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From amber to red?

January 15, 2019

Today’s news that the German economy, the powerhouse of Europe, had narrowly avoided a ‘technical recession’ in the second half of 2018 is another red light flashing for the world economy.  In 2018, German real GDP growth was 1.5% down from 2.2% in 2017.  This was the weakest growth rate in five years  And in the second half of last year, the growth was slowing fast, up only 1.1% yoy compared to 2% in Q2 2018.  It fell 0.2% in Q2 over Q1 and rose just 0.3% in Q3.

As for Germany’s industrial sector, that clearly is in recession. Industrial production in Germany decreased 4.7% in November of 2018 over the same month in the previous year.

German companies have been hit by poorer sales from a world economic slowdown and political uncertainty surrounding Brexit and the trade war between the US and China. The UK, US and China are all among German makers’ biggest markets.

The collapse is particularly noticeable in the very important auto sector, where the global slowdown, sharp drops in demand and the restrictions on diesel car emissions have destroyed the auto sector globally.  Passenger vehicle sales in China, the world’s largest car market, fell for the first time last year since the early 1990s, down 4.1%.  Sales in December were down 15.8 per cent from the same month last year, the steepest monthly fall in more than six years and the sixth consecutive month of declining sales.

Germany has dragged down industrial production in the Euro Area.  It fell 3.3% year-on-year in November.  It is the first annual fall in industrial output since January of 2017 and the biggest since November of 2012.

Indeed, the German experience is being followed in varying degrees across the globe, at least in the major economies.  The global PMI, the key business activity indicator, shows a slowing down. The level of activity is still above 50 (and therefore indicates expansion) and is not yet down to the recession depths of 2012 or 2016, but it is on its way.

And the global PMI for ‘new orders’ shows a slowdown in both manufacturing and services globally.

And among the so-called ‘emerging economies’, emergence is being replaced by submergence.  Real GDP in Latin America as a whole is contracting on annualised basis, according to investment bank JP Morgan.

Among the so-called BRICS (the major emerging economies), China’s industrial production slowed in November to 5.4% yoy, the smallest rate since the mini-recession of early 2016. Industrial production in Brazil contracted 0.9% in November, while Russia’s industrial production slowed to 2.4% yoy from 3.7% in October. Russian manufacturing output stopped growing altogether. Manufacturing output growth in South Africa slowed to 1.6% November from 2.8% in October. Even the fastest-growing major economy in the world, India, took a hit. India’s industrial production growth slowed sharply to 0.5% yoy in November, the smallest gain since June 2017 and manufacturing output actually fell 0.4%.

My post outlining an economic forecast in 2019 offered several different short-term indicators for the direction of the world economy.

The first was credit and the so-called ‘inverted yield curve’ ie the difference in the interest rate received for buying 10yr US government bonds and 2yr government bonds.  In a ‘normal’ situation, the interest rate earned for holding a longer term bond will be higher because the bond purchaser cannot get the bond back for ten years and there is higher risk from changes in inflation or default compared to a bond held over two years.  But on some rare occasions, the interest rate on two-year bonds can go higher than on ten-year ones.  This is because the interest rate is being driven up by hikes in the central bank rate and/or because investors are fearful of a recession, so they want to hold as much government paper as possible.  They sell their stocks and buy bonds.  Every time the yield curve inverts, an economic recession in the US at least follows within a year or so.

Well, investors have been selling stocks and the stock market has dived.  But we still don’t have an inverted yield curve yet, partly because the Federal Reserve appears to have decided not to raise its policy rate so quickly any more – precisely because it does not want to provoke a recession when the world is slowing down.

The second indicator is the price of copper.  As copper enters much of the components of industrial output, its price can be a good short-term gauge of the strength of economic activity globally.  Well, the copper price is down from its peak in 2017 but still not at levels seen in the mini-recession of early 2016.

The most important indicator in my view is the movement of profits for the capitalist sector of the major economies.  This drives investment and employment and thus incomes and spending.  But it is not possible to get such a high frequency measure – indeed most profit reports are quarterly at best.  Goldman Sachs, the investment bankers have made some forecasts, however for this year.  Their economists conclude that “In terms of profits, we do expect a sharp slowdown. In every region we expect profit growth to be below the current bottom-up consensus, and to be around 5% in 2019. In the case of the US, in particular, this would represent a very sharp slowdown from the 22% EPS growth expected for 2018.”  They ‘benchmark’ this profit forecast against their measure of ‘growth momentum’ and find that it “implies a further sharp deterioration in growth.”  But not yet a recession forecast.

These indicators all suggest a sharp slowdown in global growth, particularly in manufacturing and industry.  The US yield curve is close to inversion but not yet inverted; the copper price is down but not yet at lows; and global profits growth has slowed but is not yet falling.  So the amber light for a global slump in 2019 has still not turned red – yet.

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ASSA 2019 part 2 – the radical: profitability, growth and crises

January 8, 2019

While hundreds attend the big meetings of the mainstream sessions at the annual meeting of the American Economics Association (ASSA 2019), only tens go to the sessions of the radical and heterodox wing of economics.  And even that is thanks to the efforts of the Union of Radical Political Economics (URPE), which celebrated its 50th year in 2018 that even these sessions take place.  URPE provides an umbrella and platform for radical, heterodox and Marxian analysis.  But it is also true that the AEA has included URPE (and other evolutionary and institutional economics associations) in its annual sessions – a mainstream concession not offered by economic associations in the UK or continental Europe.

This year the keynote address within the URPE sessions was the David Gordon Memorial Lecture by Professor Anwar Shaikh of the New School of Social Research in New York.  Anwar Shaikh has made an enormous contribution to radical political economy over more than 40 years, with the body of his work compiled in his monumental book, Capitalism, competition, conflict, crises, published in 2016.

Shaikh’s presentation was entitled Social Structure and Macrodynamics, which was an envelope for discussing the differences between mainstream economics (both micro and macro) and radical (Marxist?) political economy – and the resultant policy solutions offered to avoid and/or restore capitalist economies in crisis.  Shaikh argued that political economists must recognise the social structure of capitalism, including the reality of imperialism – something denied or ignored by the mainstream.  Instead of looking at the social structure of economies, the mainstream deliberately locks itself into the arcane and unrealistic world of ”free markets’’ and such things as game theory.

On crises, Shaikh delineated orthodox or mainstream theory as arguing that ‘austerity’ ie cuts in public spending and wage restraint was necessary to restore an economy in a slump, painful as it might be.  Heterodox (radical Keynesian) theory opposed this and imagined that spending through monetary and fiscal stimulus could restore growth to the benefit of both capital and labour.  Both sides ignored the social structure of capitalism, in particular that it is a system of production for the profit of the owners of capital.  Shaikh put it: “The truth is that successful stimulus requires attention to both effective demand and profitability”.

Those who read my blog regularly know that I would go further or indeed put it differently.   Capitalist economies go into slumps because of a collapse in profits and investment and this leads to a collapse in “effective demand”, not vice versa as the Keynesians (in whatever species) would have it.  So a restoration of profitability is necessary to restore growth under capitalism- this is what I (and G Carchedi) have called the Marxist multiplier compared to the Keynesian multiplier.

What is wrong with Keynesian theory and thus policy is that it denies this determinant role of profitability.  Indeed, in a way, the neoclassical mainstream has a point – that it is necessary (rational?) to drive down wages, weaken labour through unemployment and reduce the burden of the state on capital to revive profits and the economy. Of course, the mainstream cannot explain crises; often deny they can happen; and have no policy for recovery except to make labour pay.

The debate continues between the two wings of mainstream economics over fiscal and monetary stimulus.  Former chief economist of the IMF, Olivier Blanchard was the outgoing President of the AEA and in his address at ASSA 2019 he argued that, because yields on bonds were so low now, the interest cost of debt was very low; and so governments can run up budget deficits (ie reverse austerity) without causing a problem.

This view was echoed by that arch Keynesian policy exponent, Larry Summers in a recent article warning of an upcoming slump and the need for governments to provide counter cyclical infrastructure spending to avoid it.  “Fiscal policymakers should realise the very low real yield on government bonds is a signal that more debt can be absorbed. It is not too soon to begin plans to launch large-scale infrastructure projects if a downturn comes.”

Blanchard and Summers’ support for fiscal stimulus was attacked by the austerity exponents like Kenneth Rogoff (the controversial debt crisis history expert) who responded that fiscal stimulus a la Keynes is and would ineffective in avoiding a crisis: “those who think fiscal policy alone will save the day are stupefyingly naive…. Over-reliance on countercyclical fiscal policy will not work any better in this century than in it did in the last.

And so the debate within the mainstream goes on, blithely (or deliberately?) ignoring the social structure of macrodynamics (as Shaikh put it), namely that capitalism is a ‘money-making’ mode of production for owners of capital and so profitability not demand (or even debt) is what counts for the health or otherwise of economies.

So what has happened to the profitability of capital since the end of the Great Recession in 2009?  Two papers in the URPE sessions considered this.  David Kotz, the well-known Marxist economist from University of Massachusetts, Amherst, looked at the Rate of Profit, Aggregate Demand and Long Term Economic Expansion in the US since 2009.  Kotz (therateofprofitaggregatedemandan_preview) noted, as many others have, including myself in my book, The Long Depression, that the US recovery since 2009 has been the weakest since the 1940s.  Indeed, the last ten years are better considered as ‘persistent stagnation’.

Kotz made the point that the onset of recession in the US economy in the period since World War II has always been preceded by a decline in the rate of profit.  After a sharp drop in 2009, the profit rate recovered through 2012-13. It then declined from 2013 through 2016, then rose slightly in 2017. Kotz asked the question: why was the three-year decline in the profit rate not followed by a recession? His tentative conclusion was that “a likely explanation is that the profit rate remained relatively high after 2013 compared to past experience in the neoliberal era.”  I would argue differently: the modest fall in profitability from 2014-2016 was actually accompanied by a mini-recession, as I have shown.  Indeed, fixed investment plummeted in 2016 to near zero, as Kotz also shows.  So the connect between profits and investment and growth is still there.

Kotz does not think that the 2008 recession was the “consequence of a falling profit rate but rather was set off by a deflating real estate bubble and severe financial crisis”.  It may have been “set off”, but was that underlying cause?  There is no space to deal with this old argument about the Great Recession.  I can only refer you to these papers here – and my new book, World in Crisis.

Even though the rate of accumulation followed the movement in profitability after 2009, it remained low compared to its pre-recession level.

As Kotz says, this is a good explanation of why US productivity growth was also poor in the long depression or stagnation since 2009.  Kotz’s stats also reveal that the major contribution to the recovery after the end of the Great Recession was business investment, contributing 53.3% of GDP growth, almost as large as the 61.8% contribution from consumer spending growth, even though the latter constitutes 60-70% of GDP and business investment only 10-15%.  After 2013, consumer spending became more important as investment tailed off, leading to the mini-recession of 2014-16.

