Summer economics

It’s summer in the northern hemisphere and holiday time in the year of the COVID.  So it’s an opportunity to review a few economics books published this year (but written before the pandemic and the Great Lockdown).

I am not a fan of clever, trick titles; they usually overhype the content of a book itself. We have had Freakonomics and Factfulness before, which never lived to up to their titles. Now we have Angryonomics by Eric Lonergan and Mark Blyth.

Eric Lonergan is a macro hedge-fund manager and Mark Blyth is an economics professor at Brown University.  Blyth is the author of Austerity: The History of a Dangerous Idea, a firmly Keynesian rebuttal of austerity policies after the Great Recession and his podcasts and his talks on YouTube are viewed by millions.  I have debated with Blyth on the future of the European Union (https://www.youtube.com/watch?v=8kqobP23FV0).

Conducted in the format of a dialogue between Lonergan and Blyth, Angrynomics explores the rising tide of anger against the status quo in economics and economic policy exhibited by the populace.  Blyth and Lonergan reckon some of this anger is sane and justified (say the protest in Beirut against the political elite), but some is irrational, like intensified racism (or Brexit).  So ‘populism’ is a force for change or for reaction.

The two authors engage in a series of dialogues to make sense of “what appears at first sight to be an incoherent outpouring of primitive emotion”.  For our Socratic authors, there is a distinction between tribal anger, which appeals to our primal instincts, and moral outrage, which protests against the wrongs done to us by inept and sometimes corrupt governments. Both are a reaction to the vacuum created by the failure of ‘technocratic politics’.

What to do next? How to reset the system?  Lonergan and Blyth reject the mainstream economics of ‘nudging’ the ‘technocratic’ system back to stability.  They claim something more radical that still cuts across ‘political lines’ (presumably class lines too).  And what is the big answer?  To create a national wealth fund.  Governments should borrow and then invest in productive assets that reap returns to be used to boost education and health, so sadly neglected by governments before the COVID.

So that’s it, set up government wealth fund, just as Saudi Arabia or Norway have done. Or as the authors point out, as Hong Kong did in keeping its equity market going with direct funding in the Asian crisis of 1998.  No need to tax the billionaires and cause political divide.  Other solutions offered by our Socratic authors include a data dividend in which the big technology companies, such as Amazon, Google and Apple, would be required to pay for the use of our private data. Again, no need to break up the tech giants or take them over – just tax them a little.

The naivety of these solutions really beggars belief: nothing of the existing economic structure is to be touched; except for governments to sweep a few crumbs off the table of unequal wealth to fund education and health.  I doubt this solution would curb the anger of the populace, rational or irrational.

The idea of saving capitalism from itself without hurting it too much emerges from another book, The Economics of Belonging, by Martin Sandbu, the economics commentator for the Financial Times.

The subtitle of the book is A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All.  This is a worthy objective and Sandbu reckons that he has a “radical new approach to economic policy that addresses the symptoms and causes of inequality in Western society today.”

Again, the context for Sandbu, as it was for the Socratic duo above, is the ‘rise of populism’ as the disenfranchised from the capitalist system threaten the existing social order of ‘liberal capitalism’.  “Like many others, I have worried that when our societies divide economically, they also fall apart culturally and politically.”  Sandbu argues that economics remains at the heart of our widening inequality and it is only by focusing on the right policies that we can address it. He proposes a detailed, radical plan for “creating a just economy where everyone can belong.”

Sandbu reckons rising inequality and dissatisfaction is not due to globalization going too far. “Rather, technological change and flawed but avoidable domestic policies have eroded the foundations of an economy in which everyone can participate”.  Given the rising skill bias of technical change, those without the skills are left behind to stay in low-paid, precarious jobs, while others reap the benefits of their technical skills. Manufacturing jobs have and are being automated, while services remain unskilled and unrewarded.  This scenario rings the truth of Marx’s law of accumulation: more technology replacing labour power so that productivity rises but wages do not.  But inequality is not just inequality of skills within labour and so inequality of income; it is much more inequality of wealth and ownership. 

What is Sandbu’s answer to the age-old trend in capitalism and to defeat the forces of ‘populism’ that threaten liberal democracy?  It’s education, education, education, as former UK prime minister Tony Blair used to parrot.  Spend more on education, and combine it with active labour market policies, a high minimum wage, and limits on top pay.

Having grown up in Norway, Sandbu puts forward that country’s economic model as the way out: “a nice contrast presented here is between poor immigrants who manually wash cars at stoplights in the US, and the Norwegian operators of automated car washes.”  Norway arguably came as close “as any modern society to the ideal of an economy with a place for everyone. Few have ever had lower economic inequality or a shorter social distance between top and bottom and managed to combine it with high productivity and strong growth.”

Picking out the richest per capita income country in the world, with just five million people, made rich by the fossil fuel industry (but still with substantial inequality in personal wealth) is hardly a likely model for the US or Greece, let alone for the UK. How does Sandbu see us getting to the ‘success’ of Norway?  He wants higher minimum wages, a universal basic income (to be financed by a carbon tax), generous government funding for education and labour-market mobility and strict enforcement of labour standards.  And he wants a wealth tax (unlike Angrynomics).

So we have policies that every major capitalist government rejects.  Instead of a radical restructuring of ownership and control to invest in basic public services, Sandbu offers us employee representation on company boards or universal basic income for people, working or not.  As one reviewer put it: “UBI will not buy me an adequate health or education or public transport system.” But he does not want to replace capitalism.  His ‘everyone economy;’ aims to “make capitalism work for all” and so save it from ‘populism’.

Saving capitalism from its own contradictions was of course the objective of John Maynard Keynes, the hero of our current summer authors.  In a new biographical history, The Price of Peace, Zachary Carter argues that it was Blair and Clinton who ended Keynes’s dream of a fair and prosperous capitalism for all, by adopting policies of inequality.  This seems a strange charge, for surely Clinton and Blair were the epitome of Keynesian-type policies of liberal capitalism.

Carter tells us the already well-known ‘revolutionary’ contribution of Keynes in the 1930s, namely that the economy had no natural tendency toward full employment. If governments did not intervene forcefully to boost consumption demand, Keynes argued, high unemployment could persist indefinitely. Cheap money provided by the central bank would not suffice to alter the circumstances decisively.

But as I have pointed in numerous other posts on Keynes that pour doubt on his supposed revolutionary fervour, Keynes was inconsistency incarnate, even on this basic Keynesian postulate.  Zachary quotes Lloyd George. “He dashed at conclusions with acrobatic ease [and] rushed into opposite conclusions with the same agility.” Carter points out that Keynes changed the views of economists and economic policy-making.  Maybe, but did he succeed in solving the contradictions of capitalist production?  Clearly not, if the Great Recession and the Great Lockdown now are to be recorded.

All these summer authors aim to save capitalism from itself with various policies, all of which are designed to make capitalism work without threatening anything in its fundamental structure.  Marxian political economy argues that this approach cannot succeed.  For a start, ‘liberal capitalism’ is a myth.  As Marx describes towards the end of Capital, “If money comes into the world with a congenital blood-stain on one cheek,” he says, then “capital comes dripping from head to toe, from every pore, with blood and dirt.”

Blood and Money is the theme of a new book by David McNally, the Marxist Professor of History at the University of Houston.  Instead of some Whiggish history of the gradual emergence of a rational democratic liberal capitalism from the anti-scientific dark ages of feudalism, Blood and Money tells the story of money (the medium of capitalist exchange) as a history of violence and human bondage.

McNally reckons money’s emergence and its transformation are intimately connected to the buying and selling of slaves and the waging of war. For example, the need to finance armies led to the rise of paper currency and banks, including the Bank of England, which was incorporated in 1694 to fund a war with France. McNally shows how the British financial system contributed to the horrors of the Atlantic slave trade, detailing the story of the slave ship Zong, whose captain ordered 133 Africans to be thrown overboard in order to collect insurance money.

McNally’s argument has the ring of historic truth, but the emergence of money must still be seen as the product of exchange. And modern capitalism without slavery (mostly) is even more exploitative of human labour power and bodies.

The Keynesians may note the anger of people and seek to find ways of improving people’s futures, but within capitalism.  Marxian political economy shows why that is not possible.  The inter-war Marxist Henryk Grossman made some of the most important contributions in explaining this. In a new publication of his works, his long-standing biographer Rick Kuhn brings together some his essential texts, many of which have been previously unpublished.

The collection pulls from monographs, articles, essays, letters, and manuscript material to assemble Grossman’s most important contributions on economic theory.  The chapters on crisis theory and imperialism are an essential read.  If you cannot afford the book and have not read Grossman’s work before, go to the Marxist internet archive for his most important works.  Much more useful summer reading.

Taking on the ‘fearsome foursome’ and ‘market power’

Last Thursday, the US-based global tech giants reported their quarterly earnings simultaneously.  On the same day, the US economy recorded the biggest quarterly contraction in national output ever (-9.5% yoy or -32.9% annualised).

In contrast, the ‘fearsome foursome’: Alphabet (Google) – the world’s largest search engine; Amazon – the world’s largest online distributor; Apple – the world’s largest computer and mobile phone manufacturer; and Facebook – the world’s largest social media provider, posted double-digit revenue growth for the three months ended in June, raking in a combined $33.9 billion in profit in the second quarter alone. While the US and world economy have been plunged into the deepest slump since the 1930s by the lockdowns from the COVID-19 pandemic, the world’s most prominent tech companies have prospered.

Revenues are up across the tech board and the price of their shares (market cap) rose $178bn in the following day, taking their stock market value to $5trn, or 25% of US GDP.  Amazon CEO Jeff Bezos saw the largest single-day increase in wealth ever recorded for any individual. In just one day, his fortune increased by $13 billion. On current trends, he is on track to become the world’s first trillionaire by 2026.

At the same time as these results came out, the fearsome foursome were ‘grilled’ by a US Congressional Committee about their nefarious practices in dealing with competitors; and their increasing ‘market power’ and ever-growing monopoly position in the most profitable sector of the US economy.  The Judiciary Committee published 1300 documents that supposedly showed their attempts to crush competitors, buy them out or exclude them from markets.

