Archive for the ‘capitalism’ Category

The state of capitalism at IIPPE

September 14, 2018

This year’s conference of the International Initiative for the Promotion of Political Economy (IIPPE) in Pula, Croatia had the theme of The State of Capitalism and the State of Political Economy.  Most submissions concentrated on the first theme although the plenary presentations aimed at both.

I was struck by the number of papers (IIPPE 2018 – Abstracts) on the situation in Brazil, China and Turkey – a sign of the times – but also by the relative youth of the attendees, particularly from Asia and the ‘global south’.  The familiar faces of the ‘baby boomer’ generation of Marxist and heterodox economists (my own demographic) were less in evidence.

Obviously I could not attend all simultaneous sessions so I concentrated on the macroeconomics of advanced capitalist economies.  Actually my own session was among the first of the conference.  Under the title of The limits to economic policy management in the era of financialisation, I presented a paper on The limits of fiscal policy (my PP presentation is here (The limits to fiscal policy).

I argued that, during the Great Depression of the 1930s, Keynes had recognised that monetary policy would not work in getting depressed economies out of a slump, whether monetary policy was ‘conventional’ (changing the interest rate for borrowing) or ‘unconventional’ (central banks buying financial assets by ‘printing’ money).  In the end, Keynes opted for fiscal stimulus as the only way for governments to get the capitalist economy going.

In the current Long Depression, now ten years old, both conventional (zero interest rates)and unconventional (quantitative easing) monetary policy has again proved to be ineffective.  Monetary easing had instead only restored bank liquidity (saved the banks) and fuelled a stock and bond market bonanza. The ‘real’ or productive economy had languished with low real GDP growth, investment and wage incomes.

Maria Ivanova of Goldsmiths University of London also presented in my session (Ivanova_Quantitative Easing_IJPE_forthcoming) and she showed clearly that both conventional and unconventional monetary policies adopted by the US Fed had done little to help growth or investment and had only led to a new boom in financial assets and a sharp rise in corporate debt, now likely to be the weak link in the circulation of capital in the next slump.

Keynesian-style fiscal stimulus was hardly tried in the last ten years (instead ‘austerity’ in government spending and budgets was generally the order of the day).  Keynesians thus continue to claim that fiscal spending could have turned things around.  Indeed, Paul Krugman argued just that in the New York Times as the IIPPE conference took place.

But in my paper, I refer to Krugman’s evidence for this and show that in the past government spending and/or running budget deficits have had little effect in boosting growth or investment.  That’s because, under a capitalist economy, where 80-90% of all productive investment is by private corporations producing for profit, it is the level of profitability of capital that is the decisive factor for growth, not government spending boosting ‘aggregate demand’.  In the last ten years since the Great Recession, while profits have risen for some large corporations, average profitability on capital employed has remained low and below pre-crash levels (see profitability table below based on AMECO data).  At the same time, corporate debt has jumped up as large corporations borrow at near zero rates to buy their own share (to boost prices) and/or increased payouts to shareholders.

Government spending on welfare benefits and public services along with tax cuts to boost ‘consumer demand’ is what most modern Keynesians assume is the right policy.  But it would not solve the problem (and Keynes thought so too in the 1940s).  Indeed, what is required is a massive shift to the ‘socialisation of investment’, to use Keynes’ term, i.e. the government should resume responsibility for the bulk of investment and its direction.  During the 1940s, Keynes actually advocated that up to 75% of all investment in an economy should be state investment, reducing the role of the capitalist sector to the minimum (see Kregel, J. A. (1985), “Budget Deficits, Stabilization Policy and Liquidity Preference: Keynes’s Post-War Policy Proposals”, in F. Vicarelli (ed.), Keynes’s Relevance Today, London, Macmillan, pp. 28-50).

Of course, such a policy has only happened in a war economy.  It would be quickly opposed and was dropped in ‘peace time’.  That’s because it would threaten the very existence of capitalist accumulation, as Michal Kalecki pointed out in his 1943 paper.

Now in 2018, the UK Labour Party wants to set up a ‘Keynesian-style’ National Investment Bank which would invest in infrastructure etc, alongside the big five UK banks which will continue to conduct ‘business as usual ‘ i.e. mortgages and financial speculation.  Under these Labour proposals, government investment (even if implemented in full) would rise to only 3.5% of GDP, less than 20% of total investment in the economy – hardly ‘socialisation’ a la Keynes at his most radical..

But perhaps President Trump’s version of Keynesian fiscal stimulus (huge tax cuts for the rich and corporations , driving up the budget deficit) will do the trick.  It is an irony that it is Trump that has adopted Keynesian policy.  He certainly thinks it is working – with the US economy growing at a 4% annual rate right now and official unemployment rates at near record lows.  But an excellent presentation by Trevor Evans of the Berlin School of Economics poured cold water on that optimism.  With a barrage of data, he showed that corporate profits are actually stagnating, corporate debt is rising and wage incomes are flat, all alongside highly inflated stock and bond markets.  The Trump boom is likely to fizzle out and turn into its opposite.

Also, Arturo Guillen of the Metropolitan University of Mexico City,( IIPPE 2018 inglés) reminded us that the medium term trajectory of US economic growth was very weak with productivity growth very low and productive investment crawling.  In that sense, the US was suffering from ‘secular stagnation’, but not for the reasons cited by Keynesians like Larry Summers (lack of demand) or by neoclassical critiques like Robert Gordon (ineffective innovation) but because of the low profitability for capital.

In another session, Joseph Choonara, took this further. Choonara saw the current crisis rooted in a long decline in profitability in the period from the late 1940s to the early 1980s. The subsequent neoliberal period developed new mechanisms to defer crises, notably financialisation and credit expansion. In the Long Depression since 2009, driven largely by the central bank response, debt continues to mount. The result is a financially fragile and uncertain recovery, which is creating the conditions for a new crisis

There were also some sessions on Marxist economic theory at IIPPE, including a view on why Marx sent so much time on learning differential calculus (Andrea Ricci) and on why Marx’s transformation of value into prices of production is dialectical in its solution (Cecilia Escobar).  Also Paul Zarembka from the University of Buffalo, US presented a paper arguing that the organic composition of capital in the US did not rise in the post-war period and so cannot be the cause of any fall in the rate of profit.

His concepts and evidence do not hold water in my view.  Zarembka argues that there is a major problem concerns using variable capital v in the denominator in the commonly-expressed organic composition of capital, C/v. That is because v can change without any change in the technical composition. Using, instead, what he calls the ‘materialized composition of capital’, C/(v+s), movement in C/v can be separated between the technical factor and the distributional factor since C/v = (1 + s/v).  With this approach, Zarembka reckons, using US data, he can show no rise in the organic composition of capital in the US and no connection between Marx’s basic category for laws of motion under capitalism and the rate of profitability.

But I think his category C/(v+s) conflates the Marx’s view of the basic ‘tendency’ (c/v) in capital accumulation with the lesser ‘counter-tendency’ (s/v) and thus confuses the causal process.  This makes Marx’s law of profitability ‘indeterminate’ in the same way that Sweezy and Heinrich etc claim.  As for the empirical consequences of rejecting Zarembka’s argument, I refer you to an excellent paper by Lefteris Tsoulfidis.

As I said previously, there were a host of sessions on Brazil, Southern Africa and China, most of which I was unable to attend.  On China, what I did seem to notice was that nearly all presenters accepted that China was ‘capitalist’ in just the same way as the US or at least as Japan or Korea, if less advanced.  And yet they all recognised that the state played a massive role in the economy compared to others – so is there a difference between state capitalism and capitalism?  I cannot say anything about the papers on Brazil except for you to look at IIPPE 2018 – Abstracts.  Brazil has an election within a month and I shall cover that then – and these are my past posts on Brazil.

There were other interesting papers on automation and AI (Martin Upchurch) and on bitcoin and a cashless economy (Philip Mader), as well as on the big issue of imperialism and dependency theory (which is back in mode).

The main plenary on the state of capitalism was addressed by Fiona Tregena from the University of Johannesburg.  Her primary area of research is on structural change, with a particular focus on deindustrialisation. Prof Tregena has promoted the concept of premature deindustrialisation.  Premature deindustrialisation can be defined as deindustrialisation that begins at a lower level of GDP per capita and/or at a lower level of manufacturing as a share of total employment and GDP, than is typically the case internationally. Many of the cases of premature deindustrialisation are in sub‐Saharan Africa, in some instances taking the form of ‘pre‐industrialisation deindustrialisation’. She has argued that premature deindustrialisation is likely to have especially negative effects on growth.

As for the state of political economy, Andrew Brown of Leeds University has explained some of the failures of mainstream economics, particularly marginal utility theory. Marginal utility theory has not to this day been developed in a concrete and realistic direction not because it is just vulgar apologetics for capitalism, but because it is theoretically nonsense. Marginal utility theory can provide no comprehension of the macroeconomic aggregates that drive the reproduction and development of the economic system.