Kotz wants to distinguish the period of 1948-79 as one of ‘regulated capitalism’ and the period 1979-2017 as the ‘neoliberal era’, by showing that investment spending growth was much higher than consumption spending growth in the first period and lower in the second period. This leads him to conclude that “neoliberal capitalism is stuck in its structural crisis phase, a condition that can be overcome within capitalism only by the construction of a new institutional form of capitalism. However, there is no sign yet of the emergence of a viable new institutional structure for U.S. capitalism.”

But I don’t think that flows from Kotz’s data.  Actually in the neo-liberal period, both investment and consumer spending growth slowed and so did growth.  The swing factor was investment growth, which halved, while consumer spending fell only 20%.  Professor Kotz may not agree but I think his analysis tells us is that business investment is still the driver of growth under capitalism, while consumption is the dependent variable in aggregate demand.  It’s the same story in the neoliberal period as in the ‘regulated period’. What happens to profitability and investment is thus the crucial indicator of the future, not the emergence of any ‘new institutional structure’.

In this light, there was a revealing paper presented by Erdogan Bakir of Bucknell University and Al Campbell of the University of Utah.  They looked at the before-tax profit rate of US capital, unlike Kotz who looked at the after-tax rate of non-financial companies.  Bakir and Campbell conclude that the before tax rate is “a good predictive of cyclical downturn in the U.S. economy.”  In a typical business cycle, profit rate peaks at a certain stage of the business cycle expansion and then starts to decline while economic growth continues. This initial decline in the profit rate during what they call the “late expansion phase of the business cycle” becomes a reliably good predictor of cyclical contraction.  This very much matches my own view of profit cycle under capitalism.  Unfortunately, I don’t have the details of this paper to hand, so I’ll have review its conclusions another time.

The gap between the levels of profitability and investment since 2000 in several major capitalist economies have been subject of much debate.  In the past, it has revolved round the view that profits and investment are not connected causally and investment is driven by other factors ie demand or animal spirits a la Keynes or financialisation, where investment is going into financial speculation and away from productive investment (see here).

More recently, this ‘puzzle’ has centred on the measurement of investment – in particular, that investment increasingly takes the form of ‘intangibles’ (brand names, trademarks, copyrights, patents etc in ‘’intellectual property’.  Ozgur Orhangazi at Kadir Has University took this up in another paper
(revisitingtheinvestmentprofitpuzzle_preview).
He presents the usual facts showing the gap between profitability and tangible investment. He argues that this gap can be explained by missing intangible investments. Intellectual property as a share of capital stock has doubled since the 1980s.

However, I note from his graph that, in the period of the 2000s, this share did not move very much and yet this is the period of the apparent ‘puzzle’.  Orhangazi draws lots of conclusions from his analysis which I shall leave the reader of his paper to consider but the key one is, as he says “All in all, these findings are in line with the suggestion that the increased use of intangible assets enables firms to have high profitability without a corresponding increase in investment.”  If this is correct it suggests, post-2009, that the causal connection between profits and tangible investment has weakened and that capitalism is actually doing ok and investing well (in intangibles) and just does not need so much profit to expand. That begs the question on whether ‘intangibles’ like ”goodwill’’ are really value-creating.

But is this argument of mismeasurement factually correct? In his AEA presidential address, Olivier Blanchard also looked at US profitability.  Like Marxist analyses of US (pre-tax) profitability, he noted that there was a big fall from the 1960s to the late 1970s and a stabilisation afterwards.

Blanchard noted that the ‘market value’ of firms had doubled compared to the stock of tangible capital invested (Tobin’s Q) since the 1980s.  But he dismisses the argument of mismeasurement of investment in intangibles to explain this:  “A number of researchers have explored this hypothesis, and their conclusion is that, even if the adjustment already made by the Bureau of Economic Analysis is insufficient, intangible capital would have to be implausibly large to reconcile the evolution of the two series: Measured intangible capital as a share of capital has increased from 6% in 1980 to 15% today. Suppose it had in fact increased by 25%. This would only lead to a 10% increase in measured capital, far from enough to explain the divergent evolutions of the two series.”

Blanchard says the ‘puzzle’ is more likely due to monopoly rents.  My own explanation and critique of these explanations can be found here.  But the essential point for explaining slumps in capitalism and predicting new ones is intact, in my view,: it depends on the relation between profitability and capitalist (productive) investment that leads to new value.

I have not got the space to deal with all the other interesting papers in the URPE sessions.  They include an analysis by Margarita Olivera of the Federal University of Brazil of the obstacles to industrial development in Latin America posed by trans-national companies and the new free trade agreements like TPP.  Eugenia Correa of UNAM and Wesley Marshall of UAM Mexico analysed the new counter-revolution in economic policy ahead as right-wing governments take over in Argentina, Brazil and Ecuador.  And again, I shall have to neglect an analysis of China’s industrial development provided by Hao Qi of Renmin University (semiproletarianizationinatwosector_preview).

There were also several papers from a post-Keynesian perspective with Michalis Nikioforos of the Levy Institute presenting the usual wage-led, profit-led theory of crises. Daniele Tavani and Luke Petach of Colorado State University presented an insightful alternative to the explanation by Thomas Piketty of rising inequality of wealth and income based on the switch to neo-liberal policies in the 1980s driving down the share of labour, not Piketty’s neoclassical marginal productivity argument (incomesharessecularstagnationand_preview).  And Lela Davis, Joao Paulo, and Gonzalo Hernandez presented a paper that showed financial fragility was to be found in smaller new firms entering and exiting – this was the weak link in the debt story for capital (theevolutionoffinancialfragilitya_preview).

Finally, there were several papers on developments in international finance.  Ingrid Kvangravenof the University of York looked at changing views on the beneficial role of international finance for capitalism; Carolina Alves of Girton College, Cambridge reckoned that ‘financial globalisation’’ and neoliberal policies have led the economic strategy of international institutions to drop fiscal stimulus policy and Keynesian-style intervention for monetary management.  Devika Dutt from Amherst reckoned that international reserve accumulation particularly in so-called emerging economies encourages volatile capital inflows that make those economies vulnerable to financial crises (canreserveaccumulationbecounterprodu_powerpoint).

To sum up ASSA 2019.  The mainstream still avoids explaining the global financial crash and the Great Recession, ten years since it ended.  So it is still confused about what economic policies would avoid a new slump; are they monetary, ‘macro-prudential’ or fiscal?  This is because it denies the social structure of capitalism, namely that is a mode of production for profit to the owners of capital who are engaged in a class struggle to extract value from labour.  The irreconcilable contradiction between profitability and growth over time was at the core of Marx’s insight as the underlying cause of regular recurring and unavoidable crises of capitalism.  This is what the mainstream does not accept and where radical political economy comes up front.

ASSA 2019 part one – the mainstream: avoiding recessions

January 7, 2019

Past annual conferences of the American Economics Association have had some dominant themes: rising inequality, slowing productivity and secular stagnation.  But in 2018 and in the 2019 conferences, the focus switched – at least among the mainstream economic stream that overwhelmingly dominate ASSA – to whether there will be a new recession in the US and globally, which could be perhaps triggered by a trade war between the US and its main economic rival China. At ASSA 2019, the big issue was whether mainstream economics had learnt the right lessons from the debacle of the Great Recession; and what monetary and fiscal policies of stimulus are best to avoid another slump or at least get out of one quickly?

Of course, there were way more subjects discussed by the 13,000 participants attending the Atlanta Georgia ASSA 2019.  In the hundreds of papers and panels presented, there were some important longer term themes debated, in particular, the impact on jobs of robots and AI, whether China would become the leading economic power in the 21st century or was heading for a fall; and a continual subject for economists, namely whether the assumptions of mainstream economic theory bore any relation to reality.

In this review, I cannot possible cover all the issues, facts and fallacies presented.  So let me first concentrate on the headline panel discussions where the leading economic policy officials and economic gurus spoke.  On Friday, there was a heavily publicised and TV broadcast session with the current Federal Reserve chair Jay Powell and the two previous chairs, Janet Yellen (under Obama) and Ben Bernanke (under Bush).

The pronouncements of Jay Powell that the Fed was going to be cautious about pursuing further interest rate increases in 2019 and would look at the data rallied the stock markets where investors are clearly worried that global growth is slowing and further hikes by the Fed could provoke a recession.  But the overall line of the Fed chairs was that the US economy was looking good, there would be no recession and measures to avoid a new financial crash, while not fully perfect, were much better than back in 2007.

But when asked about what the economics profession needed to do, Janet Yellen said that the profession failed to see the global financial crash and the Great Recession coming. So now more research is needed on “systemic risk” (ie financial collapse). Jay Powell admitted that the Fed still did not have all the “tools” to avoid credit crashes in non-bank areas. And Bernanke was worried about rising inequality which he could not explain.

It seems that mainstream economics is putting its faith in what it calls macroprudential policies to avoid or mitigate future crises ie reducing risks of instability in the finance sector, where the last crisis is supposed to have originated. As Kristin Forbes of MIT put it: “Macroprudential regulations currently focus on where the last set of vulnerabilities arose, especially in banks and mortgage markets. These are critically important, but the next crisis could start in other sectors. In fact, the success of existing regulations in reducing the risks in banks could be contributing to the build-up of vulnerabilities elsewhere, such as by shifting exposures to currency and liquidity risk to the corporate sector and shadow financial system—sectors about which regulators have less information and where entities may be less prepared to handle surprises. Macroprudential policy has made impressive progress and significantly reduced the probability of another crisis unfolding in the banking system as it did in 2008. Macroprudential policy still has some way to go, however, to ensure that there is not another crisis and economists are not asked again by a future monarch: “Why did no one see it coming?”
(macroprudentialpolicywhatweknowdo_preview). Indeed. See here for my view on whether regulation of the finance sector will do the trick next time.

As for the current state of the economy, in another session, President Trump’s top economic adviser, Kevin Hassett, made what one observer called “a victory lap” over what he considered were the successful corporate and personal tax cuts and reductions in repatriating profits enshrined in the so-called flagship Taxes Consolidation Act (TCA).  Hassett claimed that his model that supported the large reduction in the corporate tax rate and predicted a sharp jump in business investment and economic growth as a result had been vindicated.

Hassett said the model predicted a substantial jump in business investment and a rise in the US growth rate by up to 1.4% pts in a year. With US real GDP hitting 3% in 2018, he had been proved right.  Interestingly, this showed that the trend growth rate of the US since the end of the Great Recession was just 1.6%, the lowest rate of expansion of any ‘recovery’ after a slump since the 1930s.

Hassett had to admit that his model was ‘ceteris paribus’ and there could be other factors that caused an acceleration in US growth from 2017 through 2018.  I can think of a few: heavy investment in energy sectors as oil prices rose; a pick-up in growth in Europe and Asia.  But it’s certainly true that the tax cut dramatically raised profits for US business (after tax profits were up 20% yoy in Q3 2018) and that has had an effect on getting business investment rising.  But most of the increased profit has been used by companies to buy back their own shares and raise dividends, leading to the stock market boom in 2017 and most of 2018.