Amazon’s Jeff Bezos, Apple’s Tim Cook, Google’s Sundar Pichai and Facebook’s Mark Zuckerberg

For example, Facebook chief Mark Zuckerberg mailed that he saw “acquisitions as an effective way to neutralise potential competitors”, and how many start-ups fear that if they reject a Facebook buyout he will go into “destroy mode” against them. Apparently, Google insiders worried about how to fend off competition on the way to erecting what critics called a “walled garden”. As one executive opined: “The open web we knew and loved is going away.” There is a mounting campaign to curb or break up these ‘super-star’ companies and end their monopoly market power.

But this is not new in the history of capitalism.  Successful companies in new expanding fields of capitalist accumulation have grown from small to large and eventually to ‘monopoly’ positions: railways, oil, motor vehicles, finance and telecoms.  In 1911, Standard Oil was broken up into 34 companies by Congress.  Rockefeller ran the company as its chairman until his retirement in 1897. He remained the major shareholder and after 1911, with the dissolution of the Standard Oil trust into 34 smaller companies, he stayed as the richest person in modern history, as the initial income of these individual enterprises proved to be much bigger than that of a single larger company. Its successors such as ExxonMobil, Marathon Petroleum, Amoco, and Chevron are still among the companies with the largest revenues in the world.

In the 1984, AT&T was the main ‘monopoly’ telecoms provider and so was broken up into seven regional companies.  But AT&T continued to make huge profits as did its regional monopoly successors.  The break-up of ‘market power’ made little difference to improving competition or productivity or, most important, labour incomes.

The ending of monopoly ‘market power’ will not turn round the low productivity of the US economy and its current collapse into a deep slump, or for that matter, reduce inequality of incomes or wealth in the US.  Recent research by IMF economists found that the downward trend in the labour share of global income since the early 1990s was mainly due to ‘technological progress” as workers were replaced by labour-saving technology, particularly in so-called ‘routine occupations’. “The empirical analysis points to a dominant role of technology and global integration in this trend, although to different degrees between advanced and emerging market economies. Technological progress, reflected in the steep decline in the relative price of investment goods, has been the key driver in advanced economies, along with high exposure to routine occupations that could be automated, with global integration also playing a role, albeit a smaller one.”  Rising inequality is the result of ‘normal’ capitalist accumulation and the appropriation of profit through the exploitation of labour and labour-saving technology.

And yet the concept of ‘market power’ persists in left economics as the dominant explanation of what is wrong with American capitalism and globally. Take this recent article in Jacobin by rising star economic journalist, Grace Blakeley. “Many of the world’s largest tech companies have become global oligopolies and domestic monopolies. Globalization has played a role here, of course — many domestic firms simply can’t compete with global multinationals. But these firms also use their relative size to push down wages, avoid taxes, and gouge their suppliers, as well as lobbying governments to provide them with preferential treatment.”

Blakeley argues that Amazon has become America’s largest company through ‘anti-competitive practices’ that have landed it in trouble with the European Union’s competition authorities. The working practices in its warehouses are notoriously appalling. And a study from last year revealed Amazon to be one of the world’s most “aggressive tax avoiders.” Part of the reason Amazon has to work so hard to maintain its monopoly position is that its business model relies on network effects that only obtain at a certain scale, argues Blakeley. Tech companies like Amazon make money by monopolizing and then selling the data generated from the transactions on their sites.

And the rising market power of a small number of larger firms has actually reduced productivity. “This concentration has also constrained investment and wage growth as these firms simply don’t have to compete for labour, nor are they forced to innovate in order to outcompete their rivals.”

Much of what Blakeley says here is true.  Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up potential competitors.  Indeed, take the latest case.  Microsoft is now in talks to purchase TikTok, which is owned by China’s ByteDance, with the aim of weakening this latest big rival to the super star companies. But the market power or monopoly explanation goes too far. Technological innovations also explain the success of these big companies.

Marx considered that there were two forms of rent that could appear in a capitalist economy.  The first was ‘absolute rent’ where the monopoly ownership of an asset (land) could mean the extraction of a share of surplus value from the capitalist process without investment in labour and machinery to produce commodities.  But the second form Marx called ‘differential rent’.  This arose from the ability of some capitalist producers to sell at a cost below that of more inefficient producers and so extract a surplus profit – as long as the low cost producers could stop others adopting even lower cost techniques by blocking entry to the market, employing large economies of scale in funding, controlling patents and making cartel deals.  This differential rent could be achieved in agriculture by better yielding land (nature) but in modern capitalism, it would be through a form of ‘technological rent’; ie monopolising technical innovation.

The history of capitalism is one where the concentration and centralisation of capital increases, but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally). The substitution of new products for old ones will in the long run reduce or eliminate monopoly advantage.  The monopolistic world of GE and the motor manufacturers did not last once new technology bred new sectors for capital accumulation.  The oil giants are also now under threat from new technology. The world of Apple will not last forever.

Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate any ‘eternal’ monopoly, a ‘permanent’ surplus profit deducted from the sum total of profits which is divided among the capitalist class as a whole.  The endless battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors.

It’s certainly true that accumulation of capital takes the form of increased concentration and centralisation of capital over time.  Monopolistic tendencies are inherent, as Marx argued in Volume One of Capital 150 years ago.  However, ‘market power’ may have delivered rental profits to some very large companies in the US, but rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’ but do not create profit.

Kathleen Kahle and Rene Stulz found that slightly more than 100 firms earned about half of the total profit made by US public firms in 1975. By 2015, just 30 did.  Now the top 100 firms have 84% of all earnings of these companies, 78% of all cash reserves and 66% of all assets. The top 200 companies by earnings raked in more than all listed firms, combined!  Indeed, the aggregate earnings of the 3,500 or so other listed companies is negative – so much for most US companies being awash with profits and cash.

Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour.  Marx’s law of profitability is still central to a capitalist economy. Just before the COVID-19 pandemic hit the world economy, the major capitalist economies were already heading into a new recession, the first since the Great Recession of the 2008-9.  The profitability of capital was near all-time lows; up to 20% of US and European companies were making only enough profit to cover the interest on their debt, with none to spare for new investment.  Real GDP growth rates had dropped to their lowest rates since 2009 and business investment was stagnating.  A global recession was coming; and it had little to do with the ‘market power’ of the FAANGs sucking up all the profits; much more to do with the inability of capital to exploit labour enough.

But that is something mainstream economics (both neoclassical and Keynesian) never wants to consider.  For the mainstream, if profits are high, then it’s ‘monopoly power’ that does it, not the increased exploitation of labour.  And it’s monopoly power that is keeping investment growth low, not low overall profitability.  But if the ‘market power’ argument is accepted over a Marxian analysis of capital, then it implies that all that needs to be done is to weaken ‘market power’; or break up the monopolies and restore ‘competition’, not end the capitalist mode of production.

In her Jacobin article, Blakeley perceptively concludes that “The only real way to tackle these inequities is to democratize the ownership of the means of production, and begin to hand the key decisions in our economy back to the people.”  Yes, but I’m not sure what she means specifically: workers on the boards – German style?; shares for employees?; regulation? All those measures have failed in the past to ‘hand key decisions back to the people’.  In the article, Blakeley advocates a wealth tax. But such a tax would do little to ‘democratize ownership of the means of production’.

The real solution to the market power of the likes of Apple, Microsoft, Amazon, Facebook, Google, Netflix etc is to bring them into public ownership to be run by democratically elected boards and managers drawn from the workers in these companies, consumer bodies, trade unions and government.  The fearsome foursome’s rule would then be ended. The billions they ‘own’ through their shares would be lost to them overnight. The nefarious practices of these companies would then be stopped and the social media scandals ended.  And most important, the key services that these companies provide (as the pandemic has revealed only too well) can then be supplied (at low cost without adverts!) to meet social needs, not deliver mega profits.

A world rate of profit: a new approach

Marx’s model of capitalism assumes a world economy, and starts with ‘capital in general’. It was at that level of abstraction that Marx developed his model of the laws of motion of capitalism and, in particular, what he considered was the most important law of motion in the capitalist process of production, the law of the tendency of the rate of profit to fall.

The rate of profit is the best indicator of the ‘health’ of a capitalist economy. It provides significant predictive value on future investment and the likelihood of recession or slump. So the level and direction of a world rate of profit can be an important guide to the future development of the world capitalist economy.

However, in the real world, there are many capitals; and not just one world capitalist state, but many national capitalist states. So there are barriers to the establishment of a world economy and a world rate of profit from labour, trade and capital restrictions designed to preserve and protect national and regional markets from the flow of global capital.  Even so, the capitalist mode of production has now spread to every corner of the globe and the ‘globalisation’ of trade and capital flows makes the concept of measure of a world rate of profit more realistic and discernible.

My first attempt to measure a world rate of profit was in a paper in 2012.  A proper measure of the world rate of profit would have to add up all the constant and variable capital in the world and estimate the total surplus value appropriated by this global capital.  At the time, this seemed an impossible task. So a weighted average of national profit rates was the only feasible way of getting a figure.

I attempted to develop a world rate of profit that included all the G7 economies plus the four economies of the BRIC acronym.  This covered 11 top economies and constituted a significant major share of global GDP. Then I used the Extended Penn World Tables as constructed by Professor Adalmir Marquetti from Brazil.  I weighted the national rates for the size of GDP, although the crude mean average rate did not seem to diverge significantly from the weighted average.

I found that 1) there was a fall in the world rate of profit from the starting point of that data in 1963 and the world rate never recovered to the 1963 level up to 2013; 2) the rate of profit reached a low in 1975 and then rose to a peak in the mid-1990s; 3) after that, the world rate of profit was static or slightly falling.

Then in 2015, I revisited the measurement of a world rate of profit . In the intervening period, Esteban Maito had done some ground-breaking work using a similar method of measurement (national rates weighted by GDP) for 14 countries, but using national statistics, not the Extended Penn World Tables, and going back to 1870 for some countries.  Maito confirmed my more limited study of a clear downward trend in the world rate of profit, although there were periods of partial recovery in both core and peripheral countries. Maito revised and updated his work for a chapter in World in Crisis: a global analysis of Marx’s law of profitability – essential reading.

