Archive for the ‘capitalism’ Category

Big data, fake news and global growth

July 20, 2018

This week, it was reported that the number of Americans filing for unemployment benefits last week was the lowest since 1969!

The official unemployment rate is also near an all-time low.  In Japan and the UK too, the unemployment rates are near lows and in Europe, the official rate is heading back to pre-global crash levels.

As I have reported in previous posts, measures of economic activity from various sources suggest that the world capitalist economy has been picking up pace in growth since the near slump of 2015-16.  This is particularly the case for the most important capitalist economy, the US.

Below is the world composite PMI (purchasing managers index).  This is a survey globally of the state of economic activity in both manufacturing and service industries as the corporate executives see it.  If the measure is above 50, world economic activity is rising.  Currently, the PMI shows a return to trend expansion after the near contraction of 2015.

Next week we shall get the first estimate of US real GDP growth for the second quarter of 2018.  It is likely to be strong.  The Atlanta Federal Reserve has a ‘high frequency’ forecast measure for each quarter’s growth and it currently expects the Q2 figure to come in at a 4.5% annual rate.  That means real growth in Q2 would be about 1% point above Q1.  If that turns out to be right, it means that the US economy would have motored along at about 3% for the first half of 2018.

No doubt President Trump will make much of this apparent fast expansion and claim it for his policies of tax cuts for the corporate sector and the top 10%.  However, as a recent study has shown, this will be ‘fake news’.  The study by some European economists found that there was no difference between the post-election performance of the US economy under Trump and a synthetic ‘doppelganger’ US economy without Trump, suggesting that there has been no ‘Trump effect’. “The employment performance of the US economy since the election was no different from its doppelganger. There is nothing in the data that indicates an acceleration of employment creation because of President Trump.”

But the most usable surveys of economic activity in the US do show that the economy is expanding at a reasonably fast rate (if no faster than the average of 3.3% since 1945).  Here is a graph that combines various surveys of economic activity in the US.  Anything above 0 (LHS) or 50 (RHS) implies that the economy is growing.  The current RHS rate is close to 60 which implies fast expansion – certainly compared to 2016 when the measure was below 50, implying contraction and, of course, much higher compared to the Great Recession when output collapsed.

The other major capitalist economies do not seem to be doing as well as the US, despite previously optimistic reports.  The EU is growing at about 1.6% annually, the UK at under 1%, and Japan is actually contracting.  Nevertheless, global growth is expected to show an acceleration in 2018 over 2017, when all the emerging economies of China, India etc are included.

But can we get more frequent and comprehensive measures that could actually forecast accurately what will happen in future quarters and years?

The huge eruption of what is called ‘big data’ from the internet, social media and other sources in the last ten years has led to a new industry of forecasting that aims to deliver more frequent and accurate estimates of future developments, in the same way that weather forecasting has improved.

The Federal Reserve Bank of New York has refined this big data in its own survey of US economic activity.  And as long ago as 2013, the Bank of England’s economists looked at the use and efficacy of big data.  They looked at indicators for global growth in industrial production and trade.  They found that sharp changes in various indicators were a good guide to future production and growth.  However, the problem with these indicators of future expansion is that they are not that timely, with data only on a monthly (if you are lucky) but more usually on a quarterly basis.

The statistical economists have recently looked for more timely data and a Bank of England economist recently published a paper on the best predictors of global growth. The paper found that the daily movement in metals prices was a reasonably accurate measure of global economic activity.  “Metals prices are highly correlated with world activity… and perform well at predicting world GDP in the near-term.”

In other words, the pace of change in metals prices in this month of July will give a reasonable estimate of world real GDP growth for July (and eventually Q3), well ahead of any official data (Q3 world growth is not going to be available until January 2019).

The Bank of England economists used the S&P metals prices index as their metals prices indicator.

As you can see (circles), the metals index fell sharply during the Great Recession in real GDP and predicted the subsequent recovery exactly in mid-2009.  Similarly it predicted the recovery from the relative slump in 2015.  Remember the actual real GDP figures for most countries do not become available until up to two quarters later or even more.  So the metals index becomes a ‘high frequency’ indicator for growth.

Copper is the largest constituent of the index and it is a metal used in just about every important industrial and consumer appliance or service.  So the copper prices index is also likely to be a good indicator, in my view.  When I ran the copper price against world GDP growth, the correlation was very good.

So looking ahead, what do the metals price and copper price indexes tell us about the current Q3 period and onwards?  I did the trend measure of the copper price, and it shows that expansion from the trough of 2015-16 seems to have peaked.  That suggests the global expansion from 2017 which was above the trend rate has now subsided back to the trend and may fall below.

The metals price index also suggests that the peak in the current acceleration of global (and US?) growth ended in June 2018 and the direction is now downwards in Q3 (the period beginning in July).

So don’t be overwhelmed by the good news stories about US real GDP figures for Q2 2018 next week.


Free trade or protectionism? – the Keynesian dilemma

July 11, 2018

The trade war that has broken out has confused mainstream macroeconomics.  The majority still see tariff increases as ‘protectionism’ and ‘free trade’ as the only way to operate. Trump’s measures are generally condemned.  But among the Keynesians, there is confusion and split.

Martin Wolf, the Keynesian economic journalist, who writes for the FT, reckoned that the trade war would be costly for global capital: “Global co-operation would surely be shattered”  Nevertheless, he argued for UK retaliation against Trump’s measures “more because the alternative looks weak than in the belief that it would work. Another thing the rest of the world should do is to strengthen their co-operation.”  On the other hand, he thought Trump’s wild proposal to create tariff-free area (for rich countries only) could be taken up. “Who knows? It might even work.”  He did not explain how cutting tariffs on goods from the 3-4% (that they average now for most advanced countries) to zero would make any difference.

While Wolf looks for ways to ‘save globalisation and free trade’ through retaliation, another Keynesian Dani Rodrik actually advocates protectionism as a good idea for economies with weak domestic growth: “US protectionism surely will generate some beneficiaries as well in other countries.” 

In a contrary view to Wolf, who calls for retaliation to stand up to Trump. Rodrik says Europe and China should “should refuse to be drawn into a trade war, and say to Trump: you are free to damage your own economy; we will stick by policies that work best for us.”  Indeed, he says, domestic industries may benefit from tariffs on their exports to the US – they could sell at home instead. He cites how Boeing could sell more planes in the US and Airbus could do the same in Europe. “Some European airlines favor Boeing over Airbus, while some US airlines prefer Airbus over Boeing. Trade restrictions may result in a total collapse in this large volume of two-way trade in aircraft between the US and Europe. But the overall loss in economic welfare would be small, so long as airlines view the two companies’ products as close substitutes.”  According to Rodrik, “US protectionism surely will generate some beneficiaries as well in other countries.”

The protectionist line has also been peddled by leftist economist Dean Baker.  He points out that not everyone gains from ‘free trade’. He claims that it was free trade that lost manufacturing jobs in the US, echoing the Trumpist argument.  However, there is much evidence that this was not the case.  As I said in a past post on Trump, trade and technology, “the loss of US manufacturing jobs, as it has been in other advanced capitalist economies, is not due to nasty foreigners fixing trade deals.  It is due to the inexorable attempt of American capital to reduce its labour costs through mechanisation or through finding new cheap labour areas overseas to produce.  The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation and ‘globalisation’ aimed at counteracting falling profitability in the advanced capitalist economies. But it is also the result of ”neo-liberal’policies designed to hold down wages and boost profit share.”

Baker claims that trade deficits lose jobs because it reduces “demand” and so reducing the US trade deficit would save jobs.  He makes this argument when the official unemployment rate in the US, the UK and Japan is at an all-time low (yes, I know many are crap jobs)!  Apparently, if everybody ran a trade surplus (impossible by the way) all would be better off.  What he really means is Trump is right to turn the US trade deficit into a surplus and get manufacturing jobs back from the developing world and Europe. It is certainly a weird and confused argument for nationalism.

The Keynesians are confused about whether they favour ‘free trade’ or protectionist/nationalist measures.  That echoes that confusion that Keynes had during the last Great Depression of the 1930s.  He changed his mind from a strong free trader in the late 1920s to a protectionist and advocate of tariffs by the mid-1930s.  This changing view was really an expression of the changing view of British capitalism.  Free trade is fine for those winning in markets; protectionism is better when a national capital loses share.  And that was Britain’s position.