The other counter to Hassett’s boasting is that the corporate tax cut is really a one-off and its apparent effect will dissipate as we go into this year.  According to two right-wing economic scholars, Robert Barro and Jason Furman of Harvard, in their paper, the tax cut could raise growth by 0.9% from trend in 2019 (taking growth to 2.5%).  But the long-term impact of the tax cut, if sustained for ten years would be to add a cumulative 0.4-1.2% to real GDP or just 0.04-0.13% a year!  But that boost would be cut if interest rates rose during that period.

Hassett was keen to argue that the poorest American workers would gain the most from the tax cuts. He put up a graph to show that there had been faster wage growth for low-paid workers.

The faster growth of the bottom 10% of wage workers was very slight however compared to the top 10% (and the latter’s wages are way larger!).  Moreover, back in 2013, the bottom 10% had bigger nominal wage increases than the top 10% when there was no special tax cut.  A more likely reason for the small acceleration in the wage growth of the bottom 10% was the recent hike in the federal minimum wage and the success of labour in some areas in raising the ‘living wage’.

Do corporate and personal tax cuts really boost economic growth?  Think of it the other way round: would higher taxes on the top 1% damage growth?  When left-wing Democrat Alexandria Ocasio-Cortez recently called for a 70% top rate of income tax for those ‘earning’ above $10m a year in the US, she was attacked for damaging growth.  Keynesian guru Paul Krugman rushed to her defence.  He claimed with this graph (below) that there was no correlation between a high personal tax rate and economic growth.  On the contrary, as the top marginal rate was cut over the decades, average economic growth slowed.

Clearly there is no long-term correlation because there are many factors in between the tax rate on income and the creation of that income from work or other sources.  Higher profits can mean that higher tax rates can be absorbed.  But when profitability falls then capitalist policy goes in the direction of cutting taxes on the rich (among other neo-liberal measures) to sustain profits and income for capital to invest and spend.  The real correlation is between profits and investment and investment and growth, the Marxist multiplier.  Indeed, that is what Hassett’s model shows.  When corporate taxes are cut, it provides a short-term boost to profits and thus to business investment and economic growth. But that does not last (as Barro and Furman show (macroeconomiceffectsofthe2017taxre_preview) and cannot reverse indefinitely any tendency in the capitalist accumulation for profitability and profits to fall.

Previous ASSA conferences had observed that the great period of globalisation: (rising world trade and capital flows) had ended with the Great Recession and ensuing Long Depression or slowdown since 2009. But in ASSA 2019, the big name headline speakers were concerned to talk about the end of globalisation slipping into outright trade war given the tit-for-tat trade tariff hikes already begun by the US and China during 2018.

A panel chaired by the IMF deputy director David Lipton were generally concerned that a trade war would be ‘disruptive’ to jobs in both the US and China. But as Jay Shambaugh at the Brookings Institution said, so was globalisation.  Yipian Huang from Peking University appeared optimistic that the US-China trade war would be avoided and things would improve (maybe that’s the Chinese leadership line).  Adam Posen, head of the Peterson Institute, was convinced that the trade war had been started by the US as a deliberate policy to isolate and weaken China.  And it could morph into a serious divergence bringing fragmentation to a previously US-dominated world.  For my view on that see here.

There were many papers at ASSA 2019 on China, its current situation and its future. US economists are putting a lot of effort into estimating where China is going, no doubt hoping they can find faultlines. I counted well over 70 papers on China, both from the mainstream and the radical. I cannot review these this post, however. I’ll be doing a a deeper analysis of China’s future development as a conference paper later this year.

But the theme that was highlighted most at ASSA 2019 is the impact of robots and AI on future productivity and jobs.  David Autor of MIT delivered the Richard Ely lecture called Work of the Past, Work of the Future .

Autor takes the view that robots and Ai are generally jobs creating and will not necessarily increase inequality of wealth and income in society.  He reckons that “it is great time to be young and educated” but not a clear “land of opportunity for non-college adults in the US.” One big problem is that young people are leaving the rural areas and moving to the cities to get qualifications and then staying there.  In the cities there are high wage, high education jobs that are less vulnerable to robots, but there are large numbers of jobs requiring less qualifications and mainly held by women that are vulnerable.  And the new jobs that will be created by the new technology displacing the old less qualified jobs constitute only 13% of total labour hours worked (see pix below).

Low skilled jobs that pay poorly like ‘gift wrappers’, baristas, marriage counsellors, wine waiters etc in leisure and care sectors are increasing but ‘mid-skill’ jobs are “falling off a cliff”.  Middle-skill work in cities has been hollowed out since 1980. Non-college educated workers have been pushed to do low-skill work in cities. In the 1950s, people living in cities were on average five years older than those in rural areas; now they are six years younger.  The rural areas and small towns are dying.

In another paper, Daron Acemoglu, MIT and Pascual Restrepo, Boston University reckoned that the aging population of the US and other countries will be the major contributor to automation
(automationandnewtaskstheimplicatio_preview).
It’s why older nations like Germany and Japan are on the forefront of replacing workers with robots.  It will soon be a driver in China where the population is about to peak at 1.44bn in 2029 and decline steadily afterwards as the population gets older.  Acemoglu and Restrepo took a balanced view of the future with automation.  capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect.  This reduces the share of labour in value-added.  But the effects of automation counterbalanced by the creation of new tasks in which labor has a comparative advantage: the reinstatement effect.  The slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, and a weaker reinstatement effect, and slower growth of productivity than in previous decades.”  They leave open the question of which way it will go from here.

In another paper (recentunitedstateseconomicperformanc_preview) in this session, Dale Jorgenson, Mun Ho and Jon project long-term growth of only 1.8% per year for US GDP growth, derived from a 0.50 pts of hours growth (more labour), 0.45 points from TFP (robots), 0.76 points from capital deepening (investment), and only 0.12 pts from labor quality (more skill). So as robots take over, education will matter less and less!  Interestingly, Robert J Gordon, the arch pessimist in the past on US productivity growth in 21st century took a more optimistic view for the near future in his paper
(prospectsforaproductivitygrowthrevi_preview).

So will robots, AI and automation mean less jobs or more?  The answer of the mainstream experts seems to be that there will be less jobs in the middle (manufacturing and clerical), some more jobs for a future workforce in new sectors but many more poorly paid jobs in sectors like leisure services and social care.  My own view is outlined here. Automation can create new jobs and income and destroy it. The balance will depend on the trend of profitability in an economy; if profitability is rising, companies will expand investment and production in new sectors to compensate for labour-shedding in other areas – and vice versa.

The issues of poverty and inequality that have dominated previous ASSA meetings have not disappeared. Bruce Meyer at the University of Chicago analysed US poverty and inequality of income over the last two decades.  He suggested that poverty and inequality was not as bad as researchers like Thomas Piketty and Gabriel Zucman have claimed because they have underreported transfer incomes from various US ‘safety nets’ in housing and medicare.

Indeed an argument over measuring the data has broken out between Davids Auten and Splinter
top1incomesharescomparingestimate_preview)
and the Piketty researchers. Auten and Splinter reckon that Piketty’s tax return based measures are biased. Correcting for this bias reduces the increase in top 1% income shares by two-thirds! Further, accounting for government transfers reduces the increase over 80%! However, in another session, Zucman questioned the assumptions and methods used by Auter and Splinter.

Pascal Paul at the Federal Reserve Bank of San Francisco presented empirical evidence for the view that rising and extreme inequality of income plus low productivity growth are harbingers of financial crises (historicalpatternsofinequalityandpr_preview).  But, as he said, he only shows evidence of high correlation not a causal connection.  I remain sceptical that financial crises are caused by high inequality and low productivity – if anything it is the other way round.

Finally, there was an inconclusive debate about whether mainstream microeconomics and its assumptions (free markets and ‘rational expectations’) were necessary for (the Lucas critique) or not compatible (heterodox) with macroeconomics.  The neoclassical view was expressed by Harvard’s Jacob Furman that “more and more research shows you can’t think about macro without thinking about what’s going on with individuals and firms. Furman: Inequality matters for macro and we can’t think about inequality if we ignore microfoundations.”  In contrast, Keynesian Amir Sufi says: macro data are super useful. For example, Sufi said, higher debt leads to a much larger contraction in household spending in response to unemployment. This is now well established. This has big implications for macro. But it also means representative agent macro models shouldn’t be used for business cycles.

My problem is not just with the neoclassical Lucas critique , but also with Keynesian-style macro models based on neoclassical DSGE that start from the idea that economies grow harmoniously but then get hit by ‘shocks’. This approach fails to recognise the uneven development of capital accumulation.  Any way going from the micro to the macro cannot work because of the fallacy of composition – the whole can deliver a different result from the sum of its parts.

A couple of interesting facts from some other papers:  1) there is no simple causal relationship between economic conditions and the abuse of opioids.” in the US (unitedstatesemploymentandopioidsis_preview); 2) in 18 US states, budget spending on prisons is greater than spending on education!

In part two, I’ll try and cover the deliberations of the non-mainstream and radical economic sessions at this year’s ASSA.

The euro – part two will it survive another 20 years?

January 2, 2019

In part two of my analysis of the euro currency, I consider the impact of the global slump of 2008-9 and the ensuing euro debt crisis on prospects for the euro.

The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. The capitalist sectors of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead. The Eurosystem’s ‘Target 2’ settlement figures between the national central banks revealed this huge divergence within the Eurozone.

The imposition of austerity measures by the Franco-German EU leadership on the ‘distressed’ countries during the crisis was the result of the ‘halfway house’ of euro criteria.  There was no full fiscal union (tax harmonisation and automatic transfer of revenues to those national economies with deficits); there was no automatic injection of credit to cover capital flight and trade deficits (federal banking); and there was no banking union with EU-wide regulation and weak banks could be helped by stronger ones.  These conditions were the norm in full federal unions like the United States or the United Kingdom.  Instead, in the Eurozone, everything had to be agreed by tortuous negotiation among the Euro states.

In this halfway house, Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states.  Thus any bailout programmes were combined with ‘austerity’ for those countries to make the people of the distressed states pay with cuts in welfare, pensions and real wages, and to repay (virtually in full) their creditors (the banks of France and Germany and the UK).  The debt owed to the Franco-German banks was transferred to the EU state institutions and the IMF – in the case of Greece, probably in perpetuity.

The ECB, the EU Commission, and the governments of the Eurozone proclaimed that austerity was the only way Europe was to escape from the Great Recession. Austerity in the public spending could force convergence on fiscal accounts too (123118-euroeconomicanalyst-weekly). But the real aim of austerity was to achieve a sharp fall in real wages and cuts in corporate taxes and thus raise the share of profit and profitability of capital. Indeed, after a decade of austerity, very little progress has been achieved in meeting the fiscal targets (particularly in reducing debt ratios); and, more important, in reducing the imbalances within the Eurozone on labour costs or external trade to make the weaker more ‘competitive’.

