriza left breakaway parties) did poorly, although the former PASOK social democrats increased their share from 6.3% to 8% and the Communists were unchanged at 5%. Also a new party MeRa25, set up by former Syriza finance minister Yanis Varoufakis, got over the 3% threshold and will have MPs for the first time.  The neo-fascist Golden Dawn failed to make it.

The last four years of the Syriza government have been both tumultuous and saddening.  Elected to oppose the policies of the Troika (the ECB, IMF, and the EU) in imposing vicious austerity measures on Greeks in return for ‘bailing out’ its banks, foreign banks and government debt, Syriza at first resisted the Troika.  Under Tsipras and Varoufakis, it searched for a deal with the Euro leaders that would not impose the austerity.  When such a deal was rejected by the Troika and the Euro leaders led by Germany and the Netherlands, Tsipras called a referendum on the Troika ‘memorandum’: should Greeks accept the austerity or reject it?  Despite a massive propaganda campaign by the pro-business media in Greece and internationally and lack lustre campaigning by Syriza, Greeks voted 60-40 to reject the Troika.  Little more than one day later, the government ignored the vote and capitulated.

For the next four years, the Syriza government has duly attempted to implement every single demand of the Troika.  Pensions have been slashed, public sector employees have been sacked and wage freezes imposed, state assets have been sold off, taxes have been raised sharply.  Varoufakis resigned after the capitulation and toured Europe; and the left faction in Syriza split away to run its own electoral parties – to no avail.  The Syriza government ploughed on in the hope and expectation that if it met the austerity measures imposed by the Troika, it would eventually be able to resume economic growth, gain some ‘fiscal space’ and ‘return to the market’ for government borrowing.

The first loans that the government had got from the Troika were used to pay off French and German banks which held billions on Greek government debt that was not virtually worthless.  After this private sector bailout, the next loans were used to meet repayments to the IMF, the ECB and other governments from the first bailouts.  In this never-ending circle more debt was raised to pay off previous debt!  None of this money went to alleviate the depression being suffered by Greeks to their living standards.  The Greek economy collapsed by 30%, pensions and wages fell 40%; thousands of young people emigrated for work and public services and jobs were decimated.  And the biggest hit was to private sector jobs in tourism, industry and travel.

Did these sacrifices restore Greek capitalism and eventually reverse the calamitous decline in output, employment and incomes?  The short answer is no.  Greek unemployment rates remain very high, especially for young people.

Capital investment collapsed during the debt crisis but has not recovered.  Greek business cannot invest.

Gross capital formation (Em)


Government spending has been driven down by the austerity measures.

Government spending to GDP

But this has not reduced government debt to GDP, which remains at a staggering 180% of GDP and will stay there for the foreseeable future.  All the austerity measures have not dented the government debt built up to bail out the foreign banks, the Greek banks and other holders of Greek government debt.  The failure of the private sector, Greek business and global capitalism has been shifted onto the books of the government and its people for generations to come.

Public debt to GDP (%)

The huge loans that the Greek government owes to the EU leaders (the IMF and the ECB have been paid off) do not have to be repaid for a decade or more and the interest cost on the loans is low.  But the debt has not been written off; it must be repaid eventually and the Greek government must run a huge budget surplus in order to cover future payments, the interest on the debt and to obtain new loans from the global market.

The whole strategy of the Syriza government was that, as economic growth returned to the Eurozone, it would lift up the Greek boat with other European boats in the rising tide of economic recovery.  ‘Fiscal space’ would be created and public services and pensions could then be improved while still meeting the repayment schedule of the creditors.

But it has not worked out like that.  Eurozone economic growth since the debt crisis has been pathetic, hardly creeping above 2% a year and now slowing again fast.  During the debt crisis and the eventual capitulation of the Syriza government, I estimated that Greek economic growth would have to average at least 3% a year in order to end austerity if the government continued its commitments to the Troika.  Instead, the Greek growth rate has been averaged little more than 1% a year under the Syriza government.  It’s currently slowing down from a short burst above 2% to just 1.3%

Greece: annual real GDP growth (%)

The new Conservative government takes over just as the Eurozone economies and much of the rest of the world face a slowdown in investment, trade and growth at best – and an outright recession at worst.

The Syriza leaders’ economic strategy of accepting the Troika programme, honouring the debt burden and staying in the EU has failed.  The result has been total disillusionment with Syriza, particularly among the young. Many have left to find work; those who have not either did not vote in the election or voted for a change of government in the form of New Democracy.  Anecdotes of these attitudes have been expressed in the media.

Like many young Greeks, Tasos Stavridis plans to leave the country once he finishes his degree in political science.  “Our financial crisis has gone on much longer than we expected and we are so exhausted,” says the 22-year-old. “Most of my friends plan to leave too. In Greece the salaries are so low, and the economic situation is so bad,”  What about New Democracy? “The truth is, I blame them [for the crisis] too,” admits Stavridis. “But I believe Mitsotakis has made a lot of changes. I agree with the economic plan this party has, and I believe it will help us escape this situation.” We must focus on the private sector in order to get better economically,” he believes. “Our public sector is inefficient and lazy.”  Then “The last time my family supported something left, it turned out to be a lot worse,” says Zoe Babaolou, a 19 year old from Thessaloniki who voted for New Democracy in the European elections. “It seems better to return to something safer.” Babaolou adds: “We voted for ideology in 2015 and we didn’t see any changes. So I’m more interested in economic measures.”

Could there have been an alternative to the strategy of Tsripras and the Syriza leaders back in July 2015 when the referendum to oppose Troika austerity was supported by the majority of Greek people?  I think there was.  One option prominently pushed by the left faction of Syriza MPs was to break with the EU and the euro; revert to the Greek drachma, devalue the currency, impose capital controls on any flight of money, renege on the debt and revert to government spending programmes.

For example, this was the option presented by socialist economist and Syriza MP, Costas Lapavitsas, at the time.  Lapavitsas took a principled stand against the capitulation and broke with Syriza.  But he argued that: “the obvious solution for Greece right now, when I look at it as a political economist, the optimal solution, would be a negotiated exit. Not necessarily a contested exit, but a negotiated exit.” This would involve a 50% write-off the debt owed to the EU and protection of the new Greek currency (devalued by just 20%) with liquidity from the ECB.

My thought then was that even if the Troika were to agree to such a ‘negotiated exit’, which was a moot point; and even if the new Greek drachma only depreciated by 20% (extremely unlikely), the Greek economy would still be on its knees, unable to restore living standards for the majority. Devaluation and rising prices would eat into any gains made from cheaper exports. Lapavitsas seemed to recognise this when he said at the time:“Wages must rise, but even if they rise, you’re not going to go back to where you were. It’s just not feasible at the moment. We need a growth strategy for that.”

But Lapavitsas opposed a growth strategy based on socialist planning. “I don’t think that Syriza should come out with a broad and wide nationalization program right now. What is necessary is to nationalize the banks, of course. And to make sure that energy privatizations stop, electricity in particular. That stops. And privatization of other key assets stops. We need to put a growth and recovery strategy in place immediately outside of the euro, and later to have a medium-term development plan.” For me, the strategy that Greece leaves the euro and implements a broad Keynesian spending programme first, leaving any socialist measures to later could not work because the forces of capital internationally and domestically would be untouched.

In my view, there was another option: a broad and wide programme to replace capitalism. For me Greek capitalism needed to be replaced, in or out of the euro. That would mean public ownership of all big business and foreign capital in Greece; a democratic mobilisation of workers to control their workplaces and the economy with a plan of investment and production.  A socialist Syriza could then appeal for support among the wider labour movement in Europe to force their governments to drop their imposition of austerity, cancel the debt and begin a Europe-wide programme of investment to include Greece.

Such a strategy would have more support from other European workers and at home than one that concentrated on condemning the euro as the problem.  After all, there was always a majority of Greeks in favour of staying in the euro and the EU. Greece is a small and weak capitalist economy; it cannot succeed without success in the rest of Europe; and that applies to a socialist Greece too.  But at least the Greek people would be in control of their own capital assets and labour allocation.

But whatever the merits of a Keynesian or Marxist option back in 2015, now we have the return of the pro-business, corrupt, dynastic-led New Democracy government which originally presided over the financial crash and recession back in 2010.  The programme of the Mitsotakis government is to privatise, reduce taxes for the rich and encourage foreign investment, while keeping wages and pensions down and government services to the minimum – neoliberalism if you want to call it that.

The real aim is to boost the profitability of Greek capital as the economic solution and hope that capitalist then invest in Greece.  According to the EU’s AMECO database, Greece’s net return on capital plummeted by 35% from 2007 to 2012.  Under the Syriza government, profitability recovered 20% but is still some 15% below the 2007 peak.  The aim of the new government will be to continue the work of Syriza to save capitalism but with extra energy and vengeance.  Meanwhile a new global recession looms nearer.

Imperialism and profitability at Lille

July 7, 2019

The joint conference of the International Initiative for the Promotion of Political Economy (IIPP), the French Association of Political Economy (AFEP) and the Association of Heterodox Economists (AHE) brought together a large gathering of radical economists in Lille France last week.  The theme of the conference was Envisioning the Economy of the Future and the Future of Political Economy.

There were hundreds of presentations on various themes: World Economy, Economic Thought, Environment, Financialisation, China, Social Capital, Beyond Capitalism; Neoliberalism and Marxist Political Economy.  Of course, it is impossible to cover all or even most of the papers presented, particularly as sessions often clashed with others.  So, as usual, for such conference reports, I shall just discuss papers in sessions I attended or where the presenters have kindly sent me their papers.