In 1923, Keynes endorsed free trade in no uncertain terms: “We must hold to Free Trade, in its widest interpretation, as an inflexible dogma, to which no exception is admitted, wherever the decision rests with us. We must hold to this even where we receive no reciprocity of treatment and even in those rare cases where by infringing it we could in fact obtain a direct economic advantage. We should hold to Free Trade as a principle of international morals, and not merely as a doctrine of economic advantage.”

But his ‘moral’ position soon dissipated as British capitalism fell into a long depression in the mid-1920s and then in the 1930s.  In his seminal work, The General Theory, published in 1936, he concluded that “the one big (and smart) idea of absolute monarchy was to push exports over imports…..“A favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression.”

He advocated tariffs on imports into the UK as an alternative way of cutting real wages (by increased import prices) and to boost domestic production.  For Keynes, it was a way for British capital to gain a cost advantage over its rivals by reducing wage costs in real terms.  “I am frightfully afraid of protection as a long-term policy,” he testified to a UK parliamentary commission, “but we cannot afford always to take long views . . . the question, in my opinion, is how far I am prepared to risk long-period disadvantages in order to get some help to the immediate position.” Of course, once capitalism globally had recovered and, with it British capital, then ‘free trade’ could be renewed.

The current confusion in macroeconomics and particularly among modern Keynesians mirrors the changing views of Keynes as the current Long Depression lingers and ‘globalisation’ fails for all.  So now we have Keynesians like Rodrik and Baker supporting tariffs on US imports and pushing for trade surpluses, while calling on Europe and China not to retaliate!  And Wolf calls for retaliation by Europe and Asia.

What is the Marxist view?  Should we support tariffs and other protectionist measures introduced by weaker capitalist nations to ‘stand up’ to Trump’s measures (Wolf)?  Alternatively should we support Trump’s measures as a way of saving US manufacturing jobs (Baker) and perhaps helping other countries to boost their domestic industries (Rodrik)?

Free trade or protection?  I outlined my answer in a previous post.  Free trade has been no great capitalist success.  Capitalism does not tend to equilibrium in the process of accumulation.  As Adam Smith put it, in contrast to Ricardo, “When a rich man and a poor man deal with one another, both of them will increase their riches, if they deal prudently, but the rich man’s stock will increase in a greater proportion than the poor man’s. In like manner, when a rich and a poor nation engage in trade the rich nation will have the greatest advantage, and therefore the prohibition of this commerce is most hurtful to it of the two”. Capitalism does not grow globally in a smooth and balanced way, but in what Marxists have called ‘uneven and combined development’.  Those firms and countries with better technological advances will gain at the expense of those who are behind the curve and there will be no equalisation.

Free trade works for national capitalist states when the profitability of capital is rising (as it was from the 1980s to 2000) and everybody can gain from a larger cake (if in differing proportions).  Then globalisation appears very attractive.  The strongest capitalist economy (technologically and thus competitively in price per unit terms) will be the strongest advocate of ‘free trade’, as Britain was from 1850-1870; and the US was from 1945-2000.  Then globalisation was the mantra of the US and its international agencies, the World Bank, the OECD and the IMF. But if profitability starts to fall consistently, then ‘free trade’ loses its glamour, especially for the weaker capitalist economies as the profit cake stops getting large.

Marx and Engels recognised that ‘free trade’ could drive capital accumulation globally and so expand economies, as has happened in the last 170 years.  But they also saw (as is the dual nature of capitalist accumulation) the other side: rising inequality, a permanently floating ‘reserve army’ of unemployed and increased exploitation of labour in the weaker economies.  And so they recognised that rising industrial capitalist nations could probably only succeed through protecting their industries with tariffs and controls and even state support (China is an extreme example of that).

Engels re-considered the case for free trade in 1888 when writing a new preface on a pamphlet on free trade that Marx had wrote in 1847.  Engels concluded that “the question of Free Trade or Protection moves entirely within the bounds of the present system of capitalist production, and has, therefore, no direct interest for us socialists who want to do away with that system. Whether you try the Protectionist or the Free Trade will make no difference in the end.”

But it is informative to see the Keynesians split over favouring free trade for global capital (Krugman) or protection for national capitals (Rodrik and Baker for the US and Wolf for the UK and Europe).  Sign of the times.

Trade war and depression

July 6, 2018

Today is a threshold date for the global economy.  Trump’s US administration starts imposing trade tariffs on $34bn of imports from China.  And Beijing is set to target an equal amount in retaliation.  Add that to the pile of tariffs and counter-tariffs growing across the Atlantic and North America, and the value of trade covered by the economic wars that Trump has launched will race through the $100bn mark by today.

And that’s just the beginning.  This escalating trade war could easily surge through the trillion-dollar mark, taking 1.5% of global GDP. It would be equivalent to a quarter or more of the US’s $3.9tn total trade with the world last year and at least 6% of global merchandise trade (worth $17.5tn in 2017, according to the World Trade Organization).

The $34bn in Chinese imports being targeted by the Trump administration today are roughly equivalent in value to a month of imports from China.  In this tranche, a 25% import tax will be applied on 818 products ranging from water boilers and lathes to industrial robots and electric cars. In return, Beijing charge a similar tariff on a list that includes soya beans, seafood and crude oil. Both countries have also issued further product lists that would take the total trade covered to $50bn on each side.

Angered by China’s retaliation, Trump has ordered a further $200bn worth of imports to be targeted for a 10% tariff and threatened to go for another $200bn beyond that.  To which Beijing has vowed its own response.  US imports from China were worth $505bn last year while US exports to China reached a record $130bn.   So a £450bn rise in tariffs will sweep across much of China’s imports.

The Trump auto wars could be worth even more than $600bn. In a televised interview on Sunday the US president called his plan to impose tariffs on imported cars and parts in the name of US national security “the big one”. And that is certainly how the EU and others see it.  According to official data, the US imported $192bn in cars and light trucks in 2017 and a further $143bn in parts for a total of $335bn.

Then there’s NAFTA.  The US trades more with Canada and Mexico ($1.1tn) than it does with China, Japan, Germany and the UK combined.  Trump is seeking to renegotiate it just as a leftist and nationalist President AMLO has been elected in Mexico.  Trump seems to believe the auto tariffs will give him leverage over the EU and Japan in trade negotiations as well as over Canada and Mexico in the continuing talks over an updated North American Free Trade Agreement.  Mr Trump is dialling up the pressure to force capitulation. For that reason, the US could impose 20% tariffs on some or all of those imports.

Then there is FART.   Trump is planning a bill through Congress, called the Fair and Reciprocal Tariff Act, or FART for short. FART would allow Trump to abandon the World Trade Organization’s tariff rules, granting him new authority to unilaterally change tariff agreements with certain countries; to abandon central WTO trade rules, namely the “most favoured nation” principle that keeps countries from setting different tariff rates for different countries outside of free trade agreements and “bound tariff rates,” the tariff ceilings that each WTO member country has previously agreed to. In short, it would give Trump the authority to start a trade war without Congressional oversight, all while flouting the WTO’s rules.  It would mean the end of the WTO, in essence. Already, at least one prominent Trump backer, Trump’s short-lived communications director Anthony Scaramucci, tweeted that FART “stinks.”  But the smell is getting worse.

Any US tariffs are likely to be met with retaliation.  EU officials have been working on a plan to target upwards of €10bn in US goods for retaliation if it goes ahead with tariffs on the $61bn in cars and parts it imported from the EU in 2017.  But in the extreme scenario — of like-for-like, tit-for-tat tariffs — more than $650bn in global trade would be covered, with consequences for companies globally.

What is the likely impact on global growth from this trade war?  Well, Paul Krugman, Keynesian economist, won the Nobel prize in economics for his work on international trade and recently he did a ‘back of the envelope’ calculation. Krugman reckons that “there’s a pretty good case that an all-out trade war could mean tariffs in the 30-60% range; that this would lead to a very large reduction in trade, maybe 70%”! And the overall cost to the world economy would be about a 2-3% reduction in world GDP per year – in effect wiping out more than half of current global growth of about 3-4% a year (and the latter assumes that there is no new global recession).

Krugman reminds us that in the Great Depression of the 1930s, the trade war launched by the US with the Smoot-Hawley tariff, pushed tariffs up to 45%. “So both history and quantitative models suggest that a trade war would lead to quite high tariffs, with rates of more than 40% quite likely.”  Remember current global trade tariff rates are about 3-4% only.

Already, world trade has been staggering from the impact of the Great Recession and the subsequent Long Depression.  And world trade share (share of trade in global GDP) has stagnated at about 55% (see figure below).  Indeed, the great era of globalisation is over.  Now the trade war – another consequence of the Great Recession and the Long Depression since 2008 – could roll back the world trade share to 1950s levels, according to Krugman. ”If Trump is really taking us into a trade war, the global economy is going to get a lot less global.”