The adjusted wage share in national income, defined here as compensation per employee as percentage of GDP at factor cost per person employed, is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year. Every capitalist economy had managed to reduce labour’s share of the new value created since 2009.  Labour has been paying for this crisis everywhere.

Reduction in labour’s share of new value added 2009-15 (%)

Source: AMECO, author’s calculations

The evidence shows that those EU states that got a quicker recovery in their profitability of capital were able to recover from the euro crisis (Germany, Netherlands, Ireland etc) faster, while those that did not improve profitability stayed deep in depression (Greece).

One of the striking contributions to the fall in labour’s share of new value has been from emigration.  This was one of the OCA criteria for convergence during crises and it has become an important contributor in reducing costs for the capitalist sector in the larger economies like Spain (and smaller ones like Ireland). Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal, and North Africa. Now there is net emigration even with these areas.

Keynesians blame the crisis in the Eurozone on the rigidity of the single-currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, like Germany. But the euro crisis is only partly a result of the policies of austerity.  Austerity was pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK. Alternative Keynesian policies of fiscal stimulus and/or devaluation where applied have done little to end the slump and still made households suffer income losses.  Austerity means a loss of jobs and services and nominal and real income. Keynesian policies mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates.

Take Iceland, a tiny country outside the EU, let alone the Eurozone.  It adopted the Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone.  But it still meant a 40% decline in average real incomes in euro terms and nearly 20% in krona terms since 2007.  Indeed, in 2015 Icelandic real wages were still below where they were in 2005, ten years earlier, while real wages in the ‘distressed’ EMU states of Ireland and Portugal have recovered.

Iceland’s rate of profit plummeted from 2005 and eventually the island’s property boom burst and along with it the banks collapsed in 2008–09. Devaluation of the currency started in 2008, but profitability up to 2012 remained well under the peak level of 2004. Profitability of capital in Iceland has now recovered but EMU distressed ‘austerity’ states, Portugal and Ireland, have actually done better and even Greek profitability has shown some revival.

Net return on capital for Iceland and Greece (2005=100)


Source: AMECO

Those arguing for exiting the euro as a solution to the Eurozone crisis hold that resorting to competitive devaluation would improve exports, production, wages, and profits.  But suppose Italy exits the euro and reverts to the lira while Germany keeps the euro. Under the assumption that there are international production prices, if Italy produces with a lower technology level than that used by the German producer, there is a loss of value from the Italian to the German producer. Now if Italy devalues its currency by half, the German importer can buy twice as much of Italy’s exports but the Italian importers can still only buy the same (or less) amount of German exports.  Sure, in lira terms, there is no loss of profit, but in international production value terms (euro), there is a loss. The fall in the value rate of profit is hidden by the improvement in the money (lira) rate of profit.

In sum, if Italy devalues its currency, its exporters may improve their sales and their money rate of profit. Overall employment and investments might also improve for a while.  But there is a loss of value inherent in competitive devaluation.  Inflation of imported consumption goods will lead to a fall in real wages. And the average rate of profit will eventually worsen with the concomitant danger of a domestic crisis in investment and production. Such are the consequences of devaluation of the currency.

The political forces that wish to break with the euro or refuse to join it have expanded electorally in many Eurozone countries.  This year’s EU elections could see ‘populist’ euro-sceptic parties take 25% of the vote and hold the balance of power in some states like Austria, Poland and Italy.  And yet, the euro remains popular with the majority.  Indeed, sentiment has improved in 13 member states since they joined, with double-digit bumps in Austria, Finland, Germany and Portugal. Even in Italy, which has witnessed a roughly 25-point decline, around 60% of people still favour sharing a currency with their neighbours.  Greeks are still 65% in favour. What this tells me is that working people in even the weaker Eurozone states reckon ‘going it alone’ outside the EU would be worse than being inside – and they are probably right.

Ultimately, whether the euro will survive in the next 20 years is a political issue.  Will the people of southern Europe continue to endure more years of austerity, creating a whole ‘lost generation’ of unemployed young people, as has already happened in?  Actually, the future of the euro will probably be decided not by the populists in the weaker states but by the majority view of the strategists of capital in the stronger economies.  Will the governments of northern Europe eventually decide to ditch the likes of Italy, Spain, Greece etc and form a strong ‘NorEuro’ around Germany, Benelux and Poland?  There is already an informal ‘Hanseatic league’ alliance being developed.

The EU leaders and strategists of capital need fast economic growth to return soon or further political explosions are likely.  But as we go into 2019, the Eurozone economies are slowing down (as are the US and the UK).  it may not be  too long before the world economy drops into another slump. Then all bets are off on the survival of the euro.

20 years of the euro – part one: has it been a success?

January 1, 2019

Today is the 20th anniversary of the launch of the euro and the Eurozone single currency area.  Starting with eleven members, two decades after its birth, membership has grown to 19 countries and the euro-area economy has swelled by 72% to 11.2 trillion euros ($12.8 trillion), second only to that of the US and positioning the European Union as a global force to be reckoned with.

The euro is now used daily by some 343 million Europeans. Outside Europe, a number of other territories also use the euro as their currency. And another 240 million people worldwide as of 2018 use currencies pegged to the euro. The euro is the second largest reserve currency as well as the second most traded currency in the world after the dollar. As of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the US dollar.

That’s one measure of success.  But it is not the most important benchmark considered by its founders.  The great European project that started after the WW2 had two aims: first, it was to ensure that there were never any more wars between European nations; and second, to make Europe an economic and political entity that could rival America and Japan in global capital.  This project would be led by Franco-German capital.  The euro project went further and aimed at integrating all European capitalist economies into one unit to compete with the US and Asia in world capitalism within a single market and with a rival currency to the dollar.

In part one, I’ll consider whether the euro has been a success for capital in the participating states; and whether it has been good news for labour.  In part two, I’ll consider whether the euro will still be here in another 20 years.

How do we measure the success of a single currency area in economic terms?  Mainstream economic theory starts with the concept of an Optimal Currency Area (OCA).  The essence of OCA theory is that trade integration and a common currency will gradually lead to the convergence of GDP per head and labour productivity among participants.

The OCA says it makes sense for national economies to share a common monetary policy if they (1) have similarly timed business cycles and/or (2) have in place economic ‘shock absorbers’ such as fiscal transfers, labour mobility and flexible prices to adapt to any excessive fluctuations in the cycle. If (1) is true, then a one-size-fits-all monetary policy is possible. If (2) holds, then a national economy can be on a different business cycle with the rest of the currency union and still do okay inside it. Equilibrium can be established if there is ‘wage flexibility’, ‘labour mobility’ and automatic fiscal transfers.

The European Union has shown a degree of convergence.  Common trade rules and the free movement of labour and capital between countries in the EU has led to ‘convergence’ among participants in the EU. Convergence on productivity levels has been as strong as in fully federal US, although convergence more or less stopped in the 1990s, once the single currency union started to be implemented.

So the move to a common market, customs union and eventually the political and economic structures of the EU has been a relative success.  The EU-12/15 from the 1980s to 1999 managed to achieve a degree of harmonisation and convergence with the weaker capitalist economies growing faster than the stronger (graph below shows growth per capita 1986-99)..

But that was only up to the point of the start of EMU and preparations for it in the 1990s.  The evidence for convergence since then has been much less convincing.  On the contrary, the experience of EMU has been divergence.

The idea that ‘free trade’ is beneficial to all countries and to all classes is a ‘sacred tenet’ of mainstream economics.  But it is a fallacious proposition based on the theory of comparative advantage:  that if each country concentrated on producing goods or services where it has a ‘comparative advantage’ over others, then all would benefit.  Trading between countries would balance and wages and employment would be maximised.  But this is empirically untrue.  Countries run huge trade deficits and surpluses for long periods; have recurring currency crises; and workers lose jobs from competition from abroad without getting new ones from more competitive sectors.

The Marxist theory of international trade is based on the law of value.  In the Eurozone, Germany has a higher organic composition of capital (OCC) than Italy, because it’s technologically more advanced.  Thus in any trade between the two, value will be transferred from Italy to Germany.  Italy could compensate for this by increasing the scale of its production/export to Germany to run a trade surplus with Germany.  This is what China does.  But Italy is not large enough to do this.  So it transfers value to Germany and it still runs a deficit on total trade with Germany.

In this situation, Germany gains within the Eurozone at the expense of Italy.  All other member states cannot scale up their production to surpass Germany, so unequal exchange is compounded across the EMU.  On top of this, Germany runs a trade surplus with other states outside the EMU, which it can use to invest more capital abroad into the EMU deficit countries.

The Marxist theory of a currency union thus starts from the opposite position of neoclassical mainstream OCA theory.  Capitalism is an economic system that combines labour and capital, but unevenly.  The centripetal forces of combined accumulation and trade are often more than countered by the centrifugal forces of development and unequal flows of value. There is no tendency to equilibrium in trade and production cycles under capitalism.  So fiscal, wage or price adjustments will not restore equilibrium and anyway may have to be so huge as to be socially impossible without breaking up the currency union.

The EU leaders had set convergence criteria for joining the euro that were only monetary (interest rates and inflation) and fiscal (budget deficits and debt).  There were no convergence criteria for productivity levels, GDP growth, investment or employment.  Why? Because those were areas for the free movement of capital (and labour) and where capitalist production must be kept free of interference or direction by the state.  After all, the EU project is a capitalist one.

This explains why the core countries of EMU diverged from the periphery.  With a single currency, the value differentials between the weaker states (lower OCC) and the stronger (higher OCC) were exposed with no option to compensate by the devaluation of any national currency or by scaling up overall production.  So the weaker capitalist economies (in southern Europe) within the euro area lost ground to the stronger (in the north).  The graph below shows how each member state has fared in growth relative to the Eurozone average.

Franco-German capital expanded into the south and east to take advantage of cheap labour there, while exporting outside the euro area with a relatively competitive currency.  The weaker EMU states built up trade deficits with the northern states and were flooded with northern capital that created property and financial booms out of line with growth in the productive sectors of the south.

Even so, none of this would have caused a crisis in the single currency union had it not been for a significant change in global capitalism: the sharp decline in the profitability of capital in the major EU states (as elsewhere) after the end of the Golden Age of post-war expansion. This led to fall in investment growth, productivity and trade divergence.  European capital, following the model of the Anglo-Saxon economies, adopted neo-liberal policies: anti trade union laws, deregulation of labour and financial markets, cuts in public spending and corporate tax, free movement of capital and privatisations.  The aim was to boost profitability. This succeeded somewhat for the more advanced EU states of the north, but less so for the south.

Then came the global financial crash and the Great Recession.  This exposed the fault-lines in the single currency area.