The word Financialisation once again dominated many sessions.  Readers of this blog will know that I am very sceptical about whether this concept adds much to our understanding of modern capitalist trends; indeed it may even confuse on many issues.  Does it simply mean that the financial sector has grown in importance quantitatively in the structure of capitalism in the 21st century; or does it mean much more; that capitalism has entered a fundamentally new stage in the capitalist mode of production?  Those who push financialisation seem to be in the latter camp:  finance is where we must look for the key faultlines in capital and not in capital overall.  If so, I disagree.  But whatever it is, ‘financialisation’ seems to dominate the research of many radical scholars.

I wanted to attend these ‘financialisation’ sessions to get a better idea of where the concept was going but in the end I missed most of those papers, so I shall return to the discussion of ‘financialisation’ in future posts.  In the meantime, here are few papers and sources on the subject.

On Marxist political economy, Nick Potts of Southampton Solent University and a leading advocate of the Temporal Single State Interpretation (TSSI) of Marx’s theory of value and law of profitability, presented an incisive critique of those scholars who have argued that creative industries like advertising require a revision of Marx’s value theory based on the value-form interpretation that value is only created at the point of exchange or sale. 

Potts, correctly in my view, denies that advertising and marketing sectors produce value.  They are activities that appropriate value at exchange from those activities that are productive of value.  Under capitalism and production for the market, advertising, branding, marketing, copyright, etc may be necessary for individual capitalist companies to gain market share and profit, but they are still unproductive of new value.  In the same way, through the process of international exchange, imperialist countries can appropriate extra value transferred from dominated countries that produce value: “if we simply think advanced countries produce all the value they appropriate, then we cannot see how the success of the advanced is built on capturing value (robbing) from everyone else ie we would thus make growing global inequality appear to be ‘fair’”.

Indeed, the nature of the economics of imperialism and the way in which there is a transfer of value from the poor capitalist economies with lower levels of technology to the rich imperialist economies has been greatly neglected by Marxist economists in the recent period.  The discussion on imperialism has centred more on political and military power, or on ‘forced dispossession’ of natural resources or on the ‘super-exploitation’ of the poorest workers worldwide by transnational corporations.  But Marx’s analysis of the transfer of value through trade, the hidden ‘unequal exchange’ of value beneath the apparently equal exchange in trade, has not been analysed or quantified, until recently.

Now Lefteris Tsoulfidis and colleagues at the University of Macedonia have produced results using world input-output tables to show how value is steadily transferred from the rest of the world to a small group of imperialist countries. And they have measured the unequal exchange between Germany and Greece in Marxist value terms.

And at the Lille conference, Andrea Ricci, Assistant Professor of Economics, Department of Economics Society and Politics, University of Urbino, presented a new paper (which is also published in the latest Review of Radical Political Economics) Ricci unequal exchange, in which he develops a model to measure unequal exchange in international trade.  Again, using world input-output tables like Tsoulfidis to calculate hours of labour in trade for 78% of world export, he shows that there were positive transfers of value to the top imperialist economies of around 2% of GDP a year from the rest of the world.

Two things struck me as important in this analysis.  First, that imperialism is concentrated in just a few top ten economies, with the US in the lead (taking $195bn in 2007) while everybody else is in deficit, including the so-called BRICS that are often considered as ‘sub-imperialist’ (ie both subject to transfers to the imperialists but gaining transfers from those lower down the pecking order).  That does not seem to be the case: China had a negative UE value transfer of $382bn in 2007; India $189bn, Brazil $63bn etc).  China is not an imperialist economy on this definition.

G Carchedi and I are working on a paper on the economics of imperialism that covers measuring unequal exchange in trade, factor income flows on the current account; and foreign investment on the capital account.  We reach similar conclusions to Ricci in that imperialism is alive and well and inequality between the imperialist economies and the rest is just as wide as it was 100 years go.  Value produced in the dominated countries get appropriated and transferred to the imperialist economies in ever-increasing amounts.

The same theoretical theme and empirical analysis on the transfer of value through trade from the low-technology, high labour intensity economies to the high-tech, low labour input economies, a la Marx’s transformation of values into prices model, was taken up in another session by Ivan Rubinic within the context of the Eurozone.  Here was a trading area using one currency and free movement of labour and capital – an excellent laboratory test for Marx’s theory.

Rubinic and Tajnikar (Rubinić and Tajnikar – Labour Force Exploitation and Unequal Labour Exchange as the Root Cause of the Eurozone’s Inequality) use a model that compares the ratio between national income and value added for the each Eurozone economy for the ten-year period 2004-13.  If the aggregated national income is higher than the aggregated value added, that implies an appropriation through unequal transfer from other Eurozone economies.  They find that 10 of the 18 EZ economies suffer a negative transfer to the other six (led by Ireland with its American-owned tech industries and core Europe).  In my view, it is another validation of Marx’s theory that value is transferred through trade from the low-tech economies (the laggards) to the high-tech economies (the leaders); the higher the country’s capital-labour ratio, the more net transfer of value in trade.

The ratio of national income to new value added

The question still unclear is whether unequal exchange is the result only of differential technical composition or organic compositions of capital between trading nations or is due more to monopoly barriers and pricing.  In other words, is it due to ‘differential rents’ or ‘monopoly rents’? Ricci is not clear on this.  Also, much trade (one-third) is within companies across borders and the value transfer there is not captured.

The argument that monopoly power is the main reason for unequal appropriation of profits among capitalist entities can also be considered within a country.  Armagan Gezici presented a paper (Concentration&Technology_Gezici_July2019) that dealt with whether rising concentration in sectors was the explanation for slowing productivity growth in the US economy – the so-called productivity puzzleGezici poses it thu: “A crucial question is why the relationship between concentration and productivity turned negative throughout the 2000s. A possible explanation is that firms did gain market power in the late 1990s due to productive investments in technology; once they grew large and well-established, they relied on their market power, monopoly rents, and practices rather than productive investments to keep their superior positions.”  Gezici’s conclusion is in the context of the US economy; but it also suggests that imperialist economies in general may gain their hegemonic position in the appropriation of value and the accumulation of capital through their superior technological position, but then sustain it through monopoly practices.

This brings me back to the hoary old subject of measuring the contributions to the movement in the rate of profit in a capitalist economy.  If the rate of profit declines, is this due to a rising organic composition of capital (OCC) outstripping any rise in the rate of surplus value or exploitation, a la Marx; or does OCC play little role and it is all down to the class struggle between wages and profits (profits squeeze)?

Erdogan Bakir presented some new research on the US economy.  He found that in the post-war period, the US rate of profit fell an average 0.3% a year (I too find a similar result).  Erdogan decomposes that fall among whether workers increased wages at the expense of profit share (offensive), or merely defended wage share as profitability declined; or whether the rate of profit fell secularly because of a secular rise in the OCC.  Much of the fall depended on the ability of labour to defend its wage share in new value but also “changes in the organic composition of capital had secondary but still significant effect on the profit rate over the full period. 39 percent of the decline in the profit rate over the full period was accounted for by the rising organic composition of capital.”

The rate of profit was also the subject of the session on the UK that presented a paper on (UK rate of profit since 1855 and the).  The UK rate of profit and British economic history is also published in World in Crisis, jointly edited by me and Mino Carchedi.  In my paper, I argued that Marx’s law of the tendency of the rate of profit to fall helps to explain the development of British capitalism since it became the hegemonic capitalist power in the mid-19th century at the time Marx himself was writing Capital, his fully fledged analysis of the capitalist mode of production, based on the reality of the UK economy.

From the analysis of the movement in the rate of profit from various sources, it is clear that there was a secular decline in the UK rate of profit over the last 150 years, supporting the predictions of Marx’s law and paralleling the decline of British imperialism.

The periods of steepest decline in the rate of profit matched the most difficult times for British capitalism: the long depression of the 1880s; the collapse of British industry after 1918; the long profitability crisis after 1946.  But there were also periods when profitability rose: the recovery after the 1880s in the late Victorian era; the substantial recovery in the 1920s and 1930s after the defeat of the British labour movement and demolition of old industries during the Great Depression; and the neo-liberal revival based on further dismantling of the welfare state, the privatisation of state assets, the defeat of labour struggles and, most important, a switch to reliance on the financial sectors as Britain increasingly adopted rentier capitalism  The UK economy now lives or dies with the health of the global financial sector and its associated business, legal and commercial services.

I have missed out many key discussions and papers on the nature of China’s mode of production (capitalist, state capitalist or not?), on the latest research in post-Keynesian economics; on developments in Brazil, Mexico; and also the plenary sessions on the future of political economy, the environment; the future of the EU etc.  But in this post, you will only read about my own particular interests.

The G20 and the cold war in technology

July 1, 2019

Last weekend’s G20 summit in Osaka resolved nothing substantial in the ongoing trade and technology war that the US is now waging with China. At best, a truce was agreed on any further escalation in tariffs and other measures against Chinese tech companies.  But there was no long-lasting agreement reached.  And that’s because this is a ‘cold war’ between a relatively declining economic power in the US and a new and dangerous rival for economic supremacy, China.  Just like the last ‘cold war’ between the US and the USSR, it could last a generation or more before a winner emerges – and the odds are against the US this time, the longer the cold war lasts.

At the G20, Trump and Xi agreed a truce on existing tit-for-tat measures and will renew ‘negotiations’.  Trump made a few concessions, allowing US companies to resume selling products to Huawei. So, presumably, Google, Android etc. will reappear on Huawei devices.  And China will be able, presumably, to buy the processors and chips it needs from Intel, Qualcom and Micron.  But there was no clarity on whether these concessions include what Huawei can sell to US companies (i.e. 5G networks).

But as sure as night follows day, the trade war will resume at some point, because the US’ key demands are just unacceptable to China, namely that China relinquish its drive to match US technology and agree to accept US supervision of its economic affairs.

