Archive for the ‘Profitability’ Category

Abe’s mandate

October 23, 2017

The Japanese stock market rocketed to a 21-year high with a record 15-day winning streak after the result of the Japanese parliamentary election.  Japanese capital was pleased that Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) had won the snap general election and, with its Buddhist-affiliated Komeito, the incumbent coalition had retained the two-thirds majority necessary to pass legislation without recourse to the upper house.

This means that Abe can claim a mandate to change Japan’s constitution from a ‘pacifist’ defensive role for its military to a fully offensive imperialist stance for the first time since the end of the second world war.  Abe claims this is necessary to resist the growing danger of nuclear attack by North Korea and the insurgent presence of China.  In reality, it is an obsession within the ruling clique of the LDP to reassert Japan as an imperialist power and not just a lapdog of the Americans.

However, even with this vote, Abe will have to proceed cautiously because Japanese citizens are still divided on whether any constitutional change is necessary and Abe has had to agree not to move on this until 2020 at the earliest.  But now he has a longer-term mandate to do this.

If you can call it a mandate.  The reality is that Japan’s electorate had little to choose from among the parties.  The opposition was in total disarray.  The Democrat party, which had a brief run in government, offered no alternative policies, whether economic or political.  And when the conservative governor of Tokyo, Yuriko Koike decided to set up her own national party, The Party of Hope, the Democrats immediately split with half joining Koike and the other half forming a new party, the Constitutional Democratic party under Yukio Edano.  Actually, Edano’s party beat the Party of Hope to become the main opposition on a platform of opposing the constitutional change.  The Party of Hope turned out to be a damp squib with Koike not even running and leaving the country during the vote!

Once again, the real winner in Japan’s election was the ‘no vote’ party.  The voter turnout was just over 52%, the second lowest since 1945 and up only 1% on 2014 – a turnout even lower than in the US elections.  The majority of Japan’s working class, seeing no party representing their interests, just did not vote.  Indeed, Abe’s LDP gained less seats than in 2014 (down 6) as did Komeito (down 5).

In 2014, Abe also called a snap election but that time it was to get a mandate for his so-called Abenomics: a set of policies of monetary easing, fiscal tightening and ‘supply-side neoliberal ‘reforms’ designed to get Japanese capitalism out of its stagnation.

How has Japan done since then?  Well, on the main target of getting Japan out of deflation (falling prices), despite the advice of top Keynesians (Paul Krugman) and monetarists (Ben Bernanke) coming to Japan – and massive injection of money by the Bank of Japan – the monetary arrow of Abenomics has miserably failed.

The core inflation rate is still hovering around zero after three years of effort.

But maybe that does not matter – why strive to ‘cause’ inflation, as long as the economy is growing?  And Japan’s real GDP has been rising for six consecutive quarters.  Japan is now achieving modest economic growth after a nasty recession in 2014.

And when you take into account that the population has fallen by over one million since the end of Great Recession as Japanese get older, faster, then real GDP per person has risen even more. However, in dollar terms, Japan’s GDP has really stagnated because the yen has fallen substantially against other currencies.  Indeed, GDP in dollars is still below the level of the early 1990s – so the falling population has only compensated for that.

The second arrow of Abenomics was fiscal spending and no other G7 government is running such a large budget deficit, Keynesian-style.  The annual deficit had reached nearly 10% of GDP in 2012, although thanks to some recovery in real GDP, the deficit has fallen back to around 4%.  But the Japanese government has now run a deficit for over 25 consecutive years, while public sector debt (even when netted off for government assets) is well over 130% of GDP.  All that this Keynesian effort has achieved is a miserable average annual economic growth of under 1% in the last ten years.  And now Abe intends to introduce a huge sales tax increase to reduce the deficit further, at the expense of working-class consumption.  He also hopes to liberalise gaming and allow casinos to suck in more revenue at the expense of the poorest.

The real purpose of Abenomics was the third arrow of ‘supply-side’ reforms, namely to reduce labour costs (ie hold down wages) and boost the profitability of Japanese capital.  And here Abenomics has had some success.  Japanese capital’s rate of profit had been in long-term decline, driven by the classic Marxist law of a rising organic composition of capital as Japan became a leading industrial power after the 1960s.

The Koizumi Thatcherite measures of privatisation and reduction in labour rights did achieve a modest recovery in profitability in the early 2000s, although this was mainly fuelled by the global credit boom.  The Great Recession put an end to that.  But under Abe, real wages per person have been held down and profitability has begun to move up.

So far, Japanese capital has not responded by boosting investment.

Net investment (after covering depreciation) is very low and even gross private investment is crawling along. Japanese companies prefer to employ more labour at low wage rates rather than invest, or take their investment overseas (shades of the UK and the US).

Japan’s economy has picked up a little.  Industrial production growth has accelerated somewhat as exports pick up with a falling yen and as the world economy has an upturn.  Business sentiment has improved; and Japanese capital has become more optimistic about the future.  But it is all still very modest and any economic improvement is not being felt by the bulk of Japanese, with real wages stagnant and available jobs only part-time or poorly paid.

Abe may have won the election easily and the stock market may be hitting new highs.  But this is only hiding the frailties of Japanese capitalism: low investment, productivity growth flat (with levels still below 2007); and profitability still near post-war lows.  Abe will be in office when the next global recession comes.  Abenomics and his imperial ambitions will then be tested.

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The global debt mountain: a Minsky moment or Carchedi crunch?