Forecast for 2019

December 28, 2018

Well, there has not been a year starting like this for a long time.  The US government is in disarray.  The President of the Unites States starts the second half of his four-year term having lost his majority in the lower house of Congress to the Democrats in a heavy polling defeat last November.  He starts with an acting chief of staff, an acting secretary of defense, an acting attorney general, an acting EPA administrator, no interior secretary and no ambassador to the UN. His former campaign manager, deputy campaign manager, national security adviser and personal lawyer have all pleaded guilty to criminal offences.  And the investigation by special prosecutor Mueller on the connections between the Trump presidential campaign and Russian intelligence will be stepped up.  Meanwhile, one-quarter of government departments are closed because of Trump’s budget fight with Congress.

Also the geopolitical environment has turned toxic.  The Trump administration has picked a fight with China over trade and technical know-how that threatens to intensify when the current ‘pause’ on the tit-for-tat trade tariffs ends in March.

This time last year, Trump was boasting that the US economy was booming, with record highs for the US stock market.  Back then, I said that “What seems to have happened is that there has been a short-term cyclical recovery from mid-2016, after a near global recession from the end of 2014-mid 2016.  If the trough of this Kitchin cycle was in mid-2016, the peak should be in 2018, with a swing down again after that.”

And in April 2018, I posted that I thought the short boom in 2017 from the mini-recession of 2015-6 was over and that world growth had peaked.  And so it has proved.  2018 has ended with real GDP growth starting to slow nearly everywhere.

And at the end of 2018, stock markets suffered the deepest fall since the global financial crash in 2008.  Current US treasury secretary Mnuchin panicked and called a meeting of the top six US banks on Xmas eve to check that they were confident of standing firm, only making things worse.

As I have argued before, Marx said that what drives stock market prices is the difference between interest rates and the overall rate of profit. What has kept stock market prices rising since 2009 has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world, with zero short-term rates and quantitative easing (buying financial assets with credit injections).  The gap between returns on investing in the stock market and the cost of borrowing to do so has been high.

But in 2018 investors in fictitious capital (stocks and bonds) perceived that this situation was changing.  Interest rates are on the rise (driven by the US Fed) and there are signs that the recovery in the rate of return on capital in the major economies has peaked and is reversing.  US growth peaked in Q2 at a 4% annual rate and Q4 growth is expected to be closer to 2.5%.  The very latest indicator of US growth, the Richmond business activity indicator, suggests a sharp drop in growth in early 2019 – perhaps even to stagnation.

In Europe, hopes of a synchronised expansion matching that of the US have been dashed, as the leading European economies, France and Germany, have slowed, while the weaker ones like Italy have slipped back into recession.  UK real GDP growth is also dropping fast as companies apply an investment strike due to uncertainty over Brexit.  The Eurozone economy is now growing at only 1.6% compared to nearly double that rate this time last year.

And it is not just in the major advanced capitalist economies that the forecast end to the Long Depression since 2008 has been confounded.  In Asia too, there has been a slowdown in the second half of 2018.  Japan’s real GDP was static in Q3 2018.

The world’s largest manufacturing economy, China, has also slowed.

Korea too is slowing.

All the official growth forecasts (from the IMF, the OECD, World Bank etc) for are for a lower rate in 2019 compared to 2018.

Now a recession in mainstream economics is technically defined as two consecutive quarterly contractions in real GDP growth.  The consensus does not expect that in 2019.  But are the mainstream experts wrong; will the major economies drop into a slump this coming year?

Many argue that forecasts, let alone economic forecasts, are not worth the paper they are typed on.  I’m not sure that I agree. I would make a distinction between prediction in scientific analysis and forecasts.  But I won’t deal with that issue now.  Instead I’ll plough into my forecast for 2019.

So what now for 2019?  Well, what did I say were the key factors for 2018?  I said that “there are two things that put a question mark on the delivery of faster growth for most capitalist economies in 2018 and raise the possibility of the opposite.  The first is profitability and profits” and the second “is debt…global debt, particularly private sector (corporate and household) debt has continued to rise to new records.”

This is still true for 2019.  Global debt rose through 2018 and, most important, the cost of servicing that debt also began to rise as the US Federal Reserve continued with hiking its policy rate – with the last rise made just before the end of the year.

The Fed rate sets the floor for interest rates in the US and also the benchmark for international rates, given the dominant role of the dollar in international reserves and capital flows.  And other central banks have ended their cheap money injections – quantitative easing – which has now turned into quantitative tightening.

Thus “financial conditions” (the cost of debt, the state of stock markets and the value of the dollar against other currencies) have been tightening.

Just after Janet Yellen ended her term as Federal Reserve chair (her term was not renewed by Trump because he said she was “too short”), she declared that “there would be no more financial crises in our lifetime”, because of the new measures applied to ensure the banks won’t crash again.  But last month, she revised that view.  Apparently, there are “gigantic holes in the financial system” that she presided over and she now worries that “there could be another financial crisis” after all. This is because financial regulation is ‘unfinished” and she is not sure that the Fed and government are doing anything about that “in the way we should”. 

In a recent paper, Carmen Reinhart, a mainstream expert on the history of financial crises, drew attention to the sharp rise in unbacked corporate debt, called leveraged loans, with issuance hitting record highs in 2018.  Reinhart concluded that “the networks for financial contagion, should things turn ugly, are already in place.”

So the scene is set for a new credit crunch in 2019 if profits stop growing and the cost of servicing the accumulated corporate debt goes on rising.  If the Fed continues with its policy hikes, just as in 1937 during the Great Depression of the 1930s, it threatens to provoke a sharp downturn, not just in the price of fictitious capital but also in the so-called ‘real’ economy.  This fear provoked Trump to consider sacking Fed Chair Jay Powell in the New Year.

The Bank for International Settlements (BIS), the international research agency for central banks, warned that what it calls the ‘financial cycle’ implies that a new credit crunch is coming.  “Financial cycle booms can end in crises and, even if they do not, they tend to weaken growth.  Once financial cycles peak, the real economy typically suffers. This is most evident around financial crises, which tend to follow exuberant credit and asset price growth, ie financial cycle booms. Crises in turn tend to usher in deep recessions, as falling asset prices, high debt burdens and balance sheet repair drag down growth.”  And most important “the debt service ratio is particularly effective in this aspect”.

All the credit indicators for a recession are now flashing amber, if not red.  The most popular is the so-called inverted yield curve, namely when the interest rate on a long-term government bond falls below the Federal Reserve’s policy rate.  Whenever that happens, it nearly always indicates a recession within a year.  Why? Because what the inverted curve tells us is that investors think that a slump is coming so they are buying ‘safe assets’ like government bonds, while the Fed thinks the economy is fine and is hiking rates – but the market will decide.

As one analyst put it: “Think of an inverted yield curve as a fever. When your body gets a fever, the fever is not the cause of the sickness. It just says something’s wrong with your body. You have the flu, appendicitis, or some other ailment. The fever indicates you are sick but not necessarily what the sickness is. And typically, the higher the fever, the more serious the condition.  It is the same with the yield curve. The more inverted the yield curve is and the longer it stays that way, the more confident we are that something is economically wrong that may show up as a recession sometime in the future.”  The US yield curve has flattened but has not yet inverted.  So this reliable indicator has still not turned red yet.

Another important indicator for a coming recession can be found, not in the credit markets, but in the global economy.  It’s the price of copper and other industrial metals.  Metals are central inputs in industrial production around the world and so if their prices fall, this suggests that companies are reducing investment in production and so using less metal components.

In 2018, the copper price fell back from a peak of 320 to 270 after July.  But since then it has steadied and remains well above 200 then it fell to in the mini-recession of early 2016.  So this suggests that while the world economy peaked back last summer, a recession is not yet with us.

Another indicator that the world economy is slowing down from its mini-boom in 2017 is the sharp fall in oil prices.  The price has plunged from $75/b in October to $45/b now. That will hit the profits of the energy companies and the trade balances of the oil producers.

The most important factor for analysing the health of the capitalist economy remains the profitability of the capitalist sector and the movement in profits globally.  That decides whether investment and production will continue.  This blog has presented overwhelming evidence that profits and investment are highly correlated and in that order – see our latest book, World in Crisis.

The US corporate sector ended 2018 with record levels of profits/earnings, rising some 20%, the highest rate since 2010, when the US economy rebounded from the Great Recession.  But this profit jump was a one-off.  It’s been driven by huge corporate tax cuts and exemptions from tax in repatriating cash reserves from abroad that the major US companies held.  And US corporate revenues have been boosted by a very sharp fall in input costs, namely the fall in the oil price during 2018.

Globally, profits were still growing in the middle of 2018.  But profits growth has slowed in Germany, China and Japan.  Only the US has experienced any acceleration.  And if the US profits growth is a one-off, as argued above, global profits growth is likely to fall away sharply in 2019.

Slowing profits growth and a rising cost of (corporate) debt, alongside all the politico-economic factors of an international trade war between China and the US, suggest that in 2019 the likelihood of a global slump has never been higher since the end of the Great Recession in 2009.

Books in 2018: value, crashes and socialism

December 24, 2018

Let me remind you of the books that I reviewed on the blog this year.  Of course, they are economics books only and not necessarily the best books published or let alone Marxist in approach.  But several got a big audience.

Factfulness. was a book that swept the popular media  Hans Rosling posthumously argues that, contrary to the conventional wisdom, the world is becoming a better place.  Global poverty is falling, life expectancy is rising; health levels are improving; people have more things and better services.  Even violence and wars are in decline; and democracy is on the rise.  The facts provided in the book lend support to these assertions.

As a result, many of the great and good have praised the book in countering the doom and gloom of many that capitalism is a failed and broken system.  For example, the world’s richest man, multi- billionaire Bill Gates of Microsoft, saw Factfulness as justifiying his view that things are getting better for the majority.  With the right policies on health, education, population, climate change etc, the world could progress without any change in its mode of production and social structure is the conclusion.

What Factfulness tries to ignore, however, is that inequality between rich and poor is widening, within and between many countries, including the rich ones.  And climate change and global warming are accelerating despite the technological possibilities for controlling it.  And Factfulness does not deal with or explain the causes of the recurring crises of production in world capitalism that regularly wipe out the living standards of millions for a generation.

Within the world of academic economics, one book got massive widespread coverage. Mariana Mazzucato’s The value of everything seemed to have caught the imagination of the liberal wing of mainstream economics.  So much so that Mazzacuto even got a spot on Desert Island Discs, a BBC radio programme that invites ‘celebrities’ to outline what music they would like to take with them if marooned on a desert island.  As I write, the Financial Times has again highlighted her work.

Mazzucato previously wrote an important book, The Entrepreneurial State, that ‘debunked’ the mainstream myth that only the capitalist sector contributes to innovation while the state sector is a burden and cost to growth.  In this new book, she took on a bigger task: trying to define who or what creates value in our economies, a subject that has been debated by the greatest economists of capitalism from Adam Smith onwards.