The G20 may offer a brief respite for financial markets, but it will not alter the general downturn that the world economy is now experiencing, with the likelihood of a new slump in global production, trade and investment getting ever closer.  Already global activity indexes in both manufacturing and so-called services sectors have slowed to levels not seen since the end of the Great Recession in 2009.

As of June, the JP Morgan global activity index suggests that world economic growth is down to a 2.5% annual rate – a figure often considered at the threshold of ‘stall speed’ ie anything below that rate would slip into a global recession.

The reality is that Trump cannot reverse the steady decline in America’s former manufacturing prowess and now China’s challenge to its technological superiority.  Manufacturing employment in the US has fallen from around a quarter of the workforce in 1970 to 9% in 2015.  This decline was not due to nasty foreigners cheating on trade deals, as Trump likes to argue.  Most studies (not all) dismiss that thesis.  A study by Autor et al reckons competition from China led to the loss of 985,000 manufacturing jobs between 1999 and 2011. That’s less than a fifth of the absolute loss of manufacturing jobs over that period and a quite small share of the long-term manufacturing decline.

The biggest reason Trump can’t bring back home these manufacturing jobs is because they have been lost in large part to the success of ‘efficiency’ in the US  Over the past three-and-a-half decades, manufacturers have shed more than seven million jobs while producing more stuff than ever. The Economic Policy Institute (EPI) reported in The Manufacturing Footprint and the Importance of U.S. Manufacturing Jobs that “If you try to understand how so many jobs have disappeared, the answer that you come up with over and over again in the data is that it’s not trade that caused that — it’s primarily technology,”…Eighty percent of lost jobs were not replaced by workers in China, but by machines and automation. That is the first problem if you slap on tariffs. What you discover is that American companies are likely to replace its more expensive workers with machines.”

What these studies reveal is what Marxist economics could have told them many times before.  Under capitalism, increased productivity of labour comes through mechanisation and labour shedding i.e. reducing labour costs. Marx explained in Capital that this is one of the key features in capitalist accumulation – the capital-bias of technology – something continually ignored by mainstream economics, until now it seems.

Marx put it differently to the mainstream.  Investment under capitalism takes place for profit only, not to raise output or productivity as such.  If profit cannot be sufficiently raised through more labour hours (more workers and longer hours) or by intensifying efforts (speed and energy – time and motion), then the productivity of labour can only be increased by better technology.  So, in Marxist terms, the organic composition of capital (the value of machinery and plant relative to the number of workers) must rise secularly.

Against the view of mainstream ‘free market’ economics, historically, it has been government spending that has underpinned the development of unproven technologies.  This has usually occurred under duress, with innovation during war a notable driver of development, leading to breakthroughs in materials, products and processes.  The commercialisation of the jet engine, rocket motors, radar and modern computing can all trace their emergence back to World War 2 while the Cold War and the space race developed these to the point that launched the current technology age in the 1990s.

The space race was important as both sides in the cold war put to work their newly-acquired German scientists and engineers to drive forward their rocket projects.  This culminated with President Kennedy’s Apollo programme.  The US having been beaten by the Soviets to the first man into space, reacted by devoting immense resources to catching up.  The space race at its peak involved nearly 400,000 people and drew in 20,000 private industrial firms and universities.  Not only did the mission itself throw off numerous innovations — much of the technology needed to get to the moon did not exist when the programme was announced — but it created clusters of new high-tech industries across the US, building on the networks that had begun to emerge during the war.

This accelerated the development of numerous computing technologies, including the integrated circuit, mass data transfer and systems software.  These were the breakthrough technologies that drove IBM and HP’s development into computing giants.  Other engineers from the programme went on to found Intel and numerous other tech stalwarts.  Without Apollo, it’s unlikely that Silicon Valley would have developed into the tech and economic powerhouse taken for granted today.  Apollo also drove broader business innovations, including things that consultants have lived off ever since, like strategic planning, budgeting as well as new management and enhanced decision-making processes.

But as profitability in the capitalist sector fell from the mid-1960s to the early 1980s, government taxation was reduced and so spending, especially state investment, was slashed.  Technical advances in America increasingly depended on private sector innovation.  But for the most part that was not forthcoming.  America’s capitalist sector, like others in the major economies, opted to relocate more of their production overseas in search of cheap labour and then in turn export back to the US.  That was expressed in investment in Latin America (especially Mexico) and later into China.

There was one exception – the US hi-tech sector.  US technological advances are now completely dependent on investment in this sector.  Everything in the US now depends on the FAANGs (Facebook, Apple, Alphabet, Netflix and Google) plus Microsoft.  Just these few companies invest a staggering 80% when measured against a share of US government spending on education, transport, science, space and technology.  The scale of this expenditure dwarfs endeavours like the decade-long Apollo programme, where spending came in at approximately $150bn in today’s dollars — less than two years of current FAANGs plus Microsoft’s total investment expenditure.

The US hi-tech sector is the last bastion of America’s productive superiority. Investment bank Goldman Sachs has noted that, since 2010, the only place globally where corporate earnings have expanded is in the US.  And this, according to Goldmans, is entirely down to the super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies).

If China is eventually able to compete with the FAANGS, then the profitability of capital in the US will take a big shift downwards, and with it, US investment, employment and incomes over the next decade.  That is at the heart of the trade and technology war and why it will continue.

Facing up to Libra

June 29, 2019

Libra is the name that Facebook, the global social network company, is calling its planned international digital currency.  What is Facebook’s purpose with this planned new currency?

According to Facebook, Libra is “a simple global currency and financial infrastructure that empowers billions of people”. In its statement, the company says that: “The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.” Securing your financial assets on your mobile device should be simple and intuitive. Moving money around globally should be as easy and cost-effective as—and even more safe and secure than—sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn. New product innovation and additional entrants to the ecosystem will enable the lowering of barriers to access and cost of capital for everyone and facilitate frictionless payments for more people.”

So the professed aim is to provide a currency for everybody using the internet to buy and sell goods and services to each other across the world, seamlessly and with near-zero transaction costs.  International banks and national currencies would be by-passed and all their costs and fees would be avoided.  Moreover, all transactions would be private and not viewable by the authorities or banks.  And supposedly over one and half billion people without bank accounts would be able to carry out transactions globally on their phones and laptops, not using cash.

Libra’s setup may make international transactions a little faster, but actually not nearly as fast as traditional payments processors. It looks like Libra can do about 1,000 transactions per second. A traditional payments processor like Visa can do about 3,000 transactions per second.

In principle, any digital currency ought to make payments for goods and services simpler and cheaper so that people do not need to carry wads of cash about (eg flying to country with a suitcase).  A digital currency seems the way to go in the 21st century – but it immediately poses issues.  Who controls this currency and what about people who want to hold cash and do not want to be forced to have a bank account or a Libra ‘wallet’ to buy things?

Facebook is not a pioneer here – already a digital payments service operates in China with WeChat and Alipay.  The issue here is the sheer size of Libra’s global grasp, with the billions of Facebook users and also the number of large multinationals that have pledged to back and take the new currency.

Libra is the latin word for pound in weight of silver or gold.  It was a universal measure of value in Roman times.  But Facebook’s Libra will be no such thing. It is not the future people’s currency controlled by the people.  It is a privatized currency for commercial gain for Facebook and its investment backers. It will be owned and controlled by a board of multi-national corporate investors who will pledge capital to get it going.

The US dollar currency is owned by the US government.  This is the same for other national currencies.  As such, there are regulations and laws on how national currencies are issued.  None of that will apply to Libra.  Holders of Libra will have to trust Facebook and the investing board, not any government, that nothing will go wrong with their money.

Facebook says it will be using blockchain technology, the decentralized digital settlement system that is behind such so-called cryptocurrencies, like bitcoin.  Cryptocurrencies aim to eliminate the need for financial intermediaries by offering direct peer-to-peer (P2P) online payments. Blockchain is a ‘ledger’ containing all transactions for every single unit of currency. It differs from existing (physical or digital) ledgers in that it is decentralized, i.e., there is no central authority verifying the validity of transactions. Instead, it employs verification based on cryptographic proof, where various members of the network verify “blocks” of transactions approximately every 10 minutes. The incentive for this is compensation in the form of newly “minted” cryptocurrency for the first member to provide the verification.

The purpose of money in a capitalist economy is first as a universal means of payment, then as a store of value and finally as a unit of account in balance sheets.  Cryptocurrencies are nowhere meeting these three criteria.  Their function as a unit of account and store of value are greatly impaired by their speculative nature. The value of bitcoin is very volatile because it is really only bought and sold by speculators and not used by the general public or corporations for transactions or savings.

Libra does not even have the ambition of bitcoin to be a universal decentralized digital currency for people.  It will be a private currency designed to extend Facebook’s control over the purchasing power of its 4bn users and make money.

Libra is really, in financial jargon, an exchange traded fund (ETF), where the value of Libra is based on a ‘basket’ of five national currencies (dollars, euros, yen, sterling and Swiss franc) according to a weighted ratio. Libra is not a true international digital currency in its own right but dependent on the value of these major national currencies.  It’s a private currency for Facebook users. It will be similar to the Special Drawing Rights (SDR) used by the IMF for the settlement of contributions and payments by national governments to the IMF. SDRs are also tied to the value of national currencies like the dollar.

And here is the rub.  If you buy some Libra and hold it in your Facebook Libra ‘wallet’ for future purchases, you won’t get any interest as you would if you held dollar deposits in a bank. But this Libra sitting in wallets around the world will be invested by the multi-national board in financial assets to make money for them.  In effect, all interest goes to the owners of this private currency – it’s a form of seignorage, previously only available to national governments and central banks for the use of their currencies.  As the white paper puts it: “Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jump-start the ecosystem, and support further growth and adoption…..Users of Libra do not receive a return from the reserve.”