The graph below is my adaptation of Maito’s work.

Maito showed that the behaviour of the profit rate on capital stock confirms the predictions made by Marx about the historical trend of the mode of production. There is a secular tendency for the rate of profit to fall under capitalism and Marx’s law operates.  Maito also found that there was a stabilisation and even a rise in the world rate of profit from the early or mid-1980s up to the end of the 1990s, the so-called neoliberal period of the destruction of trade unions, a reduction in the welfare state and corporate taxes, privatisation, globalisation, hi-tech innovation and the fall of the Soviet Union. Again, Maito showed that this recovery peaked about 1997.

The measurement of the world rate of profit my 2015 paper (Revisiting a world rate of profit June 2015 ); this time used the more up to date Penn World Tables 8.0 for data based on the G20 top economies.  These results exhibited a similar secular decline as did the Maito data. There was a significant fall from the first simultaneous international economic slump in 1974-5 to the early 1980s, then a modest recovery before another fall coinciding with the world 1991-2 economic recession. There was a mild recovery in the 1990s until the early 2000s. After that, the G20 rate of profit slumped, both before the 2008-9 Great Recession and after, with only a tiny recovery up to 2011.

I backed up these results with data from the Eurostat AMECO database, which are even more up to date.  The issue with AMECO data is that its measure for net capital stock is highly dubious, especially in the early years from 1963.  However, from the early 1980s, the AMECO profit rate follows that of the Penn Tables measure.

Now I have taken a third look at the world rate of profit using the latest Penn World Tables 9.1 data. This latest database has an important innovation. It has a new series called the internal rate of return on capital stock (IRR), a very good proxy for the Marxian rate of profit.  Because the data are compiled on the same categories and concepts, the IRR series offers a valuable comparison between national rates of profit and it is also extended to 2017.  So we now have a series for the rate of profit for nearly all countries in the world, starting in many cases from 1950 up to 2017. (Internal rate of return)

In future posts on this, I shall consider any measurement problems with IRR and other categories; explain my methodology; and provide sources and workings.  Also, I shall look at decomposing the rate of profit into its key factors, namely the organic composition of capital and the rate of surplus value. This decomposition is important.  It is one thing to show a falling rate of profit over time; it is another to show that this is caused by Marx’s law of the tendency for the rate of profit to fall.  It could have other reasons.

If Marx’s law is correct, then it follows that when the rate of profit falls, the organic composition of capital (C/v) should be rising faster than the rate of exploitation (s/v).  Under Marx’s law, a rising organic composition of capital is the tendential determining factor for the fall in the rate of profit and the rate of exploitation is the (main) counteracting factor to that. If the latter rises faster than the former, then the rate of profit rises – and there have been periods when that has happened. But over the secular long term, the rate of profit falls and that is because the organic composition of capital rises more than the rate of exploitation.

I shall not discuss these issues in this post, but just consider the main results of measuring the world rate of profit using the IRR series in the Penn World Tables.  I have weighted the IRR series for the size of capital stock (not by GDP as in previous papers) to obtain a better measure for the G20 economies (19 countries excluding the EU), and also for the top G7 imperialist economies; and for selected emerging or developing economies.

The G7 results confirm the results from my previous two measures in 2012 and 2015; that the rate of profit in the major imperialist economies has been in long-term decline. The rate has not been a straight line down, but can be divided into four periods: 1) the ‘golden age’ of high and even rising profitability from 1950-1966; then the huge profitability collapse from 1966 to 1982; then the (relatively weak neo-liberal recovery); and since a peak in 1997, a general depression in the rate of profit up to 2017 (when the data end).

Now with the IRR series we can measure better the G20 rate of profit, probably the closest we can get to a ‘world rate’. This measure should be better than Maito’s or any previous measure because it includes more countries; although Maito’s ground-breaking work measures rates of profit back into the 19th century, not just to 1950.

The G20 rate of profit matches that of the G7 rate of profit in its trajectory.

But note that the level of the rate of profit is generally higher than the G7 rate. This should be expected under Marx’s law because the organic composition of capital will be higher in the imperialist countries than in the developing countries that are still trying to ‘catch up’ in technology.  We shall return to this point in a future post.

Indeed, let’s look at the rate of profit in some selected developing economies, in particular those G20 members, such as Argentina, Brazil, Mexico South Africa, China, India, Indonesia and Turkey. Again, we find that the rate of profit falls over the long term, but with the four sub-periods similar to the G7 and G20 series.

But again, note the much higher level of the rate of profit, up around 24% in the Golden Age compared to just 10% in the G7 economies and falling to 10% in last sub-period compared to 6.5% in the G7.  Also, the turning point into the neo-liberal period is later; in 1989 compared to 1982 for the G7.  And for these developing economies, any profitability recovery is short-lived, crashing back in the emerging market crisis of 1998.  The long depression in profitability in developing economies has ensued since.

Thus we can sum up these initial results from the Penn World Tables 9.1 IRR series as confirming the long-term decline in the world rate of profit (ie for most of the major and larger economies), with various subperiods, just as was discerned in the previous two measures of 2012 and 2015.

In future posts, I shall expand on these results.  I shall look at the decomposition of the world rate of profit and the factors driving it.  I shall consider the rate of profit in specific key economies (US, Germany, Japan, China) to see what we can learn.  I shall try to relate the change in the rate of profit to the regularity and intensity of crises in the capitalist mode of production. And I shall consider the question posed and answered in Maito’s work: if the world rate of profit is set to decline, will it go to zero and how is that possible?; and if so, how long will it take?  And what does that tell us about capitalism itself?

Capital Wars

We’ve had the argument that the major global issue of the 21^st century is the growing trade and technology war between the US and China.  In their book, Trade Wars are Class Wars, Klein and Pettis reckon that the trade imbalances are cause by inequality and income and consumption in the two powers: China has ‘excess savings’ and the US has ‘excess consumption’.  I have argued that this argument is false in previous posts.

Now we have Capital Wars as an alternative scenario for the rivalry between China and the US.  The rivalry between the US and China in the economic sphere has so far been on trade and technology. There has been little comparable friction in financial markets. Indeed, as more Chinese stocks are incorporated into global indices, US investors have been pouring capital into China via their investment in index-tracking funds.

Yet that is unlikely to last, according to Michael Howell, a former research director of investment bank Salomon Brothers who now runs his own ‘boutique’. In Capital Wars he points out that the swap lines extended by the US Federal Reserve to other central banks after the 2008 financial crisis — an exercise repeated since coronavirus struck — have been extended to friendly nations, while China has been pointedly excluded. So the Fed’s role as a global lender of last resort has been both partial and politicised.

Howell reckons the nature of the relationship between these two powers is unbalanced. Despite its declining share of global output, the US is the main provider of the dominant reserve currency to world markets. But its economy is marked by low productivity growth along with highly developed financial markets. China has enjoyed high productivity growth as it catches up, but it has underdeveloped financial markets. Persistent trade surpluses have contributed to a huge accumulation of foreign exchange reserves: the majority is in dollar assets. All this creates a fractious interdependence.

China’s economic rise coincided with a long period of liberalisation in international financial markets. A central theme of Howell’s book is the ballooning of global liquidity — gross flows of credit, savings and international capital that facilitate debt, investment and cross-border capital flows. In 2019, this international pool of funds was estimated at $130tn, two-thirds larger than world GDP. China’s contribution was close to $36tn.

There is nothing new in Howell’s insight here.  Indeed, several authors, including myself, have pointed out the huge rise in ‘liquidity’ ie money supply, bank credit, debt (both public and private) and debt instruments like derivatives, particularly since the early 2000s.

What is new is Howell’s emphasis on what new ways the financial system has found to expand what Marx called ‘fictitious capital’, ie financial assets supposedly representing future new value and profits.  Whereas banks used to rely on customer deposits to lend and speculate with; now the chief source of funds is not deposits, but repurchase agreements or ‘repos’, a form of borrowing that has to be backed by ‘collateral’ in the form of “safe” assets such as government bonds.

Howell argues, like others, that the financial system has moved from the post-war model, where banks were the main facilitators in lending.  They borrowed from their retail depositors and lent to individuals and companies. Today, wholesale markets predominate; and the main providers of funds are financial institutions and large companies such as Apple or Toyota. Users range from companies and banks to hedge funds and governments: non-bank finance or ‘shadow banking’.

Howell’s main argument is that the chief source of instability in the modern financial system has been a shortage of safe assets for these liquidity creators to hold as there was not enough government debt and the return was low anyway.  Indeed, before the 2008 financial crisis, investment bankers tried to invent new ‘safe assets’ such as collateralised mortgage obligations.  Of course, we now know that such assets were not ‘safe’ at all, but nothing but a giant Ponzi scheme of credit that turned out to be very ‘fictitious’ indeed in the global financial meltdown in 2007-9.

The question that Howell hints at is whether the huge injection of credit money by the Federal Reserve and other central banks to bail out companies and governments in the COVID pandemic slump will lead to a similar financial ‘shock’ in due course.  The difference now is that it is the state that is buying up these ‘safe assets’ directly, rather than the banking or shadow banking system as in 2008-9.  Nevertheless, the size of central bank purchases of corporate and mortgage bonds, as well as government paper is so huge that, if there were to be substantial explosion of bankruptcies, the lender of last resort (central bank) – now turned into the first buyer for fictitious capital – may end up with huge losses for governments to absorb.

One merit of Howell’s book over others of the same ilk is that he offers an explanation of why there was this drastic change from ‘traditional banking’ to the ‘financialisation’ of government and corporate assets.  He puts the cause squarely at the collapse of profitability in the productive sectors of the economy.

Howell reckons that falling profitability in industrial capital led to rising global ‘liquidity’ and this contributed to declining interest rates across risk assets, leading to the search for safe financial assets beyond government debt and into ‘repos’, to the detriment of productive investment.