Her arguments were that 1) government is not recognised in national accounts as adding to value through its contribution to investment and innovation but should be; 2) finance has sneaked into accounts as productive and value-creating when in reality it ‘extracts’ value from productive sectors and breeds speculation and ‘short-termism’ etc.; and 3) there has been the growth of a monopoly sector in modern capitalism that is ‘rent-seeking’ rather than ‘value-creating’.

There are many powerful truths in Mazzucato’s theses.  But there are also serious weaknesses, in my view.  To argue that government ‘creates’ value is to misunderstand the law of value under capitalism.  Under capitalism, the commodities (things and services) are produced for sale to obtain profit.  Sure, commodities must have use value (be useful to someone) but they must also have exchange value (make a profit).  From that capitalist perspective, government does not create value – indeed, it can be seen as a (necessary) cost that reduces the profitability of capitalist production and accumulation.  It is the profitability of the productive sectors that is essential to a capitalist economy, not the overall amount of use values produced.

Finance is clearly ‘unproductive’ even in a capitalist sense.  But it is not just finance that is unproductive.  Real estate, commercial advertising and media and many other sectors are not ‘productive’ because the labour employed does not create new value but instead just circulates and redistributes value and surplus value already created.

The result of Mazzucato’s view is that finance is the enemy, not capitalism.  So she does not call for the replacement of capitalism but “how we might reform it” in order “to replace the current parasitic system with a type of capitalism that is more sustainable, more symbiotic – that works for us all.”  She wants a “partnership between government, multi-nationals and a ‘third sector’ (presumably social non-profit coops etc).” Indeed, she makes no mention of bringing the ‘parasitic’ finance sector into public ownership, let alone the ‘short-termist’, ‘rent-seeking’ monopolies.

The other academic book with huge impact in 2018 was that of economic historian Adam Tooze of Columbia University.  Crashed, How a decade of financial crises changed the world is an important contribution to the economic history of the global financial crash of 2008-9.  Tooze shows how it came about that the great credit boom of the early 2000s eventually led to the biggest financial disaster in modern economies and the ensuing deepest slump in capitalist production since the 1930s.  Tooze particularly emphasises that the crash was not so much a story of the US spreading its financial contagion to Europe. The credit boom was just as strong in Europe.

He shows how governments ensured that the stronger and luckier big banks gained at the expense of the weaker and smaller; and how government intervention provided funding for the culprits of the financial disaster at the expense of the victims, working people, tax payers and small businesses.  Crashed is a granular and fascinating account of the crash and its aftermath.  It powerfully shows what happened and how, but, in my view, does not adequately show why it happened.  For Tooze, the cause seems to be the previous deregulation of the banking system, financial greed and incompetent authorities.  For me, these are only symptoms or immediate catalysts of the underlying causes in the capitalist economy.  For the latter, we must go deeper to the nature and movement of profitability in capitalist economies.

The theme that the global financial crash and the Great Recession were caused by financial deregulation and reckless bankers was also promoted by Lord Robert Skidelsky in his new book Money and Government: A Challenge to Mainstream EconomicsLord Robert Skidelsky is emeritus professor of economics at Warwick University, England.  and the most eminent biographer of John Maynard Keynes and a firm promoter of his ideas.

Skidelsky’s book, its cover blurb says, is “to familiarise the reader with essential elements of Keynes’s ‘big idea’.“ Skidelsky starts from the premiss (like Keynes) that capitalism is the only viable and best mode of production and social relations possible – the alternative of a socialist system of planning based on public ownership is anathema to Skidelsky (as it was to Keynes).  But capitalism has fault-lines and successively recurring slumps and depressions reveal that. So Skidelsky’s job (as Keynes also saw it) is to save capitalism and manage these recurring crises to reduce or minimise their impact.

What does Skidelsky think we should do?  First, we must break up the big banks into smaller units and “institute controls over the type and destination of loans they make.” Second, we need to ‘manage’ capitalism with proper fiscal and monetary policies.  Third, we need to reduce inequality so that wages are sufficiently high to sustain “the consumption base of the economy”. Otherwise it “becomes too weak to support full employment.”  Thus Skidelsky seems to think that the causes of crises are low wages and consumption.  And like Tooze, Skidelsky says that unless we act along these lines to save capitalism, there is the danger of the rise of ‘populism’ and “the flight of voters toward political extremism.”

Mazzacuto’s attempt to resuscitate classical value theory is flawed, in my view.  In contrast, Professor Murray Smith of Brock University Canada offers a much clearer analysis, in his 2018 book, Invisible Leviathan, which, of course, has not got any acclaim or coverage from the left, let alone, the mainstream.  Smith critically explores the debate surrounding Karl Marx’s ‘capitalist law of value’ and its corollary, the law of the falling rate of profit.  The reader gets a clear account of the various interpretations of value theory and Smith makes his own significant contribution.  In my view, it is essential reading (not just because I wrote a foreword!).  The price set by the publishers, Brill, is prohibitive.  However, a paperback version will appear in 2019.

The capitalist mode of production is coming to an end.  But it is not being replaced by socialism. Instead, there is a new mode of production, based on a managerial class that has been forming in the last hundred years.  This managerial class does not exploit the working class for surplus value and its accumulation as capital.  The managers instead use power and control which they exercise through the management of transnationals and finance.  The working class will not be the ‘gravediggers’ of capitalism, as Marx expected.  The ‘popular classes’ instead must press the managerial class to be progressive and modern; and eliminate the vestiges of the capitalist class in order to develop a new meritocratic society. Such is the thesis of Managerial Capitalism, by Gerard Dumenil and Dominique Levy (D-L), two longstanding and eminent French Marxist economists.

For me, this seemed an old-fashioned, outdated and refuted scenario to present in 2018.  After all, Marx wrote about joint stock companies 150 years ago.  Surely, the real question is: in whose class interest do managers carry out their managerial labour? The very nature of the capitalist economy obliges the managers to manage in the interest of the 1%.  Their jobs depend on the decisions of the shareholders, the company share price and its earnings performance, however highly paid they are.  Capitalism has not really changed in its fundamentals in the last 150 years.

But one thing has changed – the ‘socialist’ alternative of the Soviet Union has disappeared.  What can we learn about the feasibility of socialism from this failed state?  In a new book, Varieties of Alternative Economic Systems, edited by Richard Westra, Robert Albritton and Seong Jeong, Marxist economists try to ‘look beyond’ just a critique of capitalism and consider ‘practical utopias’ for the socialist alternative.

How a socialist future might work is a badly neglected area of debate with most Marxists just relying Marx’s own short Critique of the Gotha Programme of the German Social Democrats, or occasional economic analyses that deny the feasibility of socialism. This book moves things on to discuss ‘positive practicalities’ with some ground-breaking work from the likes of Richard Westra, Al Campbell and Seong Jeong.  Factfulness argued that the future is bright – but this book shows that this is true only with the arrival of ‘practical’ socialism.

Top ten posts in 2018: value and robots, populism, stock markets and debt

December 22, 2018

Here is my usual resume of the top ten most read posts on my blog in 2018.  Leading the list by some way was my post on a debate that I had over Marx’s value theory with Professor David Harvey. As most of my readers will know, David Harvey is the most well-known Marxist theorist globally, so the argument that I had with him obviously interested blog readers.

In a recent paper, entitled Marx’s refusal of the labour theory of value, Harvey argued that Marx did not have a ‘labour theory of value’ at all. As he put it: “if there is no market, there is no value”.  I understood this to mean it is in the realization of value as expressed in money that value emerges, not in the production process as such.  Harvey then goes on to argue that if wages are forced down to the minimum or even to nothing, then there will be no market for commodities and thus no value – and this is the “real root of capitalist crises”. And thus it follows that a policy for capital to avoid crises would be by “raising wages to ensure “rational consumption” from the standpoint of capital and colonizing everyday life as a field for consumerism”.

In the post, I responded that, in Marx’s view, the value of a commodity is still the labour contained in it and expended during the production process before it gets to market.  Value is not a creature of money – on the contrary.  Money is the representation or exchange value of labour expended, not vice versa. With Harvey’s interpretation, Marx’s theory of crisis (based on insufficient surplus value) is replaced with insufficient use values for workers as consumers.  Overaccumulation is replaced by underconsumption.  The class struggle becomes not workers versus capitalists; but consumers versus capitalists or taxpayers versus governments.  Naturally, Harvey firmly disagreed with my interpretation and found the empirical support I offered for my view  (eg the graph below shows that it is investment not consumption that leads slumps in the US) nonsensical. But read the post and make up your own minds.

The second most viewed post was on robots and what they mean for jobs and incomes.  I’ve covered the issue of robots and AI in earlier posts, but in a way, this post summed up the arguments for and against robots in delivering more or less jobs and incomes and offered some policy responses, preferring Universal Basic Services, (ie what are called public goods and services, free at the point of use) as a better policy option than Universal Basic Income.

This month has seen a very sharp fall in global stock markets as world economic growth slows, the trade war between the US and China continues and the global debt mountain accumulates. The S&P 500 index is down 10.6 per cent so far this month, its largest December drop since 1931 at the depths of the Great Depression. The benchmark’s 7.8 per cent drop so far in 2018 is its biggest since 2008.

Back last February, I argued, as I have done in earlier posts, that the economic landscape looks much like 1937, when an apparent economic recovery from the Great Depression in the US came to a sharp stop when the US Fed hiked interest rates, triggering a new downturn.  And throughout this year, the Fed has been hiking (with the latest rise this week), while the stock market is falling and economic growth is slowing.

Several of the top ten in 2018 covered specific countries, including the economic meltdown in Turkey, a key example of rumbling emerging market debt crisis that I have highlighted before. This is what I said in May after Turkey’s general election. “Rising global interest rates and the growing trade war initiated by US President Trump are going to hit the so-called emerging capitalist economies like Turkey.  The cost of borrowing in foreign currency will rise sharply and foreign investment is likely to reverse…..Turkey is now near the top of the pile for a debt crisis, along with Argentina (already there), Ukraine and South Africa.”

My posts on the elections in Sweden and Italy also caught the attention of blog readers.  In both, there was a dramatic rise in the votes of the so-called ‘populist’ parties.  In Italy, Five-Star (on the left) and the Liga (on the right) won and formed an unstable coalition government that has quickly come into conflict with the EU Commission over its attempt to expand public spending beyond EU fiscal caps.

Sweden has long been the poster child of the ‘mixed economy’, the social democrat state – where capitalism is supposedly ‘moulded’ to provide a welfare state, equality and decent working and living conditions for the majority. The 2018 general election result put that story to bed. The so-called Democrats, an anti-immigrant party with neo-Nazi roots, came third and now hold the balance of power between the traditional parties of the ‘centre-left’ and ‘centre-right’.

In these posts, I argued that the results in Italy and Sweden – and for that matter the giles jaunes mass protests in France and the Brexit debacle – follow the pattern of so-called populism.  It is the product of the failure of capitalism to deliver after the end of the Golden Age in the mid-1960s, but particularly after the global financial crash, the Great Recession and the ensuing Long Depression.