Indeed, the huge amounts of Libra that build up in Facebook users ‘wallets’ would become available for the board to speculate in financial assets globally, thus adding a new dimension to the possibility of credit bubbles and financial crashes that could come back to hit billions of Libra users.  The regulation of the banks and other financial institutions has not worked, as the global financial crash proved.  And the huge rise of private sector debt continues alongside the rise in public sector debt that mushroomed to bail out the global banking system. With a successful Libra, there would be another new layer of credit-fuelled debt created, with repercussions for billions of people and this time without any deposit insurance from governments!

What is worrying from global capital’s view is that if a large section of a country’s population were to use Libra instead of the sovereign currency, central banks could be left powerless or unable to stop the rapid conversion of currency into Libra during periods of financial distress.  Now you might say that’s good news for people, if not for capital.  People need to break away from the control of central banks, commercial banks and governments and ‘free up’ the currency and reduce the cost of our transactions.

But Libra will not deliver on this aim.  Libra’s claim that the currency will be designed and operated “as a public good” with “decentralised governance” is hard to tally with an operating structure comprised of unaccountable and highly-centralised global corporations such as Facebook, Uber and Paypal.  With cash use increasingly restricted, we’re already reliant on a handful of big banks to manage our money and make payments, while Visa and Mastercard have achieved almost total dominance of the card market. Visa now accounts for 98% of debit cards issued in the UK.  Libra is really a corporate attempt to assert even greater control over our money.

What we really want from a digital currency is transparency in its operations and privacy with your data – Facebook’s Libra is the mirror opposite of that.  What it does show is the bureaucratic, inefficient and autocratic control of our money by the state and its institutions is now under threat from mega-global tech companies using their control of social media.  This is ironic just when the supporters of Modern Monetary Theory are telling us that it is the state that controls and creates money so we can use the state to get employment and incomes for all.  Now it seems the state will be challenged by mega private monopolies for the control of our money.

What we really need is democratic control of financial institutions and the take over of mega-tech companies like Facebook, Google and Amazon.  Governments should then use technological innovation to develop an international digital currency controlled and run in the public interest.  But such a public digital currency would require common ownership and control of financial institutions and digital monopolies.  In the meantime it will be the US dollar or Libra… maybe.

Economics for the summer

June 23, 2019

Last week Martin Wolf, the FT economics journalist, listed the new economics books that he would recommend for summer reading.

He started off with Austerity: When It Works and When It Doesn’t, by Alberto Alesina, Carlo Favero and Francesco Giavazzi, Princeton, RRP£27/$35.  Wolf commented that “this is an extremely important book. It uses empirical evidence to assess the effects of fiscal austerity through spending cuts versus tax increases. It concludes that the negative effects on output of spending cuts are far smaller than those of tax increases. Moreover, spending-based plans are more effective in lowering the growth of debt than tax increases. Yet, it should be noted that the costs are assessed only in terms of aggregate output and so ignore the distributional impacts of spending cuts versus tax rises.”

Alesina et al have been leading supporters of the positive impact of ‘austerity’ on economic growth, in contrast to the pile of evidence from the IMF and other sources that the policies of austerity have not helped (instead hindered) economic recovery in any of the major capitalist economies.

When they first published a paper on this, Alesina et al reckoned that “fiscal adjustments based upon cuts in spending are much less costly, in terms of output losses, than those based upon tax increases. ….spending-based adjustments generate very small recessions, with an impact on output growth not significantly different from zero.”  And “Our findings seem to hold for fiscal adjustments both before and after the financial crisis. We cannot reject the hypothesis that the effects of the fiscal adjustments, especially in Europe in 2009-13, were indistinguishable from previous ones”.  In other words, cutting government spending (austerity) had little effect on the real GDP growth rate and that applied to the post-crisis ‘austerity policies of European governments.

At the time, I wrote in a post that “economic growth in capitalist economies depends on an expansion of business investment and that depends ultimately on the profitability of those investments. If we look at the multiplier effects of government spending, taxation and borrowing on growth through the prism of profitability, we find that it is very unlikely that extra government spending, whether financed by taxes or borrowing, would boost profitability in the business sector and therefore raise capitalist investment and economic growth.” In other words, raising or cutting government spending will have only marginal impact on growth.  The change in the profitability of capital is what matters in a capitalist economy.

Wolf’s second recommendation was Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy, by Anders Aslund, Yale University Press, RRP£25/$35. Wolf comments that “This superb book shows why Putin’s regime is a leading catastrophe of the 21st century. Russia’s president has constructed what Aslund calls “an iron quadrangle of four circles of power”: vertical state power; big state enterprises; his cronies; and the “Anglo-American havens, where he and the cronies can safely keep their money”.  According the author what is needed is “radical transparency over the beneficial ownership of wealth held in the west.”

In other words, we need to expose the money laundering and tax avoidance of Russian oligarchs that has been assisted by Western banking.  After the scandals of the Panama papers and the Deutsche Bank and Danske bank tax scams, that is a forlorn hope. As Gabriel Zucman  and Thomas Wright have shown in a meticulous and in-depth analysis of the size and extent of tax havens and tax avoidance, far from them being reduced or controlled, on the contrary, such schemes are an increasing part of international corporate profits, organised and transacted by the banks. About half of all the foreign profits of US multinationals are booked in tax havens.

The next book Wolf highlights is The Globotics Upheaval: Globalization, Robotics and the Future of Work, by Richard Baldwin, Weidenfeld & Nicolson, RRP£20.  According to Wolf, “Globotics” describes the integration of artificial intelligence with robotics. Improvements in technology will make it far easier to collaborate at a distance. Moreover, many tasks now carried out by people will be done by AI and robots. The combination will, he argues, transform (and threaten) the economic opportunities of huge numbers of relatively educated people in high-income countries.

In other words, AI and robots will boost trade but reduce jobs in areas that previously assisted trade and investment.  Yes, it’s a dialectical issue. Reducing the labour time, particularly transport and logistics time, can only increase productivity.  But under capitalism, that does not mean less working time for all, but a loss of jobs that technology replaces. Those jobs must be replaced by new jobs associated with the new technology. That can happen.

But as Marx pointed that does not mean a seamless process of change. “workers who have been thrown out of work in a given branch of industry can no doubt look for employment in another branch…even if they do find employment, what a miserable prospect they face! Crippled as they are by the division of labour, these poor devils are worth so little outside their old trade that they cannot find admission into any industries except a few inferior and therefore over-supplied and under-paid branches. Furthermore, every branch of industry attracts each year a new stream of men, who furnish a contingent from which to fill up vacancies, and to draw a supply for expansion. As soon as machinery has set free a part of the workers employed in a given branch of industry, the reserve men are also diverted into new channels of employment, and become absorbed in other branches” (Grundrisse).

Wolf also recommends The Sex Factor: How Women Made the West Rich, by Victoria Bateman, Polity, RRP£16.99.  Bateman is the Cambridge academic, notorious for her “naked protests” on TV against Brexit.  Apparently she argues that “women’s freedom is vital for economic prosperity. It boosts wages, skills, saving and entrepreneurial spirit, and it delivers a democratic and capable state.”

Although Bateman is a feminist, she believes, against many feminists, that markets “have . . . been central to building women’s freedom”.  Wolf thinks she is right on that.  But does the evidence support the view that capitalism and markets have helped make women freer? Yes, capitalist accumulation has led to a sharp increase in the employment of women, but also to the increased exploitation of female labour power (at lower wages than men). Yes, women have made Western capitalism rich, but not vice versa.

The most self-serving of the books recommended by Wolf is Firefighting: The Financial Crisis and its Lessons, by Ben S Bernanke, Timothy F Geithner and Henry M Paulson Jr, Penguin, RRP$16/Profile, RRP£9.99.  In this we are told by the very men that ensured the bailout of US banking and financial institutions with taxpayer money how they saved the world (for capitalism).  Wolf agrees “If what these three men did during the financial crisis had not been done, the world would, in my view, have experienced a second great depression.” 

This book is really a repeat of Ben Bernanke’s own memoir published four years ago when he defended his role as head of the US Federal Reserve. In that book he would like us to think that he “courageously” saved the world by adopting unconventional monetary policies learnt from the lessons of the Great Depression and in the teeth of orthodox opposition.  But he did not save the world but only the banks (the biggest ones) and his unconventional monetary policy has not revived the US economy, let alone the world, but only fuelled a new credit-led stock market and bond boom for the 1%.

Wolf admits that “the story told in this short book contains a sober warning. Despite stronger regulation and more robust financial systems, further financial crises will happen. Policymakers need tools to put out these fires. But, in the US at least, their ability to do so is now less than it was before the crisis. We must pray that we do not learn to regret this.”

Perhaps the answer is to adopt a policy of massive monetary injections directly to the public, by-passing the banks.  This is the policy recommended to save the world economy in the next crisis in The Case for People’s Quantitative Easing, by Frances Coppola, Polity, RRP£35. Wolf: “The alternative, she argues, is for central banks to create money in a crisis that provides people with purchasing power directly. The view that this must be part of the policy arsenal is right. We should think about how this is to be done when a crisis hits once again.”  The ‘money trick’ continues to dominate the thinking of Keynesian and post-Keynesian economists like Coppola, Pettifor and, of course, the Modern Monetary Theorists.  My views on these ideas and policies are expressed in several posts.

In The Wealth Effect: How the Great Expectations of the Middle Class Have Changed the Politics of Banking Crises, by Jeffrey M Chwieroth and Andrew Walter, Cambridge University Press, RRP£29.99/$39.99, Wolf tells us that future financial crises will require yet more bailouts by government and this book says there is no way out of this. “We have ended up in a race between the regulatory capacity of the state and the financial sector’s ability to discover new ways to collapse. There is no straightforward way out of this dangerous red queen’s race.”