‘Financialisation’ is the word/concept that dominates IIPPE conferences.  It is a concept that has some value when it describes the change in the structure of the financial sector from pure banks to a range of non-deposit financial institutions and the financial activities of non-financial corporations in the last 40 years.

But I am not happy with the concept when it used to suggest that the financial crash and the Great Recession were the result of some new ‘stage’ in capitalism.  From this, it is argued that crises now occur not because of the fall in productive sectors but because of the speculative role of ‘’financialisation.’  Such an approach , in my view, is not only wrong theoretically but does not fit the facts as well as Marx’s laws of motion: the law of value, the law of accumulation and the law of profitability.

For me, financialisation is not a new stage in capitalism that forces us to reject Marx’s laws of motion in Capital and neoliberal economics is not in some way the new economics of financialisation and a different theory of crises from Marx’s.  Finance does not drive capitalism, profit does.  Finance does not create new value or surplus value but instead finds new ways to circulate and distribute it.  The kernel of crises thus remains with the production of value.  Neoliberalism is merely a word invented to describe the last 40 years or so of policies designed to restore the profitability of capital that fell to new lows in the 1970s.  It is not the economics of a new stage in capitalism.

Sure, each crisis has its own particular features and the Great Recession had that with its ‘shadow banking’, special investment vehicles, credit derivatives and the rest.  But the underlying cause remained the profit nature of the production system. If financialisation means the finance sector has divorced itself from the wider capitalist system, in my view, that is clearly wrong.


Sweden in deadlock

September 10, 2018

Sweden has long been the poster child of the ‘mixed economy’, the social democrat state – where capitalism is ‘moulded’ to provide a welfare state, equality and decent working and living conditions for the majority. The 2018 general election result has put that story to bed.

In yesterday’s election, the Social Democrats, the supposed standard-bearer of the ‘mixed economy’, remained the largest party with just over 28% of the vote.  But this was its lowest share in an election since 1908.  The main pro-business party, the so-called Moderates, also lost votes, coming in with 19.7%.  Cutting through both these parties, who have alternated for decades in controlling government, was the rise of Sweden’s so-called Democrats (an oxymoron), an anti-immigrant party with neo-Nazi roots, which polled 17.7%.  The smaller parties of the centre-right and the left also gained – the Left party jumping to 8%.  The middle-of the road Green party was run over and nearly failed to gain the 4% necessary to enter parliament.  The two alliances of the social democracy and the pro-business parties are virtually tied with 40% of the vote each – leaving the Democrats with the balance of power in the new parliament.  Such is the impasse.

It was an illusion anyway about Sweden being the ‘third way’ between untrammelled free market capitalism and command economy autocratic Communism.  The great gains of the Swedish labour movement in the early 20th century have slowly been reversed.  And the post-war diversion to public services of some of the profits of the Swedish engineering and manufacturing (owned by a handful of families) stopped decades ago.  Just as in other capitalist economies, the polices of neoliberalism – a reversion to free markets, low taxation for the rich and corporations, cuts in the welfare state and in real wages, rising inequality etc – have been operating in Sweden since the mid 1990s.

Why were neo-liberal policies introduced in Sweden? As in other capitalist economies, the profitability of capital fell sharply from the mid-1960s (to the mid-1990s in the case of Sweden).  After a credit boom that went bust and a major banking crisis, Sweden’s famed manufacturing sector took a massive dive.  It was then that Sweden’s major parties, the Social Democrats and Moderates, firmly adopted policies to boost the rate of profit for capital at the expense of the welfare state and public services.

Sweden may still have a more ‘equal’ income and wealth distribution than the US and the UK, but it is still very unequal – and inequality has been rising the fastest since the 1990s of all advanced capitalist economies.  In 2012, the average income of the top 10% of income earners was 6.3 times higher than that of the bottom 10%. This is up from a ratio of around 5.75 to 1 in the 2007 and a ratio of around 4 to 1 during much of the 1990s. Sweden’s richest 1% of earners saw their share of total pre-tax income nearly double, from 4% in 1980 to 7% in 2012. Including capital gains, income shares of the top percentile reached 9% in 2012. During the same time, the top marginal income tax rate dropped from 87% in 1979 to 57% in 2013.

In Sweden, like in most other Nordic countries, tax reforms over the 1990s have decreased the tax burden for wealthier households, e.g. by decreasing capital taxation and lowering or abandoning wealth taxation. At the same time, there have been cuts in welfare benefits for the poor.

What is not often known is that Sweden is no longer an epitome of state provision. The country is one of the world leaders in having public services supplied by the private sector, paid for by the government.  About one-third of all Swedish secondary schools are so-called ‘free schools’, with the majority of them run by for-profit companies, while about 40% of primary healthcare providers are privately owned. Public provision has been outsourced to the detriment of quality.  Sweden’s schools have slipped from being one of the world’s best in international ratings to “one of the most mediocre”.

The rise of the Democrats follows the pattern of so-called populism that we have seen in Germany, France, Italy, Denmark and other EU countries, as well as with Brexit in the UK and Trump in the US.  It is the product of the failure of capitalism to deliver after the end of the Golden Age in the mid-1960s, but particularly after the global financial crash, the Great Recession and the ensuing Long Depression.

Swedish capitalism, somewhat like Germany (only much smaller), has done better than most other capitalist economies since 2008.  But even in Sweden, the rate of economic growth has slowed in the last few decades and particularly since 2008.

Unemployment may be low by EU standards but the official figure hides those on work programmes  (German-style) and those on sick benefits.  As in Germany, many jobs are now ‘precarious’ and low-paid, particularly in the small towns.  And there have been significant public spending cuts on hospitals, schools, housing, pensions and transport.

And then there is immigration. Over 600,000 immigrants from the Middle East have entered the country since the Syrian/Iraq disaster (graph below).  Many immigrants are young single men and they have helped capitalist enterprises and the state sector overcome an acute labour shortage for low skilled work.  But the amount of immigrants per head of population is way more than in any other European economy and it has increased pressure on those public services, already suffering from neo-liberal measures.

There has been a massive housing boom driven by low interest rates and credit.  That has benefited the middle and upper classes but the working class and immigrants struggle for proper housing (graph – waiting list for rented housing in Stockholm).

Sweden is still growing much faster than much of the rest of Europe, but it is highly dependent on the growth of world trade and the strength of economic activity in Europe.  The strong growth has been driven again by a credit-fuelled consumer boom as in the 1980s, as well as from the extra value from immigrant labour.

Stockholm has the second most inflated housing market in the world, while the banking sector booms. The Swedish banks currently have assets that are four times the national GDP, second only to Switzerland.  The 1980s are repeating themselves.

Real GDP growth seems strong at over 3% a year.  But if you strip out the impact of extra immigrant labour, real GDP growth per person is much lower (below 1% in 2017).  Real per capita growth is seen averaging just 1% in the decade through 2026, according to the Swedish National Institute of Economic Research.

The small towns in Sweden have experienced low wages, poorer services and then were faced with an influx of new immigrants.  This was the breeding ground for the Democrats’ racist and nationalist message of ‘Sweden for Swedes’.  The Social Democrats are now paying for their support of capitalism and neo-liberal policies of the last 20 years.

A plan for a new economy?

September 6, 2018

The Institute of Public Policy Research (IPPR) claims it is “the UK’s pre-eminent progressive think tank”.  It is backed and funded by many ‘progressives’, trade unions, universities and also corporations.  And it is now seen as a think tank that influences the current left Labour Party leadership.  Now, just before the annual Labour conference at the end of September, the IPPR has published a new report called Prosperity and Justice for all – A plan for a new economy The report is result of the work of special commission of several great and good experts in the ‘progressive’ left on the state of UK economy and what to do about it.

In its interim report last year, the IPPR report provided a scathing account of the state of the UK economy:  its weak growth, low investment, stagnant average incomes; low productivity growth and high inequality in incomes and wealth.  It highlighted the overdependence on the financial sector in the UK economy to the detriment of manufacturing and other productive sectors.  It condemned the UK’s highly regressive tax system, along with all the loopholes to avoid paying tax for the rich and corporations.

This final IPPR report concludes that there is a need for fundamental reform of the UK economy.  The question what reforms are proposed and would they work?

The IPPR is clear on the problems. “The UK economy is not working. It is no longer delivering rising living standards for a majority of the population. Average earnings have stagnated for more than a decade – even while economic growth has occurred. Too many people are in insecure jobs; young people are set to be poorer than their parents; the nations and regions of the UK are diverging further.”

The causes are structural and endemic: “Many of the causes of the UK’s poor economic performance – particularly its weaknesses in productivity, investment and trade – go back 30 years or more.”  Radical action is needed: “They will not be addressed by incremental change or trying to ‘muddle through’. “

More than a fifth of the British population live on incomes below the poverty line after housing costs are taken into account, even though most of these households are in work. Nearly one in three children live in poverty and the use of food banks is rising.  There is a sixfold difference between the income of the top 20% of households and those of the bottom 20%. Wealth inequality is much worse, with 44% of the UK’s wealth owned by just 10% of the population, five times the total wealth held by the poorest half.