Given this, Krugman looked at the hit to US economic growth.  He reckoned it could take 2% of GDP off real growth each year.  As average growth is expected to be about 2% a year over the next five years (assuming no world slump), that would mean the US economy would stagnate.  That is not as bad as the Great Recession, which knocked 6% of US real GDP growth, but it’s bad enough to sustain a further leg of the current Long Depression.

And other countries will be hit even harder. Several major economies rely on trade much more than the US and Europe for growth.  In the league of global value chain for trade, Taiwan is top with nearly 70% of value-added coming from exports; and many Eastern European countries also have high export ratios.  The US is only at 40% and indeed China is under 50%.

According to Pictet asset management, if a 10% tariff on US trade were fully passed onto the consumer, global inflation would rise by about 0.7%. This, in turn, could reduce corporate earnings by 2.5% and cut global stocks’ price-to-earnings ratios by up to 15%.   All of which means global equities could fall by some 15-20%. In effect, this would put world stock market price back by three years – indeed a crash.

Meanwhile, Asian governments, led by China, are continuing their drive to relax trading restrictions among themselves, while retaliating to Trump’s trade war.  Last week, the 16-nation Regional Comprehensive Economic Partnership, which includes China, Japan and India but not the US, met in Tokyo to try and complete a new trade pact that would include the 10 members of the Association of Southeast Asian Nations as well as South Korea, Australia and New Zealand, and cover one third of the world’s economy and almost half its population.

And of course, as I have argued previously, China is driving forward its belt and road global investment scheme across central Asia.  So, although many Asian and Eastern European economies may suffer more than the US initially from a global trade war, longer term, trade pathways may alter to make them more Euro-Asia centric, to the detriment of the US and Latin America.

Global growth has been picking up in the last 12 months after a near-recession in 2015-16.  Indeed, Gavyn Davies, FT economics blogger and former Goldman Sachs chief economist, reckoned that world growth was growing at 4.4%, about 0.6% above trend, and a full percentage point higher than a couple of months ago.

But the trade war will particularly hit the manufacturing and productive sectors of the major economies.  And while global growth as a whole may have picked up recently, world manufacturing growth is looking frail.  The global manufacturing PMI measures activity in manufacturing and anything over 50 means growth.  So not looking so rosy.

Indeed, the US stock market has not bounced very much because, counteracting the one-off rise in corporate profits, has been the possibility of rising interest rates driving up the cost of borrowing and servicing existing debt and the potential hit from the coming trade war.

Hopes for a sharp rise in productive investment from the tax cuts appear dashed.  Instead of more investment, there has been a three-fold increase ($150bn) is share buybacks. In Q1 alone, US corporations collectively repatriated $217bn of their international stashes, around 10% of the $2.1trn of greenbacks estimated to be currently offshore.  But JPMorgan calculates only $2bn of the $81bn repatriated in Q1 by the top 15 companies was spent on productive investment.

World economic growth (and US growth may have peaked in Q2 2018 and now there is the prospect of an all-out trade war.

Mexico: violence, corruption and inequality – AMLO to the rescue?

July 2, 2018

The victory in Mexico’s presidential election of Andrés Manuel López Obrador (AMLO), under the rubric of his relatively new ‘progressive’ Morena party, is both unsurprising and surprising.  It’s unsurprising because AMLO had a huge and increasing lead in the opinion polls leading up to polling day.  And Mexico’s 88m voters (out of 127m people) have now given him the biggest win in post-war election history, with over 53% of the vote.  The candidates of the establishment parties were way behind.  For the first time, the parties of the elite and the status quo were split over who should be their standard bearer.  And the sheer anger and frustration at the state of Mexico’s economy and daily life for average citizens has swept AMLO into office.

But the result is also surprising because the ruling classes’ immense power to ‘fix’ the election (as they have done in the previous ones), or to find a way to stop AMLO politically has failed.  Of course, the Mexican courts may attempt to overturn the result on alleged ‘irregularities’ but such is the size of AMLO’s victory, that such a trick will probably not succeed. AMLO’s party Morena has also gained a majority in the Mexican Congress and has won at least five of nine gubernatorial races, with the winners including Mexico City’s first elected female mayor, Claudia Sheinbaum.  But Morena is in alliance with a small extreme Christian fundamentalist party which may moderate what the new administration will do, particularly in social and ‘family’ matters.

AMLO has won because he campaigned on three key issues that enrage and engage Mexicans: rising pervasive and daily violence across the country; endemic corruption among politicians and officials; and high and rising inequality between rich and poor.

On average, someone was killed in Mexico every 15 minutes during the month of May, putting the country on track to surpass last year’s grim milestone of 29,168 killings.

Political killings have also shot up, with 130 politicians, including 48 candidates for office, murdered since the beginning of the electoral cycle in September, according to political consultancy Etellekt.

Behind this violence lies the battle of the drug cartels, organised crime and general criminality which is often settled by assassination.  The police are either lacking in personnel or backing from the government; or both are in the league with the criminals.

Corruption is integrally linked to the massive profits made from drug trafficking and production, and other criminal activity.  Politicians of the establishment parties were up to their neck in this.  Mexico’s global corruption ranking has never been higher.

The country has been rocked by a succession of eye-watering corruption scandals, including that of Javier Duarte, a PRI governor who went awol in a government helicopter in 2016 after being accused of corruption and whose wife recently turned up living in luxurious exile in one of London’s poshest boroughs.  The government of President Enrique Peña Nieto was riddled from practically the moment he took office. His wife purchased a bespoke home from a government contractor on favourable terms. Then there was the cover-up of the horrific disappearance of 43 teachers’ college students, the use of sophisticated spyware purchased by the government to monitor journalists and human rights lawyers, while top officials embezzled public funds to pay for party electoral campaigns.

AMLO has pledged to end corruption – but how this is to be done remains unclear.  AMLO says he will allow a recall of officials in office after two years (including the presidency) and he will sell the presidential plane and only live in modest premises.

AMLO says he will stand up for the poor (over 50m Mexicans are designated as such) first over the rich.  And that is the third issue that has led to his election victory.  Mexico is one of the most unequal societies in the world in the 21st century – surpassed only by post-apartheid South Africa.  Recently the US Brookings Institution adjusted the standard measure of inequality in a country, the Gini coefficient.  The nearer the Gini is to 1, the higher the level of inequality. On its new estimates, Mexico’s Gini coefficient for 2014 rises from an already high 0.49 to a mega 0.69, close to that of South Africa, the world’s most unequal country.

Behind the shocking story of violence, corruption and inequality lies the stagnant state of the Mexican economy.  It’s the 15th largest in the world as measured by GDP and the second largest in Latin America.  It is sufficiently advanced to be included in the top 30 OECD economies.  And yet it is in a sorry state.

The inequality is not just between rich and poor but also in the uneven development of the economy under capitalism.  Cumulative economic growth in the best-performing Mexican states reached 32% between 2007 and 2016, about double the average for Latin America.  But this is about four times the rate of growth in the low-performing states. Per capita output shows the same diverging path.

In Oaxaca and Chiapas, for example, about 70% of the population is in poverty and 23-28% in extreme poverty, according to data from the National Council for the evaluation of socio-political development (CONEVAL).

Contrary to the views of mainstream economics, the 1994 NAFTA trade deal with the US and Canada has not taken the Mexican economy forward.  Indeed, whereas the Mexican economy more than doubled to reach 16% of the US output in the 30 years to the mid-1980s, it has declined to 12% since then.

Mexico’s output per hour worked relative to that of the US is near its lowest level since 1950.

NAFTA, far from boosting Mexico’s economic performance, increased its dependence on US trade and investment, locked in the neo-liberal measures of the 1980s and increased the disparities between the faster-growing US border areas with their special economic zones and the poor southern rural regions.  And now US President Trump is insisting on renegotiating to make it even more favourable to the US!

Moreover, as the excellent report by the CEPR argues, If NAFTA had been successful in restoring Mexico’s pre-1980 growth rate, Mexico today would be a high income country, with income per person significantly higher than that of Portugal or Greece. It is unlikely that immigration reform would have become a major political issue in the United States, since relatively few Mexicans would seek to cross the border.