Here Howell half grasps the story of the 30 years leading up to the global financial crash and the Great Recession. Unfortunately, despite referring to Marx’s analysis on occasion, Howell does not use it. Instead he falls back on the usual Keynesian macro-identities to explain why crises occur.  Thus, as with all Keynesian macro identities, profits disappear from the equations.

Howell takes the basic identity: savings = investment and revises it into his key equation: Liquidity = fixed investment plus the net acquisition of financial assets.  Liquidity is really profit plus credit in its various forms.  But for Howell, the driving force of modern capitalism is not the profit part of ‘liquidity’, however, -that’s old hat.  It’s the credit part.  For him, financial flows and the risk-taking behaviour of investors drive the real economy and asset prices, not vice versa.  More liquidity leads to more purchases of financial assets.  And more purchases of financial assets require more liquidity.  Thus, we move from a view of capitalism as a mode of production for profit, to capitalism as a mode of financial speculation and financial instability.  This theory is akin to the Minsky approach and the modern ‘financialisation’ theories.

For Howell, the coming war between the US and China will be fought not so much through trade or technology, but through financial flows and the control of international currencies as rival powers struggle to offer the ‘safest’ financial assets to global capital: eg the dollar or the renminbi?

There is clearly some truth in this.  If China were able to offer a strong and liquid currency to replace the dollar, US imperialism would be in serious trouble.  But a strong currency cannot be ‘created’ by financial markets; it comes about from the relative strength of the productivity of labour and value creation in an economy. That is where the economic war is centred; with trade, technology and financial being the battle grounds.  Value decides, not credit.

Wealth or income?

Most discussions on inequality, whether between nations globally or within nations, take place around income.  Data and papers on inequality of income are profuse, particularly on the rise in most major economies since the 1980s and the cause of it.  I have covered many of these papers; the conclusions and causes; in many posts. 

Related to the debate around inequality of income is also the issue of ‘poverty’: how to define and measure it and whether poverty globally and within economies has risen or fallen. A recent report by the World Economic Forum, found that income inequality has risen or remained stagnant in 20 of the 29 advanced economies while poverty has increased in 17. Income inequality has increased more rapidly in North America, China, India and Russia than anywhere else, notes the World Inequality Report 2018 produced by the World Inequality Lab, a research center based at the Paris School of Economics. The difference between Western Europe and the United States is particularly striking: “While the top 1% income share was close to 10% in both regions in 1980, it rose only slightly to 12% in 2016 in Western Europe while it shot up to 20% in the United States. Meanwhile, in the United States, the bottom 50% income share decreased from more than 20% in 1980 to 13% in 2016.”

But discussion and analysis of inequality of wealth (personal wealth) does not get so much attention.  And yet, I would argue that anybody with huge amounts of wealth (defined as ownership of property, means of production and financial assets) correspondingly obtains high levels of income – and, it seems, relatively lower levels of taxation.

Of course, there has been excellent work in measuring levels of personal wealth and changes in the distribution of that wealth over time.  Every year, I post a report on the Credit Suisse global wealth report, which shows how much personal wealth is held by individuals worldwide.  The current score shows that the top 1% of wealth holders have just under 50% of all the world’s wealth.  Oxfam regularly publishes data on how just a few families have huge portions of personal wealth in nations and globally.  And economists like Thomas Piketty, Emmanuel Saez and Gabriel Zucman have produced sterling work in recent years to show the huge inequity in the ownership of the means of production, land, property, financial assets and even patents and ‘knowledge’ products,.

But this is the rub.  Both in advanced and emerging economies, wealth is significantly more unequally distributed than income.  And the WEF reports that: “This problem has improved little in recent years, with wealth inequality rising in 49 economies.”

In 1912, Italian sociologist and statistician Corrado Gini developed a means of measuring wealth distribution within societies known as the Gini index or Gini coefficient: its value ranges from 0 (or 0%) to 1 (or 100%), with the former representing perfect equality (wealth distributed evenly) and the latter representing perfect inequality (wealth held in few hands).

And when you use the gini index for both income and wealth for each country, the difference is staggering.  Take a few examples. The gini index for the US is 37.8 for income distribution (pretty high), but the gini index for wealth distribution is 85.9!  Or take supposedly egalitarian Scandinavia. The gini index for income in Norway is just 24.9 but the wealth gini is 80.5!  It’s the same story in the other Nordic countries.  The Nordic countries may have lower than average inequality of income but they have higher than average inequality of wealth.

Which countries have the worst inequality in personal wealth? Here are the top ten most unequal societies in the world.

You might expect to find some of these countries listed here in the top ten: ie very poor or ruled by dictators or military.  But the top ten also includes the US and Sweden.  So, both a ‘neoliberal’ advanced economy and a ‘social democratic’ economy make the list:  capitalism does not discriminate when it comes to wealth.

Nevertheless, the US stands out as leader in the top G7 advanced economies in wealth and income inequality.

Indeed, can we discern whether high inequality in wealth is closely correlated with inequality in incomes?  Using the WEF index, I found that there was a positive correlation of about 0.38 across the data: so the higher the inequality of personal wealth in an economy, the more likely that the inequality of income will be higher.

The question is which drives which? This is easily answered. Wealth begets wealth. And more wealth begets more income.  A very small elite owns the means of production and finance and that is how they usurp the lion’s share and more of the wealth and income.

And a study by two economists at the Bank of Italy found that the wealthiest families in Florence today are descended from the wealthiest families of Florence nearly 600 years ago!  So the same families are still at the top of the wealth pile starting from the rise of merchant capitalism in the city states of Italy through the expansion of industrial capitalism and now in the world of finance capital..

And talking of the shockingly high inequality of wealth in ‘egalitarian’ Sweden, new research from there reveals that good genes don’t make you a success but family money, or marrying into it, does. People are not rich because they are smarter or better educated.  It is because they are either ‘lucky’ and/or inherited their wealth from their parents or relatives (like Donald Trump).

Researchers found that “wealth is highly correlated between parents and their children” and “Comparing the net wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for pre-birth factors.”  The researchers concluded that “wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.”

So Marx’s prediction 150 years ago that capitalism would lead to greater concentration and centralisation of wealth, in particular in the means of production and finance, is borne out.  Contrary to the optimism and apologia of the mainstream economists, poverty (in wealth and income) for billions around the world remains the norm with little sign of improvement, while inequality of wealth and income within the major capitalist economies increases as capital is accumulated and concentrated in ever smaller groups. The work of Emmanuel Saez and Gabriel Zucman has also shown that, in the US, wealth has become increasingly concentrated in the hands of the super-rich.

Moreover, wealth inequality has risen, mainly as the result of the increased concentration and centralisation of productive assets in the capitalist sector.  The real wealth concentration is expressed in the fact that big capital (finance and business) controls the investment, employment and financial decisions of the world.  A dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the global network according to the Swiss Institute of Technology. A total of 737 companies control 80% of it all. This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.

What that means is that policies aimed at reducing inequality of income by taxation and regulation, or even by boosting workers’ wages, will not achieve much impact while there is such a high level of inequality of wealth.  And that inequality of wealth stems from the concentration of the means of production and finance in the hands of a few.  While that ownership structure remains untouched, taxes on wealth will fall short too.

UK: wishing for a V-shape

Last week, the Conservative Chancellor (finance minister) Rishi Sunak in the UK presented a plan to support businesses and workers as Britain emerges from the pandemic lockdown.  The financial support for workers ‘furloughed’ by their employers is being ratcheted down by the government to zero by end October.  After that, workers and employers are on their own.  But not quite.

Ex-hedge fund manager and multi-millionaire Sunak announced that the government would pay up to £1000 for each furloughed worker taken back on after October and other incentive measures and subsidies to encourage employers to employ, workers to work, and households to spend – to the tune of £30bn.  Added to approximately £160bn already pledged in the form of loans and grants to firms and higher welfare benefits and credits to workers, this makes close to a fiscal injection of £190bn, or about 8% of 2019 GDP.  Along with the fall in tax revenues and the rise in welfare benefits, the UK government budget deficit will be about £350bn in 2020, or 18% of GDP.

The latest measures are really designed to wean workers and businesses off government ‘furlough’ subsidies that have paid up to 80% of the wages for nine million workers sent home. By end-October, these payments will go and be replaced by a one-off payment to employers of £1000 for every worker re-employed before end-January.

At the same time, the government is offering employers funds to take on young people on six month contracts, more money for job centres and local authorities; a cut in sales tax for the leisure industry and a £10 voucher to reduce prices in cafes and restaurants.

The measures are designed to get people back to work and for businesses to resume as before.  So all this funding is just temporary.  It all runs out at the end of January, by which time the government hopes the COVID virus and the lockdowns will just be a bad nightmare and everybody can wake up to a new bright 2021.

But none of the measures can have any lasting impact on achieving sustained recovery. They are mainly directed to persuade employers in leisure industries with nothing for other sectors.  And they rely on private businesses to make decisions about re-employing their laid off workers.  There is no state jobs project and a limited investment programme. The Job Retention Bonus hardly meets the average wage costs of employers.

Tony Wilson, director of the Institute for Employment Studies, said the value of the kickstart subsidy was a third lower than that offered under the Future Jobs Fund introduced by Gordon Brown’s Labour government after the 2008 financial crisis, but was intended to create four times as many jobs. The City and Guilds Group, which works with education providers and businesses on skills development, said the kickstart scheme would only help tackle long-term unemployment if young people emerged with skills and a qualification that would help them secure a permanent job. Kirstie Donnelly, chief executive, said: “If this is not the case it’s just a sticking plaster solution, or even a ‘revolving door’ back to the unemployment queue.”

The Eat Out vouchers are an ironic joke, given that the government was forced, kicking and screaming, to maintain vouchers for school meals during the pandemic, but now wants to pay £10 for meals in restaurants at a higher cost.

In a ‘photo opportunity’ for the £10 meal vouchers, the Chancellor Sunak serves food – without a mask!

There is an extra £15bn for personal protection equipment (PPE) for health and care staff.  This a huge bill that will deliver too late for most workers and just confirms that the government had run down stocks before the pandemic to save money – now they have the benefit of hindsight, but with no benefit to health workers.  Meanwhile the extra funding for local authorities falls well short of the cost that the councils have incurred in the last three months, so a whole round of cuts and job losses are now being imposed by councils.