The IPPR says, “It is not sufficient to seek to redress injustices and inequalities simply by redistribution through the tax and benefit system. They need to be tackled at source, in the structures of the economy in which they arise. These include the labour market and wage bargaining, the ownership of capital and wealth, the governance of firms, the operation of the financial system and the rules that govern markets. Economic justice cannot be an afterthought; it must be built in to the economy.

All this sounds to the point.  But what does the IPPR Commission propose?  Well, it has a ten point plan: to promote ‘investment-led growth’ by raising public investment, holding down house price inflation and reducing the incentives that currently favour short-term shareholder returns over long-term productive investment; to rebalance the economy through ‘new industrialisation’, away from an over-dependence on the finance sector towards a more diverse array of manufacturing and other innovative, export-oriented industries, located right across the country; to give workers greater bargaining power, making it easier for trade unions to negotiate on their behalf to achieve higher productivity and to share its rewards fairly through better wages and conditions and reduced working time;  to pursue ‘managed automation’, accelerating the adoption of new technologies across the economy and ensuring that workers share in the productivity gains and are helping to retrain; to promote open markets which reduce the near-monopoly power of dominant companies, particularly in the digital economy, and make data available to promote innovation for social good; and to spread wealth more widely in society, both by widening ownership of capital and through fairer forms of wealth and corporate taxation.

Let me concentrate on what I think are the key measures the IPPR offers to achieve radical improvements in the UK economy as well as making it ‘fairer’.  Just as many on the left including the Labour leaders have advocated, it proposed to overcome the failure of the British banking system to lend to productive companies and the failure of many companies to invest in jobs and technology to boost productivity by establishing a National Investment Bank (NIB) to invest in infrastructure, innovation and business growth in England.

There are several things here.  First, note the clear omission of any proposal to take over the big five banking groups in the UK that triggered the financial crash in 2008; that continue to speculate rather than lend; and that have been exposed in all sorts of scams, frauds, tax avoidance and cash laundering and most of whose executives have remained in place even when partially nationalised (as in the case of RBD and Lloyds).

Back in 2012, the UK firefighters union (FBU) commissioned a report on the banks, that I wrote jointly with Mick Brooks.  We found that less than 5% of lending by UK banks went towards productive investment by companies.  The rest went on real estate (mortgages) or lending to other financial institutions for speculation.

Instead bank loans have poured into real estate.  The productive sectors of manufacturing, professional scientific & technical activities, information & communication and administrative & support services account for 28.7% of real GDP. But loans outstanding to these four sectors total just £108.82bn, or 5.5% of GDP.  This is less than the total of loans outstanding to companies engaged in the buying, selling & renting of real estate (£135.97bn or 6.9% of GDP).  Indeed, 33% of all bank loans go to other financial institutions to speculate.

The IPPR report too is clear on this. “The UK’s financial sector is one of the largest and most successful in the world…, but there has been insufficient provision of ‘patient capital’ for long-term investment. So the “UK has had a long-term problem of asset price inflation, particularly in land and property.“  As the IPPR points out: “the Bank of England has experimented with ultra-loose monetary policy, with record low interest rates and a £445 billion injection of ‘quantitative easing’ (QE). But these policies have not generated the sustained growth”.

But what is the answer of the IPPR?  It is to leave the big five banks to carry on as before, with the proposed NIB to do all the work in funding industry and investment.  The NIB would be ‘seeded’ to lend £50-200bn for investment over a period of time. The IPPR is right that, instead of ‘encouraging’ British big business to invest through ‘tax incentives’, such subsidies should be “channelled  into direct funding for innovation through Innovate UK and the National Investment Bank.” 

But the amount of funding for investment involved would be no more than about 2% of GDP a year.  Currently, government investment is under 2% of GDP. The IPPR proposes that the government should increase its investment programme by £15bn a year by 2022 to take the government investment ratio to 3.5% of GDP, the current G7 average.

The IPPR wants “as an alternative to QE, to enable macroeconomic policy to stimulate the economy in recessionary conditions that the Bank of England should be given the power to ask the National Investment Bank to expand lending in the real economy, and to buy its bonds to ensure this can be financed.”

However, business investment in the UK is closer to 15% of GDP.  So the planned NIB and government investment boost, even if fully implemented after five years, would still be less than one-third of the investment coming from the capitalist sector of the economy.  That sector would still be decisive for growth, incomes and investment.  And much of the NIB funds would anyway go to big companies to invest.  There would not be much direct investment by state-owned operations.

So is the NIB, more government investment and BoE funding enough to be considered a radical change?  The FBU report showed clearly that it would be ‘business as usual’ for the big banks unless they were brought into public ownership.  Surely, we cannot allow the big five banks to continue to dominate funding for investment, which will be the case even with the NIB in place?

The IPPR wants to raise productivity levels through a ‘social partnership body’; it wants to ‘modernise the labour market’ by raising the living wage to a proper level (its £8.75 an hour outside London is still pretty modest, however).  It does not propose to outlaw ‘zero hours contracts’ where people are on call from their employers and receive no job security or a weekly pay packet, but merely to raise the minimum payment. And to democratise corporations, it proposes to revive the idea of workers reps on company boards.  This is the German corporate model which sounds good but has signally failed to control corporate decision-making on wages, gender pay gaps or conditions.

The IPPR rightly exposes the regressive nature of the UK’s income tax system. “Our present system of taxing incomes is complex, lacks transparency and is insufficiently progressive. On average the poorest fifth of households pay 35 per cent of their gross income in tax, which is more than the richest fifth.”  There needs to be a return to the post-war “‘formula-based’ system, abolishing bands and applying instead a gradually rising marginal rate of tax as incomes rise.”  The IPPR would also want to increase in the rate of corporation tax and “tackle tax avoidance by multinational corporations” with a ‘backstop tax’ levied “on company’s UK sales at a rate derived from its global profits relative to global sales.”

All these measures are surely to be supported, but will they do the trick?  On the tax measure, even Keynesian reformers have expressed doubts.  Simon Wren-Lewis is unsure that “the stakeholder measures talked about, or greater union influence may not be enough to reverse runaway corporate pay….The report involves reversing many aspects of neoliberalism, but an interesting question is whether that is enough to achieve a decline in the 1% share, or whether other measures like higher top taxes are an essential part of doing that?”

The IPPR wants to establish “a National Economic Council (NEC) as a forum for economic policy consultation and coordination. This would have responsibility for drawing up and agreeing a 10-year plan for the UK economy, to provide a coordinated framework for the management of economic policy.”  But how can there be any coordinated plan that works if the ‘commanding heights’ of the economy remain in the hands of the big five banks and top corporations, entities that will continue to control the bulk of investment, employment and wages?

FT columnist and Keynesian Martin Wolf commented recently that the reason the UK economy has not changed in any fundamental way since the disaster of the Great recession was “the power of vested interests. Today’s rent-extracting economy, masquerading as a free market, is, after all, hugely rewarding to politically influential insiders.”

The finance sector stumped up over half the cash for Cameron’s party when it gained power in 2010. One in four Tory MPs elected in 2015 came from finance backgrounds – more than all who worked in schools, universities, health, the armed forces and agriculture put together. All the government reports on banking after the crash are dominated by bankers, and the Bank of England’s Mark Carney celebrated the prospect of a finance industry becoming 20 times the size of our GDP.

And yet the IPPR proposes no change in the power of these “vested interests”.  Can the bulk of the finance sector in the UK be allowed to carry on with ‘business as usual’?  In his piece, Wolf concludes that “A better version of the pre-2008 world will just not do. People do not want a better past; they want a better future”.  This is also the aim of the IPPR report.  But, in my view, its proposals fall short of achieving that.

Lehmans, animal spirits and the failure of the progressives

September 2, 2018

It’s coming up to ten years this September since the US investment bank Lehman Brothers was allowed to go bust in the depth of the Great Recession of 2008-9.  Actually, the financial crisis really began in August 2007 when the first losses took place for investment banks in Europe. But the fall of Lehmans is the usual marker for Americans. To commemorate this unedifying event, former employees of Lehmans are apparently holding a reunion party to see how they have all got on since!

Several writers have published accounts of why Lehmans went under and what caused the greatest global financial crash in the history of capitalism so far. The most comprehensive is Crashed by Adam Tooze, which I recently reviewed.  But there have been other accounts by financial journalists like Gillian Tett at the Financial Times, a close observer of the run-up to the disaster, as investment banks expanded their ‘financial engineering’ with new and exotic forms of securities and ‘derivatives’.

For her, financial crises like that of Lehmans share two things. “First, the pre-crisis period is marked by hubris, greed, opacity — and a tunnel vision among financiers that makes it impossible for them to assess risks. Second, when the crisis hits, there is a sudden loss of trust, among investors, governments, institutions or all three.”  Hubris turns into its opposite; or what Keynes called ”animal spirits’’ suddenly disappears.