Mexico’s poverty rate of 55.1% in 2014 was higher than the poverty rate of 1994. As a result, there were about 20.5 million more Mexicans living below the poverty line as of 2014 (the latest data available) than in 1994.  Real wages have made little progress since 1994.  There was a fall in real wages of 21.2% from 1994–96, associated with the peso crisis and recession. Wages did not recover to their pre-crisis (1994) level until 2006, 11 years later. By 2014, they were only 4.1% above the 1994 level, and barely above their level of 1980. The minimum wage, adjusted for inflation, fared even worse. From 1994 to 2015, it fell by 19.3%.

As a result of low profitability and investment, along with the impact of the NAFTA deal, the Mexican economy has basically stagnated.  The reason lies with the failure of Mexico’s capitalist sector.  Yes, the ‘neo-liberal period’ since the early 1980s, presided over by successive establishment, pro-business Mexican governments, did stem the fall in the profitability of Mexican capital to some extent, but it failed to turn profitability up, as was achieved in most other capitalist economies.

Slow economic growth in the post global crash period has led to a crisis in public finances as the state had to pick up the bill from the private sector’s failure.  Between 2008 and 2018, public debt grew from 21% of GDP in 2008 to 45.4% of GDP in 2018. Servicing this debt now absorbs 20% more government revenue than that allotted for health, education and poverty reduction in the federal budget. This is the burden that AMLO will inherit.

The OECD, the main promoter of neoliberal measures in Mexico, claims that “growth is set to pick up, underpinned by private consumption and exports.”  But even the OECD reckons “uncertainty (with Trump) will continue to restrain private investment”. However, “private investment could accelerate if the NAFTA negotiations end favourably.”  And it continues to demand “structural reforms” (ie neoliberal measures of government spending cuts and privatisations) “to strengthen the rule of law and improve institutional quality.” (!).

Despite the OECD’s optimism, capitalist sector investment has stagnated or fallen since the end of the Great Recession.

And that is because the profitability of Mexican capital has not recovered since the Great Recession, at least according to the net rate of return on capital data offered by AMECO.  Indeed, profitability is still some 18% below the level of 2007 and 28% below the 1997 ‘neo-liberal’ peak.

AMLO’s programme is fundamentally Keynesian, using public investment to ‘prime the pump’ of private investment and claiming that money saved from reduced corruption will deliver the funding. But he is unwilling to reverse the part-privatisation of PEMEX, the state oil company or end the proposed new ‘nightmare’ Mexico City airport – only to consider ‘reviewing the contracts’. But how can AMLO turn things round on corruption, inequality and violence without control of the banks (mainly foreign), renationalisation of PEMEX and taking over the major multi-national operations within Mexico?

Donald Trump congratulated AMLO on his win.  But Mexico’s northern neighbour is now being run by a nationalist, imperialist crazy bent on launching a trade war with all and sundry.  Mexico is right in the front line of this whirlwind, with a capitalist economy that is struggling amid poverty, corruption and violence.  Nevertheless, with a huge and young population, oil and gas resources and modern industry in parts, Mexico is in a much better position to succeed than Venezuela and Cuba was.   AMLO does not take over the presidency for another five months (December).  He has major challenges ahead.

The productivity puzzle again

June 29, 2018

Just this week, the chief economist of the Bank of England, Andy Haldane, delivered a speech on the causes of the UK’s productivity problem.  Entitled, “The UK’s Productivity Problem: Hub No Spokes” ,Haldane returned to a familiar theme that has puzzled mainstream economics since the end of the Great Recession.  Why has productivity growth in nearly all the major capitalist economies slowed to a trickle despite the new emerging technologies and the supposed economic recovery?

In the case of the UK, this slowdown has been very severe.  As Haldane put it, UK productivity has flat-lined for a decade. Productivity is running almost 20% below its pre-crisis trend. “It is a gap it is unclear will ever be closed.” In the UK, productivity levels are as much as one-third below those in the US, Germany and France. As Haldane joked “It is the source of the oft-quoted quip that the average French worker achieves by Thursday lunchtime what the average British worker achieves only by close of business on a Friday.”

Also, the productivity gap between the top- and bottom-performing companies is materially larger in the UK than in France, Germany or the US. In the services sector, the gap between the top- and bottom-performing 10% of companies is 80% larger in the UK than in international competitors. This productivity gap has also widened by far more since the crisis – around 2-3 times more – in the UK than elsewhere. This long and lengthening tail of ‘stationary’ companies explains why the UK has a one-third productivity gap with international competitors and a one-fifth productivity gap relative to the past.

Haldane remarked that “the UK is in many respects a tale (tail) of two companies: a small set in the upper tail gazelling along the productivity high road and a much larger set in the lower tail snailing along the low road.” As Haldane recognises “Capitalism always of course throws up winners and losers, hares and tortoises, gazelles and snails, upper and lower tails”.  But it appears that in the UK, however, these differences are far-larger, and have increased by more, than elsewhere. Over the ten years to 2014, top 1% of UK companies experienced annual productivity growth of 8% and the top 0.1% companies (the huge multi-nationals) achieved growth of 12%.  The rest stagnated.  The bottom 25% of UK companies have levels of productivity around 80% or more below the UK median. Their Germany and French counterparts have productivity around 60% or more below the median, large but not as large a differential as in the UK.

It’s not a problem of so-called zombie companies, says Haldane.  Most ‘tail’ companies are not zombies, overburdened by an insurmountable mountain of debt or a broken business model. Rather they are companies surviving, but not yet thriving. And they account for fully 80-90% of all jobs. “They are not the tail; they are the dog.” If you restricted ‘creative destruction’ to true zombies – those whose productivity was negative – this would make little arithmetic difference to average productivity, raising it by perhaps 1%.

In sum, according to Haldane, the UK’s long tail problem is largely a diffusion rather than innovation problem. And this problem seems to have its roots in transfer barriers – barriers to transferring technology, know-how, people and financing – from the UK’s thriving hubs to its striving spokes. “Stronger, longer spokes are needed to reach the long tail.”

The problem with Haldane’s analysis is this ‘long tail’ pre-dates the crisis and as he says himself “thus cannot by itself explain all of the UK’s poor productivity performance since the crisis.  In the UK, this technological trickle-down, from frontier to tail, appears to have dried up. “A lengthening flotilla of boats has remained in dry dock.”  By 2015 there were still only 13% of companies who had adopted all five of these basic technologies. And there was still a tail of 9-10% of companies who had adopted only 2 or fewer of them. Indeed, the top UK companies may have improved their productivity more than the small companies but at a slower pace since the end of the Great Recession and so overall productivity growth has slowed and fallen even further behind other capitalist economies.

So why productivity growth collapsed since the recession?  Haldane cannot answer this.  But I think there are explanations that apply to all major capitalist economies, not just the UK. Productivity growth in all the major capitalist economies has slowed because of the failure of capitalists in most economies to step up investment in new technologies.

There was one phase during the 34 years of the internet and ICT revolution when US economic efficiency sharply increased. In the period leading to 2003, US annual productivity growth reached its highest level in half a century – 3.6%. This was explained by a huge surge in ICT-focused fixed investment. US investment rose from 19.8% of GDP in 1991 to 23.1% of GDP in 2000, fell slightly after the ‘dot com’ bubble’s collapse and then reached 22.9% in 2005. The majority of this investment was in ICT. After this, US investment fell, leading to the sharp productivity slowdown.

The correlation between the growth in investment and the increase in labour productivity three years later was 0.86, and after four years 0.89 – extraordinarily high. When capital investment fell, this was followed by a decline in labour productivity. In other words, productivity growth depends on capital investment being large enough.

Why is productivity growth so poor in Britain, especially among the key big British multi-nationals?  The answer is clear: reduced business investment.  The latest business investment figure for Q1 2018 showed an absolute fall in investment.  Business investment growth has been on a steady trend down since the end of the Great Recession.Indeed, total UK investment to GDP has been lower than most comparable capitalist economies and has been declining for the last 30 years.

In the case of the UK, there is another particular problem: the UK is increasingly a rentier economy, relying on finance, business services and real estate.  These are unproductive activities that do not boost the productivity of labour, but do reduce available profits for productive investment.  Indeed, the relative fall-back in UK productivity compared to Germany and France etc can be particularly discerned from the early 2000s, when the oil revenues dissipated and investment increasingly went into a credit fuelled real estate boom.

A detailed sectoral analysis by the Economic Statistics Centre of Excellence has shown that three-fifths of the drop in productivity growth stems from sectors representing only a fifth of output, including finance, utilities, pharmaceuticals, computing and professional services.  The Bank of England did a similar analysis found that it is the top ones that have become the slackers. The most productive groups are “failing to improve on each other at the same rate as their predecessors did”, according to its research. The best companies still improved their productivity faster than the rest, but productivity growth among the best has sharply fallen and this has hurt the UK’s growth rate.