October 20, 2017

During the current Chinese Communist party congress, Zhou Xiaochuan, governor of the People’s Bank of China, commented on the state of the Chinese economy.  “When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified…If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.” 

Here Zhou was referring to the idea of Hyman Minsky, the left Keynesian economist of the 1980s, who once put it: “Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.”  China’s central banker was referring to the huge rise in debt in China, particularly in the corporate sector.  As a follower of Keynesian Minsky, he thinks that too much debt will cause a financial crash and an economic slump.

Now readers of this blog will know that I do not consider a Minsky moment as the ultimate or main cause of crises – and that includes the global financial crash of 2008 that was followed by the Great Recession, which many have argued was a Minsky moment.

Indeed, as G Carchedi has shown in a new paper recently presented to the Capital.150 conference in London, when both financial profits and profits in the productive sector start to fall, an economic slump ensues.  That’s the evidence of post-war slumps in the US.  But a financial crisis on its own (falling financial profits) does not lead to a slump if productive sector profits are still rising.

Nevertheless, a financial sector crash in some form (stock market, banks, or property) is usually the trigger for crises, if not the underlying cause.  So the level of debt and the ability to service it and meet obligations in the circuit of credit does matter.

That brings me to the evidence of the latest IMF report on Global Financial Stability. It makes sober reasoning.

The world economy has showed signs of a mild recovery in the last year, led by an ever-rising value of financial assets, with new stock price highs.  President Trump plans to cut corporate taxes in the US; the Eurozone economies are moving out of slump conditions, Japan is also making a modest upturn and China is still motoring on.  So all seems well, comparatively at least.  The Long Depression may be over.

However, the IMF report discerns some serious frailties in this rose-tinted view of the world economy.  The huge expansion of credit, fuelled by major central banks ‘printing’ money, has led to a financial asset bubble that could burst within the next few years, derailing the global recovery.  As the IMF puts it: “Investors’ concern about debt sustainability could eventually materialize and prompt a reappraisal of risks. In such a downside scenario, a shock to individual credit and financial markets …..could stall and reverse the normalization of monetary policies and put growth at risk.”

What first concerns the IMF economists is that the financial boom has led to even greater concentration of financial assets in just a few ‘systemic banks’.  Just 30 banks hold more than $47 trillion in assets and more than one-third of the total assets and loans of thousands of banks globally. And they comprise 70 percent or more of international credit markets.  The global credit crunch and financial crash was the worst ever because toxic debt was concentrated in just a few top banks.  Now ten years later, the concentration is even greater.

Then there is the huge bubble that central banks have created over the last ten years through their ‘unconventional’ monetary policies (quantitative easing, negative interest rates and huge purchases of financial assets like government and corporate bonds and even corporate shares).  The major central banks increased their holdings of government securities to 37 percent of GDP, up from 10 percent before the global financial crisis.  About $260 billion in portfolio inflows into emerging economies since 2010 can be attributed to the push of unconventional policies by the Federal Reserve alone.  Interest rates have fallen and the banks and other institutions have been desperately looking for higher return on their assets by investing globally in stocks, bonds, property and even bitcoins.

But now the central banks are ending their purchase programmes and trying to raise interest rates. This poses a risk to the world economy, fuelled on cheap credit up to now.  As the IMF puts it: “Too quick an adjustment could cause unwanted turbulence in financial markets and international spillovers … Managing the gradual normalization of monetary policies presents a delicate balancing act. The pace of normalization cannot be too fast or it will remove needed support for sustained recovery”.  The IMF reckons portfolio flows to the emerging economies will fall by $35bn a year and “a rapid increase in investor risk aversion would have a more severe impact on portfolio inflows and prove more challenging, particularly for countries with greater dependence on external financing.”

What worries the IMF is that this this borrowing has been accompanied by an underlying deterioration in debt burdens.  So “Low-income countries would be most at risk if adverse external conditions coincided with spikes in their external refinancing needs.”

But it is what might happen in the advanced capital economies on debt that is more dangerous, in my view.  As the IMF puts it: “Low yields, compressed spreads, abundant financing, and the relatively high cost of equity capital have encouraged a build-up of financial balance sheet leverage as corporations have bought back their equity and raised debt levels.”  Many companies with poor profitability have been able to borrow at cheap rates.  As a result, the estimated default risk for high-yield and emerging market bonds has remained elevated.

The IMF points out that debt in the nonfinancial sector (households, corporations and governments) has increased significantly since 2006 in many G20 economies.  So far from the global credit crunch and financial crash leading to a reduction in debt (or fictitious capital as Marx called it), easy financing conditions have led to even more borrowing by households and companies, while government debt has risen to fund the previous burst bubble.

The IMF comments “Private sector debt service burdens have increased in several major economies as leverage has risen, despite declining borrowing costs. Debt servicing pressure could mount further if leverage continues to grow and could lead to greater credit risk in the financial system.”

Among G20 economies, total nonfinancial sector debt has risen to more than $135 trillion, or about 235 percent of aggregate GDP.

In G20 advanced economies, the debt-to-GDP ratio has grown steadily over the past decade and now amounts to more than 260 percent of GDP. In G20 emerging market economies, leverage growth has accelerated in recent years. This was driven largely by a huge increase in Chinese debt since 2007, though debt-to-GDP levels also increased in other G20 emerging market economies.