Tett quotes Paul Tucker, former deputy at the Bank of England, “There is a dynamic which pushes banking and the penumbra of banking to excess, over and over again.” So for Tett, financial crises occur over and over again because of recklessness and greed and presumably lack of regulation.  But she offers no deeper reason why this is a recurring flaw in finance capital; or why ‘animal spirits’ suddenly turn into their opposite.  It just does.  And it will happen again, says Tett casually.  And she echoes this blog, when pointing out that “between 2007 and 2017, the ratio of global debt to GDP jumped from 179 per cent to 217 per cent”.  But this time, the “borrowing binge has not occurred in the areas of finance that caused the last crisis, such as subprime loans. Instead, the debt boom is among risky companies and governments, ranging from Turkey (which already faces a financial crunch) to America (where borrowing has accelerated under the administration of Donald Trump.)”

Tett offers no underlying cause of crises.  But then that is the story of all mainstream explanations, including Keynesian ones, as I have outlined before in various posts and papers.  We get an even more superficial account from Keynesian economic journalist, Larry Elliott, in the UK’s Guardian.  Rather than explain the crash (for which he has no other explanation than the usual Keynesian one), he tells us that real tragedy was that the ‘progressive left’ failed to explain it or do anything about it.  The ”progressives” for him appear to be Obama in the US and Blair/Brown in the UK – hardly ‘progressive’, in my opinion.  But Elliott reckons that ‘progressive’ Obama “deserves a bit of sympathy” because he had no clear ‘narrative’ or theory to turn to, Keynesian or Marxian, unlike, say Roosevelt in the 1930s. Actually history shows that Roosevelt also rejected both those ‘narratives’.

Elliott’s complaint is that the progressives have since failed to ‘break up the banks’; tax financial speculation; or do anything about climate change. Leaving aside the dubious premise that these ‘progressives’ would ever do anything to threaten the interests of finance capital, Elliott’s progressive ‘solutions’ anyway fall well short of what would be needed to stop future financial crashes.  Why break up the banks instead of bringing them under public control and ownership?  Why just tax speculative investment rather than ending it and turning banks into a public service like other essential services?  Such alternative policy actions (from the ‘Marxist narrative’) that I have discussed in this blog on numerous occasions are obviously ‘too progressive’ for the likes of Keynesians like Elliott.  As for another thing that Elliott wants, namely ‘winning the battle of ideas’ and ‘taking back control of how economics is taught’; that will improve just as inadequate (see my posts here). 

Also interesting are views on what has happened to the major capitalist economies since the end of the Great Recession and Lehman’s collapse.  In my last post, I outlined how, finally after ten years, the US economy in 2017-18 has made a relative recovery (if only from the near-recession of 2015-6), with real GDP growth reaching nearly 3% a year-on-year, while the official unemployment rate at a record low, and with corporate profits rocketing up from Trump’s tax cuts, leading to a modest revival in business investment.  I argued that this won’t last.  But others are unsure which way it will go.

Noah Smith, a Keynesian economist, who writes for Bloomberg, reckons that the US economy is definitely having a boom, but he is not sure why.  He reckoned that there were “no definitive answers”.  You see Fundamentally, economists don’t know why booms happen.”  But he had a go at guessing.  It could be due to a credit boom fuelled by low interest rates “which tends to juice investment.”  Or it could be “Donald Trump’s tax cuts”.  Or it could be “what John Maynard Keynes called animal spirits, and what modern-day economists call sentiment — potentially random fluctuations (crises are random apparently!- MR) in the optimism and confidence of business people and consumers.”

Smith is worried that all these possible causes of the current ‘boom’ are set to dissipate and “the current boom is simply the tail end of the long recovery from the Great Recession…If loose monetary and/or fiscal policy is driving up demand, then it will likely eventually cause inflation to accelerate, prompting a clampdown by the Fed. If animal spirits are responsible, it could lead to over-borrowing and an eventual debt crisis and crash — indeed, corporate debt is looking worrisome, as levels of risky debt rise and credit spreads narrow.”

He concludes by going for the usual mystic Keynesian explanation : “If I were forced to pick one leading explanation for the boom, I would go with animal spirits. Exuberant business sentiment and the build-up of risky corporate debt seem indicative of good times that won’t last.”

The good Keynesian that he is, Smith generally rejects ‘supply-side’ explanations of the apparent boom, like technical innovation delivering higher productivity; or rising profits being the result not only of tax cuts but also the suppression of real wages by anti-trade union laws and wage caps (Trump has just announced that he wants to block the planned wage rise for federal government employees).

And yet one of the interesting contributions made at last week’s summer symposium of central bank governors at Jackson Hole, Wyoming was by Alan Krueger, the Princeton economist.  Like Jerome Powell, the Federal Reserve Chair, did in his speech, Kreuger pointed out that usually in ‘booms’, wages rise as the labour market tightens.  But not this time: mainstream economic laws like the Phillips curve (falling unemployment comes with rising inflation) are just not operating.  Profits have risen, but not wages – instead, in Marxist terms, the rate of exploitation or surplus value has jumped.

Kreuger pointed out that one factor causing this has been the destruction of trade union power in the labour market.  According to Krueger, a quarter of the work force in 1980 belonged to unions. That’s when income inequality in the US was at its lowest.  Today, union membership in the US is down to 10.7% and if you subtract the public-sector unions, it’s more like 6.5%.

The Jackson Hole symposium also heard papers from various economists on the rise of ‘market power’ (ie the concentration and centralisation of capital) in the hands of a few mega corporations.  These mega corporations like the FANGS, Facebook, Amazon, Netflix, Google, Microsoft etc control their markets, keep out rivals and mop up all the profits.  Thus we have weak unions on the one hand and thus ‘monopsony’ (buyers monopoly) in the labour market and strong ‘monopoly’ companies in commodity markets.  That is a recipe for high profits for the ‘winners’ in capitalist competition and for high rates of surplus value (eg. hundreds of thousands of Amazon workers on minimum wages while CEO Jeff Bezos ‘earns’ more than anybody else in the world).

But what one paper by John Van Reenen showed was that the huge profits of the FANGS are not really the product of ‘monopoly’ due to de-regulation or lack of anti-trust laws, as many leftist economists claim, but just the result of ‘globalisation and new technologies’ – a conclusion that I have offered in previous posts.  It is not ‘imperfect’ competition under capitalism that is the cause of inequality of incomes and high profits, but what Anwar Shaikh has called ‘real competition’.  The capitalist economy should not be viewed as a ‘perfect’ market economy with accompanying ‘imperfections’. Real competition is a struggle to lower costs per unit of output in order to gain more profit and market share.  In the real world, there are capitals with varying degrees of monopoly power competing and continually changing as monopoly power is lost with new entrants to the market and new technology that cuts costs.  Real competition is an unending struggle for monopoly power (dominant market share) that never succeeds in total or forever.

The policy conclusions from all this are that more regulation or the breaking-up of banks or big corporations and the removal of anti-labour legislation may help to reverse somewhat the trends of rising inequality and ‘monopoly’ power.  But, as the global financial crash and the Great Recession showed and the subsequent Long Depression has confirmed, such measures will not stop another crash and recession, when ‘animal spirits’ disappear and boom turns into slump again.  And anyway, there are no ‘progressives’ around to implement such ‘reforms’.

Trump’s profits bonanza

August 30, 2018

Warning – graphics alert!

Yesterday, we got the data for US corporate profits in the second quarter of 2018, along with a revised estimate for US real GDP growth.  On the GDP front, the ‘annualised’ rate of growth was revised up to 4.2%, the strongest rate on that measure since the middle of 2014.  But this was after some very poor annualised rates (below 2%) in 2015 and 2016.  So it’s a bounce back from poor growth.

This 4%-plus growth rate sounds strong and President Trump is making much of it.  But it is likely to be the peak of the annual growth rate for this year and beyond.  If it is, then as John Ross and others have pointed out, this would be the lowest peak annual growth rate of any president since the second world war.

A more realistic measure of US growth is the year-on-year rate, in other words, how much the economy has expanded in Q2 2018 compared to Q2 2017.  On that measure, US real GDP growth was 2.9% in Q2, up from 2.6% in Q1 and the fastest since early 2015.  So that also sounds good – but remember that growth rate is still below the long-term average rate for the US economy of 3.3% and it is likely to be the peak rate going forward.  And when you strip out population growth and just look at real GDP per person, then the rate is just 2.2%, pretty much where it has been since the end of the Great Recession.

Why is this likely to be peak growth? Well, when we see where the growth came from in Q2, it was mainly from a rise in household spending, particularly on services.  Business investment (particularly software and ‘intellectual property’) also contributed but in less of a proportion than in the previous quarter.  And there was a big jump in net exports, partly because the cost of imports fell (energy prices subsided).  And the upcoming trade war could hit that.

Business investment was led by more shale oil construction and intellectual property.

The driver of this investment was the sharp increase in corporate profits in the second quarter – and that was all down to Trump’s corporate tax cuts and subsidies to the large corporates.  Corporate profits rose $72bn in Q2 compared to a rise of $27bn in Q1.  Corporate profits are up 7.6% from the same time last year.  If you strip out financial sector profits, the growth in profits in the non-financial sector was still 6.6% yoy.  And, after tax, corporate profits in Q2 were up 16.1% yoy!