Investment in a capitalist economy depends on its profitability as I have argued ad nauseam in this blog.  And there is still relatively low profitability and a continued overhang of debt, particularly corporate debt, in the major economies.  In the case of the UK, the profitability of the non-financial sector is still some 12% below its level in 1997.  And in the oil sector, it has fallen 50%.

Under capitalism, until profitability is restored sufficiently and debt reduced (and both work together), the productivity benefits of the new ‘disruptive technologies’ (as the jargon goes) of robots, AI, ‘big data’ 3D printing etc will not deliver a sustained revival in productivity growth and thus real GDP.

And there is another factor, again particularly discernible in the UK: the lack of funding for smaller companies to invest in new technology.  As Haldane explains, new, ‘upper tail’ UK companies can attract venture capital finance. The UK has a large and liquid corporate bond market, totalling around £500 billion for investment grade securities, which allows larger and better-established companies to raise money at long maturities in capital markets.  But for the rest, it is much more difficult. Lending to the corporate sector by UK banks, at 6% of their assets, is around one third of the equivalent by German banks. In relation to GDP, bank financing of companies is around half that in Germany. The UK’s national development bank (the British Business Bank) has assets that are a small fraction of its German counterpart (KfW).  The big five banks in the UK do not help smaller businesses to invest but prefer to speculate in financial assets.

That makes the idea presented in a recent report by the UK’s Labour Party suggesting the Bank of England set a target for 3% productivity growth in its policy actions ridiculously utopian. The BoE has no real control over the lending policy of the commercial banks and no control at all over the investment actions of the major UK companies. Without such control, the 3% productivity growth target is just a dream.  To achieve it would require public ownership of the major financial institutions and the top 1% of UK companies (as Haldane has referred to them).

Compare the inability of the BoE to manipulate the UK capitalist economy with the power that China’s monetary authorities have.  Last weekend, the People’s Bank of China cut the reserve requirement ratio, the amount of cash that banks must hold in reserve at the central bank, freeing up Rmb700bn ($106bn) for new lending and investment.  Over the last 18 months, China’s central bank has been reining excessive lending by local authorities and ‘shadow banking’.  This has been achieved “even as growth remained surprisingly resilient” (FT).

Now the authorities are gradually preparing to reverse that policy as the trade war with the US rears its head and with a possible hit to China’s growth.  China’s authorities have the power to launch a massive investment program, as they did in the Great Recession, to sustain growth and productivity (which is motoring) because the state controls the banks and commanding heights of the economy.  That power does not exist for governments in the major capitalist economies.  In those economies, profitability rules and productivity stagnates.

Erdogan’s Turkey

June 25, 2018

Turkey is a country of 80m people and 56m adults had the right to vote in Sunday’s general election.  87% of those turned out.  Incumbent President Recep Erdogan, of the Islamic AKP, was re-elected with 52% of the vote, with the main opposition candidate, Muharrem Ince, of the secular centre-left CHP getting 31%. Erdogan’s AKP saw its share of the vote in parliament fall back from 49.5% in the last election of November 2015 to 42.4%. The loss seems to have gone to the ultra-nationalist MHP which won 11.2% and will now form a coalition government with Erdogan’s party.

Erdogan’s rule is now cemented.  He had already got a referendum through to increase sharply the powers of the president.  Now he has won a snap general election just before the oncoming economic crisis facing the country.

Since the failed military coup in 2016, Erdogan has imposed emergency powers in a period of unprecedented repression. The coup aimed at stopping further Islamic rule by Erdogan and restoring the secular state that began with Kemel Ataturk in 1917.  Above all the military wanted to put Turkey back into the fold of international capital and the EU.

With its defeat, Erdogan has moved fast to destroy any further vestiges of opposition and to break with the political interests of international capital, as represented by the EU, the IMF and the UN.  More than 100,000 people have been detained. Tens of billions of assets have been seized and 150,000 people have been purged, losing not only their jobs but their passports (and those of their spouses) and branded national security threats. Often, they lose their housing (tied to government employment) and their pensions. “One elite is being displaced by another: property is changing hands, new cadres are being groomed for the civil service, the universities are being emptied of one class of intellectuals to be replaced by more loyal alternatives, and regime-friendly capital is gaining access to state largesse, including the bounty resulting from asset seizure.”

Under Erdogan, corruption is even more the order of the day (as it is in several of the larger emerging economies like Mexico and Brazil which also have elections this year).

The key reason for the early election was the impending economic crisis in Turkey.  At first sight, the Turkish economy seems to be racing along – with real GDP growth officially at 7% plus.  But this is illusory.  Much of this growth is in unproductive real estate expansion and grandiose government projects.

The profitability of Turkish capital has been in steep decline since the end of the Great Recession.  And economic growth was slowing fast in 2016 at the time of the coup.  But since then Erdogan has engendered a boom mainly in real estate and banking through ultra-low interest rates and public spending.  Foreign investment has come in to finance this unproductive investment.

This credit boom has pushed the inflation rate to double digits.

exposing Turkey to the risks of capital flow reversal at any time.

And that’s the issue ahead.  Rising global interest rates and the growing trade war initiated by US President Trump are going to hit the so-called emerging capitalist economies like Turkey.  The cost of borrowing in foreign currency will rise sharply and foreign investment is likely to reverse.  Turkey has external debt equivalent to 50% of its GDP, and that is rising rapidly.  It must roll over 20% of GDP annually in foreign debt and more than one third falls due within the next 12 months.

Turkey is now near the top of the pile for a debt crisis, along with Argentina (already there), Ukraine and South Africa.

Erdogan makes a ‘populist’ appeal to his domestic support that he is not going to be told what to do by the IMF or the EU. But the result is that the Turkish lira has been diving in the last year as foreign investors get out of Turkey for fear on an impending debt crisis.

Erdogan may have won the election; he may have increased his powers for suppression and autocracy; and he may continue to stick up his finger to international capital. But Turkey’s economy is on (turkey) legs and is vulnerable to a major slump if the global trends on the cost of foreign capital and the end of globalisation intensify.

Brazil: austerity, debt and trade

June 19, 2018

I have just returned from Brazil where I spoke at the annual Society for Political Economy (SEP) conference at the University Federal Fluminense (UFF) in Rio de Janeiro and at the economics faculties of the Federal University of Rio de Janeiro and the State University of Sao Paolo.

I did so as the currencies of the major so-called emerging market countries dived against the dollar.  The moves by President Trump to ‘up the ante’ on tariffs on trade against everybody and the resultant retaliation planned by the EU and China will hit the exports of these economies hard.  At the same time, the US Federal Reserve has raised its policy interest rate yet further.  That will eventually increase the cost of servicing dollar debt owed by these emerging economies.  So the emerging market debt crisis is getting closer.  Argentina has already had to go to the IMF for a $50bn loan and its stock market dropped nearly 10% in one day this week. The South African rand is also heading back towards its all-time low against the dollar that it achieved two years ago.

Brazil is part of this new trade and currency crisis.  The Brazilian real has taken a hit too, halving in value against the US dollar since 2014 and heading back to a record low since the Great Recession of R$4 to the US$.

Unemployment remains near highs.

And this is at a time when the country is bracing itself for a presidential election in October.  The leading candidate in the polls is former president Lula of the Workers Party (PT). But he is languishing in jail convicted on a supposed corruption charge.  He is unlikely to be able to stand in October.  So the election result is wide open.  And with 50% of Brazilians saying that they are not going to vote (even though it is compulsory!), that is an indication of the disillusionment that most Brazilians have with their mainly corrupt politicians and with the prospects of Brazil getting out of its slump that the economy has been since the end of the commodity price boom in 2010.

The Great Recession of 2008-9 hit the economy as everywhere else, but when the prices for Brazil’s key exports (food and energy) also plummeted, the economy entered a deep depression that troughed in 2015-6.  The mild recovery from that is now stalling.

The incumbent administration of President Temer came into office through a constitutional coup engineered by right-wing parties in Congress that led to the impeachment of the Workers Party president Dilma Rousseff.  From the start, Temer aimed to impose the classic ‘neoliberal’ policies of ‘austerity’ in the form of drastic cuts in public services, reductions in public sector jobs and government investment.  Above all, Temer aimed to massacre state pensions.  The slump and the high level of public debt were to be paid for by Brazilian households.  No wonder Temer’s popularity ratings have slumped to a record low of just 4%.  But public sector deficits (now around 8% of GDP) and debt must be brought under control to re-establish business and foreign investor ‘confidence’, so the argument goes.