Overall, about 80 percent of the $60 trillion increase in G20 nonfinancial sector debt since 2006 has been in the sovereign and nonfinancial corporate sectors. Much of this increase has been in China (largely in nonfinancial companies) and the United States (mostly from the rise in general government debt). Each country accounts for about one-third of the G20’s increase. Average debt-to-GDP ratios across G20 economies have increased in all three parts of the nonfinancial sector.

The IMF comments: “While debt accumulation is not necessarily a problem, one lesson from the global financial crisis is that excessive debt that creates debt servicing problems can lead to financial strains. Another lesson is that gross liabilities matter. In a period of stress, it is unlikely that the whole stock of financial assets can be sold at current market values— and some assets may be unsellable in illiquid conditions.”

And even though there some large corporations that are flush with cash, the IMF warns: “Although cash holdings may be netted from gross debt at an individual company—because that firm has the option to pay back debt from its stock of cash—it could be misleading”.  This is because the distribution of debt and cash holdings differs between companies and those with higher debt also tend to have lower cash holdings and vice versa.

So “if there are adverse shocks, a feedback loop could develop, which would tighten financial conditions and increase the probability of default, as happened during the global financial crisis.”

Although lower interest rates have helped lower sovereign borrowing costs, in most of the G20 economies where companies and households increased leverage, nonfinancial private sector debt service ratios also increased.  And there are now several economies where debt service ratios for the private nonfinancial sectors are higher than average and where debt levels are also high.  Moreover, a build-up in leverage associated with a run-up in house price valuations can develop to a point that they create strains in the nonfinancial sector that, in the event of a sharp fall in asset prices, can spill over into the wider economy.

The IMF sums up the risk.  “A continuing build-up in debt loads and overstretched asset valuations could have global economic repercussions. … a repricing of risks could lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability.”

Yes, banks are in better shape than in 2007, but they are still at risk.  Yes, central banks are ready to reduce interest rates if necessary, but as they are near zero anyway, there is little “scope for monetary stimulus. Indeed, monetary policy normalization would be stalled in its tracks and reversed in some cases.”

The IMF poses a nasty scenario for the world economy in 2020.  The current ‘boom’ phase can carry on.  Equity and housing prices continue to climb in overheated markets.  This leads to investors to drift beyond their traditional risk limits as the search for yield intensifies despite increases in policy rates by central banks.

Then there is a Minsky moment.  There is a bust, with declines of up to 15 and 9 percent in stock market and house prices, respectively, starting at the beginning of 2020.  Interest rates rise and debt servicing pressures are revealed as high debt-to-income ratios make borrowers more vulnerable to shocks. “Underlying vulnerabilities are exposed and the global recovery is interrupted.”

The IMF estimates that the global economy could have a slump equivalent to about one-third as severe as the global financial crisis of 2008-9 with global output falling by 1.7 percent from 2020 to 2022, relative to trend growth.  Capital flows to emerging economies will plunge by about $65 billion in one year.

Of course, this is not the IMF’s ‘base case’; it is only a risk.  But it is a risk that has increasing validity as stock and bond markets rocket, driven by cheap money and speculation.  If we follow the Carchedi thesis, the driver of the bust would be when profits in the productive sectors of the economy fall.  If they were to turn down along with financial profits, that would make it difficult for many companies to service the burgeoning debts, especially if central banks were pushing up interest rates at the same time.  Any such downturn would hit emerging economies severely as capital flows dry up.  The Carchedi crunch briefly appeared in the US in early 2016, but recovered after.

Zhou is probably wrong about China having a Minsky moment, but the advanced capitalist economies may have a Carchedi crunch in 2020, if the IMF report is on the button.

 

 

 

Sunny periods followed by showers

October 9, 2017

Today, the IMF and the World Bank meet in Washington for their semi-annual conference to discuss the world economy.  In the course of the proceedings, the great and the good in the world of economics, central banking and finance get together to understand the trends and consider the policy and strategy for capital.  That includes the IMF and the World Bank issuing many reports and studies for consideration.

The current view of the world economy was spelt out over the weekend by Christine Lagarde, the IMF managing director and former French finance minister under the right-wing presidency of Nicholas Sarkozy.  Lagarde’s line was that the global economy was showing significant signs of improvement and this was an opportunity to ‘fix the roof while the sun shines’ – in other words, get on with difficult and controversial ‘reforms’ while things were improving, both to sustain any recovery and reduce the social impact of any measures.  “Pleasant as it may be to bask in the warmth of recovery… the time to repair the roof is when the sun is shining.”

Lagarde, in her speech to Harvard University, a bastion of the elite, started by pointing out that “the long-awaited global recovery is taking root. In July, the IMF projected 3.5 percent global growth for 2017 and 3.6 percent for 2018. Next week we will release an updated forecast ahead of our Annual Meetings — and it will likely be even more optimistic.  Measured by GDP, nearly 75 percent of the world is experiencing an upswing; the broadest-based acceleration since the start of the decade. This means more jobs and improving standards of living in many places all over the world…. the likelihood for this year and the next is that growth will be above trend.”

This optimistic view has been previewed by many others.  Gavyn Davies, former chief economist at Goldman Sachs, now runs Fulcrum Forecasting which tries to measure global economic activity.  In their latest survey, Fulcrum says that “global economic activity has embarked on the strongest and most synchronised period of expansion since 2010. Global growth is running well above the long term trend, especially in the advanced economies.”