In many posts and papers, I have argued that there is a way out of recurring financial crises.  Regulation has not worked and will not work.  Public ownership and public banks under democratic control is the only way to end speculation, money laundering and tax evasion by the financial sector. To quote Lenin: “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.”

Wolf praises the next book Democracy and Prosperity: Reinventing Capitalism through a Turbulent Century, by Torben Iversen and David Soskice, Princeton, RRP$29.95/£24 because it reckons that ‘democracy’ and capitalism go together and cannot be separated: “democracy and markets have proved highly successful over the past century and, in all probability, will continue to be so in future.” This rosy-glassed view stands in opposition to the reality that when it comes to a choice between preserving capitalism and the profits of the owners of capital and sustaining ‘democracy’, the latter has always been sacrificed for the former.

Then there is China. Wolf recommends The State Strikes Back: The End of Economic Reform in China, by Nicholas Lardy, Peterson Institute for International Economics, RRP$23.95.  Lardy’s new book promotes his argument that “China has moved away from market-oriented reform towards a more state-controlled economy, partly in order to strengthen the control of the party-state. This, he argues, is a mistake. Among other things, China cannot simultaneously promote a state-controlled domestic economy and argue for an open world economy. It must choose. The current path will prove damaging for both China and the world.”

Lardy has regularly forecast the collapse of the Chinese economy unless it fully adopts markets and gets rid of state control.  And yet the evidence of China’s economic success stands in contradiction to this view. Yes, China is an autocratic, one-party state increasingly dominated by one man. But a switch to open markets, free trade and opening up to foreign investment will not deliver ‘democracy’, but the very economic collapse Lardy claims it will avoid.

That markets are no solution to economic prosperity and democracy is actually hinted at in The Third Pillar: The Revival of Community in a Polarised World, by Raghuram Rajan, William Collins, RRP£30/Penguin Press, RRP$30.  Rajan, former governor of the Reserve Bank of India, argues that the balance between the market economy and the state has been disrupted. The solution is to empower a third pillar: the local community. He recommends shifting “from maximising shareholder value to maximising the overall economic value of businesses, taking in investments by workers and suppliers.”  Rajan has claimed in the past that he was one of the few mainstream economists that warned about the dangers of financial speculation before the global financial crash but he was dismissed.  Now it seems that his solution is the utopian one of ‘community politics’ and ‘shareholder democracy’.  More sophistry.

In The Power of Capitalism: A Journey Through Recent History Across Five Continents, by Rainer Zitelmann, LID Publishing, RRP£23.79/$33.42 , we get the true voice of capital.  According to Wolf, “Capitalism is the only economic system that has proven to be successful, in the long term. This is the core argument of Zitelmann’s lively polemic. As is true of most ideologues, he oversimplifies. He understates the costs of high inequality. He also understates the fragility of free-market financial systems. But, at a time when socialism is becoming politically attractive, he rightly points to the proven economic superiority of market economies built on private property.”

Zitelmann is in no doubt that capitalism is the best of all possible worlds.  Wolf agrees and he does not want ‘socialism’ either, except that he is concerned that the financial sector is unstable and capitalism may create inequality.  There you have it.  One wing of the mainstream is all out for capital and markets; the other wing is too, but wants to manage it better and make it fairer.

Strikes in the Long Depression

June 18, 2019

Jorg Nowak, a fellow at the University of Nottingham, UK has just published Mass Strikes and Social Movements in Brazil and India:: popular mobilisation in the Long Depression.  Nowak argues that in the 21st century and in this current long depression in the major economies, industrial action is no longer led by organised labour ie trade unions, and now takes the form of wider ‘mass strikes’ that involve unorganised workers and wider social forces in the community.  This popular mobilisation is closer to Rosa Luxemburg’s concept of mass strikes than the conventional ’eurocentric’ formation of trade unions.

The nature of global labour struggles against capital and the changing forms of class conflict is important.  But what also interested me was Nowak’s chapter on the political economy of mass strikes in the current global capitalist crisis – and in particular the section on strikes and economic cycles (pp113-117).

In that section, Nowak develops the argument that the intensity of class conflict between labour and capital varies with stages in the economic cycle of capitalist economic upswings and downswings.  He cites various authors who seek to show that when capitalism is in a general upswing in growth, investment and employment, class conflict as expressed in the number of strikes rises, particularly near the peak of the upswing.

Nowak surveys the work of those authors (including my own) that assert evidence for a Kondratiev-type cycle or wave in capitalist expansion. The mostly likely length of a full Kondratiev cycle is put at 64-72 years (longer than traditionally claimed).  If that K-cycle is broken down into ‘seasons’; first there is the ‘spring’ period of recovery from depression, with rising profitability of capital and a revival of labour organisation; then there is a summer period of falling profitability and strong labour forces.  Those two seasons complete the K-cycle upswing.  Then in the downswing comes autumn (rising profitability but weakened labour) and finally winter (economic depression).  Nowak reckons that the two periods of most intensive class conflict are at the cusp of spring through into summer seasons (as in 1964-82, for example).  Then there are weaker more local struggles towards the end of the downswing in the winter season. Nowak presents two case studies based on India and Brazil in the period 2010-14 to argue for this theory and to generalise it internationally.

Back in 2006, in my book, The Great Recession (2009), I also argued that K-cycles could be correlated with the intensity of class struggle.  I developed this further in my book, The Long Depression (2016).  More recently, I wrote a chapter on the UK in World in Crisis (2018) in which I outlined the trajectory of the UK rate of profit since 1855 and how it matched broadly the ‘seasons’ in the K-cycle.

In 2017, I took this scenario further in a paper to the Capital:150 conference held in London to commemorate the publication of Marx’s Capital Volume One.  In that paper, I attempted to map out the class struggle in relation to the movement in the rate of profit for the UK.

When Marx was writing Capital, the UK economy was experiencing a boom in profitability and growth and British capital was ruling the world and at its zenith.  However, from the late 1860s, profitability turned down and the UK, along with other major economies entered a long depression through the mid-1880s (longer in the US).  Depression weakened the old unions and class struggle faded.  After the crushing of the Paris Commune in 1871, the first international was dispatched to retirement in New York by Marx.

If we look at the history of British capital after Marx’s death in 1883, I think we can link the profitability of capital to the intensity of class struggle as defined by the level of strikes.  In the period from the 1890s to WW1, we find that strikes were initially high as new mass unskilled unions formed as British capital recovered some profitability after the end of the depression of 1880s.  But strikes dropped off after the late 1890s as profitability rose and wage demands were met.  However, from the 1900s profitability of capital began to diminish and in the years leading up to the war, strong unions and a rising labour movement engaged in more intensified struggle.

After the end of the war, that struggle resumed.  But with the defeat of the transport unions in 1921 and the general strike in 1926, UK profitability jumped up and intense class struggle dropped away through to the end of the WW2.

The post-1945 period started with high profitability and growth (after 1946), leading to a recovery in trade unions (in new industries).  Strikes rose a little but class struggle was generally ameliorated by concessions and wage increases.  However, from the mid-1960s, UK capital entered a long profitability crisis (as in other economies).  Capital needed to reverse this by crushing labour power.  Strong unions took on capital in the most intense class battle since the early 1920s.  Two big slumps and other neo-liberal measures eventually defeated union power and the class struggle subsided.  The neoliberal period ended in the 2000s and capitalism entered a long depression after the Great Recession.  There has been no recovery in the labour movement or class struggle (at least as measured by strike rates).

This map of the class struggle in Britain implies that only a sustained recovery in profitability in capital that also allows labour to recover its organised strength in new industries and sectors can create the conditions for intensified struggle when profitability eventually drops back again – as it will.  That suggests a generation ahead before we can see intense class struggle as experienced in the 1910-26 period or in the 1970s.  This is a similar conclusion reached by Nowak (p115).

Nowak considers two case studies of mass strike waves in the winter season of the current cycle – the Long Depression.  I presented a paper to the Society of Political Economy in Brazil last year (The rate of profit and class struggle) that also looked at the Brazil experience using macroeconomic data.  Noronha et al. (1998) conducted a study about the evolution of strikes in Brazil, identifying some key characteristics observed from the end of decade of 1970s and until the beginning of decade of 1990[i].

According to those authors, the phenomenon of Brazilian strikes began around 1978 in the main industrial area of the country and identified three major cycles of strikes: first cycle had an upward trajectory, ranging from 1978 to 1984, where the organization of unions began in Sao Paulo and spread to other regions in the country; the second cycle occurred between 1985 and 1989 and presents a flat evolution path; finally, the third cycle was characterized by a decline in stoppages after 1990.[ii]  Thus a rise in strikes matched a period of falling profitability from the mid-1970s to the mid-1980s.  Strikes flattened out with the flattening out of profitability up to the end of the 1980s. The rise in the rate of profit in the 1990s and the adoption of neo-liberal policies saw a decline in class struggle.

In Brazil, unionization rates experienced a small decline during the 1990s, yet between 2000 and 2006 this trend was reversed.[iii]  The number of strikes nearly tripled between 2002 (298 strikes) and 2012 (873) while the number of working-hours lost more than tripled in the same period. According to Brazil DIEESE’s estimates, in 2002 working-hours lost due to strikes amounted to around 116.6 million while in 2012 it was around 381.7 million.

The profitability of capital in Brazil peaked in the late 1990s and early 2000s on the measures above.  But Brazil’s labor movement strengthened in the early 2000s, so when profitability began to fall again and employers applied pressure to control the cost of labour, there was a class reaction through increased strikes.  The Great Recession did not affect Brazil’s economy severely until the commodity price boom collapsed in 2011.  The strike wave faded in the initial period of the global crash but started to rise again from 2010 – up to 2016 according to Nowak.