But while in the first half of 2018, profits have jumped, thanks to the tax cuts, before-tax corporate profits are still below their peak in 2014.  After the effect of the downswing in 2015-6, US corporate profits have basically been flat for four years.

Cash flow has poured into US corporations from Trump’s tax cuts (the tax bill is down 33% from last year!).  But much of this extra money has ended up in dividends to shareholders and share buybacks (likely to reach $1trn this year).  The jump in profits has stimulated faster business investment growth but not anywhere as much it has driven corporations to buy their own shares or invest in other financial assets.

While corporations were mopping up a flood of cash into their coffers, there was little improvement in average real earnings for most Americans.  Indeed, real weekly earnings are still below levels reached this time last year, while after-tax profits are up 16%.

No wonder the majority of Americans feel no benefit from Trump’s growth ‘success’ – it’s all going to the top.

At the same time, the much-Trumpeted program to reverse the crumbling and increasingly dangerous infrastructure in the US shows no signs of emerging.  Government investment continues to be squeezed.

Q2 2018 will be the peak in US growth as it will be for corporate profits as the effect of Trump’s one-off cuts dissipate.   And we still have the impact of Trump’s protectionist policies on global growth to factor in.

Economic activity is weakening again in Europe.  The composite PMI is a survey of perceived activity.  Anything above 50 means growth, below is contraction.  In this third quarter of 2018, the PMI dropped back in the Eurozone (54 from 59 at the beginning of the year), was slightly down in Japan (52); and was flat in the US (55).  So all three areas are still growing but the pace is decelerating.

And then there is the emerging ‘emerging market’ debt crisis – Argentina, Turkey, Venezuela onto Brazil and South Africa.  So the last quarter is not going to be exceeded this quarter.

The Fed’s star-gazing

August 26, 2018

US Federal Reserve Chairman Jerome Powell spoke at the annual Jackson Hole symposium on Friday.  This annual symposium brings together all the top central bankers in the world who hear papers by mainstream economists on the issues and problems facing the major economies.  Powell was expected to deliver a speech in which he would appear cautious about the progress of the US economy.  He did not disappoint in his caution.

The Fed is still expected to raise its policy rate by another quarter point at its September meeting.  Indeed, it is projecting four hikes for this year, so the December meeting is also expected to be another when the Fed hikes again.  Earlier in the week President Trump  expressed his displeasure with the Fed and Powell, by name, saying he disagreed with the Fed’s interest-rate hiking because it could hurt the economy and vowed to keep criticizing the central bank until it stops.

At Jackson Hole, what did Powell think was the state of the US economy and what he would do with the Fed’s plan to raise interest rates this year and next?  He started by saying that “On the doorstep of the period now referred to as the Global Financial Crisis, surely few, if any, at that symposium would have imagined how shockingly different the next 15 years would be from the 15 years that preceded it.”  In other words, how wrong we were that the US capitalist economy could go on growing, the housing boom would continue and the credit-fuelled financial sector would keep on spiralling up.

But never mind, continued Powell, “over the course of a long recovery, the US economy has strengthened substantially”.  His ‘long recovery’ means a slow and weak one, something I have described better as a ‘long depression’.  But all is well now, because “there is good reason to expect that this strong performance will continue.”  And this justifies the decision of the Federal Bank to “gradually raise the federal funds rate from its crisis-era low near zero toward more normal level” and to end the policy of quantitative easing (buying government and corporate bonds by printing money),Powell reckoned that “this gradual process of normalization remains appropriate”.

So Powell reckons the ‘long depression’ (sorry, ‘recovery’) is over.  But he remains worried that the “US economy faces a number of longer-term structural challenges that are mostly beyond the reach of monetary policy. For example, real wages, particularly for medium- and low-income workers, have grown quite slowly in recent decades. Economic mobility in the United States has declined and is now lower than in most other advanced economies.  Addressing the federal budget deficit, which has long been on an unsustainable path, becomes increasingly important as a larger share of the population retires. Finally, it is difficult to say when or whether the economy will break out of its low-productivity mode of the past decade or more, as it must if incomes are to rise meaningfully over time.”  Hmm, so still a lot of problems for US capitalism to overcome and nothing much that the Fed can do about it.

Interestingly, then Powell discussed how accurate the Fed was in gauging whether the US economy was growing too fast (that might engender accelerating inflation and a squeeze on profits), or whether it was still growing too slowly (that hiking interest rates could actually push the economy back into a new recession, which would also hit profits).  He suggested that following the usual conventional ‘stars’, namely NAIRU, the natural rate of unemployment (when the economy is at full speed), or the natural rate of interest (where the cost of borrowing is about right) or some inflation target like 2% a year (the current Fed target) may not be of any use.

That’s because these natural rates for harmonious non-inflationary keep moving about!  “Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.” The supposed strong relationship between economic growth and low unemployment (Okun’s law) seems to have shifted as the US economy crawls along at 2% while unemployment drops well below any previous estimates of NAIRU; or between falling unemployment and price inflation (the Phillips curve) as price inflation stays below the Fed Target although the official unemployment rate keeps dropping.

“Experience has revealed two realities about the relation between inflation and unemployment, and these bear directly on the two questions I started with. First, the stars are sometimes far from where we perceive them to be. In particular, we now know that the level of the unemployment rate relative to our real-time estimate of NAIRU (u*) will sometimes be a misleading indicator of the state of the economy or of future inflation. Second, the reverse also seems to be true: Inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization.”

Inflation has not appeared in the ‘real economy’ but “destabilizing excesses appeared mainly in financial markets “ and so what is happening with debt or credit growth and the spiralling stock market may be more important indicators of whether the economy was about to ‘overheat’ and go bust.  Indeed…

So Powell concluded that moving interest rates up should be considered cautiously and even slowly, just in case: “when you are uncertain about the effects of your actions, you should move conservatively”.  However, in the next breath of his speech, he went on: “we have seen no clear sign of an acceleration (of inflation) above 2 percent, and there does not seem to be an elevated risk of overheating.”  So “further gradual increases in the target range for the federal funds rate will likely be appropriate.” 

Having spent a large part of his speech saying that the usual mainstream economic indicators of the health of the economy were not helpful because “the stars” kept moving and that the inflation indicator was less important than any ‘bubble’ signs in the financial sector (as they were in the 2008 crash), he then goes back to the inflation target to argue that more rate rises are ok!

Well, are they ok?  I have raised before that a capitalist economy goes into a slump or recession when profitability (rate of profit) starts to fall and profits (total profits) slow to a crawl or fall.  A slump in investment will follow eventually.  If the level of debt (particularly corporate debt) is also high and interest rates rise to push up the cost of borrowing, then profits available for investment will be squeezed more, perhaps to breaking point.

The Fed started hiking rates in late 2016. So far, that has not triggered a downturn or slump.  That’s because there has also been a sharp reduction in corporate taxation and other subsidies to US companies from the Trump administration – and it also appeared that economic growth was picking up in rest of the world, particularly Europe and Japan.  However, that optimistic spiral upwards from a seeming trough in 2016 appears to have peaked as I suggested last April.  Economic growth in Europe (2%) and Japan (1%) is slowing again.  And so is China.

As I offered in a previous post, the price of industrial metals, particularly copper (because it is sensitive to global investment in raw materials) is a very good high frequency indicator of the state of the global economy.  The copper price started to fall back in June – not yet back to the ‘recession’ level of 2016, but on its way.

At the same time, corporate debt in the US is still rising, as it has been in most ‘emerging economies’. At $8.6 trillion, US corporate debt levels are 30% higher today than at their prior peak in September 2008.  At 45.3%, the ratio of corporate debt to GDP is at historic highs, having recently surpassed levels preceding the last two recessions.

Rising interest rates, driven by the Fed, have already sparked serious emerging market debt and currency crises in Argentina and Turkey; and others are on the horizon.

And profits in the non-financial sector of the US have been falling while global corporate profits have slipped back into negative territory on my estimates (average of the top five economies). This is something not seen since 2015 which was followed by a near recession in 2016.

The US stock market jumped up after Powell’s speech because he seemed to be suggesting a relatively slow pace of interest rate hikes ahead.  The stock market reached an all-time high last week, fuelled by low interest rates, Trump’s tax cuts, but also by companies buying back their own shares to boost prices. This year companies have spent over $1trn buying shares.

Rather than invest in productive assets, the large companies have increased debt and spent their cash on financial assets (fictitious capital, Marx called it).  The build-up in US corporate debt threatens to squeeze profits further as interest rates rise and if wage growth does finally pick up.

One reliable signal for the start of a slump in the past has been the inversion of the bond yield curve.  As I explained in a previous post, the interest rate for borrowing money for one or two years is usually much lower 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 two-year rate 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.”  The gap between the 2-year yield and 10-year yield, is now at a very flat 22 basis points.