Similarly, the Brookings Institution think-tank and the Financial Times Tiger index of global activity reckons that the global economy is experiencing its broadest and strongest upturn for more than five years. The index, which covers all significant advanced and developing economies, is at or close to five-year highs on measures of the real economy, confidence and financial conditions. “A cyclical pickup in investment and trade in the advanced economies — especially in Europe and Japan — has led to better-than-expected growth.”   And a special G20 reports reckons that: “The G-20 has come a long way towards its goal of strong, sustainable, and balanced growth.” 

This is all sounds good.  At last the world capitalist economies are entering a period of sustained and faster growth.  The Long Depression, as I have characterised it, is over.  Yet for all the optimistic talk, these commentators from Lagarde to the World Bank, to the new G20 report, and to Gavyn Davies, also offer a dark side of doubt.

As Gavyn Davies put it: “Is this just another false dawn?”  He comments that “there are few signs of recovery on the supply side and some indications of excess risk taking in asset markets (ie rocketing stock markets).  Some economists are therefore suggesting that the global economy may be “bipolar”, with rising risks that the current period of firm growth in activity could be punctured by a sudden surge in risk aversion in asset markets.  So “a relatively minor risk shock, for example from geopolitics, could result in a large correction in asset prices, and that might stop the global economic recovery in its tracks”.

Davies cites a new model published by Ricardo Caballero and Alp Simsek at MIT which concludes that the global economy could be “bipolar”, with its encouraging recent behaviour being unusually vulnerable to risk shocks in asset markets.  These economists suggest three main dangers, either a technical market correction (ie a financial crash); or a straightforward economic recession; or a geopolitical event (eg America attacks North Korea and war breaks out). They dismiss the first two as unlikely right now.  However, “if we were to see a volatility spike that pushes the economy into a recession, the latter in itself would raise volatility endogenously.”

And this is the risk that the Bank for International Settlements recently flagged as a possibility or even probability, as I pointed out in a recent post: The BIS said: leverage conditions in the United States are the highest since the beginning of the millennium and similar to those of the early 1990s, when corporate debt ratios reflected the legacy of the leveraged buyout boom of the late 1980s.  Taken together, this suggests that, in the event of a slowdown or an upward adjustment in interest rates, high debt service payments and default risk could pose challenges to corporates, and thereby create headwinds for GDP growth.”

The FT Tiger index authors were also cautious.  Yes there was a “synchronised” but “sluggish recovery”.  It’s sluggish because a proper sustained end to the Long Depression is being held back by weak productivity growth.  “The combination of weak productivity and investment growth does not portend well for an increase in growth or even for the sustainability of the current low growth.”

Lagarde too pointed out the other side of the story: “the recovery is not complete.  Some countries are growing too slowly, and last year 47 countries experienced negative GDP growth per capita. And far too many people — across all types of economies — are still not feeling the benefits of the recovery.”  In the largest economies, overall productivity growth — a measure of how efficient we are — has dropped to 0.3 percent, down from a pre-crisis average of about 1 percent. This means that, despite technological advances, wages in many places are only inching up.

In an accompanying report, the IMF economists point out that productivity growth has slowed sharply across the world following the global financial crisis.  They attribute this to “the fading impact of the information and communication technology boom, weaker labor and product market reform efforts, skills shortages and mismatches, and demographic factors such as aging populations. In addition, the lingering effects of the global crisis continue to be felt—weak corporate balance sheets, tight credit conditions in some countries, soft investment, weak demand, and policy uncertainty.”

And they refer to the global trade slowdown as another long-term drag on productivity.  “Trade since 2012 has barely kept pace with global GDP. This could point to lower productivity gains in the future—even without taking into account the possibility of trade restrictions.” What worries Lagarde and the IMF is that this cyclical recovery could peter out without any long-term solution to this “productivity puzzle”.

All these things mentioned by the IMF are undoubtedly factors in the Long Depression, but the IMF studiously leaves out the key underlying cause: productivity growth still depends on capital investment being large enough.  And that depends on the profitability of investment.  Under capitalism, until profitability is restored sufficiently and debt reduced (and both work together), the productivity benefits of the new ‘disruptive technologies’ (as the jargon goes) of robots, AI, ‘big data’ 3D printing etc will not deliver a sustained revival in productivity growth and thus real GDP.

Also, there is no sign of any reversal in the continuing rise in inequality in incomes and wealth around the world, which threatens social cohesion and the steady rule of capital over labour:“if we look at inequality within specific countries, especially some advanced economies, we see widening gaps and an increased concentration of wealth among the top earners.” (Lagarde).  The IMF economists find that “In advanced economies, the incomes of the top 1 percent have grown three times faster than those of the rest of the population.”

More jobs for youth and women and more training and education for skills is the IMF answer.  A redistribution of income and wealth through ‘progressive taxation’ is hinted at (“These are all ideas worth exploring”), but public ownership and control of the big monopolies and banks is, of course, not mentioned.

Indeed, the IMF’s employment policies are the old neoliberal ones of ‘flexible labour markets’.  The IMF points out that if women participated in the labor force in the same numbers as men, GDP could increase by as much as 5 percent in the US, 27 percent in India, and 34 percent in Egypt, to name just three examples.   But it has little to say on the chronic sore (in what Marx called the reserve army of labour) which modern capital has used to exploit the global workforce: namely, the massive level of youth unemployment globally.