So it seems that class struggle (as measured by strikes) tends to be more intense in the summer ‘season’ of the K-cycle, when profitability has been falling but the labour movement and workers’ confidence has not yet been crushed.  Eventually, labour defeats and economic slumps usher in a period (neo-liberal) when class conflict is subdued.  This continues in the ‘winter’ period of low profitability and weak growth, although Nowak provides evidence that there can also be a strike wave towards the end of this period (2010-14), perhaps from new sectors of the economy that had not been in action before.

[i] Noronha, E. G;. Gebrin, V.; Elias Jr. J. Explicacoes para um Ciclo Excepcional de Graves: o Caso Brasileiro. XXI Congresso internacional do LASA, Latin American Studies Association, 1998.

[ii] Aricieri Devidé Júnior, José Raimundo Carvalho,Strike Duration after Collective Bargaining Legislation Changes: A Reappraisal of the 1988 Brazilian New Federal Constitution with Better Micro Data

[iii] Walter Arno Pichler, Giovana Menegottol, Union membership and industrial action in Brazilian public sector in the 2000s

The heroes of finance and Powell’s put

June 10, 2019

At the weekend G20 meeting of finance ministers and central bankers in Japan, the world’s finance leaders tried to put a brave face on the situation.  Tension over the intensifying trade war between China and the US was the biggest talking point at the meetings. Officials also wrangled over wording for a final communique on how to describe their concerns for world growth. While they flagged that it appears to be ‘stabilizing’, they also warned that the risks were tilted to the downside. “Most importantly, trade and geopolitical tensions have intensified. We will continue to address these risks, and stand ready to take further action”, the communiqué said.

But where is this action to avoid a new global recession going to come from? The world’s central banks, it seems. “Central banks are heroes,” OECD Secretary General Angel Gurria told Bloomberg Television in an interview during the meetings. “The question is: how much armoury do they still have, how many bullets, particularly silver bullets?”

In other words, what monetary policy weapons do the major central banks have left after ten years of keeping policy interest rates near or even below zero, and after massive injections of money through ‘quantitative easing’, buying up all the debt of governments and corporations from banks in order to encourage them to lend for investment?

Well, we are about to find out in the US.  The Federal Reserve led by Jay Powell, having gradually raised its policy rate for the last four years, is now indicating that it will reverse this policy and take its rate down again in order to boost the American and world economy. Powell told markets and the G20 ministers that the Fed stood ready to cut interest rates, saying it would “act as appropriate to sustain the expansion”.

A put is financial jargon for betting on a rise in financial assets in futures markets.  In the mid-1990s the then Fed chair Alan Greenspan reduced interest rates to boost the stock and property markets.  The Greenspan ‘put’ ‘took the stock market to a new peak in 2000, (but it was followed by the huge ‘’ bust).  We are about to have the Powell put to do the same.  Financial markets are now betting that the Fed will cut rates and keep the cost of borrowing really low in order to speculate further in financial markets. Jay Powell is set to be the new hero.

Thus the fantasy world of financial markets may be extended.  But will cutting interest rates avoid a recession in the ‘real’ economy?  Everywhere the ‘hard data’ are showing a sharp slowdown in economic growth, a collapse of the world car industry, and outright slumps in many large so-called emerging economies.  Above all, there is a significant a contraction in world trade as the trade and technology war instigated by the US against China hots up.

US economic growth had accelerated (from 2% to 3% a year) in 2018 after the Trump corporate tax cuts boosted profits – and unemployment dropped to post-war lows.  But last Friday’s May employment growth figures were the lowest in years and wage growth that had been accelerating also dropped off.  So there are signs that Trumponomics has been exhausted.  Now Jay Powell must step up to the proverbial baseball plate (after being ‘encouraged’ by Trump).

Elsewhere in the world, two key G7 economies continue to show a significant slowdown in economic growth. German industrial production plunged 1.9% from a month earlier in April.  That was the biggest drop in output since August 2015.  Year-on-year, industrial production dropped 1.8% over April 2018, following a 0.9% fall in March. Manufacturing output dropped 3.4% over the year!. Both German exports and imports fell.  German growth is now the slowest in five years. As a result, the German Bundesbank central bank cuts its GDP growth forecast for this year to just 0.6%, down from 1.6% at the beginning of 2019.

At the same time,the G20’s host, Japan announced that wages had fallen for the fourth consecutive month and overall household spending slowed sharply. Unemployment, currently at record lows, was now set to rise.  And most important, China’s economic growth rate is at its lowest level in over a decade – even if the rate of 6%-plus is around three times the average in the rest of the G20 economies.

In its semi-annual report on Global Economic Prospects, the World Bank cuts it forecast for global economic growth (that’s all countries including China and India) for this year by 0.3% percentage points to 2.6%. “There’s been a tumble in business confidence, a deepening slowdown in global trade and sluggish investment in emerging and developing economies,” said new (Trump-appointed) World Bank President David Malpass, “Momentum remains fragile.”

World trade growth is expected to fall to its lowest level since the global financial crash of 2008. The bank also warned that risks are skewed “firmly” to the downside, citing reignited trade tensions between the U.S. and China, financial turbulence in emerging markets and sharper-than-expected weakness in advanced nations, particularly Europe. Hidden in the back of its report, World Bank economists reckon that “A sharper-than expected deceleration of activity in systemically large economies—such as China, the Euro Area, and the United States—could also have broad ranging repercussions. The probability of growth in 2020 being at least 1 percentage-point below current projections is estimated at close to 20 percent. Such slowdown would be comparable to the 2001 global downturn.”

Another sign that the world capitalist economy is turning sour is what’s happening in the smaller G20 economies.  Growth in the Australian economy fell to its weakest rate in almost a decade in the first three months of this year. The economy grew by just 1.8 per cent year on year in the first quarter, and down from 2.3 per cent year on year in the preceding fourth quarter. This is Australia’s worst quarterly growth showing since the end of 2009.

Among the so-called BRICS (Brazil, China, India, Russia and South Africa), it is looking even worse. The South African economy is now suffering its worst slump in a decade. Output in Africa’s most industrialised nation dropped by an annualised 3.2 per cent in the first quarter, its largest quarterly fall since 2009. Power-intensive industries such as manufacturing and mining recorded the biggest drops in activity in the quarter. Mining activity fell by more than 10 per cent while manufacturing dropped 8.8 per cent.

Turkey went into a recession earlier this year under Turkey’s Trump, President Erdogan.  Argentina was already in a slump in 2018 under the governance of the right-wing administration of President Macri.  The country is now experiencing vicious austerity measures at the behest of the IMF which is bailing out the Macro government with the biggest loans in its history.

But the likely trigger of a new recession is the ongoing and intensifying trade and technology war between the US and China.  Neither side appears to be ready to back down and, as a result, world trade growth is diving while there is the prospect of increased tariffs and protectionist measures that will hit world growth.  Bloomberg economists reckon that if tariffs expand to cover all US-China trade in the next few months, then global GDP will take a $600bn hit in 2021. With 25% tariffs on all bilateral trade, GDP would be down 0.8% for China: 0.5% for the US and 0.5% for the world economy compared to no trade war.  That spells global recession.

And Trump seems bent on widening the trade war to other economies.  He has just temporarily delayed introducing a range of tariffs on Mexican imports, including imports of car and car parts that American companies make inside the Mexican border with the US.  The world car industry is already in major crisis driven by the end of diesel and slowing demand in China, Europe and Japan.  Now American car companies face new problems with Trump’s plans.

Thus while financial markets may be set to boom with the Powell put, that’s likely to have little effect on the struggling world economy.  The recovery since the Great Recession ended in mid-2009 has reached its tenth year, making it the longest from a slump in 75 years.  But it is also the weakest recovery since 1945.  Trend real GDP growth and business investment remains well down from the rate before 2007.

The trade and technology war is settling in for the long haul.  What makes it likely that the trade war will not be resolved amicably to avoid a global recession is that the battle between the US and China is not just over ‘unfair trade’, it is much more an attempt by the US to maintain its global technological superiority in the face of China’s fast rise to compete. The attack on Huawei, globally organised by the US, is just the start.

US investment bank Goldman Sachs has noted that, since 2010, the only place where corporate earnings have expanded is in the US.  And this, according to Goldmans, is entirely down to the super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies).  And now it is just this sector that will suffer from the technology war.

The risk of a new recession, as measured by various methods, continues to rise.  Here is the New York Fed’s index of the probability of a recession based on analysing financial market and economic data.

Then there is the supposedly reliable indicator of the inverted yield curve in bond markets.  Normally, the interest rate of long-term bonds (ie 10 years or more) is much higher than the short-term interest (less than one year). So the ‘curve’ of interest rates from 3m to 10 years is up (or steep).  But when the 10-year rate drops below the three-month rate, this has invariably heralded a new recession within a year.  Why?  Because it implies that investors are so worried about the future that they want to hold ‘safe’ assets like government bonds rather than invest, to the point that long-term interest rate on these bonds falls below even the rate set by the Federal Reserve for short-term loans.

The yield on benchmark U.S. government bonds hit new 2019 lows near 2% before the G20 meeting.  Yields on 10-year bonds in both Germany and Japan were below zero!  About $11 trillion of bonds around the world, concentrated in Europe and Japan, carry negative yields, now account for about 20% of all debt world-wide.

And US yield curve has now inverted. The inversion has only just happened and it needs to continue for a few months to justify its reliability as a recession indicator. So watch this space. Maybe the central bank heroes can save the day.


Keynes: socialist, liberal or conservative?

June 5, 2019

James Crotty is emeritus professor of economics at the University of Massachusetts Amherst.  Along with his colleague Sam Bowles, he is one of the few radical heterodox economists to gain tenure at a leading American university.