As I showed in a previous post, Brazil has the highest public debt ratio among emerging economies (IMF data).

But as I also showed in that post, the cause of the high budget deficit and debt was not ‘excessive’ government spending on pensions etc.  Instead it was continual recurring crises in the capitalist sector and the low level of tax revenue – because the rich do not pay high taxes and continually avoid them anyway, while the majority pay sales taxes that are highly regressive ie. the poorer pay more as a percentage of income than the richer.

The slump has been caused by the collapse of the capitalist sector in Brazil and the cost is being shifted onto the public sector and average Brazilians through austerity measures. The results of the slump and austerity were evident to me on my latest visit to Brazil: in the rundown streets of the cities of Rio and SP; and from the comments of people and the attendees at my meetings on the continual freeze in education and health spending etc – and in the high levels of crime.

So it was no surprise that SEP asked me to speak on the impact of austerity globally.  Austerity, investment and profit. Actually my paper made two points: first, that austerity was not the cause of the slump or Great Recession in global capitalism.  On the contrary, government spending was rising in most countries before the crash, as economies globally boomed.  See below for state spending in emerging economies (my calcs).

But more important, I wanted to show that, while Brazilians must resist and reverse ‘austerity’ with all their might to protect public services and welfare, just increasing public spending will not solve the underlying problem of capitalist booms and slumps – as the Keynesians claim.

In my paper, I presented both theoretical arguments and empirical evidence to conclude that just boosting government spending will not deliver the sufficient ‘multiplier’ effect on growth, income and jobs wherever the capitalist mode of production dominated.  Capitalist production only revives with an increase in profitability and overall profits; and a slump and ‘austerity’ are the ways that capitalism can get out of a crisis – at labour’s expense.  I showed that the impact of a rise in profitability on growth under capitalism – what my colleague G Carchedi and I have called the Marxist multiplier – is much greater than boosting government spending (the Keynesian multiplier). So the policy of austerity is not just some ideological pro-market irrationality as Keynesians claim, but has rationality in the context of low profitability for the dominant capitalist sector.

And as I pointed out in my other lectures in Rio and SP universities, the Long Depression continues and now it seems to be entering a new phase (The state of world economy): first, with the growing risk of a major trade war between Trump’s America and everybody else; and second, with the rising cost of debt biting into corporate stability, particularly in ‘emerging economies’ like Brazil.  The repayment schedule for debt owed to foreigners will reach a peak next year, as the costs of servicing and ‘rolling over’ that debt will have risen.

And as I have shown before, Brazil has the highest interest costs on debt of all major emerging economies (see BR in the graph below).

The global economy has been experiencing a mild upswing (within the Long Depression) from a near recession in 2016.  But in 2018 it looks like growth globally will peak and the underlying low levels of profitability and investment will reappear, along with a new debt crisis in non-financial corporate sector itself, to pose new risks.  We shall see.

Vollgeld and the sovereign money initiative

June 11, 2018

On Sunday, the Swiss voted down in a referendum a proposal known as sovereign money or Vollgeld/Monnaie Pleine). This proposed to do away with ‘fractional banking’ and make the central bank the sole authority for creating money. In the modern banking system, notes and coins — currency — (along with some special reserves) are created by the central bank.  But this ‘monetary base’ only represents a small part of the total money supply in an economy. Instead, the majority of money is created by commercial banks when they lend to consumers and businesses. When banks make loans to households, companies and other financial institutions, they create money deposits (because these loans then appear as deposits for the borrowers in the bank.

But the amount that banks have to keep as reserves to meet these depositors’ demands for cash and as a buffer against any collapse in the value of the assets offered by the borrowers against their loans asset write-downs is very small in comparison to their assets, a fraction. That’s because the risk of failure or non-repayment is low and the regular demand for cash is low.  In practice, banks keep about 5% of liabilities as fractional reserves.

The Swiss sovereign money initiative proposed that all deposits have to be kept as reserves (with the central bank). So the commercial banks’ ability to ‘create’ money through loans would disappear and, effectively, the central bank would be in sole charge of money supply.

Why do this?  The argument is that commercial banks are inefficient in lending and cause regular financial crises. They tend to lend more for financial speculation rather than for productive investment and this leads to financial crashes.  If the central banks hold all the country’s cash, they can control the lending and make sure it is for productive purposes.  And the central banks could directly boost demand in the economy by expanding the money supply without the inefficient intermediary of the commercial banking system.

The sovereign money idea is not new but has been revived because the global financial crash and the Long Depression that has followed.  It was previously mooted in the Great Depression of the 1930s.  Chicago University ‘Debt depression’ economist Irving Fisher put it forward then.  More recently, some economists at the IMF resurrected the idea in a recent working paper, “The Chicago Plan Revisited” ( IMF Working Paper WP/12/202).  IMF Working Paper WP/12/202.   Several top Keynesian economists also have supported vigorously the idea – including Martin Wolf at the Financial Times and Steve Keen, the post-Keynesian economist. 

Naturally, the monetary authorities are opposed to the idea because of the fear that governments could remove the ‘independence’ of the central bank and start to use the country’s cash deposits now at the central bank for their own purposes and also to expand the money supply without any productive assets backing – thus leading to runaway inflation.

The other question is whether putting all the money supply in the hands of the central bank would stop future financial crashes.  The credit crunch and global financial crash of 2007-8 did not originate in commercial banking but in investment banks like Bear Stearns and Lehmans.  These banks held no customer deposits or made loans to households but were engaged in speculative capital like ‘exotic derivatives’.  With ‘sovereign’ banking, such speculation would continue and even increase in the commercial banking system.

I have dealt with the banking scheme before in a previous post.  As I argued then, sovereign money would only work if the banks were brought into public ownership and made part of an overall funding and investment plan.  But if that happened, there would be no need for it.

Behind these schemes is a belief that all that is wrong with capitalism is a bad monetary system and reckless bankers.  Also there is the Keynesian belief that government controlled money expansion can avoid crises and slumps by boosting ‘effective demand’.  It is ironic that Keynes himself with the experience of the Great Depression in the 1930s came to the conclusion that monetary stimulus was inadequate to get economies out of slumps and eventually opted for fiscal stimulus.

The reality of the capitalist system is that only if profitability is sufficient will investment increase and lead to more jobs and then incomes and consumption.  Artificial money creation by fiat from the government does not get round this – as the experience of ‘quantitative easing’ has already shown.

The outcome of a sovereign money scheme to bypass the banking system will not be a sustained economic recovery, but either a new bout of financial asset speculation or inflation, or both.  It is not the banking system that has to be bypassed but the capitalist system of production for profit that has to be replaced by planned investment under common ownership.  Indeed, if the banking system is circumvented, the capitalist system of production will be thrown into greater confusion.

Trump’s tantrums and the world economy

June 10, 2018

The G7 meeting in Quebec Canada was a landmark in many ways.  First, there was a clear break in the usual bland unity of purpose and policy expressed at G7 meetings by the leaders of the top seven capitalist countries in the world.

Just before the G7 meeting US president Donald Trump had announced a series of protectionist tariff measures against the rest of the G7, including its closest neighbour Canada on the grounds of “national security” – apparently Canada is now a security risk to the US.  In doing so, Trump fulfilled his election promises.

At the meeting Trump slammed into the other leaders claiming that their governments were imposing ‘unfair’ trading rules on US products and they needed to reduce their surpluses on trade with the US.  The other leaders had already responded to the US tariff measures with planned reciprocal tariffs on key US exports and now they replied to Trump’s attacks with arguments and evidence that, on the contrary, it was the US that restricted foreign imported goods and services.

And thus the trade war has begun – a war that the major capitalist economies have not engaged in since the 1930s depression and which was supposed to be resolved by international agreements like General Agreement on Tariifs and Trade (GATT), the World Trade Organisation (WTO) and the North American Free Trade Agreement (NAFTA) in the post-war period.  Trump has called the WTO the worst possible trade deal and NAFTA the next worst (for America).  America had protected European and Japanese capitalist states with its armies and nuclear weapons against the supposed Russian threat and now it was time they paid their way both in defence spending and in ‘fairer’ trade deals.  The real irony in this argument by Trump was that then he called for Russia, the supposed enemy, to be restored to a place at the top table – talk about adding insult to injury.