A recent speech by Mario Draghi, head of the ECB, exposed the failure of capitalism to provide jobs at decent pay and with a future for millions of young people.  Draghi pointed out that youth unemployment is not a recent phenomenon. It started with the end of the golden age of capitalism in the early 1970s when unemployment increased from 4.6% to 11.1% by the end of the decade.  In 2007, when total unemployment in the euro area declined to 7.5%, its lowest level since the early 1980s, the unemployment rate for young people was already very high at around 15%.

And then as a result of the Great Recession, it reached 24% and is still about 4 percentage points higher than at the beginning of the crisis in 2007.  The number of young adults participating in the EU labour market, at 41.5%, is very low. That means a large majority is currently in training, studying, or not looking for work.  If we compare youth unemployment with unemployment among people 25 years and older, we discover it is 250% higher. This has hardly changed in the past few years – even in the EU’s largest nations. In the case of young adults the modest increase in employment consisted almost exclusively of temporary jobs. In Spain and Poland more than 70% of young adults have temporary jobs.  This is a permanent unskilled reserve army of labour for capital.

The other reason that the world economy will not sustain this ‘cyclical recovery’ is the still high level of private sector debt.  In its latest Global Financial Stability report, the IMF economists focus on rising household debt.  The IMF starts: “Debt greases the wheels of the economy. It allows individuals to make big investments today–like buying a house or going to college – by pledging some of their future earnings. That’s all fine in theory. But as the global financial crisis showed, rapid growth in household debt – especially mortgages – can be dangerous.”

The report finds: “In the short term, an increase in the ratio of household debt is likely to boost economic growth and employment, our study finds. But in three to five years, those effects are reversed; growth is slower than it would have been otherwise, and the odds of a financial crisis increase. These effects are stronger at the higher levels of debt typical of advanced economies, and weaker at lower levels prevailing in emerging markets.”

More specifically, “our study found that a 5 percentage-point increase in the ratio of household debt to GDP over a three-year period forecasts a 1.25 percentage-point decline in inflation-adjusted growth three years in the future. Higher debt is associated with significantly higher unemployment up to four years ahead. And a 1 percentage point increase in debt raises the odds of a future banking crisis by about 1 percentage point. That’s a significant increase, when you consider that the probability of a crisis is 3.5 percent, even without any increase in debt”.

“What’s the reason for the tradeoff? At first, households take on more debt to buy things like new homes and cars. That gives the economy a short-term boost as automakers and home builders hire more workers. But later, highly indebted households may need to cut back on spending to repay their loans. That’s a drag on growth. And as the 2008 crisis demonstrated, a sudden economic shock – such as a decline in home prices–can trigger a spiral of credit defaults that shakes the foundations of the financial system.”

So the IMF is concerned that the house of cards that is private sector debt will bring down any economic recovery.  In this blog, I have highlighted, not household debt, but corporate debt and the greater risk there.  Corporate debt is very high and rising, while the number of ‘zombie’ companies (those hardly able to meet their debt payments) are at record levels (16% in the US).  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.  That suggests that increased costs of debt servicing from rising interest rates driven by the Fed’s ‘normalisation’ policy could tip things over, unless profitability recovers for the wider corporate sector.

A key word in Lagarde’s address to the great and good at Harvard University was “cycles”.  Lagarde started: “Of course, there are seasonal cycles — like the one we are enjoying right now. Then there are economic cycles. A key challenge in economic cycles is trying to gain perspective on what comes next while you are in the midst of it.”

Yes, what sort of cycle is the world economy in?  Is it the start of a long cycle of boom after depression, at last? Or is a just a short and unsustainable pick-up?  In my book, The Long Depression, in a chapter on cycles, I try to delineate between longer-term cycles of profitability and finance (Marx) and innovation (Kondratiev) and short-term cycles of investment and construction (Kuznets) and capacity utilisation (Kitchin).  The latter cycle of using up spare capacity and working capital generally has a length of just four years, unlike the investment cycle of 8-10 years or the longer profitability cycle (32 years, I claim).

I think we are in an upswing of a new Kitchin cycle, but still within the down phase of the profitability cycle.  The troughs and peaks of the Kitchin cycle, as measured by the changes in the utilisation of capacity (the graph shows US industry), can be defined on a 4-6 year basis: 1982, 1986, 1991, 1996, 2002, 2008, 2012 and 2016.  If this is right, the Kitchin cycle will peak in 2018 and then slip down to a new trough by 2020.

That does not quite fit in with my old thesis of a new slump by 2018.  But that is built round the profitability cycle.  More on this in the future. In the meantime, enjoy the sunshine before the winter.

Trump’s tax reform

September 28, 2017

President Trump’s announcement of ‘tax reform’ plans that he intends to get the US Congress to pass can only mean less tax on the richest segment of income earners and less tax on the profits of large multi-national corporations.  But it won’t boost investment or growth.

Let’s take the planned cuts in corporation tax first.  Trump claims that US corporations have the highest tax rate in the world and this needs to be cut to boost investment and growth.  This is nonsense.  The official US federal tax rate on corporate profits is 35% and when you add in state taxes, the top rate rises to 39%.  Even on that measure, the US is actually third highest out of 188, behind the United Arab Emirates and Puerto Rico.  Trump wants to cut the federal rate of 20%. But the official rate is an illusion.  Once various exemptions and allowances are taken into account, plus the provision to pass on losses in one year to deduct against profits in another year, the effective tax burden on US corporation averages out at about 27%, which puts the US rate near the global average.