Crotty’s main contribution to economics has been to try and synthesise Marx and Keynes.  This ended up with Crotty arguing in his 1985 article “The Centrality of Money, Credit, and Financial Intermediation in Marx’s Crisis Theory”, “that Marx’s vision of capitalist crises cannot be understood except in terms of the development of the credit and the financial system, and that his discussion of these ideas anticipated the ideas on financial fragility later developed by Minsky and other Post Keynesians.” (quoted in an interview with JW Mason)  In other words, Marx was really a post-Keynesian Minskyite.

I won’t discuss the validity of that view here because Crotty has a new book out, entitled Keynes Against Capitalism: His Economic Case for Social Liberalism, in which he claims that, far from being a conservative Keynes was in fact a socialist, if not a revolutionary one like Marx.  “Keynes did not set out to save capitalism from itself as many think, but instead reckoned it needed to be replaced by a liberal form of socialism.”

Crotty argues that Keynes’s Liberal Socialism began to take shape in his mind in the mid-1920s, evolved into a more concrete institutional form over the next decade or so, and was laid out in detail in his work on postwar economic planning at Britain’s Treasury during WWII.

In Crotty’s reconstruction, the analysis goes something like this: “Keynes writes in many places that he’s a socialist. He gives speeches to the Labour Party saying ‘I’m a socialist.’ What does he mean? He thinks we need to organize capital investment decisions, bring them all under a board of national investment. And we have to bring together all the sources of savings that are in our economy in one place. And, he goes through all of these incredible, important things you can do with this capital if you can control it. In 1942 or 43, he says if the state can control two-thirds to three-quarters of large-scale capital investment through this national board of investment, we’ll be fine. The only way you can do this is if you drive the interest rate down towards zero, and that’s what you should do. So you have to have strict capital controls, otherwise, people will take their money out.”

Crotty interprets Keynes’ s policy ideas as socialist. “His socialist plan, means, we’re going to have to manage our trade, we should have industrial policies, we should have wage policies, we should have geographical location policies. And all of this to achieve not just full employment, but the creation of arts, the building of cities, the building of housing, and so on. In his socialism, there’s still private markets, but they are small. He keeps saying if we don’t have socialism, we’re going to have chaos, we’re going to have revolution.

But does this view of Keynes the ‘socialist’ really hold water? Crotty argues that it does because Keynes “decisively rejected the traditional theory of perfect competition, applauded the ongoing trend toward increased reliance on public corporations, and argued that the government should not only accept the current movement toward cartels, holding companies, trade associations, pools and other forms of monopoly power, but should proactively assist and accelerate this trend in order to regulate and control it. Keynes argued that an increasing part of the country’s largest and most important private companies were evolving toward a status that could make them as easy to regulate as public corporations.”

As Crotty puts it, Keynes’ central point was that the emerging importance of the system of public and semipublic corporations and associations combined with the evolution of collusive oligopolistic relations in the private sector already provided the foundation for a qualitative increase in state control of the economy.  Crotty concludes “Keynes was unabashedly corporatist.”  Indeed – I would add that his concept of corporatism was not dissimilar to that actually being implemented in fascist Germany and Italy at the time.

And who was to run this corporate capitalist/socialist state?  According to Keynes’ biographer, Robert Skidelsky, it would be “an interconnected elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge and imbued with a public service ethic, would come to run these organs of state, whether private or public, and make them hum to the same tune.” (Skidelsky 1992, 227-28).

Keynes rejected laissez-faire and “doctrinaire State Socialism” because what is “needed now is neither free-market competition nor quantitative central planning but “regulated competition” (19, 643).  Keynes goes on, “we must also be prepared to experiment with all kinds of new sorts of partnership between the state and private enterprise.  The solution lies neither with nationalisation nor with unregulated private competition; it lies in a variety of experiments, of attempts to get the best of both worlds. The Government must recognise the trend of soundly run business toward trusts and combines.  It must be prepared to recognise their existence as beneficent institutions in right conditions; and it must adopt an attitude towards them at the same time of encouragement and regulation.” (19, 645)  In this way, we “will get the best both of large units and of the advantages that might be expected of nationalisation, whilst maintaining the advantages of private enterprise and decentralised control.”(19, 649).

Keynes’s ‘socialism’ was really the so-called mixed economy of capitalist combines and government control, all run by “an elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge.”  This is what Crotty describes as ‘liberal socialism’.  For me, it is neither liberal nor socialist; but elitist and capitalist.

What were the practical economic policies of Keynes’ socialism, according to Crotty. Keynes proposed a National Investment Board that would have funds of between 4-8% of GDP to invest to ensure that economies moved in productive directions.  This proposal was part of the Liberal Party Manifesto in 1928 – and not accidentally is now part of the UK Labour Party’s in 2019 under Corbyn and McDonnell.  This apparently, according to Crotty, is what Keynes meant by his famous phrase, the “socialisation of investment”.

But just in case you think that Keynes wanted only his elite to run this corporate capitalist state, he also patronisingly advocated that “To make the worker feel that “he is treated as a partner and not as a mere tool,” (238), (he) proposed that every firm be legally required to form a “Works Council” to facilitate “permanent, regular, and established methods of consultation [between management and labor] in every factory and workshop of substantial size” (472).  Shades of the ‘social market economy’ with its workers councils of modern Germany!

That’s Crotty’s evidence that Keynes was against capitalism and for socialism.  For me, it merely shows that Keynes reckoned that capitalism was no longer a system of ‘perfect competition’ (it never was of course) but had evolved into ‘monopoly capitalism’. And this was a good (‘beneficent’) thing, requiring only the nudging and direction of a ‘wise educated elite (of men)’, dutifully supported by the workers, in order to deliver prosperity for all.

And there is plenty of evidence in Keynes’ writings that he really stood for ‘managed capitalism’, and not socialism by any reasonable definition.  As he wrote: “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”

The profit motive must remain: “The loss of profit may be due to all sorts of causes, but short of going over to communism there is no possibility of curing unemployment except by restoring to employers a proper margin of profit.” As Keynes argued that “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.” As  American economic historian, Bruce Bartlett explains: “He offered for the economy a hierarchical ideal.  The creative center of the system was the skilled entrepreneur and the goal of policy was to cultivate his skills and ensure his inducement to invest.”

In his later years, Keynes praised the very laissez-faire ‘liberal’ capitalism that he appeared to condemn in the 1920s. In 1944, he wrote to Friedrich Hayek, the leading ‘neo-liberal’ of his time and ideological mentor of Thatcherism, in praise of his book, The Road to Serfdom, which argues that economic planning inevitably leads to totalitarianism.  Keynes wrote: “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”!

And did he stick to his view of ‘socialised investment’ as Crotty claims?  This is what Keynes said in his last years: “If our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.” So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Keynes was a strong opponent of national economic planning, which was much in vogue after the Second World War. “The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far,” he wrote.

Contrary to Crotty, Bartlett reckons that “Keynes was almost in every respect a conservative, both in philosophy and temperament, although he identifies himself as a liberal throughout his life. His conservatism was largely a function of his class.  When asked why he was not a member of the Labour Party, he replied; “to begin with it is a class party and that class in not my class.. and the class war will find me on the side of educated bourgeoisie.” Conservative icon Edmund Burke was one of his political heroes. Keynes expressed contempt for the British Labour Party, calling its members “sectarians of an outworn creed mumbling moss-grown demi-semi Fabian Marxism.”  He also termed the British Labour Party an “immense destructive force” that responded to “anti-communist rubbish with anti-capitalist rubbish.”

Keynes’ ‘socialism’ was openly designed as an alternative to the dangerous and erroneous ideas of what he thought was Marxism.  State socialism, he said, “is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago.”  Keynes told George Bernard Shaw that the whole point of The General Theory was to knock away the ‘Ricardian’ foundations of Marxism and by that he meant the labour theory of value and its implication that capitalism was a system of the exploitation of labour for profit. He had little respect for Karl Marx, calling him “a poor thinker,” and Das Kapital “an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world.”

John Kenneth Galbraith, the great heterodox economist of the Roosevelt and post-war years, and whose politics were well to the left of Keynes, reckoned, “The broad thrust of his efforts, like that of Roosevelt, was conservative; it was to ensure that the system would survive”.  Keynes’s friend and biographer Harrod tells us that underneath his veneer of trendy liberalism, “Keynes was always deeply conservative. He was not a Socialist. His regard for the middle-class, for artists, scientists and brain workers of all kinds made him dislike the class-conscious elements of Socialism. He had no egalitarian sentiment; if he wanted to improve the lot of the poor…that was not for the sake of equality, but in order to make their lives happier and better.” (without their involvement, we might add.)

It has always been difficult to be sure where Keynes stood on many issues as he changed and adapted his views continually.  Hayek criticised him for this and Keynes replied that “If the facts change, I change my views, don’t you?”  Even so, it seems that Professor Crotty may be on his own in thinking Keynes was an anti-capitalist socialist.

Global slump: the trade and technology trigger

May 26, 2019

Despite all the optimistic talk by President Trump about the state of the US economy, the latest data on economic activity and industrial production suggest that America is joining Europe and Japan in a sharp slowdown as we enter the second half of 2019.  And this is at a time when the trade and technology war between the US and China has moved up another gear and so threatens to trigger an outright global recession before the year is out.

JP Morgan economists report that the so-called flash May PMIs for the US, Europe and Japan G-3 point to a 0.7-pt decline, consistent with just 2.5% annual growth in global GDP. Purchasing Managers Indexes (PMIs) are surveys of company views on their current and future sales and purchases.  They have proved to be reasonable guides to actual production.  And 2.5% growth globally is considered to be the ‘stall speed’ for the world economy, below which a recession is indicated.