Powell, it seems, is not worried about an inversion of the yield curve. One financial analyst commented: “We know there’s a bunch of people who are saying this time it’s different,” said Sharif. “Yet they (the Fed) spent a good chunk of their July meeting listening to a staff presentation on whether their tool kit is sufficient if there’s another downturn. They’re kind of prepping their tool kit.”

The trouble is that the tool kit is pretty empty apart from reversing the current hiking of rates and going back to the failed policy of quantitative easing.

Crashed: more the how, than the why

August 24, 2018

Adam Tooze was in London this week to present his new book, Crashed, How a decade of financial crises changed the world. Tooze is the author of The Deluge and The Wages of Destruction. The Wages of Destruction won the Wolfson Prize for History and the Longman-History Today Book of the Year Prize. He has taught at Cambridge and Yale and is now Kathryn and Shelby Cullom Davis Professor of History at Columbia University. In my view, he is our leading radical economic historian.

Tooze’s new book makes a massive contribution to the economic history of the global financial crash of 2008-9.  Tooze shows what happened and how it came about that the great credit boom of the early 2000s eventually led to the biggest financial disaster in modern economies and the ensuing deepest slump in capitalist production since the 1930s.  And he concludes that the way this was dealt with by ‘the powers that be’, namely through bailouts of the banks and the general saving of the wealth of the rich at the expense of the rest of us, has provoked the emergence of a ‘populist’ reaction against ‘capitalism’, whether leftist as in Greece or Spain, or rightist as with Trump, Brexit and the Liga in Italy.  So the legacy of the first ten years of 21st century capitalism is still with us in the second decade.  And worse, the underlying problem of rising debt and an uncontrolled financial sector has not been resolved.  The financial crisis of 2008-9 could well return.

There have been other intriguing analyses of the great financial crash before Tooze’s.  The most popular was The Big Short by Michael Lewis (which was made into a movie).  Lewis tells the story of the investment banks who sold ‘toxic’ mortgage backed bonds to their clients (mainly other investment banks and rich individuals, often from Europe), knowing full well that they were rotten.  As the property bubble started to burst, these banks then secretly went ‘short’ (betting on a collapse).   As Lewis puts in his book, “Goldman Sachs did not leave the house before it began to burn; it was merely the first to dash through the exit – and then it closed the door behind it.” 

In my own book on this period, The Great Recession, which is a chronological account, month by month, of the crisis from 2005 to 2010, I describe how the big banks in particular completely escaped the consequences of this scam, thanks to the US government.  Indeed, the whole ugly story of the activities of Goldman Sachs and other investment banks before, during and after the credit crunch and the Great Recession beggars belief.

But Tooze’s long book covers the significant financial crises of the previous ten years in much more detail than Lewis or me – and is global in scope.  Its length does not mean it is boring at all, as he presents us with vignettes of the major players and their decisions.  He shows how they ensured that the stronger and luckier big banks gained at the expense of the weaker and smaller; and how government intervention provided funding for the culprits of the financial disaster at the expense of the victims, working people, tax payers and small businesses.  It was ‘socialism for the rich and capitalism for the poor’: such is the stuff of the capitalist order.

Tooze particularly emphasises that the crash was not so much a story of the US spreading its financial contagion to Europe. The credit boom was just as strong in Europe. And as Tooze notes, “The flow of funds around Europe, as around the global economy, was driven not by trade flows but by the business logic of bankers, who compared the cost of funding and the expected return.” Indeed, the credit crunch started with BNP in France and was soon followed by the run on Northern Rock in Britain.

What is no surprise to readers like me who have studied the failures of mainstream economics and the official authorities prior to the crash is that Tooze shows that the competent powers that be were not competent at all.  They failed to see the crisis coming, denied it was happening and could not explain afterwards why it happened.  I won’t cite all the idiocies of the great and good in their complacency before the crisis and stunned surprise during the crash.  Tooze does it all.  But there are two examples worth restating.

In January 2007, just six months before the beginning of the global credit crunch and the collapse of the British money lender Northern Rock, Gordon Brown, the finance minister (Chancellor) in the UK spoke to a dinner of bankers in the City of London, just before he became Prime Minister.  He said: “Over the ten years that I have had the privilege of addressing you as Chancellor, I have been able, year by year, to record how the City of London has risen by your efforts, ingenuity and creativity to become a world leader.. an era that history will record as the beginning of a new golden age for the City…Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate is the hallmark of your success.”

After the financial meltdown and in the depth of ensuing Great Recession, the great helmsman and ‘guru’ of the preceding credit boom and supporter of ‘financial engineering’ and derivatives, Alan Greenspan, the former chairman of the Federal Reserve, was asked in the US Congress investigating the disaster, why it happened.  He responded: “I am in a state of shocked disbelief.” He was questioned further: “In other words, you found that your view of the world, your ideology was not right, it was not working”(House Oversight Committee Chair, Henry Waxman). “Absolutely, precisely, you know that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well”.

When you read that, it is a little surprising that Tooze seems to find the role of Alan Greenspan, Larry Summers (former Treasury secretary) or Hank Paulson (the head of Goldman Sachs who became Treasury secretary in the crash) and other players in the crash as people who did the best they could, rather than as arrogant supporters of the ‘financial engineering’ that led to the crash.  These players get off lightly compared to Tooze’s correct criticism of Keynesian economists like Paul Krugman, who also reckoned that the financial sector was stable and would not be the catalyst for a crisis.  Of course, after the slump, Krugman attacked mainstream economics for its failure to see it coming.

Crashed provides us with the most granular and fascinating account of the crash and its aftermath.  It powerfully shows what happened and how, but in my view does not adequately show why it happened.  But maybe that is not the job of economic history, but that of political economy.  For Tooze, the cause seems to be deregulation of the banking system, financial greed and incompetent authorities.  For me, these are symptoms or immediate catalysts of the underlying causes in the capitalist economy.

As Martin Wolf said in his review of Crashed, “Even a story this complete has omissions. Tooze focuses on the idea that the growth of the financial sector’s balance sheets was ultimately the cause of the crisis. He does not pay enough attention to why policymakers needed this to happen.”  Wolf presents his causal explanation in Keynesian terms. “The explanation, as I have argued in my own book, The Shifts and the Shocks, was the global savings glut and associated global macroeconomic imbalances. Huge external surpluses in some countries necessitated huge deficits in others. Central banks needed the credit growth if they were to hit the macroeoconomic targets.”

Wolf’s explanation is equally inadequate: what was the cause of this global savings glut and ‘imbalances’ that arose in the 2000s?  Actually, the savings glut was in reality an investment dearth.  And slowing global investment, particularly in the advanced capitalist economies, was a product of falling profitability, from the late 1990s onwards – something that I and others have documented.

In Tooze’s view, “These crises are hard to predict or define in advance,” and, short of more regulation, there is nothing we can do. In a way, as long as capitalism continues as the dominant mode of production globally, that is pretty much right.  That reminds me of what Greenspan said in his final summation of the crisis: “I doubt that stability is achievable in capitalist economies, given the always turbulent competitive markets continuously being drawn toward but never quite achieving equilibrium”. He went on, “unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging the aftermath is all we can hope for.”

Tooze is pessimistic about the future.  Economically, he sees a future crash, probably coming from a meltdown in debt-ridden China.  In my view, it is more likely in the heart of Capital: the corporate sector of the US and Europe.

Politically, he warns that the 2008 crash and the response of the ruling orders has created the conditions for “illiberal democracy.” The success of the Tea Party and the American far-right, he argues, has grown directly from it.  And now we have Donald Trump, Putin, Brexit, Erdogan and the rise of the far right in Europe.

But ‘populism’ as it is called by the mainstream, has also taken a left turn with Syriza (until the crunch came); leftist groups in Spain and other parts of Europe, as well as Corbyn in the UK.  Opposition to the main capitalist solutions to the crash (bailouts, austerity and free markets (‘business as usual’) has not come purely from the reactionary nationalist right.

Accountable, inclusive or responsible capitalism?

August 21, 2018

Senator Elizabeth Warren is tipped as a likely Democratic presidential candidate in 2020.  She is seen as being on the ‘left’ of the Democratic Party, a radical fighting against the powerful rich and Trumpism in all its forms.  To promote that image, she has unveiled legislation aimed at reining in big corporations, redistributing wealth, and giving workers and local communities a bigger say.

She has introduced a bill into the US Congress called the Accountable Capitalism Act. Under the legislation, corporations with more than $1bn in annual revenue would be required to obtain a corporate charter from the federal government – and the document would mandate that companies not just consider the financial interests of shareholders.  Instead, businesses would have to consider all major corporate ‘stakeholders’ – which could include workers, customers, and the cities and towns where those corporations operate.   As she put it: “Over the last year, corporate profits have soared while average wages for Americans haven’t budged. It’s been the same sad story for decades. Today I’m introducing a new bill to help return to the time when American companies & workers did well together”.