Moreover, the burden of corporate tax on US companies has steadily been reduced over the last 50 years, from providing from 32% of federal tax revenue in 1952 to 10% in 2013. Indeed, total revenues from corporation tax are just 1.6% of US GDP, well below the OECD average of 2.8%.  In other words, the contribution that the top US corporations make to government spending on services etc is tiny.  Some smaller US companies avoid corporation tax altogether and instead pay ‘income tax’ as owners.  Trump is one of these:  his companies pay no corporation tax but just tax on whatever he takes as ‘income’ from his companies.  That is taxed at a top rate of 39.6%.  Trump wants to cut this to a 15% rate.

In the recession years of 2008-12, many large companies paid no corporation tax at all. General Electric, Boeing, Verizon and 23 other profitable Fortune 500 firms paid no federal income taxesfrom 2008 to 2012. General Electric, one of the most notorious corporate tax dodgers, got $3.1 billion in refunds on $27.5 billion in profits from 2008 to 2012. The company paid less in federal income taxes in five years than a single American family pays in one year. These companies were, in effect, being bailed out by the taxpayer – that’s us, who instead saw a sharp rise in taxes on income, cuts in government services and rises in sales taxes to pay for these bailouts.

The other trick to avoid tax was to shift profits on company accounts to foreign subsidiaries.  U.S. corporations dodge $90 billion a year in income taxes by shifting profits to subsidiaries — often no more than post office boxes — in tax havens. Now US corporations officially hold roughly $2.6trn offshore, a figure cited by Congress’s Joint Committee on Taxation. The top five in order of overseas cash holdings as of Sept. 30, are Apple ($216 billion), Microsoft ($111 Billion), Cisco ($60 billion), Oracle Corp. ($51 billion) and Alphabet Inc. ($48 billion).— much of it in tax havens — that have not yet been taxed here. Trump plans to offer these companies a reduced tax rate of 10% to repatriate these profits.

The planned income tax reforms (cuts) will also help the rich the most. The individual tax rates would be 12%, 25% and 35% – and the plan recommends a surcharge for the very wealthy. But it does not set the income levels at which the rates would apply, so it is unclear just how much of a tax cut would go to a typical family. There will be a cut in taxes on capital gains, 70 percent of which flow to the top 1 percent.  The  estate tax will be eliminated. This applies to a tiny number of people, couples that have estates bigger than $10.8 million.   Trump himself would make a big windfall from this. Trump’s estate would save $564m, the review found, based on his estimated net worth of $3bn; Trump’s commerce secretary, Wilbur Ross, roughly $545m and potentially result in more than $900m in savings for Richard DeVos, the father-in-law of Betsy DeVos, Trump’s education secretary.

The nonpartisan Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, found “high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income… Three-quarters of the tax cuts would benefit the top 1 percent of taxpayers,” if the plan were put into effect this year, it said. The highest-income households — the top 0.1 percent — would get “an average tax cut of about $1.3 million, 16.9 percent of after-tax income.” Those in the middle fifth of incomes would get a tax cut of almost $260, or 0.5 percent, while the poorest would get about $50. That split would worsen down the road, the Tax Policy Center says: “In 2025 the top 1 percent of households would receive nearly 100 percent of the total tax reduction.”  Even the conservative-leaning Tax Foundation concluded that those in the top 1 percent of the income scale would save at least 10 times as much, or 5.3 percent. That’s nearly $40,000 extra for those at the top, compared to $67 for those smack dab in the middle of the income scale.

Overall, the tax cuts would reducing tax revenue to the federal government by $160bn, or 0.8% of GDP.  In other words, that would halve the corporate tax contribution to the government, which would seek to make the rest of us pay for the gap.  Mainstream economist Marin Feldstein from Harvard University claims that “A lower corporate tax rate and the shift to a territorial system would increase the flow of capital to investment in US corporations from abroad and from capital investments in owner-occupied housing and in agriculture. This would raise productivity and GDP, leading to increases in tax revenue that would partly offset the direct effect of the corporate rate reduction.”  JP Morgan economists beg to differ: they see a boost, if any, to US economic growth at no more than 0.4% over two years, at most.

And there is no empirical relationship between cutting corporate tax rates and job growth, according to a recent study by the Center for Effective Government. Twenty-two of the 30 profitable Fortune 500 companies that paid the highest tax rates (30% or more) from 2008 to 2010 created almost 200,000 jobs between 2008 and 2012. The 30 profitable corporations that paid little or no taxes over the three years collectively shed 51,289 jobs between 2008 and 2012.

What these corporations did with the extra profit from less tax was to buy back their own shares to boost the stock price or issue bonds at very low rates to enable them to take over other companies.  Thus the tax shortfall merely led to a boom in fictitious capital (debt and shares) not real investment.

It’s also highly unlikely that companies with factories overseas will shift meaningful production to the US. After all, labour remains significantly cheaper in nations like China. Hourly compensation costs were $36.49 per employee in the US in 2013, according to The Conference Board. The comparable cost in China was just $4.12 that year (the most recent figure), even after having increased more than six-fold over the preceding ten years.

The Trump tax ‘reform’ is yet another attempt to kick-start an economy by providing handouts to corporations and the rich (like Trump) at the expense of the rest of us, in the vain hope that the capitalist sector will invest more.  But it’s a vain hope.  Business investment is falling in the US.

Capital.150: part 3 – struggle!