JP Morgan find that global manufacturing is suffering most – being nearly at 50 in the PMI (anything below 50 means contraction).  But services, which constitute 70-80% of most major economies (at least in the official definition), are also sliding towards the levels of the mini-recession of 2015-6.

Most concerning, “the global manufacturing and services expectations measures look set to fall roughly 2-pts in May and would push the indexes beneath the lows set in early 2016.”  (JPM).

Like other forecasters, the OECD’s Economic Outlook, published last week, predicts slower growth this year than last in most big economies — in some cases much slower. What is more, even in 2020, global growth will not return to the pace it reached in the past few years, it says.  Angel Gurría, its secretary-general, said: “The world economy is in a dangerous place.”

Up to now, it has been in Europe and Japan that signs of a slowdown and even an outright recession were visible.  But now the US economy may be joining them.  The US Manufacturing PMI dropped to 50.6 in May, implying almost stagnation. It was the lowest reading since September 2009 as new orders fell for the first time since August 2009 while output and employment rose less.

US Manufacturing PMI

The services sector also dropped back. The overall economic indicator showed the weakest expansion in the private sector since May 2016.  Then on Friday, we had actual data for US manufactured durable goods. In May new orders fell 2.1% from a month earlier in April 2019.  Transportation equipment, also down two of the last three months, drove the decrease.  The Atlanta Fed’s GDPNow model estimate (a very reliable indicator of future growth) puts US real GDP growth in the second quarter of 2019 at just 1.3%.

When we get to Europe, the latest figure for Europe’s powerhouse, German manufacturing activity, makes particularly dismal reading.  The May reading pointed to a fifth month of contraction in the manufacturing sector, as new orders continued to fall sharply largely due to lower demand across the car industry and the effects of customer destocking. In addition, the rate of job losses accelerated to the quickest since January 2013.

German manufacturing PMI

Even with the services sector holding up, overall activity in Germany looks very weak. And the business morale survey is at its lowest for nearly five years. Activity in the Eurozone as a whole is also at a near five-year low.

Eurozone composite PMI

Japan’s economy is “worsening” for the first time in more than six years, according to one of the government’s main indicators.  The index of economic conditions compiled by Japan’s Cabinet Office fell 0.9% from February to March. That prompted government statisticians to cut their assessment of the economy from “weakening” to “worsening” — the lowest of five levels. The last time the Cabinet Office used the bottom grade to describe the economy was in January 2013.  Barclays economist Kazuma Maeda said that the “mechanical” downgrade in the assessment did not necessarily imply that a downturn was in prospect. But he added: “That said, there is mounting concern about an economic recession”

Nominal activity growth in Japan, which can be viewed as an up-to-date proxy for nominal GDP, has been falling since the end of 2017, since the decline in real output growth has been greater than the rise in inflation. On the core nominal activity measure, the rate of increase has now dipped to around 0.5 per cent, lower than it was at bottom of the 2016 deflationary shock.

As an aside, it is worth noting that Japan is supposed to be the poster child of Keynesian fiscal and monetary policy.  The Bank of Japan has negative interest rates and has bought virtually all government bonds available from the banks, as well corporate debt and stock, through massive credit injections in the last ten years.  And it has consistently run budget deficits to try and boost the economy; so much so that the government debt to GDP is the highest in the world. But nominal GDP growth and prices continue to stagnate.

Those who support Modern Monetary Theory should take note.  Yes, you can run budget deficits permanently and run up public debt without consequences for inflation or even the currency in an economy like Japan.  But you cannot get a permanent boost to growth if Japan’s corporations won’t invest or the government won’t either.  Creating money does not necessarily create value. The irony is that Prime Minister Abe plans to raise the sales tax later this year to try and lower the deficits and debt ratios in line with neo-liberal policy. The last time he did that, Japan went into recession.

Outside the imperialist blocs, the so-called ‘emerging market’ economies are also slowing.  Turkey, Argentina, Pakistan are already in recession.  Brazil and South Africa are on the brink.  And capital flows to these economies from the imperialist bloc are drying up, while public sector investment has nearly ground to a halt.

Net public investment in emerging market countries has fallen below 1% of GDP for the first time on record, raising fears of widening infrastructure gaps. The share of national output developing world governments are spending on investment in assets such as schools, hospitals and transport and power infrastructure, net of depreciation of the existing capital stock, has fallen from 3.3 per cent in 1997 to a low of just 0.9 per cent last year, according to data from the IMF. This is well below what the IMF believed was needed to meet basic needs and allow countries to close infrastructure gaps that are slowing the pace of development.

Indeed, if you exclude China, then investment growth is dropping in the rest of the G20 economies.  Only the US and India are keeping investment positive.  If they should falter, as investment is the driver, a global recession would follow.

If China is stripped out of the data, the weighted average for the rest of the emerging world is 3.9 per cent of GDP, markedly lower than the 4.8 per cent figure seen as recently as 2010. The 49 low-income developing countries, mainly in Africa but also encompassing the likes of Vietnam, Bangladesh and Moldova, are even more badly placed, with the IMF calculating they need to invest an additional 7.1 per cent of GDP a year until 2030 on roads, electricity and water alone. With health and education added in, this rises to a colossal 15.4 per cent of GDP, or $528bn, a year.

Low profitability explains above all else why corporate investment has been so weak since 2009.  What profits have been made have been switched into financial speculation: mergers and acquisitions, share buybacks and dividend payouts.  Also, there has been some hoarding of cash by the FAANGS.  All this is because the profitability of productive investment remains historically low.

The other key factor in the long depression has been the rise in debt, particularly corporate debt.  With profitability low, companies have run up more debt in order to fund projects or speculate.  The big companies like Apple or Microsoft can do this because they have cash hoards to fall back on if anything goes wrong; the smaller companies can only manage this debt spiral because interest rates remain at all-time lows and so servicing the debt is still feasible – as long as there is not a downturn in sales and profits.

When fundamentals like profitability and debt turn sour for capital, then anything can trigger a slump.  Each crisis has a different trigger or proximate cause.  The 1974-5 international recession was triggered by a sharp rise in oil prices and the US coming of the dollar-gold standard.  The 1980-82 slump was triggered by a housing bubble in Europe and a manufacturing crisis in major economies.  The 1990-2 recession was triggered by the Iraq war and oil prices.  The 2001 mild recession was the result of the bursting of the bubble.  And the Great Recession was started with the collapse of the housing bubble in the US and ensuing credit crunch brought on by the international diversification of credit derivatives. But underlying each of these crises was a downward movement in the profitability of productive capital and eventually a slowdown or decline in the mass of profits. (The profit investment nexus).

It now seems possible that brewing trade war between the US and China could be a new trigger for a global recession.  Certainly, US investment bank, Morgan Stanley has raised such a risk. “While a temporary escalation of trade tensions could be navigated without much damage at all, a lasting breakdown would inflict serious pain. If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining circa $300 billion of imports from China, we see the global economy heading towards recession,” the bank’s analysts said in a note.

The OECD also highlighted the danger coming from the trade war.  According to the OECD, international trade has slowed abruptly. Its rate of increase has fallen from 5.5 per cent in 2017 to what the OECD thinks will be 2.1 per cent and 3.1 per cent this year and next respectively. That is lower than projected economic growth, meaning trade is shrinking as a share of global economic activity.  Since 2009, it had been the slowdown in investment growth that has led to a slowdown in trade growth; and the IMF estimated that three-quarters of the trade growth slowdown could be attributed to weak economic activity, especially in investment.  But now the boot seems to be on the other foot.

The OECD numbers on aggregate investment are corroborated by more fine-grained data. Most big US companies’ investment spending, as reported in regulatory filings, has stalled dramatically. A Wall Street Journal investigation of 356 of the S&P 500 companies found that they spent only 3 per cent more on capital in the first quarter year on year; down from a 20 per cent growth rate a year earlier. For the biggest capital spenders, investment fell outright. Trade frictions seem the main cause — directly for businesses particularly reliant on Chinese demand, such as specialised chip producers, as well as indirectly through the increased uncertainty spreading through the economy. Another survey has found that many US companies operating in China are also holding off on investing.

Morgan Stanley also warned not underestimate the impact of trade tensions in a number of ways.  Firstly, the impact on the U.S. corporate sector would be more widespread as China could put up non-tariff barriers such as restriction of purchases. Given the global growth slowdown that would follow, profits from firms’ international operations would be hit and companies would not be able to fully pass through the tariff increases to consumers.

What makes it likely that the trade war will not be resolved amicably to avoid a global recession is that the battle between the US and China is not just over ‘unfair trade’, it is much more an attempt by the US to maintain its global technological superiority in the face of China’s fast rise to compete. The attack on Huawei, globally organised by the US, is just a start.

A chain reaction is under way as a giant industry braces for a violent shock.  US Investment bank Goldman Sachs has noted that, since 2010, the only place where corporate earnings have expanded is in the US.  And this, according to Goldmans, is entirely down to the super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies).

The growth slowdown is being driven by low investment and profitability in most economies and in most sectors.  Only the huge tech companies in the US have bucked this trend, helped by a recent profits bonanza from the Trump tax ‘reforms’.  But now the technology war with China will hit tech profits too – even if the US and China reach a trade deal.

The IMF is very concerned.  New IMF chief economist, Gita Gopinath, commented. “While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardise the projected recovery in global growth in 2019.”  Roberto Azevêdo, director general of the World Trade Organization, said the US-China trade war was hurting the global economy. The WTO has been bypassed by the US as the Trump administration aims its attacks directly on China.  Azevêdo said that: “$580bn [£458bn] of restrictive measures were introduced in the last year, seven times more than the previous year. This is holding back investors, this is holding back consumers, and of course it is having an impact on the expansion of the global economy. Everyone loses … every single country will lose unless we find a solution for this.”