Then there is the grotesque decision to raise the stamp duty threshold on house purchases.  The Chancellor, who apparently owns seven luxury homes, will be a beneficiary, along with buy to let landlords.  But the average first-time buyer already pays no stamp duty in all regions and nations except London and therefore won’t benefit.  And anyway, why is the government trying to boost house prices in this crisis?  Indeed, the huge loss of tax on this could have been better used to build new affordable homes, given the dire shortage of good housing in Britain.  Indeed the new investment on housing and infrastructure announced is not ‘new’ at all, but simply previous plans just accelerated.

Len McCluskey, general secretary of Unite, the union, said the cut in stamp duty might well please “the better off with little to fear from this crisis”, but it was “no use to the tens of thousands of workers who have lost their jobs in recent weeks and the millions more we fear could follow them”.

Frances O’Grady, general secretary of the Trades Union Congress, the unions’ umbrella body, said the government needed to do far more to stem the “rising tide” of redundancies. She called for extra investment in jobs across public services — including the 200,000 vacancies in the NHS and social care. “And if the chancellor wants people to have the confidence to eat out, he should have announced a pay rise for hard-pressed key workers rather than dining out discounts for the well-off,” she said.

The problem is that the pandemic is not over in the UK or elsewhere.  Britain, in particular, has handled the pandemic very badly, achieving the second highest death rate in Europe and the second highest rate of ‘excess deaths’ over normal in the world.

The damage of the three-month lockdown and the continued level of new infections has scarred the economy permanently.  Many people are now unwilling to go back to work, travel on public transport or go to cafes and restaurants, gyms etc where the risk of infection remains high.

The prospect of a V-shape recovery from the pandemic that the government prays for does not look likely. The UK economy is going to contract this year by the largest margin in 100 years.

And government borrowing and debt will hit historic highs by the end of 2020.

This debt would be manageable, given current low interest rates, if the UK economy were set to bounce back in 2021.  But British businesses do not expect that to happen – instead they are getting ready to sack staff and hold back on spending.  British consumers are not racing to the shops either.

The worst is yet to come on jobs, incomes and public services, as companies in all sectors announce redundancies and local authorities the same.  And as businesses go bust, the burden of unpaid loans for the banks will rise.

The underlying weakness in British capitalism has been exposed by the pandemic.  Even before the lockdown, economic growth was grinding to a halt, business investment was falling, and corporate profitability had never been lower since records began.

Profitability and investment will reach new lows during 2020.  And Britain has a history of slow and weak recoveries from slumps.

But this government does not want to take the lead in investing for recovery. It wants the market and capitalist companies to do that.  That is its ideology and that will be the cause of its failure to make its wish for a V-shaped recovery come true.

 

Sweatshops and monopsony power – a review

Leicester is a medium-sized city in the centre of England.  It has come into the limelight in the last few weeks because of an outbreak of COVID-19 in the city, forcing a local lockdown, while the rest of England starts to ‘come out’.  Leicester has a relatively high British Asian community and many are concentrated for work in the garment industry.  And it is here that the COVID outbreak seems to have emerged.

The reason is clear. Garment workers in Leicester work out of tiny, unsafe factories or even homes, employed for below poverty wages ($5 an hour!) and they have worked throughout the coronavirus crisis lockdown. These small businesses had to carry on because there was really only one buyer, the online retailer, British Asian owned BooHoo.  Like Amazon, Boohoo has made a fortune during the pandemic with shop-based retailers in lockdown.  Its profits are registered in the tax haven island of Jersey. And it dominates the Leicester garment industry.  It’s a classic example of monopsony power.

We often see the concept of ‘monopoly’ in political economy and leftist circles as a relevant category for modern capitalism. We don’t usually recognise ‘monopsony capitalism’.  But we should.  This is where Ashok Kumar’s book, Monopsony Capitalism Power and Production in the Twilight of the Sweatshop Age fills a gap.

Whereas, monopoly implies a dominant or hegemonic seller in the market for goods and services, controlling prices and keeping out potential rivals, monopsony implies the control of the market by a dominant buyer over many smaller sellers.  The capitalist labour market is one key example, where capital exerts relative monopsonic power over workers, unless they are organised in unions etc.

The Boohoo monopsony in Leicester is repeated on an even larger scale with major retailers like Walmart in the US or Amazon globally, or manufacturers like Nike or Apple or food producers like Nescafe or Del Mar, which exert huge monopsonic power over their suppliers (in farming, garment and footwear, electronics etc).

Kumar is a lecturer in International Political Economy at the School of Business, Economics and Informatics at Birkbeck University. His book takes us to the heart of the monopsonic capitalism globally through the value chain of cheap garments and shoes in the shops of the ‘global north’ to the sweatshops of Bangladesh and other countries under the domination of the multi-nationals.

Monopsony Capitalism argues that the garment value chain globally relies on the unequal power dynamic of many suppliers and few buyers – monopsony. The result is a low level of surplus value capture at the production phase of the supply chain, which ensures chronically low capital investment in the peripheral countries’ industry.  Cheap labour and many suppliers are preserved, as opposed to the use of machinery and fewer, larger companies. Fragmentation and low capital investment in garment and footwear value chains creates low barriers to entry, resulting in bidding wars between thousands of smaller firms from around the world.  Indeed, a ‘sweatshop’ can be defined as a workplace where labour has essentially no bargaining power.

The Rana Plaza tragedy of 2013 when a massive garment factory in Bangladesh collapsed, floor upon floor, crushing many of its occupants was a catalytic moment. “The Rana Plaza disaster proved a monument to the complete and utter failure of Western activism: 1,134 workers perished.”  Consumer boycotts and campaigning in the global North against ‘sweatshops’ proved to have had no effect.

But what has happened since shows another way out of this nightmare. After Rana Plaza, the Bangladeshi unions demanded new safety conditions, similar to the way in which reduced hours and better safety was fought for in cotton sweatshops of mid-19th century Britain that Marx records. By August 2013, 45 garment factory unions had been registered with the Bangladeshi government. The unions used a ‘hot shop’ organizing model, following the trail of labour unrest from case to case, factory to factory, establishing and strengthening union footholds. An almost endless pool of small garment firms across the globe began to steadily disappear, absorbed into larger rivals or forced to merge.  Thus, Kumar argues the monopsony power of the multi-national retailers increasingly faced oligopolistic companies, driven by their workforces to demand better prices and terms.

Kumar’s book analyses workers’ collective action at various sites of production primarily in China, India, Honduras, and United States, and secondarily in Vietnam, Cambodia, Bangladesh, and Indonesia. Action by labour in these countries have “tested the limits of the social order, stretching it until the seams show, and forcing bosses to come to the proverbial table, hat in hand, to hash out agreements with those who assemble their goods.”

In these case studies Kumar reveals that there has been increasing supplier-end consolidation, raising the surviving suppliers’ share of value, and so facilitating self-investment and higher entry barriers.  Workers struggles over wages and conditions have altered the balance of economic power between the multi-nationals and the domestic suppliers.

Kumar reminds us that Marx and Engels argued that global capital would generate a global proletariat that would ultimately be its undoing. But perhaps collective worker action is the exception under capitalism. Maybe capital’s structural advantages in certain sectors, like garment and footwear, have effectively resolved the dialectical struggle in favour of capitalists.  Kumar’s case studies suggest otherwise. The garment sector (and vertically disintegrated value chains generally) are also “animated by the logic of competition, which moves inexorably in the direction of consolidation, thereby reducing the monopsonistic power of buyers. while changes in the value chain are reflected in the bargaining power of workers.”

Kumar confirms that Marx’s law of accumulation still operates, namely that capitalism must increasingly come to rely on ‘dead labour’ (technology and so on) and less and less on ‘living labour’ (workers) and that includes the peripheral ‘emerging economies’ too. Higher levels of ‘dead labour’ start to create higher barriers to entry:  Why? “Because the smaller the organic composition of capital, the less capital is required at the beginning in order to enter this branch and establish a new venture. It is far easier to put together the million or two million dollars necessary for building a new textile plant than to assemble the hundreds of millions needed to set up even relatively small steel works.”

Relying on this fundamental trend in capitalist accumulation, Kumar reckons “there is a change in the air.” In China, India, Honduras, Vietnam, Cambodia, and Indonesia many factories already have a relatively high organic composition. It becomes “possible to glimpse another world where bosses come to the proverbial table, hat in hand, to hash out agreements with those who assemble their goods. When labour unions, activists, and advocates marshal their resource  – financial, moral, political, and human – to support smart, focused, bottom-up organizing in large, increasingly integrated firms, garment workers will transform their industry.”

Once barriers to entry have been established among the domestic suppliers it will be impossible to tear them down and return to monopsony power. Sweatshops occur where surpluses are limited, and production is diffuse and isolated from consumption. But competition eventually creates a centralized industry, with a few mega-firms in a few locations.  Then suppliers ascend, giving workers the high ground too.  But as Kumar says, “whether this is indeed the twilight of the sweatshop age or a new race to the bottom may ultimately depend on the self-organization and demands of the working people.”  That applies to the garment sweatshops of COVID-19 Leicester too.

Deficits, debt and deflation after the pandemic

The Great Lockdown enforced by the COVID-19 pandemic has driven governments across the globe to apply extensive bailout and fiscal stimulus programmes.  On average, these measures of wage supplements, furlough payments, loans and grants to firms; and emergency spending on health and other public services, have been paid for by extra government spending equivalent to an average of around 5-6% of GDP with a similar amount on top from loan guarantees and other credit support for banks and companies.  That’s at least twice as large as the fiscal and monetary stimulus and bailout packages delivered during the Great Recession of 2008-9.

Globally, the IMF forecasts that general government budget deficits (ie where tax revenues fall short of government spending) will reach 10% of GDP in 2020, up from 3.7% in 2019.  In the advanced capitalist economies, the deficit will be 10.7%, more than three times larger than in 2019.  The US government will have a 15.4% of GDP deficit.