September 27, 2017

In the third and final part of my review of last week’s Capital.150 London symposium on the modern relevance of Marx’s Capital Volume One 150 years after it was published, I want to cover some of the presentations not mentioned so far.  This is going to be a quick compendium that won’t do justice to the presenters’ papers or to the debates on them.  But at least you can follow up by reading the papers that I shall refer to.

In the session on imperialism, the some old debates among Marxists were revived. As far as I understood the argument presented by Marcelo Dias Carcanholo from the Federal University Fluminense in Rio de Janeiro Brazil (Carcanholo PP) , Marcelo reckoned the ‘dependency’ was deepening, driven by ‘unequal exchange’ in trade with imperialism and significant ‘super-exploitation’ of labour in the peripheral economies.  This makes it increasingly difficult for national capitalist forces to engage the working class in the peripheral economies in class collaboration.  Both ‘dependency’ (of ‘colonial’ economies on imperialist ones) and ‘super-exploitation’ of labour (in the south by the north) as the main generator of profit, are controversial issues and the debate continues on the nature of modern imperialist exploitation and its implications for class struggle.  Raquel Varela from Lisbon New University argued that Marx’s theory of primitive accumulation as expounded in Volume One had new angles to take on modern capitalism – existing still in the poorest areas of so-called emerging economies like India, but Marx’s theory of exploitation of labour by capital was now dominant globally.

Tony Norfield, author of the best-selling book, The City, on London’s role in imperialism spoke on Das Kapital, finance, and imperialism. Tony seemed to be arguing that Marx’s law of value had “evolved” in the modern world of imperialism and finance capital and now “financial markets show more directly what the capitalist world economy allows” and so “equity markets, bond yields and FX markets are now the key market levers”, not the profitability of capital in the non-financial sectors.  That’s because the large tech corporations are really financial companies and use their financial power to appropriate more surplus value than they generate from production.  But that also means there is less profit available for productive investment.

In my view, Tony’s thesis suggests that capitalism has changed to the point that it is no longer the capitalism of Volume One.  This seems to me to destroy the relevance of Marx’s value theory in understanding the laws of motion of capitalism.  For me, stock and bond market prices reflect the vicissitudes of fictitious capital (speculative capital), but because this capital is fictitious, it will collapse when the productive sectors collapse with insufficient profits- and that is Marx’s point (and also the point of Carchedi’s paper – see my part one post,https://thenextrecession.wordpress.com/2017/09/21/capital-150-part-one-measuring-the-past-to-gauge-the-future/).

So, far from stock prices being the best measure of capitalist health, surely they usually reflect speculative bubbles in assets that are eventually revealed to have no or less value?  For example, currently stock market prices are daily registering new highs and yet economic growth remains low and investment in productive capital flat.  It is not that Marx’s law of value should give way to stock prices, but that fictitious capital will eventually give way to value.  Maybe Tony meant that Marxists should take into the account the huge increase in fictitious capital and its impact of profitability.  If so, then some authors, including myself, have done so by either adding in financial assets to productive assets as part of the net worth of corporations (Debt matters) or by deducting fictitious profits from total profits.

The final sessions of the symposium covered the future of capital and the future of labour in 21st century capitalism.  Alex Callinicos author of Deciphering Capital: Marx’s Capital and Its Destiny reminded us that the current debate over the relevance of Marx’s law of the tendency of the rate of profit to fall started among Marxists just as soon as the publication of Volume 3 of Capital.  For example, there was a debate over its relevance between Benedetto Croce and Antonio Gramsci, with the latter defending the law. Hannah Holleman in her contribution brought to our attention the big new contradiction in capitalist accumulation that Marx had only noted in Capital: the destruction and pollution of the planet by the rapacious drive for profit, which has now culminated in global warming and climate change, possibly irreversibly.

Eduardo Motta Albuquerque of the Federal University of Minas Gerais, Belo Horizonte Brazil showed that Marx in Volume One also paid close attention to technological developments in 19th century capitalism as a guide to new waves of development (Albuquerque Marx Technology Divide).  Machines in England led to the destruction of Indian industry; with industries at the centre of imperialism and agriculture at the periphery.  The expansion of rail transport was accompanied by the global expansion of capital and the tentacles of imperialism.  “In sum: each technological revolution can reshape the international division of labour”. So what will be those new “starting points” in the 21st century?

And Fred Moseley, a longstanding Marxist economist and author of the recent book Money and Totality, updated his view of the relevance of the rate of profit for the future of US capitalism.  Fred argued that a key element for the growth of profitability was the relation between productive and unproductive labour, the latter being that part of labour not generating value or surplus value but only appropriating some of it.  These sectors were finance, government and other non-productive industries, but also supervisory and management workers in productive sectors.

The increasing appropriation of surplus value by these sectors sounds the death knell of economic resurgence by the US economy as it restricts profit for productive investment. Only a destruction of capital in these sectors could release more value for productive investment (Moseley PP).  For more on this, see the excellent new paper by Lefteris Tsoulfidis and Dimitris Paitaridis (MPRA_paper_81542).

The final Wednesday afternoon session at the Capital.150 symposium in London considered what would happen to labour in modern capitalism and how Marx envisaged society and labour would change under communism, Tithi Bhattacharya looked at the nature of modern labour in “Social reproduction theory: conceiving capital as social relation”. This produced a vigorous debate on whether social reproduction theory (SRT), around the issues of the exploitation of women at home and capitalist pressures on working class families, was a useful addition to Marx’s labour power theory in Volume One or not.