As for the UK, my post critiquing the opposition Labour Party’s plans for more public ownership also made the top ten.  The aim of the Labour leaders to reverse previous privatisations, end the iniquities of so-called private-public partnership funding; reverse the out-sourcing of public services to private contractors and take the market out of the National Health Service etc is excellent, However, without control of finance and the strategic sectors of the British economy, a Labour government will either be frustrated in its attempts to improve the lot of “the many not the few” (Labour’s slogan), or worse, face the impact of another global recession without any protection from the vicissitudes of the market and the law of value.

As usual every year, my post summing up the latest degree of global inequality of personal wealth in 2018 makes the top ten.  This is based on the annual report of Credit Suisse bank.   Last year, the bank’s economists found that top 1% of personal wealth holders globally had over 50% of the world’s personal wealth – up from 45% ten years ago. In the US, the three richest people in the US – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the US population, or 160 million people.  In contrast, around two-thirds of the world’s adults remain basically without any personal wealth worth speaking of.

Two of the top ten posts that interested blog readers were on the key factor that could trigger a new slump in the world economy: the rising level of global debt and the likely global credit crunch to come.  In one post from May, I highlight the vulnerability of many so-called emerging economies, like Turkey (as above), Argentina, Brazil and South Africa.

The story of the last ten years since the Great Recession is that the world capitalist economy has staggered on at low levels of growth and investment and with virtually no improvement in real incomes for the 90%.  And it has only staggered on because of a huge build-up in debt, particularly in the capitalist sector.  Now, monetary authorities are trying to reverse the credit binge and restore ‘normality’.  As a result, the cost of servicing that debt is on the rise and availability of more credit to finance is shrinking.

With global debt now reaching $237trn by the end of 2017, and with interest rates rising on this debt, servicing it has become more difficult.  According to the IIF, ‘stressed’ firms now account for more than 20% of corporate assets in Brazil, India and Turkey and those companies where profits are greater than interest costs are shrinking fast. The crunch will come when corporate profits in many economies begin to fall as debt servicing costs rise. But this has not happened yet.  I’ll discuss when and how this might happen in my annual post forecasting economic outcomes in 2019 – coming up.

Finally, let me thank all my blog followers for their interest in the blog this year and also to those who have made comments on my posts (sometimes favourably, but often critically).  This blog aims to provide information on the world economy, discuss and develop economic theory and research from a Marxist point of view and comment on economic policy; with the aim of showing how and why it is necessary to replace capitalism with a new stage of human social organisation, socialism.

Also remember, you can follow my Facebook site, where I cover day-to-day items of interest.  I now have a combined following on my blog and on my accompanying Facebook site https://www.facebook.com/Michael-Roberts-blog-925340197491022/ of just under 11,000. During 2018, I had a record 440,000 viewings of posts on the blog and over 195,000 different visits to the blog.

As for my books, you can get my Essays on Inequality in Createspace:
https://www.createspace.com/5078983;
or the Kindle version for the US:
http://www.amazon.com/dp/B00RES373S;
and the UK:
http://www.amazon.co.uk/s/?field-keywords=Essays%20on%20inequality%20%28Essays%20on%20modern%20economies%20Book%201%29&node=341677031.

You can get my first book, The Great Recession – a Marxist view (2009), here.  I think it still has a lot to say.  And if you have not got my best-selling book, The Long Depression (2016), you can get it here; check to see how its forecasts are turning out.

In 2018, I published two books.  To commemorate the 200th anniversary of Marx’s birth, I published Marx 200, covering Marx’s main economic ideas and their relevance in the 21st century (here).  And just last month, I co-edited with Guglielmo Carchedi, World in Crisis, a global analysis of Marx’s law of profitability (here), which provides empirical backing to Marx’s law from authors spanning the globe.

More projects are planned for 2019!

Brexit: 100 days and after

December 18, 2018

It’s just 100 days to go before the UK officially leaves the European Union and the political shenanigans continue over whether UK Prime Minister Theresa May can get her proposed ‘transition deal’ with the European Union through parliament before 29 March 2019.  The May deal is not acceptable to the bulk of her own Conservative party or any other party in parliament.  May even struggled to survive an attempt to oust her as leader of the Conservative party, with the majority of her parliamentary members who were not on the government payroll voting her down.  She only carried the day because she had the votes of government ministers and because she announced she would stand down as leader before the next election.

But uncertainty remains about whether a transition deal up to December 2020 (while the EU and Britain discuss a permanent trade arrangement) will be agreed or whether the UK will just leave in March without any deal, or whether parliament will call a second referendum to decide whether or not to leave after all.

Much ink and social media have been spilled on the politics of Brexit.  For an excellent account of the options before the British people, see this by Laurie MacFarlane.  But in this post I want to concentrate on the economic impact of Brexit – as Lenin said ‘’politics is a concentrated expression of economics”, or as former President Clinton put it: “it’s the economy, stupid!”

I have not posted on Brexit for over two years for two reasons. First, Brexit may be a big deal in the British media but it is no more than a side dish in the menu of the world economy and that is where this blog normally aims its focus. And second, I was waiting for some clarity on what deal had been reached with the EU over future relations.  But such is the delay on the latter, I have decided I might as well review the economic outcomes now.

When we consider the impact of Brexit, it is clear that already it has had a detrimental effect on the UK capitalist economy.  During the referendum campaign in 2016, the combined forces of the then Tory government of Cameron and Osborne, the Liberal Democrat junior coalition partners, the right-wing of the Labour party, the City of London and big business screamed that to ‘vote leave’ would lead to the collapse of the economy and a deep recession.  This exaggeration, called Project Fear by the leavers, was only matched by the lies of the anti-immigrant UKIP party and the Tory right who claimed that leaving the EU would lead to extra money for the hard-pressed health service, trade would flourish and there would be prosperity all round.

Neither view was right.  The UK economy did not go into a slump and there will be no extra money for the health service from Brexit; instead, the vote to leave in 2016 has been followed by a sharp fall in the much-needed immigration of health service and farm employees and a financial crisis in healthcare.

There may have been no economic recession but the ‘uncertainty’ of the last two years and interminable squabbling has been accompanied by a sharp slowdown in Britain’s economic expansion.  I said at the time of the referendum vote that “in the short term, the uncertainty over the terms of any negotiations will mean a big reluctance of British capitalists to invest and for foreign investors to hold British financial assets.  The pound sterling has already weakened and it would fall even more with a vote to leave.”  So it has proved.  Sterling’s value has dropped from $1.70 in 2014 to $1.25 now, more than 20%.

Britain’s trade deficit with the rest of the world has widened to around 6% of GDP; and real GDP growth has slid back from over 2% a year to below 1.5%, with industrial production crawling along at 1%.  Whereas the UK economy was doing better than most other G7 top economies in 2015, it is now doing even worse than Italy, while inflation has picked up due to the devaluation of the currency – so much for the argument often presented by Keynesians that having the ability to control the national currency (unlike those in the Eurozone such as Greece) can help restore economic growth and avoid austerity.  Depreciation of a currency is not enough or even beneficial.

Indeed, higher inflation and slower economic growth in the last two years have hit the average British household hard.  Real wage growth disappeared and has only just returned at a feeble rate.

Above all, from the point of view of British capital, business investment stagnated as companies paused on any investment plans while waiting for clarity on the Brexit deal.

And now with the possibility still of no transition deal with the EU in March, Project Fear has returned.  The Bank of England’s economists reckon that if there is a ‘no deal’ Brexit, then the UK economy could shrink 8% in 2019, while interest rates would rise to 5% to protect the pound and guard against rampant inflation, and home prices would fall by up to 30%.  This would be a bigger decline that during the Great Recession of 2008-9.

Capital Economics researchers are less pessimistic but still estimate that a ‘disruptive no-deal Brexit’, where the UK and the EU do not co-operate, could knock 3% off Britain’s likely national income by 2020 and possibly “an outright recession”.  However, a “managed” no-deal scenario — where the two sides seek to minimise disruption in key areas, for example by agreeing arrangements to enable flights between the UK and mainland Europe —  would only involve a pause in economic growth next year and a 1% hit to gross domestic product by 2020.  Oxford Economics estimates that in this ‘managed scenario’ the economy would still “flirt with recession” in 2019 and GDP would be 2% lower than its current baseline forecast by 2020.

And even if there is a ‘transition deal’, the next two years are likely to be fraught with ‘uncertainty’ for British capital, while some sort of trade deal with the EU is cobbled together.  Indeed, so difficult might that be (even excluding the thorny problem of the so-called backstop for Ireland), that the transition period might have to be extended into 2022!

But let us look further ahead.  Assuming the UK leaves the EU in March with a transition deal in place and eventually some long-term trade arrangement is reached with the EU, what are the prospects for 1) British capital and 2) British labour?  Well, there have been a host of reports recently that try to measure the impact on the economy.  For British industry and service sectors, Europe is the main trading partner.  About 57% of UK goods trade is with EU; and 40% of services trade.

Most long-term forecasts by mainstream economic institutes, including the Bank of England and the UK government, reckon that there would be an accumulated loss in real GDP from potential for the UK over the next ten to 15 years of between 4-10% of GDP from leaving the EU. That’s a 3% of GDP loss per person, equivalent to about £1000 per person per year.  It all depends on whether any deal keeps the UK in a customs union (with similar tariffs and border regulations) with the EU and what parts of the existing Single Market (freedom of movement of labour and capital and citizens’ rights) are preserved.

But whatever the final deal (or no deal), it does not mean an actual fall in UK GDP over the next ten to 15 years.  This cannot be emphasised enough.  The UK economy will not be smaller in ten years if it leaves the EU, it will just grow slower than it otherwise would have.  The current average growth rate for the UK has been about 2% a year since 2010, which is down from an average 2.6% a year before the Great Recession in 2008.  Most mainstream forecasts are predicting a slowing of the growth rate to between 1.3-1.6% a year depending on the nature of the final deal with the EU.  Below I show in a graph how that looks relatively.  This is hardly a disaster, if still a significant loss.

The problem with the mainstream forecasts is that they ignore the elephant in the room for the UK economy – another global slump or recession. The forecasts are based on ceteris paribus (other things being equal).  But they won’t be.  Can it be realistic to assume that there will be no major slump in the major capitalist economies over the next ten to 15 years?

A slump as the UK economy experienced in 2008-9 would deliver much more long-lasting damage to national income than even a ‘bad Brexit’ deal.  I calculate that the UK economy, like all the other major economies in the Long Depression that has taken place in the last ten years, has experienced a permanent relative loss in GDP – in the UK’s case of over 25%.  In other words, the UK economy has had average growth some one-quarter slower since 2008 than it did before.  Even if it continued to grow at around 2% over the next ten years with no impact from Brexit, that relative loss from the Great Recession would reach 40% by 2030.  That would be four times as much as the worst outcome from Brexit.