As a result, public sector debt levels are expected to exceed anything reached in the last 150 years – including after WW1 and WW2.  The public sector debt ratio in 2020 will reach 122% of GDP in the advanced capitalist economies and 62% in the so-called emerging economies.

Everybody, whether governments, investors or economists, agree that there was no alternative but to expand public spending during the Great Lockdown to avoid or ameliorate the catastrophe of the global economy coming to a total halt.  But as the lockdowns end (whether the pandemic is over or not), the question is whether this increased government spending can be allowed to continue and whether public sector debt levels must eventually be curbed and reduced.

After the end of the Great Recession, the predominant view among governments and economists alike was that public debt levels were too high and would damage economic growth rates and/or even engender a further financial crisis.  Top economists like Rogoff and Reinhart argued that there was empirical evidence over centuries that showed when public debt ratios were above 90% of GDP, the probability of a financial crash was very high.  This evidence was disputed at the time, but even so, it was generally held that measures to control public spending and raise taxes so that budget deficits were reduced and even eliminated to bring debt levels down were necessary to ensure future sustainable economic growth.  This ‘Austerian’ view dominated and the apparently alternative Keynesian view that in a slump ‘deficits and debt don’t matter’ was rejected, sometimes even by Keynesians.  When the Greek government faced disaster during the euro debt crisis of 2012-15, the powers that be were merciless in their view that there was no alternative.

But this time round, at least, things are different.  Governments, on the whole, do not talk about getting public sector finances ‘under control’ and economists on the whole seem comfortable with governments running deficits far into the future even if it means rising public sector debt levels.

As former Goldman Sachs chief economist, and hedge fund manager Gavyn Davies recently put it: “Even more notable has been the unanimity among macroeconomists that massive fiscal and monetary stimulus is the appropriate response to a “wartime” economic emergency. Almost no one seriously disputes that policy should be doing “whatever it takes” to overcome the shock from the virus. This agreement reflects a key conclusion from public finance theory: that higher government debt is the correct shock absorber for the private sector in the face of unpredictable, temporary economic crises. It avoids the distortions that would follow the big variations in marginal tax rates that would otherwise be needed to finance a surge in public spending over a short period.”  So the public sector is there to bail out the private (capitalist) sector when it goes into ‘unpredictable, temporary crisis’.

Davies goes on: “Most New Keynesian economists, including Paul Krugman and Lawrence Summers, believe high debt levels will not in themselves be a problem for advanced economies. They even suggest further rises in debt would be desirable, as that would help reverse the trend towards secular stagnation in Europe and the US.”  A key reason for their optimism is that the annual cost of servicing the debt will be below the nominal growth rate in the economy and the central banks seem set to keep it there.

Indeed, central bank rates are near zero or even below and longer-term bond yields are at historic lows.  So, if the interest cost of the government debt keeps below the growth rate, the debt/gross domestic product ratio will eventually stabilise. And as economic growth picks up, tax revenues will come through, enabling the ‘primary balance’ (tax minus non-interest spending) to rise.  Then central banks can gradually allow interest rates to rise towards more ‘normal levels’. And the debt could be managed without a crisis.

The more extreme Keynesian position that is now popular is that even managing debt levels does not matter.  Modern Monetary Theory (MMT) reckons that, as long as there is ‘slack’ in the capitalist economy ie. unemployment, governments can spend indefinitely and central banks can support them by ‘printing money’ without any risk of default or financial collapse.

However, it may not be as simple as that.  Calculating whether debt service is sustainable involves several key numbers: 1) the level of debt, 2) average interest rate on the debt, 3) fiscal deficit (which adds to the debt), 4) the size and growth of public expenditure, and 5) expansion rate of the economy.  Sustainability of public debt service then depends on two numbers, the fiscal deficit and the initial size of the public debt.

If government spending outside covering interest costs on existing debt continues to rise faster than tax revenues, then this ‘primary deficit’ will continually add to total public debt.  This means that the interest cost of that debt will rise even if the rate of interest is very low.  Already, the interest cost in government budgets in the major economies has reached 10% of tax revenues, even though interest rates have fallen.  This cost is gradually eating into current spending on welfare, public sector investments and public services.

In the advanced economies, the maturity of public debt (the period before repayment of bonds is required) is about 7 years on average (it’s way higher in the UK).  The longer the maturity, the less the impact of increased deficits and debt on debt servicing.

So it’s the growth constraint that is the main factor making public sector debt levels matter.  ‘Excessive debt’ means government debt that is so high that it eats into corporate profitability through higher taxes on business, less subsidies to business, higher inflation costs and higher interest rates for borrowing across the board.  So government spending, Keynesian-style, can only be a substitute for failing private investment and consumption for a short while. Ultimately, it is a burden on capitalism, not its saviour.  That is why it must be reduced.  If profitability of the capitalist sector remains low, and in the G7 average profitability on capital is at an all-time low, then investment and GDP growth will be weak.  And the ‘productivity of debt’ will continue to fall.

Governments could just print money to pay for their debts (they have that unique power as MMT argues), but that would eventually mean devaluing the currency used to pay for things.  It is something that the US has found with its external deficits.  As a result, the buying value of the dollar has fallen over the last 30 years by over 25%.

Similarly, if governments print money to pay for their debts at home, they will eventually drive up inflation and devalue wages and savings.  The ‘evil’ of inflation is even admitted by MMT, if only when full employment is reached and the ‘slack’ in the economy disappears. Governments can borrow and central banks can print money to finance the present public expenditures. However, these also involve taking on future risks.  As Stephanie Kelton put it in her new book, The Deficit Myth: “Can we just print our way to prosperity? Absolutely not!  MMT is not a free lunch. There are very real limits, and failing to identify—and respect—those limits could bring great harm. MMT is about distinguishing the real limits from the self-imposed constraints that we have the power to change.”(Kelton 2020, p. 37).

But the issue of debt, post-COVID is not only, or even mainly, about public debt; it is corporate debt that really matters.  The pandemic slump began with a ‘supply shock’ as major sectors of the economy were locked down; then it became a ‘demand shock’ as households stopped spending and companies stopped investing; but a third leg of the crisis impends: a financial shock.

Corporate debt levels globally were already at record highs before the pandemic crisis.

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Corporate sector ‘delinquencies’ (failing to meet debt repayments on time) and bankruptcies are rising.   A whole layer of ‘zombie companies’ (where debt interest is not covered by profits) that this blog has talked about before on several occasions are likely to go bust before ‘normality’ is restored.  And if there is any rise in interest rates, that trickle could turn into a flood and then an avalanche that takes down others and the banking system.

 

The amount of debt classified as distressed in the U.S. has surged 161% in just the last two months to more than half a trillion dollars. In April, corporate borrowers defaulted on $35.7 billion of bonds and loans, the fifth-largest monthly volume on record, according JPMorgan Chase & Co. And so far in 2020, the pace of corporate bankruptcy filings in the U.S. has already surpassed every year since 2009, the aftermath of the global financial crisis, Bloomberg data show.

So the levels of both public and corporate sector debt do matter.  If governments go on raising public spending and budget deficits, it will squeeze the capitalist sector by sucking up all the demand for debt, while increasing the share of unproductive expenditure at the expense of public services and investment.  If governments fund such spending through central bank ‘monetary financing’, the risk of inflation will return.

Why?  The Japanese government has run permanent budget deficits since the 1990s and the government debt ratio will be over 250% of GDP this year.  The Bank of Japan owns most of the new government debt outstanding, assets equivalent to 75% of GDP.  But Japan has no inflation in the prices of goods and services.  If anything, there is deflation.  So why should budget deficits and rising debt lead to inflation?

The causes of inflation require a whole book on their own.  The traditional mainstream theories fall into two categories: a monetary theory; changes in the quantity of money relative to output sets the rate of inflation; or that inflation of prices is caused by changes in the cost of production (wages, raw materials, oil prices etc).  Neither of these is convincing as a theory (a future post here).

There is a massive rise in the quantity of money in economies, at the moment: money supply as represented by deposits in banks (M2) is up 25% yoy.  But prices of goods and services are hardly rising – indeed, by year-end the consumer inflation rate in the US could be negative for the first time since the Great Recession and possibly down by the largest annual reduction since 1955.

The reason is obvious: consumer spending and capitalist investment is down hugely.  Much of the money and government handouts is not going into spending or investment but into paying down debts or hoarding by companies.  This is what happened in Japan.  Indeed, what we find is that there has been a significant decline in the velocity of money since the early 2000s.  The velocity of money measures the stock of money relative to nominal GDP – and it’s been falling.  This is a good measure of hoarding money.

The trend matches the downturn in the rate of profit of capital and consumer price inflation.  As profitability of investing in productive assets fell, investment growth slowed.  Companies instead invested in financial assets (fictitious capital) or hoarded cash (the large companies).  Interest rates and inflation fell, while stock markets boomed.  And this is what is happening now.  Inflation is non-existent because new value is not being created and so profits and wages are falling even faster than money supply can be injected.

However, that situation will change when the lockdowns ease over the next year (whatever the virus does).  Then profits and wages will rise (not to the same levels as before, but still up).  If central banks pump in yet more money and credit, then prices will rise because economic growth will remain weak.  Demand (money) will exceed supply (new value).  The hoarding effect will dissipate and prices will jump.

One estimate for inflation based on the mainstream quantity theory of money suggests inflation rates could jump to 4-6% if central banks go on printing money.  My own estimate would suggest inflation would be around 3-4% next year (unpublished research).  Inflation is bad news for labour because it will eat into real incomes, already stunned by the slump.  It’s good news for companies as they try to hike prices to restore profits, but it’s bad news for the financial sector and bond investors as their real gains will be reduced.

Next year, the weight of both public and corporate debt will press down on economic recovery, while inflation will rise, putting upward pressure on interest rates.  That’s a recipe for corporate bankruptcies and a financial crisis, alongside ‘stagflating’ economies, similar to the 1970s.

Trade wars are class wars – part two: global imbalances?