What all these Trumpist antics revealed is that the period of the Great Moderation and globalisation, from the 1980s to 2007, when all major capitalist states worked together to benefit capital in all countries (to varying degrees) is over.  The Great Recession of 2007-8 and the ensuing Long Depression since 2009 has changed the economic picture.  In a stagnating world capitalist economy, where productivity growth is low, world trade growth has subsided and the profitability of capital has not recovered, cooperation has been replaced by increasingly vicious competition – the thieves have fallen out.

Trump is the ‘populist’ and nationalist leader of the largest capitalist power; Italy (the weakest of the G7) has gone ‘populist’ and nationalist too.  And Britain is locked in the pit of ‘Brexit’, a disaster for British capital of its own making.  Trump’s attack meant that the G7 meeting, which was to discuss rising inequality, automation and climate change – the key long-term challenges for capitalism’s survival – was paralysed.

But no matter, for now.  The world economy is actually looking at its best since the end of the Great Recession.  The World Bank estimates that global real GDP growth will 3.1% this year, the same as in 2017.  That may not seem very high, but that is a pick-up after the near recession period of 2015-6, when global growth dropped to just 2.4% and the G7 economies could manage no more than 1.5%.  Now the G7 economies are expanding at around a 2.5% rate.  Unemployment in the US, the UK and Japan is at all-time lows.  And even in Europe, the unemployment rate has fallen to 8%, still above pre-crisis levels but getting back there.

However, in its latest Global Economic Prospects, the World Bank’s economists were not convinced that this mild recovery (still some 30% below pre-crisis world growth rate) is going to be sustained.  “It is expected to edge down in the next two years, as global slack dissipates, trade and investment moderate, and financing conditions tighten. Growth in advanced economies is predicted to decelerate toward potential rates, as monetary policy normalizes and the effects of U.S. fiscal stimulus wane.”  Moreover, “Risks to the outlook remain tilted to the downside. They include disorderly financial market movements, escalating trade protectionism, heightened policy uncertainty, and rising geopolitical tensions, all of which continue to cloud the outlook”.

Now I have suggested at the end of last year that the short-term trade cycle from the trough of 2015-16 would peak in 2018 and then subside back to 2019-20.  “What seems to have happened is that there has been a short-term cyclical recovery from mid-2016, after a near global recession from the end of 2014-mid 2016.  If the trough of this Kitchin cycle was in mid-2016, the peak should be in 2018, with a swing down again after that.”  And I reiterated that forecast in April.

The World Bank economists seem to agree. They expect world economic growth to subside to 2.9% by 2020.  “The global economic expansion remains robust but has softened…. Global activity still lags previous expansions, and growth is projected to decelerate in 2019-20 as trade and investment moderate. Progress in per capita income will be uneven and insufficient to tackle extreme poverty in Sub-Saharan Africa.”  And “Notwithstanding the ongoing global expansion, only 45 percent of countries are expected to experience a further acceleration of growth this year, down from 56 percent in 2017. Moreover, global activity is still lagging previous expansions despite a decade-long recovery from the global financial crisis. So the World Bank reckons the Long Depression will continue.

And this is assuming no new world slump in the next two years.  While there is no immediate sign of a new global recession (indeed, the apparent opposite), there are many factors building up that suggest it is not too far away.  The first is that obvious fact that the current very weak recovery from the Great Recession is the second-longest expansion in the post-1945 period, reaching ten years next summer 2019 – if it lasts that long.

And then there is profitability.  In the first quarter of 2018, the top 500 US companies achieved a 26% increase in earnings per share.  But this was mainly due to a huge tax reduction engineered by the Trump administration.  When you look at the profits of the whole corporate sector before the tax reductions, there was a fall in Q1 2018 (-0.6%) which followed a fall in Q4 2017 (-0.1%).  With the tax reductions, profits rose 6%.  The Trump bonanza was a one-off.  And average profitability in the G7 economies remains below pre-crisis levels even after ten years of recovery.

And the big risk ahead is the combination of falling profitability and high and rising debt in the corporate sectors of G7.  If profits should start to slip while the cost of servicing debt rises as interest rates rise, then this a recipe for corporate bankruptcies and a new debt crisis.  Global debt, particularly corporate debt, is at all-time highs.

In 2017, debt rose 10.2% from 2016 to 2017. Breaking it down by sector, non-financial corporate debt grew 11.1%, government debt grew 6.7%, household debt grew 12.5%, and financial sector debt grew 11.3%.

The level of emerging market debt will be unsustainable because, among other reasons, debt matures and must be either repaid or refinanced. Here’s emerging market debt by maturity:

Many emerging market businesses and financial companies have borrowed money in dollars, as the dollar was relatively weak and US interest rates ridiculously low. Much of the inflow of capital into emerging economies was not productive investment but loans and bonds for speculative activity.  Long-term capital flows to the productive sectors of the emerging economies (FDI) have been in decline ever since the Great Recession.

Now the loan bonanza is over. Some $4.8trn in emerging market debt matures from this year through 2020, and much of which will need to be rolled over at generally higher rates and, if dollar strength continues, in a disadvantageous currency environment.

The cracking signs are already appearing in some of the largest so-called emerging economies.  Argentina has crashed and been forced to borrow $50bn from the IMF as it can no longer borrow in international bond markets at affordable costs. The economy is plunging, inflation is rocketing and the currency has dived.  Brazil is not far behind.  The Brazilian economy is struggling to grow at all and yet it has the highest interest costs for debt in the world.  In Q1 2018, South Africa’s economy contracted at its fastest rate in nine years as corporate investment fell sharply.  And Turkey’s currency, the lira, hit all-time lows as annual inflation reached over 12%; foreigners withdrew their money and the central bank hiked its interest rate to nearly 18%.

But the real pivot point is likely to be corporate debt in the G7 economies.  US non-financial corporate debt hit a post-crisis high of 72% of GDP. At around $14.5 trillion in 2017, non-financial corporate sector debt was $810 billion higher than it was a year ago, with 60% of the rise stemming from new bank loan creation. At present, bond financing accounts for 43% of outstanding debt with an average maturity of 15 years vs. the average maturity of 2.1 years for US business loans. This implies roughly around $3.8 trillion of loan repayment per year. “Against this backdrop, rising interest rates will add pressure on corporates with large refinancing needs.” (IIF)

Aside from higher interest rates, the companies that need credit (as opposed to high-rated ones that borrow only because they can do it cheaply) tend to be riskier.  A recent Moody’s report found that 37% of US nonfinancial corporate debt is below investment grade. That’s about $2.4trn.

Furthermore, all corporations, both investment grade and speculative, have added significantly more leverage since the Great Recession. Some companies borrowed to fund share buybacks and have vast cash flow and reserves. They can easily deleverage if necessary. But smaller, riskier companies have no such choice. The average non-financial business is roughly 20% more leveraged than at the time of global financial crash in 2007-8. A lot of that debt is rated BBB, the lowest investment grade rating. That means they are just one step above junk. The number of BBB-rated companies is up 50% since 2009.

Source: David Rosenberg

Global recession is not with us in 2018 – on the contrary, the global economy is growing faster than at any time since 2009.  But that growth may well have peaked and in the next 18 months the world economy could head down to a possible slump.  How will we know?  Well, as I have argued before, profitability of capital must start to fall again and eventually total profits of corporations in the major economies must stop rising.  If the cost of servicing all this debt has also risen, then the conditions are set for corporate bankruptcies.

One reliable signal for this in the past has been the inversion of the bond yield curve.  The interest rate for borrowing money for one year is much lower usually than the rate for borrowing for ten years for obvious reasons (the lender gets paid back quicker).  So the yield curve between the ten-year rate and the one year rat is normally positive (say 4% compared to 1%).

The general idea is that a steepening yield curve, where long rates are rising faster than short rates, indicates that credit is easy to access and profits are high enough from faster economic growth. But when short-term yields rise above the prevailing long-term bond rate it indicates credit conditions have become unusually restrictive compared to profits and that there is a very high probability that a recession will arrive within about a year.

RBC investment strategist, Jim Allworth reckons that: There hasn’t been a recession in more than 60 years that wasn’t preceded by an inversion of the yield curve. On average, the yield curve has inverted 14 months prior to the onset of a recession (median 11 months). The shortest “early warning” was eight months. We are not there yet in the US and certainly nowhere near in Europe.  But the US curve is going in that direction.

Trump’s trade tantrums and the growing risk of a trade war that could stifle the current ‘recovery’ only adds to the underlying risks of new global slump ahead.