Warren argued in an article in the Wall Street Journal of all places, there was an “obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer,” and she was looking to reverse “a fundamental change in business practices” dating back three decades that made corporations beholden to the bottom line at the expense of better worker wages and local investment.  In other words, according to Warren, capitalism did have a period when it benefited both capitalists and workers in equal measure (presumably in the Golden Age of the 1960s, before inequalities got out of hand under ‘neoliberalism’).

Large companies dedicated 93% of their earnings to shareholders between 2007 and 2016 – a shift from the early 1980s, when they sent less than half their revenue to shareholders and spent the rest on employees and other priorities (what these were is not clear). Warren said. “Real wages have stagnated even as productivity has continued to rise. Workers aren’t getting what they’ve earned. Companies also are setting themselves up to fail,” she wrote.

Under her bill, anyone who owns shares in the company could sue if they believed corporate directors were not meeting their obligations (??).  Employees at large corporations would be able to elect at least 40% of the board of directors. An estimated 3,500 public US companies and hundreds of other private companies would be covered by the mandates.

Warren’s proposal comes when the latest data show that the chief executives of America’s top 350 companies earned 312 times more than their workers on average last year, according to a new report by the Economic Policy Institute.

The rise came after the bosses of America’s largest companies got an average pay rise of 17.6% in 2017, taking home an average of $18.9m in compensation while their employees’ wages stalled, rising just 0.3% over the year.  The pay gap has risen dramatically, with some fluctuations, since the 1990s. In 1965 the ratio of CEO to worker pay was 20-to-one; that figure had risen to 58-to-one by 1989 and peaked in 2000 when CEOs earned 344 times the wage of their average worker.  CEO pay dipped in the early 2000s and during the last recession but has been rising rapidly since 2009. Chief executives are even leaving the 0.1% in the dust. The bosses of large firms now earn 5.5 times as much as the average earner in the top 0.1%.

Warren’s analysis and policy proposals join a long line of such approaches by those who want to ‘save or maintain’ capitalism by ‘correcting’ its worst features as though these were anachronisms of the time and not inherent structural features.  But inequality of income and wealth is, to use the much overused cliché, in the DNA of capitalism.  And the dominance of corporate directors and management is the very basis for making profits for companies under the capitalist mode of production.  To imagine that companies can be forced to adopt ‘social’ targets rather than maximise profits by some legislation is not only utopian, it will be self-defeating.

And Warren’s proposals are hardly radical.  A few years ago, in the UK there was an attempt to promote, not Accountable Capitalism, but “Inclusive Capitalism”, the brain-child of Lady Lynn Forester de Rothschild, Chief Executive Officer, E.L. Rothschild, the exclusive London investment company with investments in media, asset management, energy, consumer goods, telecommunications, agriculture and real estate worldwide.  Lady Rothschild wanted to persuade company chiefs that capitalism must go “beyond financial performance only, in an effort to enhance the value of environmental, human, ethical and social capital”.  The idea was backed by luminaries like Bill Clinton; Mark Carney, Governor of the Bank of England; Justin Welby, the Archbishop of Canterbury in the Church of England; and, to cap it all, Prince Charles of the British monarchy! These eminences were out to tell the world that capitalism is a great and good thing and can be made even better if we can reduce inequality and poverty, end global warming and wars, and operate in a ‘moral’ way.  Like Warren, Lady Rothschild argued that “the imbalance of capital and labour” must be acted upon.

Even earlier, the UK received the idea of “responsible capitalism’ from the long forgotten ex-Labour leader in the UK, Ed Miliband.  Miliband reckoned that the ‘creativity’ of capitalism should be allowed to flourish in ‘free markets’, but within rules to ensure that it is not ‘irresponsible’ and was made “more decent” and “humane” .  Miliband saw “capitalism is the least worst system we’ve got”, so there was no alternative than to try to make it work. “We need to get the private sector working with government”, Scandinavia-style.

It’s a huge dilemma for these ‘well-meaning’ exponents of ‘saving capitalism’.  As Thomas Piketty, the super star economist and author of best-selling Capital in the 21st century, put it in an interview in the FT“I believe in capitalism, private property, the market”— but “how can we tackle inequality?” Piketty’s answer was a global wealth tax which he admitted is a “utopian” dream.  Lady Rothschild wanted to get shareholders in companies to take a stand on CEO compensation and on the ethical and environmental policies of the companies they own.  Warren wants to put workers on the boards of large companies – something that has happened for decades in Germany with workers councils, with little impact on reducing inequality or establishing more ‘social awareness’ on the part of Volkswagen or Siemens etc.

Have workers councils reduced inequality and given workers more say in the activities of their companies? Academic studies on the subject differ, but the majority of research suggests co-determination and works councils have mainly been successful in boosting productivity in the workplace – the main objective of companies –  but not in raising wages and conditions for workers.

Germany’s labour reforms in the early 2000s led to a stagnation of real incomes and rising inequality, with little opposition from ‘workers councils’.  About one quarter of the German workforce now receive a “low income” wage, using a common definition of one that is less than two-thirds of the median, which is a higher proportion than all 17 European countries, except Lithuania.  A recent Institute for Employment Research (IAB) study found wage inequality in Germany has increased since the 1990s, particularly at the bottom end of the income spectrum. The number of temporary workers in Germany has almost trebled over the past ten years to about 822,000, according to the Federal Employment Agency.  German real wages fell during the Eurozone era and are now below the level of 1999, while German real GDP per capita has risen nearly 30%.  The forces of globalisation and capital were much more powerful than workers councils in adjusting inequalities and real incomes.

Elizabeth Warren, Lady Rothschild, Ed Miliband and Thomas Piketty believe in capitalism as the best social system for everybody. All reckon or hope that capitalists can be made to or persuaded to act to reduce inequality, create a better environment and adopt moral policies in investment. Piketty wants more and higher taxes to do this; Lady Rothschild wants shareholder power. Warren wants a charter and workers on company boards. You can call it accountable, inclusive or responsible, but capitalism won’t and can’t deliver.

Rethinking Rethinking economics

August 14, 2018

Can economics ever become ‘pluralist’?  Namely, will the universities and research institutes in the major capitalist economies expand their teaching and ideas to cover not just mainstream neoclassical and Keynesian theories but also more radical heterodox themes (post-Keynesian, Austrian and Marxian)?  If you look at the list of study courses that are considered heterodox by Heterodox News, there are not many in the UK and the US and are concentrated in a just few colleges – with the big names having no such courses at all.

Rethinking Economics, a pressure group of academics and students was launched over four years ago to turn this round. Now in July, Rethinking Economics said Britain’s universities were failing to equip economics students with the skills that businesses and the government say they need. Following extensive interviews with employers, including organisations such as the Bank of England, it found that universities were producing “a cohort of economic practitioners who struggle to provide innovative ideas to overcome economic challenges or use economic tools on real-world problems”.  Moreover, the group said, “when political decisions are backed by economics reasoning, as they so often are, economists are unable to communicate ideas to the public, resulting in a large democratic deficit.” 

There are efforts among some academics to broaden the outlook of economics graduates. The Core project was adopted by 13 UK universities last September and has won £3.7m from the Economic and Social Research Council.  As the Guardian put it: “the developers of the programme also claim it has freed itself from neoliberal thinking, which judges markets to be self-adjusting and consumers and businesses to be operating with the same information. The world is full of asymmetric power and information relationships, and Core reflects this.

The Core project has produced an antagonistic reaction from right-wing commentators.  The prolific right-wing British political blogger, “Guido Fawkes”, tweeted: “The left in the universities are trying to rehabilitate Marxist economics to poison the future. Very concerning that they got £3.7 million of taxpayers’ money to do it”.  One strong promoter of Core and Rethinking Economics, the leftist economist, Jonathan Portes, responded to Fawkes that he was sure that none of the contributors to the Core programme were Marxist and “I’m obviously not a “Marxist”.  And that is true.  

The reality is that Rethinking Economics and Core is dominated by Keynesian ideas with hardly any look-in for Marxist ones.  It’s true that Sam Bowles is one of the main coordinators of the Core textbook project and he considered himself a (neo?) Marxist in the past – but his recent comments on Marx’s theories at the 200th anniversary suggest otherwise now (see here).

I am reminded of that first London conference of Rethinking Economics.  At that meeting, leading radical economists Victoria Chick and Sheila Dow told us that reform of society would be impossible until we can change the ‘closed mind-set’ of mainstream economics. As if the issue was a psychological one. Mainstream economics is closed to alternatives because there a material interest involved. But Chick and Dow seemed to think that it’s just a question changing the mind-set of other economists that support the market – for their own good because austerity and neoliberal policies are actually bad for capitalism itself.

More recently, leading leftist economists in the UK held a seminar on the state of mainstream economics, as taught in the universities.  They kicked this off by nailing a poster with 33 theses critiquing mainstream economics to the door of the London School of Economics.  This publicity gesture attempted to remind us that it was the 500th anniversary of when Martin Luther nailed his  95 theses to the Castle Church, Wittenberg and provoked the beginning of the Protestant reformation against the ‘one true religion’ of Catholicism.