Trade wars are Class Wars by Matthew Klein and Michael Pettis has now been entered as one of the best books of the year by the FT and one to read over the summer by Martin Wolf, the FT’s economics guru. Wolf says that “This is a very important book. Its central argument is that “A global conflict between economic classes within countries is being misinterpreted as a series of conflicts between countries with competing interests. The danger is a repetition of the 1930s, when a breakdown of the international economic and financial order undermined democracy and encouraged virulent nationalism. Policies that generate high inequality and excessive private savings must end if economic stability is to be restored.”

Klein-Pettis reckon that there is a ‘global savings glut’ in the world economy caused by rising inequality, low wages and consumption. I discussed this in the first part of my review.  But they also argue that policies of investment for export by countries like China and Germany create ‘global imbalances’ that encourage dangerous trade wars.  In this second part, I consider the validity of this view.

According to the authors, some capitalist economies are ‘saving’ too much ie not investing at home enough to use up savings and so export abroad, running up big trade surpluses. Others are forced to absorb these surpluses with excessive consumption and run large current account deficits and so we have trade wars as governments like Trump’s try to reverse this trend.

Klein and Pettis are saying that these imbalances are caused by the decisions of governments like China and Germany that seek to suppress wages and consumption (the class war) in order to boost investment and export surplus savings. As Adam Tooze, the radical historian, put it: the authors “divide the world into the surplus generators and the deficit countries. The strong causal claim is that imbalances are largely the result of social-structural change in the surplus countries.”

Pettis admits that China’s investment-driven and export-led policy was “not necessarily a bad thing. After five decades of anti-Japanese war, civil war and Maoism, China was hugely underinvested. By constraining the ability of households to consume a significant share of what they produced, the government effectively forced up the savings rate and channeled all of those savings into a massive investment program. China had the highest investment growth rate in history, and the highest investment share of GDP in history. As a developing country that was significantly underinvested, this was exactly what the doctor ordered.”

Following a growth model for developing countries that concentrates on investment (put forward by Alexander Gerschenkron for US development in the 19th century), the authors argue that “It’s a very successful growth model, but once you reach the point at which you can no longer increase investment at a great pace, you are forced to make institutional reforms.” But Klein and Pettis reckon that “The problem emerged when the Chinese economy could no longer absorb new investment productively. … Once China reached that point, consumption was too low to drive growth, and it entered into a state of excess production.”

This is surely nonsense. It’s just not true household consumption in China is being repressed. Actually, personal consumption in China has been increasing much faster than fixed investment in recent years, even if it is starting at a lower base.  Consumption rose 9% last year, much faster than GDP.

Even Pettis and Klein’s own empirical analysis reveals that there has been a rise in consumption as a share of GDP in China in the last ten years, even without recognising that this is a probable underestimate of the size of household consumption in the stats (which exclude many public services or the ‘social wage’).

Again, as I argued in part one of this review, it is not lack of consumption that is key to the ‘class war’; it’s profitability. In a capitalist economy, companies compete with each other to raise profitability through the introduction of new technologies.  But there is an inherent contradiction under capitalist production between a tendency for falling profitability of capital alongside rising productivity of labour.  As capitalists try to raise the productivity of labour by shedding labour with technology, and so lowering labour costs and increasing profits and market share, the overall profitability of investment and production begins to fall. Then investment collapses and productivity stagnates. I would argue that the recent drop in the investment share of GDP in China is due to the falling profitability (internal rate of return in graph) of the capitalist sector of the Chinese economy.

Klein and Pettis seem to be on stronger ground in their second case study of an excess saving surplus economy: Germany.  They argue that German politicians after the unification in the 1990s did not want to subsidise the real incomes of those from the east as it would damage profitability.  So they introduced (under a social democrat government) the Hartz reforms, which successfully repressed real wages and boosted profits.  This is something that I have shown in previous posts and Klein and Petts confirm that story.

But surely here we are also validating the real class war involved: namely between capital and labour over profits and wages; not as Klein and Pettis see the class war through restricted consumption?  Their idea is that “the excess savings of Germany and several other smaller European countries (such as the Netherlands) were offset by unsustainable credit and spending booms in countries such as Greece, Ireland and, above all, Spain. The global financial crisis ended that. Since then the entire eurozone has moved into a globally destabilising current account surplus, in a damaging attempt to turn the second-largest economy in the world into a bigger Germany in the midst of a global savings glut.”

But any proper analysis of the Euro imbalances will find that it was not a result of Germany needing to export its ‘excess savings’, but the result of Germany’s more superior technology and productivity, enabling it to expand exports throughout the EU at the expense of its other weaker member states.  In my view, global imbalances in trade and capital are the result of the higher productivity and technology base of the major companies in the ‘winning’ economies leading to a transfer of profits to the strong from the weak.  It’s not a transfer of excess savings to excess consumption across borders; but the transfer of value and surplus value from the weaker capitalist economies to the stronger.  Indeed, that is precisely the nature of imperialism: the unequal exchange of value, not a savings-consumption imbalance.

To show this in relation to the Klein-Pettis thesis, I decided to take closer look at the savings-investment imbalances. Over the last 30 years, China’s savings rate rose 25.8%, but its investment rate rose more, 26.8%; so no savings glut there, at least over the long term. Indeed, in the global boom period of 1990s, China’s investment rate rose much faster than its savings rate. There were no large surpluses on the current account.  Only in the short period of 2002-7 did China run a large net savings surplus. In my view, this was because investment and production were switched sharply into exports as China took advantage of its cost superiority on its entry into the WTO.

In the case of Germany, in the boom decade of 1990s, the German savings rate fell along with the investment rate as West Germany absorbed the East.  Indeed, the investment rate was higher in the 1990s and Germany ran current account deficits. The big rise in net savings took place after 2002 with the start of the euro and the Hartz reforms.  Germany’s investment rate rose but not as much as the saving rate, as Germany ran big surpluses with other EZ countries.

In the case of the US, between 2002-18 the savings rate actually rose by 1%.  It was the investment rate that fell by 3.2%.  Indeed, in the post GR period since 2008, the US savings rate has risen 21.3% while the investment rate has fallen 0.5%.  Again, the so-called savings glut thesis has only some validity in the short period of 2002-7.  Then Germany and China savings rates rose 25-30% while the US rate fell 4.2%.  But otherwise in the 21st century, the savings glut imbalance is a myth.

China’s net savings rate (current account surplus as % of GDP) is now no higher than in the late 1990s. It’s true that Germany’s surplus savings rate has risen significantly.  But the US savings deficit is no higher than at the beginning of the century – so it is no victim of these excess savings economies. The Klein-Pettis thesis is limited in validity to a short time period and is really old hat now.

Klein and Pettis argue: “The rest of the world’s unwillingness to spend — which in turn was attributable to the class wars in the major surplus economies and desire for self-insurance after the Asian crisis — was the underlying cause of both America’s debt bubble and America’s deindustrialisation.” But this is historically inaccurate. Since the 1970s, the US had been losing market share in manufacturing and trade and running current account deficits, not just after the Asian crisis. The cause of this decline is down to the relative weakness of US productivity growth, not Asian excess savings. Moreover, US manufacturing companies had shifted their production abroad during the 1980s.

Share of manufacturing world trade (%)

And yet, Klein and Pettis want to position the US as a victim of Asian and German economic policy. As Adam Tooze says, “One could read this as an apology for the protectionist turn of American politics in recent decades. You are showing that there is, in fact, a hidden macroeconomic rationale to the desire of American policymakers to ward off other people’s imbalances.”

But rather than a victim of excess savings economies, the US, as the hegemonic imperialist power, gains extra value from trade and capital flows; tribute from mainly the peripheral economies of the global south (including China); and even to some extent from the likes of Germany. The US is not the victim and China and Germany are not perpetrators of crises.  Instead, the victim is labour everywhere; and the perpetrator is capital everywhere.  Both American and German workers are being exploited by capital and that’s the basis of the class war; while how that surplus value is distributed and shared by capital is the basis of the trade war.

Klein and Pettis argue that “America doesn’t control its current account; it doesn’t control its net overall macroeconomic savings balance.”  That’s true.  But it does not need to. On the contrary, as an increasingly rentier economy, it can extract ‘rent’ or surplus value from other more productive economies through both its external current and capital accounts. And it can do so better than, say, the UK because it is still the hegemonic power that controls the international reserve currency, the dollar; and it has the financial firepower and military might.  It is the Roman empire of the 21st century – in its declining stage, but not yet collapsed.

The Klein-Pettis thesis leads to the conclusion that wages are too high for capital. “In the current environment, the argument against increasing wages is too strong: higher wages reduce competitiveness and cause the benefits of higher wages to flow abroad. If you pay your workers more, consumers in your country will consume from abroad, because prices have to rise. If you believe that the problem is a sort of massive beggar thy neighbor problem—in which every country improves its relative position by putting downward pressure on wages, either directly like Germany did under the Hartz reforms, or indirectly through weak currencies and subsidies—then it’s very difficult to raise wages.” Yes, but that’s capitalism.“In fact, you get a situation in which each country benefits by lowering wages.” Exactly, because this boosts profits.

Of course, Klein and Pettis argue that low wages cause crises, given their underconsumption theory (see part one of this review). If so, what is the answer to low wages? Pettis: “In order to address the problem of wages, we have to prevent the unfettered flow of capital. We need some sort of protection. But rather than trade protection, I would argue that we need to impede capital flows.”  And the US needs to invest more.

So we must try and make US capitalists invest more by restricting the flow of foreign savings into the economy with capital controls. But will US companies raise investment while profitability remains low?  Of course, for our authors profitability is irrelevant; what matters is reducing ‘excess consumption’ in the case of the US.

For Klein and Pettis, this is the solution to crises. As Klein puts it in explaining where Lenin’s theory of imperialism differs from Hobson’s. “Lenin’s understanding of Hobson was that capitalism inevitably leads to imperialism, which generates conflict among the capitalist powers. But that wasn’t Hobson’s actual argument. He argued that there are problems in the distribution of income and purchasing power within the major European capitalist countries, and that this explains imperialism. That’s an important difference. Hobson’s interpretation was that there are middle courses between overthrowing the entire system and tolerating exploitative international relationships, and we agree. We don’t argue that we’re in an inevitable crisis of capitalism, but rather that the problems we face can be solved using the kinds of redistributional tools that policymakers have used in the past.”