An economic slump and the Long Depression are way more damaging to the UK economy than Brexit.  Brexit will just be an extra burden for British capital to face.  The UK economy already has weak investment and productivity growth compared with the 1990s and with other OECD countries. It is a ‘rentier’ economy that depends too heavily on its financial and business services sector.  And services sector trade with the EU is likely to fall 50-65% after Brexit.

Many banks, insurers and asset managers who want to retain access to customers in the EU after 29 March have already redirected hundreds of millions of pounds of investment towards new or expanded hubs in the bloc.  Nearly 40 banks from London have applied to the European Central Bank for licences. According to Frankfurt Main Finance, which promotes German financial capital, these are set to transfer 750-800 billion euros in assets early in 2019.  This is still a trickle, but it could turn into a flood.

From the point of view of labour (‘the many not the few’), the failure of British capitalism and the prospect of yet another slump in the next few years is much more of concern than Brexit as such. Indeed, the EU as a trading destination for UK exports is in relative decline – as it is for other EU economies. The fastest-growing areas for trade are outside the EU, in particular, Asia.

British labour is already taking a pounding.  Research by the British Trades Union Congress (TUC) found that the average worker has lost £11,800 in real earnings since 2008. The UK has suffered the worst real wage slump among leading economies. Stephen Clarke, senior economic analyst at the Resolution Foundation think tank, put it: “While wages are currently growing at their fastest rate in a decade and employment is at a record high, the sobering big picture is that inflation-adjusted pay is still almost £5,000 a year lower than when Lehman Brothers was still around.”

On leaving the EU, what little British labour has gained from EU regulations will be in jeopardy within a country which is already the most deregulated in the OECD.  The EU rules include a 48 hour week maximum (which is riddled with exemptions); health and safety regulations; regional and social subsidies; science funding; environmental checks; and of course, above all, free movement of labour.  The latter means immigration into the UK from EU countries which has been significant; but it also works the other way; with many Brits working and living in continental Europe.

The number of EU citizens living in member states other than their own has risen from 4.6 million in 1995 to 16 million in 2015. And 22 of the 28 EU Member States participate in the Schengen Agreement, which allows passport-free travel for over 400 million citizens, who make over 4 million trips as tourists in another member state every year.  With the UK out of the EU, British travellers will be subject to travel visas and other costs that will be greater than the total money per person saved from contributions to the EU.

Around 3.7% of the total EU workforce – 3 million people – now work in a member state other than their own. The number of students studying in another EU state other than their own has increased from 3,000 in 1988 to 272,000 in 2014. Since 1987, over 3.3 million students and 470,000 teaching staff have taken part in the EU’s Erasmus programme.  There are 1.5 million Brits living in other EU countries and two-thirds of the long-term residents (800,000) are working (not retired) – although the UK has the lowest proportion of citizens living in the rest of the EU.

On balance, EU immigrants (indeed all immigrants) have contributed more to the UK economy in taxes (income and VAT), in filling low-paid jobs (hospitals, hotels, restaurants, farming, transport) than they have taken up (in extra cost of schools, public services etc).  That’s because most are young (often single) and help pay pension contributions for those Brits who are retired.  The Brexit referendum has already brought about a sharp drop in net immigration into the UK from the EU, down 50-100,000 and still falling.  That can only add to the loss of national income and tax revenues down the road.

It is an irony that the Brexit referendum was called by the Tories to head off votes going to the anti-immigrant UKIP and so to hold onto power.  Because just this week, the Tory government has dropped its election commitment to reduce net immigration to 100,000 a year, as that cannot be achieved, if only because non-EU net immigration will stay much higher, even if all EU immigration were stopped.

The pressure on public services and social resources is not the result of ‘too much immigration’ – on the contrary.  It is a result of huge cuts in public spending by the Conservative government and the overall slowdown in economic growth.  The answer is to stop cutting taxes for the rich and instead boost public spending, in welfare and investment.  The answer to British citizens being undercut for jobs from EU immigrants is to raise wages for all.  For example, agricultural workers used to have a Wage Board to ensure minimum wages in rural work.  This was abolished by the Conservative government.  State pension levels in the UK, relative to average wages, are the lowest in the OECD.  This has nothing to do with immigration, but only to do with the weak state of British capital and government policies against labour.

On balance, leaving the EU is a negative for British capital but it is also not good news for British labour, even if the hit is relatively small compared to the hit that working-class households suffer from regular and recurring slumps in capitalist production, especially when followed by a depressionary stagnation, as in the last ten years.

The EU is a ‘capitalist club’ in that it was set up to improve trade and integrate small nations within Europe so that Franco-German capital could lead a new force to compete with the US and Japan (later China).  But then the UK is a capitalist state and its policies will still be decided by market forces and big business, in or out of the EU.  So whether the UK remains or leaves the EU is not pivotal for working people.

What is pivotal is whether there is a complete change in the control of investment, employment and production. There has been some discussion about whether a left government staying in the EU would be blocked or not by EU rules on state aid in implementing a programme of public ownership and state investment.  It is another irony that it was successive UK governments that inspired the EU’s current state aid rules.  If such a left programme were blocked, and it’s not clear that it would, that would be a much better reason for leaving the EU to put to the British people than ‘too much immigration’ or ‘EU regulations’, as the Brexiters have presented it.  Anyway, a left government that aims to make such pivotal change will be faced with vehement opposition by the forces of capital, whether the UK is in or out of the EU.

Back to Front

December 10, 2018

Is it supply that drives an economy or demand?  Such was the question asked by Keynesian economics blogger and Bloomberg columnist Noah Smith.  Smith often raises issues that enlighten us on the differences (and similarities) between mainstream neoclassical and Keynesian economics, and, in so doing, where Keynesian theory and policy differs from a Marxian analysis.

In a recent article, Smith questioned the traditional neoclassical view of economic growth, namely that real GDP expansion depends on employment plus productivity (output per employee).  This neoclassical view, says Smith, means that, while Keynesian monetary and fiscal policies might get an economy out of a slump, they can do little to raise long-term productivity growth.  But he begs to differ.

This ‘supply-side view’ is inadequate, says Smith.  Boosting demand with Keynesian-style measures of cheap money and government spending could create the conditions for raising output permanently onto a new and higher trajectory: it may be time to momentarily step away from economic orthodoxy and look at demand-based policies to help boost productivity.” There is a ‘demand-side’ view of long-term economic growth.

Smith cites Verdoorn’s law as relevant to this thesis: Dutch economist Petrus Johannes Verdoorn describes a correlation between output and productivity — when growth is faster, productivity also grows faster. You can see this correlation in the data.”  This, claims Smith, “leaves open the tantalizing possibility that the reverse is happening — that high levels of aggregate demand also drive up productivity.”  So, when there is a boom in demand, this leads to more sales and output and encourages companies to invest more and, as a result, this leads to rising productivity.  Thus demand creates its own supply – the reverse of Say’s law, as promoted by Ricardian and neoclassical economics, that supply creates its own demand.

So has neoclassical economics got things back to front and all we need to do in economic policy is to keep “running the economy hot, through continued monetary and fiscal stimulus”? Well, the first thing to say is that Smith’s reference to Verdoorn’s law to support his argument that Keynesian-style demand boosts will sustain increased productivity is misleading.  Actually, all that Verdoorn shows is that “in the long run a change in the volume of production, say about 10 per cent, tends to be associated with an average increase in labor productivity of 4.5 per cent.”  This correlation proves nothing about causation.  So output and productivity growth are correlated – surprise! – but is it total ‘demand’ or output growth that stimulates productivity growth, or vice versa?

Smith cites research that is supposed to show the causal connection from demand to supply, but when you check that research you find that the authors cited, Iván Kataryniuk and Jaime Martínez-Martín, conclude: “some of the deterioration of the TFP (productivity – MR) growth outlook in recent years may be explained by a negative business cycle, but structural weaknesses remain behind the slowdown in medium-term growth, especially for emerging countries.”  So it’s not demand that is the main cause of long-term productivity growth.

From a Marxist view, what’s missing from this debate, as always between mainstream neoclassical and Keynesian disputes, is profit and profitability.  Sure, it is obvious that when an economy is booming and demand for goods is strong, then companies will usually increase investment in new technology as well as employing more workers (but I say ‘usually’, because in this Long Depression, it seems companies have increasingly kept cash or invested in financial assets ie their own shares, rather than in productive assets).

An expanding economy leads to a virtuous circle of growth, investment and even productivity growth.  But that virtuous circle eventually turns into a vicious circle of slump, a collapse in investment and output that cannot be corrected by easy money or fiscal stimulus.  Why does a boom turn into slump?  The Marxist view is not because of some unexplained shock to the harmonious development of the market economy (the neoclassical view) or some unexplained change in the ‘animal spirits’ of entrepreneurs to invest (the Keynesian view).  It is because, in a profit-making economy (i.e. capitalism), profitability and profits fall back.  When that happens, as it will at recurring intervals, then output, investment and productivity will follow.  There is a profit cycle.

The Marxian view argues that it is the Keynesian view that is back to front.  Supply leads demand, not vice versa.  But this is not the same as the neoclassical view that supply creates its own demand (Say’s law).  For Marx, Say’s law was a fallacy.  In a monetary economy, there is always the possibility of a breakdown (both in time and inclination) between sale for money and purchase with money.  Hoarding of money can cause a collapse of sales and purchases. But what causes that possibility to become a probability or reality?  For Marx, it is a fall in the profitability of capital.

In the Keynesian world of macro-identities, National Income equals National Expenditure.  National income is composed of wages and profits and National Expenditure is composed of Consumption and Investment.

NI = NE can be decomposed to

Wages +Profits = Consumption + Investment

If we assume that workers do not save but spend all their wages, then the equation becomes:

Profits = Investment

This is an identity that does not reveal the causal direction.  The Keynesian view is that Investment (demand) creates Profits (supply).  But the evidence is against Noah Smith and the Keynesians.  The body of empirical evidence is that changes in profitability and profits lead to changes in investment.  And it is this that decides when there are cyclical booms and slumps and also the long-term growth path of a capitalist economy

Smith says “much more research is needed” to see whether demand creates supply or vice versa.  But the research is already there.  It is well established that ‘easy money’ (low interest rates and ‘quantitative easing’) won’t work in restoring long-term productivity growth – as Keynes also concluded in the 1930s and the evidence of the last ten years confirms.  The search for some ‘natural rate of interest’ that establishes full employment and maximum potential output growth is a mirage (reaching for the stars).

And studies (including my own) of the (Keynesian) ‘multiplier’ effect of boosting government spending or running the economy ‘hot’ (Smith) is much weaker (and even inverse in direction) than the impact of the profitability of capital on growth and productivity.

Clearly in this Long Depression, hysteresis is in operation, namely that low growth in output and profits has pushed investment and productivity growth onto a permanently lower trajectory.  But this is not the result of a lack of ‘effective demand’ per se, but comes from the failure of the profitability of capital to return to pre-2008 levels and/or to grow fast enough.

Smith may suggest that neoclassical theory has got it ‘back to front’.  But so has Keynesian theory.