The economists were purporting to tell us that mainstream economics was like Catholicism and must be protested against, just as Luther did back in 1517.  But as I commented then, is a revolution against the mainstream really to be painted as similar to Luther’s protestant revolt?  The history of the reformation tells us the protestant version of Christianity did not lead to a new pluralistic order and freedom to worship.  On the contrary, Luther was a bigot who worked with the authorities to crush more radical movements based on the peasants, led by Thomas Munzer.

Don’t get me wrong: attempts to expand economic ideas beyond the mainstream can only be good news and the content of the Core project is really stimulating and educational.  But it seems that, for Rethinking Economics and Core, the mainstream economic ‘religion’ is just neoclassical theory and that it is neoliberal economics that must be overthrown. They have nothing to say against Keynesian economics – indeed variants of Keynes are actually the way forward for them.

Take the new course at University College London for undergraduates. It’s called Rethinking Capitalism – a new elective module for UCL undergraduates.  Run by Mariana Mazzucato, the director of the Institute of Innovation and Public Purpose (IIPP) and author of The value of everything, it’s a great initiative, with guest lecturers including Branco Milanovic. . The module aims to “help students develop their critical thinking and make the connections between economic theory and real world policy issues. It will provide an introduction to a range of different economics perspectives, including Neoclassical, post-Keynesian, ecological, evolutionary, Marxist and institutional economics theories and how their different assumptions link to different public policies.”  But looking at the BASC0037 Rethinking Capitalism. I am sceptical that students will hear much about Marxist economic theory within its ‘heterodox’ approach.

Keynesian theory dominates in Rethinking Economics and so do the policy conclusions arising from Keynesian ideas in wider left circles.  Take the recent seminar organised by the IIPP in the UK’s House of Lords to discuss the financing of innovation (badly needed given the poor performance of the British capitalist sector in productivity growth).  But who did the IIPP line up to discuss with Mazzacuto the very limited proposal for a UK national investment bank to replace the European Investment Bank when the UK leaves the EU next year?  It was Tory Lord David Willetts, and as keynote speaker, Liberal leader Sir Vince Cable!  Cable was quoted approvingly to say that “The current enthusiasm for ‘selling the family silver’ (ie privatisation)) has its roots in bizarre Treasury accounting conventions.”  This was very rich hypocrisy coming from Cable, who when in coalition with the Conservatives, presided over the privatisation of Royal Mail, Britain’s state-owned postal service, selling it off for a price at least £1bn below market value – yes, selling the ‘family silver’.  I’m not sure that the IIPP will get far with its laudable aim of increasing the state role in innovation and investment by relying on these people for support.

And Keynesian ideas are central to the opinions of key advisers for the leftist Labour leaders in Britain.  In a recent article, Ann Pettifor, director of Prime Economics, blamed the economic crisis in Turkey and other ‘emerging economies’ on ‘orthodox economics’, in particular the move by central banks to hike interest rates and ‘normalise’ monetary policy. I’ll be debating with Ann Pettifor on what to do about finance at this year’s Momentum conference taking place during the Labour Party conference in Liverpool in late September.  I too have pointed out the risk that this policy entails for the world economy when profitability is still low and debt is high.

Pettifor’s conclusion was that “it was time to ditch economic orthodoxy” and….”revive the radical and revolutionary monetary theory and policies of John Maynard Keynes” as the way to avoid another global crisis.  But regular readers of this blog will know that I have shown Keynes’s ideas were far from radical, let alone revolutionary.  And they certainly would not avoid another global crisis.  And thinking they would do so would be a step back for the labour movement and its leaders.

One key point is that capitalism is not just a monetary economy as Keynesians think; it is a money-making economy.  You can print money indefinitely, but you cannot turn it into value under capitalism without the exploitation of human labour.  When you sift through the body of ideas in Core, one thing stands out: the failure to analyse modern economies with a law of value and a theory of exploitation for profit.  Profit and exploitation do not appear in the body of Core work (except for fleeting references to Marx).  And yet this is at the heart of capitalism and is the soul of Marxist theory.

Are there textbooks that do offer a Marxist alternative to neoclassical and Keynesian schools?  My favourite is Competing Schools of Economic Thought by Lefteris Tsoulfidis.  Then there is Contending Economic Theories by Richard Wolff And Stephen Resnick.  There is the new two-book textbook on Microeconomics and Macroeconomics by Ben Fine and Ourania Dimakou.  And of course, there is Anwar Shaikh’s monumental Capitalism (which the dedicated can dip into if they have their brains working!).  These should be on the curriculum of Core and Rethinking Economics courses. Maybe they will be.  But it may require a rethink.

Turkey: total meltdown

August 11, 2018

The Turkish lira is in total meltdown.  It has lost 40% of its value against the dollar in the last six months and fell nearly 20% in the last week.  The turkeys have come home to roost on the country’s economy and the erratic economic policy of its autocratic (recently re-elected) leader, Recep Tayyip Erdogan.

What triggered the crisis was when the US imposed asset freezes on Abdulhamit Gul, Turkey’s justice minister, and Suleyman Soylu, interior minister, for their alleged roles in the detention of Andrew Brunson, an American pastor. Mr Brunson, who ran a small church in Turkey for two decades before he was arrested in October 2016, is accused of participating in a conspiracy to topple Mr Erdogan. The pastor has described the charges as “slander”. His detention is just one of a number of disagreements between Turkey and the US that range over divergent stances on Syria to the delivery of US arms.

Then on Friday, Wilbur Ross, US commerce secretary, said the US would double the tariff on imports of Turkish steel to 50 per cent, because the previous level of 25 per cent had not been enough to sufficiently reduce Turkish exports to the US. “Doubling the tariff on imports of steel from Turkey will further reduce these imports that the [commerce] department found threaten to impair national security,” said Ross.

That was the trigger but it was not the revolver that now is pointed at the head of Turkey’s economy.  That was the fast deteriorating economic situation.  After the botched attempted military coup against him in 2016, Erdogan launched a credit boom to boost the economy while locking up thousands and sacking even more from their jobs in academic and government positions.  He insisted on keeping interest rates low and blocked any action to curb fast-rising inflation by Turkey’s central bank, describing interest rates as “the mother and father of all evil”.

Turkey’s capitalist economy could not handle this, just at a time that the US dollar strengthened after the US Federal Reserve began to raise US interest rates.  The problem for Turkey, a country without energy resources and only its human expertise and cheap labour to sell is that the vast majority of the funding for industrial development, construction and real estate comes from abroad:  American and European investors.  Turkey’s citizens and companies borrow significantly in dollars and euros.

The apparently fast economic growth of the last two years was built on turkey legs (credit and foreign borrowing) while imports flooded into the economy not matched by exports and the profitability of Turkish capital fell sharply.  The rise of the dollar and interest rates globally brought an end to the party and has exposed Erdogan to the realities of global capitalism.

Turkey banks and corporations are now in dire trouble. Turkey’s non-financial companies’ foreign currency liabilities now outstrip their foreign exchange assets by more than $200bn.

The country’s banks and corporations have billions of dollars of hard-currency debt coming due.  Turkey’s banks are scheduled to repay $51bn over the next year, while the remaining $18.5bn sits on non-financial corporate balance sheets. These bills are coming due at a time when corporate indebtedness sits at 62 per cent of GDP, half of which is denominated in foreign currencies (dollars and euros, mostly).

Foreign investors are now worried that Turkey will not be able to finance this.  Relative to its short-term external debt, Turkey’s FX reserves have declined to new lows.

So capital has fled the country and the lira has tumbled.

Now the extra worry for global capital is that if Turkey’s banks and corporations start defaulting on their debt servicing, then European banks could suffer significant losses on their own balance sheets – what markets call ‘contagion’, the spreading of losses and default internationally.  Some of Turkey’s banks are foreign-owned and the biggest lenders to Turkey are Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas.

Turkey’s banks appear to have plenty of reserves and loans to Turkey are just a small part of total loans made by these foreign banks.  But even ‘marginal’ losses can sometimes be a tipping point when profits are tight.  And bad debts in the banks have already been rising (% of debt that is ‘bad’ graph below)

How can Erdogan get out of this currency crash?  The capitalist solution is to hike interest rates to an astronomical height so that further borrowing is stopped.  Then the government should dramatically cut government spending and raise taxes (ie fiscal austerity) and use the ‘savings’ to bolster the banks and meet foreign debt repayments.  Turkey should also turn to the IMF for a loan – Greek style.  Under IMF rules, it could borrow up to $28bn to fund future debt repayments but then be subject to the dictats of IMF austerity measures.  This capitalist solution means an outright slump in the Turkish economy, hitting its citizens hard and seriously damaging Erdogan’s support in the country.

The government could introduce capital controls and block any money leaving the country.  But this would mean that foreign lenders would just stop lending, driving the economy into a slump anyway.  Or Erdogan could try to get funding from Russia, China or Saudi Arabia (as Pakistan has just done).  Unfortunately, he is on bad terms with all these countries.  Erdogan is resisting all these options so far, telling his supporters to ‘trust in God’ and him.

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

So there’s more to come.