For Klein and Pettis, there is nothing wrong with the capitalist mode of production and investment for profit. It’s just the imbalances of savings and consumption they generate. Boost wages and reduce inequality and all will be well as the global imbalances disappear and aggregate demand rises. As Klein and Pettis say: “Trade war is often presented as a war between countries. It is not: it is a conflict mainly between bankers and owners of financial assets on one side and ordinary households on the other — between the very rich and everyone else.”

For them, the class war is between ‘bankers’ and ‘households’, not capital and labour. And the coming imperialist trade wars are between excess savers and excess consumers, not between rival imperialist powers over the share of profits extracted from labour globally. Which is the more accurate explanation of class and trade wars: the Klein-Pettis Hobson one or the Marxist one?

Trade wars and class wars: part one – the global savings glut?

This review of a new book is in two parts as there is much to say. Here is the first part.

‘Trade wars are class wars‘ is the title of a new book by Matthew Klein and Michael Pettis. Matthew C. Klein is the Economics Commentator at Barron’s. He has previously written for the Financial Times, Bloomberg View, and the Economist.  Michael Pettis is professor of finance at Peking University’s Guanghua School of Management and a senior fellow at the Carnegie Endowment for International Peace.

The book has a provocative title but it’s apposite, given the growing global rivalry between the US and the China with the implementation of trade tariff and technology war, as the US tries to curb and reverse the rising share of trade and hi-tech production that China has been achieving and using to widen its influence globally; at the expense of an ageing and relatively declining US hegemony.

The subtitle of the Klein and Pettis’ book is “how inequality distorts the global economy and threatens international peace.” Klein and Pettis argue that the origins of today’s trade wars emerge from decisions made by politicians and business leaders in China, Europe, and the United States over the past thirty years. Across the world, the rich have prospered while workers can no longer afford to buy what they produce, have lost their jobs, or have been forced into higher levels of debt.  Rising inequality has weakened aggregate demand; and a global ‘savings glut’ generated by countries like Germany and China are creating huge global imbalances in demand and supply that threaten economic crises, increased protectionist rivalry and international peace.

The essence of the problem for Klein and Pettis is “the greater eagerness of producers to sell than of consumers to buy”. According to them, this is at the heart of the imperialist rivalry globally. The authors revert openly and clearly to the thesis of John Hobson, the anti-semitic, social reformist writer and economist of the early 20th century.  They update the Hobsonian thesis for the 21st century. As Pettis puts it: “Our argument is fairly straightforward: trade cost and trade conflict in the modern era don’t reflect differences in the cost of production; what they reflect is a difference in savings imbalances, primarily driven by the distortions in the distribution of income. We argue that the reason we have trade wars is because we have persistent imbalances, and the reason we have persistent trade imbalances is because around the world, income is distributed in such a way that workers and middle class households cannot consume enough of what they produce.

Thus, we have a straightforward underconsumption theory of crises as presented by Hobson. What is added by the authors is the concept of a ‘global savings glut’, or the reciprocal of a lack of consumption, which generates ‘global imbalances’ between those countries running systematic trade and income surpluses (China, Germany) with others (the US) running chronic deficits. This imbalance of consumption and saving between the major economic powers is the essential cause of future crises and even wars, according to the authors.

What is missing from this analysis is what is missing from all underconsumption theories; namely investment ie capitalist investment.  Consumption is not the only category of ‘aggregate demand’; there is also investment demand by capitalists. Indeed, Marx argued that this was the most important factor in driving growth of production in a capitalist economy – and even Keynes sometimes agreed.  I have shown in several posts and papers that it is capitalist investment that is the ‘swing factor’ in booms and slumps – a fall in investment leads capitalist economies into slumps and leads them out.  Consumption is a lagging factor, and indeed changes in consumption are small during the cycle of boom and slump compared to investment.

Moreover, using IMF/World bank data, if we look at investment rates (as measured by total investment to GDP in an economy), we find that in the last ten years, total investment to GDP in the major economies has been weak; indeed in 2019, total investment (government, housing and business) to GDP is still lower than in 2007. In other words, even the low real GDP growth rate in the major economies in the last ten years has not been matched by total investment growth.  And if you strip out government and housing, business investment has performed even worse.

The national savings ratio of the advanced capitalist economies in 2019 is no higher than in 2007, while the investment ratio has fallen 7%.  There has been an investment dearth not a savings glut.  In my view, this is not the result of a lack of aggregate demand caused by rising inequality and the inability of workers to buy back their own production. It is the result of the declining profitability of capital in the major capitalist economies, forcing companies to look overseas to invest where profitability is higher (the investment ratio in emerging economies is up 10% in the last ten years – something Klein and Pettis do not note.). As usual with Keynesian and post-Keynesian analyses, the movement of profit and profitability is ignored.

Klein and Pettis like to refer to the work of Mian and Sufi who emphasise rising inequality from the 1980s, a shift in income from the poorer to the top 1%, leading to a rise in household debt and a ‘savings glut’.  But the latter do not explain why there was rising inequality from the early 1980s and they ignore the rise in corporate debt which is surely more relevant to capital accumulation and the capitalist economy.  Household debt rose because of mortgage lending at cheaper rates, but in my view, that was the result of the change in nature of capitalist accumulation from the 1980s, not the cause.  Actually, in their new work, Mian and Sufi hint at this. They note that the rise in inequality from the early 1980s “reflected shifts in technology and globalization that began in the 1980s.”  Exactly. What happened in the early 1980s?  The profitability of productive capital had reached a new low in most major capitalist economies (the evidence for this overwhelming – see World in Crisis, the co-edited by G Carchedi and me).

If we are measuring ‘aggregate demand’ by consumption globally, there has been no decline; on the contrary, household consumption in the major economies rose to new highs as a share of GDP.  What ended this speculative credit boom was the turning down in the profitability of capital from the end of the 1990s, leading to the mild ‘hi-tech’ bubble burst of 2001 and eventually to the financial crash and Great Recession of 2008. A ‘savings glut’ is really one side of an ‘investment dearth’. Low profitability in productive assets became a debt-fuelled speculative bubble in fictitious assets.

Crises are not the result of an ‘indebted demand’ deficit; but are caused by a ‘profitability deficit’. The ‘class war’ that Klein and Pettis argue is the cause of trade wars is related to the exploitation of labour by capital for higher profitability, not a lack of domestic consumption caused by low wages.

Klein and Pettis follow John Hobson in his argument that ‘imperialism’ (or trade wars for our authors) was the result of capital being forced to seek new markets overseas because of the lack of consumption demand at home.  Pettis: “It’s interesting to go back to Hobson. He argued that the reason England and other European countries exported capital abroad was not military adventurism, but income inequality. You had incredibly high savings because much of the income was concentrated among the wealthy, and so England had to export those excess savings and the accompanying excess production. Imperialism enabled it to lock in markets for both of those exports. Hobson’s prescription was that increasing the wages of English workers such that they’re able to consume what they produce would make imperialism unnecessary—and this is where I see the connection to today.”

This is what Hobson reckoned for the late 19^th century. But the evidence does not back this up. The UK was the leading imperialist power of the 19th century. The great economist J Arthur Lewis summed up the driver behind Britain’s imperialist ambitions in the late 19th century. “In the low level of profits in the last quarter of the century we have an explanation which is powerful enough to explain the retardation of industrial growth in the 1880s and 1890s… we have here also, in low domestic profits, the solution to the great mystery of British foreign investment, namely why Britain poured so much capital overseas…  home industry was so unprofitable in the 1880s through the squeeze on profits between wages and prices.” Lewis shows that during the long depression, nominal wages fell, but as prices fell more, real wages stayed up at the expense of profits.  (See my book, The Long Depression).

As the Marxist economist of the 1920s, Henryk Grossman said of Hobson’s thesis: “It is not enough to account for capital export in terms of the lack of profitable investment opportunities at home, as the liberal economist and pioneering critic of imperialism, John Hobson put it”.  “[W]hy,” then, “are profitable investments not to be found at home?…..The fact of capital export is as old as modern capitalism itself. The scientific task consists in explaining this fact, hence in demonstrating the role it plays in the mechanism of capitalist production.” It is the race for higher rates of profit that is the motive power of world capitalism. Foreign trade can yield a surplus profit for the advanced country.

From about the 1980s onwards, the rate of profit in the major economies reached new lows, so the leading capitalist states again looked to counteract Marx’s law through renewed capital flows into countries that had massive potential reserves of labour that would be submissive and accept ‘super-exploiting’ wages. World trade barriers were lowered, restrictions on cross-border capital flows were reduced and multi-national corporations moved capital at will within their corporate accounts.  This explains the policies of the major imperialist states at home (an intensified attack on the working class) and abroad (a drive to transform foreign nations into tributaries).

A recent paper by two economists at the US Federal Reserve, Joseph Gruber and Steven Kamin shows a widening gap between corporate savings (or profits) and corporate investment in most of the major economies (Gruber corporate profits and saving.) But Gruber and Kamin demonstrate that this was because rates of corporate investment “had fallen below levels that would have been predicted by models estimated in earlier years”.  With the exception of Japan, since 1998, corporate savings to GDP have been broadly flat. But there has been a fall in the investment to GDP ratio in the major economies, with the exception of Japan, where it has been broadly flat. So the gap between savings and investment cannot have been caused by rising savings.

There has NOT been a global corporate savings (or profits) ‘glut’ but a dearth of investment.  There is not too much profit (surplus savings), but too little investment. The capitalist sector has reduced its investment relative to GDP since the late 1990s and particularly after the end of the Great Recession.

As profitability fell, investment declined and growth had to be boosted by an expansion of fictitious capital (credit or debt) to drive consumption and unproductive financial and property speculation.  The reason for the Great Recession and the subsequent weak recovery was not a lack of consumption or a savings glut, but a collapse in investment.