China workshop: challenging the misconceptions

June 7, 2018

The recent workshop on China organised by the China Workshop (poster and programme_05062018) in London asked all the questions, even if it did not resolve them.  What are the reasons for China’s phenomenal growth in the last 40 years and can it last?  What is the nature of the Chinese economy: is it capitalist or not?  What explains under Xi the new emphasis on studying Marxism in China’s universities?  Is China’s export and investment expansion abroad imperialist or not?  How will the trade war between the US and China pan out?

In the opening session, Dr Dic Lo, Reader in Economics at SOAS, London University and Zhu Andong, Vice Dean at the School of Marxism at Tsinghua University, Beijing (representing a delegation from various Chinese universities) were at pains to argue that China is misrepresented in the so-called West and not just through mainstream capitalist views but also from the left.

All the talk from the left, said Lo, was about political repression, labour exploitation, inequality or Chinese ‘imperialism’. But then how to explain China’s phenomenal growth and success in taking over 850m people out of poverty (as defined by the World Bank) and reaching national output second only to the US.  China doubles real living standards every 13 years. It now takes the US and Europe 50 years and Japan even longer.  Is this just fake or illusory and if not, how can this ‘capitalist’ and ‘imperialist’ economy have bucked the trend, when the record of all other capitalist economies (advanced or ‘emerging’) can show no such success? “How can it be possible, in our times, for a late-developing nation to move up the world political-economic hierarchy to become imperialist? Can anyone on the left answer this question?

Dic Lo criticised the majority view of left political economists that China could be characterised as “neoliberal capitalist”, the so-called “Foxconn Model” of labour exploitation. This view was pioneered by Martin Hart-Landsberg and Paul Burkett, made most influential by David Harvey, most systematic by Minqi Li; and politically correct by Pun Ngai.  But were they right?

Zhu Andong also critiqued what he considered was this Western view.  In contrast, far from a Marxist critique disappearing in China, there was growing official support for the study of Marxism in Chinese universities, both in special departments and even increasingly in economics departments, which up to recently had been dominated by mainstream neoclassical economics influenced by Western universities.

In my contribution, I also referred to the dominance of mainstream economic analyses on the nature of China – and such theories also still appeared in China’s own financial institutions like the People’s Bank of China.  A recent striking example is Wang Zhenying, director-general of the research and statistics department at the PBoC’s Shanghai head office and vice chairman of the Shanghai Financial Studies Association. For Wang, Marx has had his day in the theoretical limelight (ie 19th century) and for that matter so had Keynes (20th century).  The recent global financial crisis needs a new theory for the 21st century.  And this apparently was the behavourial economics of ‘uncertainty’, not Marx.

I argued that there are really three models of development that could explain China’s growth miracle and whether it would last.  I deal these in detail in my paper on China for the Leeds IIPPE conference in 2015.  So please consult that for a fuller account than this post can provide.

There is the mainstream neoclassical view that: China went through a primitive industrial expansion using its ‘comparative advantage’ of cheap and plentiful labour and investment in heavy industry.  But now China had reached the ‘Lewis point’ (named after the left economist of the 1950s, Arthur Lewis). Put simply, this is the point at which a developing country stops being able to achieve rapid growth relatively easily, by simply taking rural workers doing unproductive farm labour and putting them to work in factories and cities instead. But once this ‘reserve army of labour’ is exhausted, urban wages rise, incomes reach a certain level and a middle-class emerges.  China is now in a ‘middle-income’ trap like many other emerging economies, from which it cannot escape and become an advanced economy, unless it gets rid of state enterprises and heavy industry and orients towards the consumer and services.

This view is nonsense for several reasons – not least because comparative advantage theory is bogus and unrealistic – after all, China has grown exponentially not just because of cheap labour but also because of massive productive investment promoted and controlled by the state sector.  Actually, as a result of that investment expansion, consumption spending is also growing very fast. Would a switch to capitalist companies serving a middle-class consumer be better?

The second model is the Keynesian.  This recognises that China’s success has been due to massive investment in productive capital, not just the use of cheap labour.  Infrastructure investment directed and controlled by the state was behind the ability of the Chinese economy to avoid the worst effects of global financial crash and the Great Recession where every other economy suffered.  But what the Keynesian model fails to recognise is that China cannot escape the law of value and imbalances and inequalities that value creation through trade and the growing market economy generates.

The Marxist analysis starts from the basic premise that human social organisation aims to raise the productivity of labour to the point that sufficient abundance will make it possible for toil and poverty to be eliminated.  But the drive for higher productivity in capitalism comes into conflict with capital’s requirement for profitability.  Increasingly, the issue for China is whether the capitalist sector of the economy will eventually override the planned public sector, so that profitability will dominate over productivity and crises will appear, leading to stagnation not expansion.

In my view, that point has not yet been reached in China.  The state sector and public investment through one-party dictatorship still control investment, employment and production decisions in China – the private capitalist sector, although growing, is still subject to that control.  See my post here.

Now this is a minority view among Marxian economists, let alone mainstream economics.  Most consider that China is capitalist just like any other capitalist economy, if with a bit more state intervention.  Indeed, it is even imperialist in the Marxist sense.  But, as I have shown in previous posts, 102 big conglomerates contributed 60 per cent of China’s outbound investments by the end of 2016.  State-owned enterprises including China General Nuclear Power Corp and China National Nuclear Corp have assimilated Western technologies—sometimes with cooperation and sometimes not—and are now engaged in projects in Argentina, Kenya, Pakistan and the UK.  And the great ‘one belt, one road’ project for central Asia is not aimed to make profit.  It is all to expand China’s economic influence globally and extract natural and other technological resources for the domestic economy.

This also lends the lie to the common idea among some Marxist economists that China’s export of capital to invest in projects abroad is the product of the need to absorb ‘surplus capital’ at home, similar to the export of capital by the capitalist economies before 1914 that Lenin presented as key feature of imperialism.  China is not investing abroad through its state companies because of ‘excess capital’ or even because the rate of profit in state and capitalist enterprises has been falling.

Indeed, the real issue ahead is the battle for trade and investment globally between China and the US.  The US is out to curb and control China’s ability to expand domestically and globally as an economic power. At the workshop, Jude Woodward, author of The US vs China: Asia’s new cold war?, outlined the desperate measures that the US is taking to try to isolate China, block its economic progress and surround it militarily. But this policy is failing.  Trump may have launched his tariff hikes, but what really worries the Americans is China’s progress in technology. China, under Xi, aims not just to be the manufacturing centre of the global economy but also to take a lead in innovation and technology that will rival that of the US and other advanced capitalist economies within a generation.

There was a theoretical debate at the workshop about whether China was heading towards capitalism (if not already there) or towards socialism (in a gradual way).  Marx’s view of socialism and communism was cited (from Marx’s famous Critique of Gotha Programme) with different interpretations.  For me, I reckon Marx’s view of socialism and/or communism starts from two realistic premises; 1) that communism as a society of super-abundance where toil, exploitation and class struggle have been eliminated to free the individual, is technically possible now – especially with the 21st technology of AI, robots, internet etc; and 2) socialism and/or any transition to communism cannot even start until the capitalist mode of production is no longer dominant globally and instead workers’ power and planned democratically-run (not dictatorships) economies dominate. That means China on its own cannot move (even gradually) to socialism (even as the first stage towards communism) unless the dominant power of imperialism is ended in the so-called West. Remember China may be the second-largest economy in the world in dollar terms but its labour productivity is less than one-third of the US.

China has succeeded in transforming its economy and society since the revolution of 1949 by the removal of capitalist and imperialist power and through state control of the commanding heights of industry and agriculture.  And it is now succeeding in applying new technology to take it forward as a modern urbanised society in this century.  But at the same time, the law of value and capitalism operates within the country.  Indeed, the capitalist sector in the economy is growing; there are many more Chinese billionaires and inequality of income and wealth has risen; while Chinese labour struggles against exploitation in the workplaces.  And the law of value exerts its destructive influence also through international, trade, multi-national companies and capital flows – it was no accident that when China last year relaxed its capital controls on the advice of neoliberal elements in the monetary institutions that the economy suffered serious capital flight.

There is a (permanent) struggle going on within the political elite in China over which way to go – towards the Western capitalist model; or to sustain “socialism with Chinese characteristics”.  After the experience of the Great Recession and the ensuing Long Depression in the West, the pro-capitalist factions have been partially discredited for now.  President for Life Xi now looks to promote ‘Marxism’ and says state control (through party control) is here to stay.  But the only real way to guarantee China’s progress, to reduce the growing inequalities and to avoid the risk of a swing to capitalism in the future will be to establish working class control over Chinese political and economic institutions and adopt an internationalist policy a la Marx.  That is something that Xi and the current political elite will not do.