Lucia Pradella from King’s College looked at the impact of imperialism and migration on the power of labour and workers’ struggles.  Imperialism has created new disasters on world labour and a massive increase in the migration from the poorer to richer areas.  But just as in the 19th century with the migration of Irish people to work in British cities, that produced dangerous prejudices and divisions, it also opened up positive opportunities for global solidarity – something Marx also strived for in his day between English and Irish immigrant workers. Beverly Silver from John Hopkins University considered Marx’s general law of capital accumulation and the making and remaking of the global reserve army of labour. 

Finally, top Marxist scholar, Michael Heinrich analysed the nature of Communism as expounded in Marx’s Capital and other works.  His was a powerful account of the fundamental basis of a Communist society: ‘from each according to his/her abilities; to each according to their need’.  Can this ever be achieved in the 21st century?  Michael tolds us the story of somebody visiting Marx at his home in his later years.  He asked Marx, in effect, ‘what must we do?’  Marx paused before replying and then said just one word: “Struggle!”.

Germany stutters

September 25, 2017

The general election in Germany produced a sharp swing to the right.  The two main parties of the centre-right and centre-left, the Christian Democrats/Social Union (CDU-CSU) and the Social Democrats (SPD) suffered significant losses in their share of the vote.  The party of Chancellor Angela Merkel lost 8.5% pts from the 2013 election to finish with 33%; and the SPD lost 5.2% pts to finish with 20.5% – both achieving the lowest share of the vote since 1945.  The share of the vote going to the two main parties, which were in a ‘grand coalition’, is hardly above 50% of those voting – and the voter turnout rose to 75% from 71% in 2013.

The big gainer was the anti-immigrant, ultra-nationalist, anti-muslim, Alternative for Germany (AfD) which polled 12.6%, compared with 4.7% in 2013 and entered the German parliament (Bundestag) for the first time.  The other major gainer was the petty-bourgeois, neo-liberal Free Democrats (FDP) which polled 10.7% compared to 4.8% last time and re-entered the Bundestag.  Die Linke (Left) party polled more or less the same as last time with 9.2% and so did the Greens with 8.9%.  Indeed, the left (if you include the Greens in that) polled less than 40% of the total vote, even lower than in 2013.

The SPD says that they will not enter a new grand coalition with the CDU, and that’s not surprising after the hammering they have taken in the election for being part of Merkel’s government.  The SPD particularly lost support in higher unemployment areas of West Germany, revealing that the poorest sections of the working class do not see the SPD as fighting for them any longer.

The big gains by the AfD made it Germany’s third-largest party in the Bundestag.  The phenomena of ‘populist’ right-wing nationalist parties that we have seen in France (National Front), the UK (UKIP), Italy (La Liga) and Greece (Golden Dawn) demonstrate the fragmentation of the political status quo in Europe in this Long Depression.  Some (not all) of the poorest and least organised of the working class, along with small business and self-employed, have turned to nationalism for an answer.  They think that the causes of their demise are immigrants, handouts to other EU countries and big business – in that order.

Germans are used to immigrants.  Germany is the second most popular migration destination in the world, after the US. Over one out of five Germans has at least partial roots outside of the country, or about 18.6m.  But the question of immigration became a huge issue in Germany because of the disaster of the Middle East and the massive and fast influx of refugees, around 2m in the last two years into Germany.  Most of these refugees were placed in the poorest parts of east Germany, already under the pressure of poorer housing, education and social services.

It is an economic issue because of the previous policies of the SPD and CDU in introducing so-called labour ‘reforms’ that created a whole layer of part-time temporary employees for German business on very low wages.  This is what Marx called a ‘reserve army of labour’.  This kept labour costs down for German industry and laid the basis for the sharp rise in the profitability of German capital from the early 2000s up to the global financial crash.

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 10 years to about 822,000, according to the Federal Employment Agency.

So the reduced share of unemployed in the German workforce was achieved at the expense of the real incomes of those in work.  Fear of low benefits if you became unemployed, along with the threat of moving businesses abroad into the rest of the Eurozone or Eastern Europe, combined to force German workers to accept very low wage increases while German capitalists reaped big profit expansion.  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%.

This cheap labour, concentrated in the eastern part was in direct competition with the huge numbers of refugees arriving in the last two years. The irony, as always, is that the AfD vote improved mainly in areas in Eastern Germany where immigration was relatively low – you see, it is the fear rather than the reality that drives such prejudice and reaction.

The other irony is that the co-leader of the AfD is no poor populist of the people, but instead Alice Weidel is a former economist at Goldman Sachs and financial consultant – shades of UKIP leader Nigel Farage, who is a stockbroker. These representatives of capital have no connection with their rank and file voters but attempt to rise to power on prejudice and mendacity.

What the result shows is that even German capitalism, the most successful advanced capitalist economy in the world, cannot escape the divisive forces of the Long Depression.  Germany is the EU’s most populous state and its economic powerhouse, accounting for over 20% of the bloc’s GDP.  Germany has preserved its manufacturing capacity much better than other advanced economies have. Manufacturing still accounts for 23% of the German economy, compared to 12% in the United States and 10% in the United Kingdom. And manufacturing employs 19% of the German workforce, as opposed to 10% in the US and 9% in the UK.

Even so, economic growth since the last general election has been little better than the UK and the US, but that was better than during the euro debt crisis just before the last election in 2013, when there was a short recession.

What has changed economically since the last election in 2013 is yet another fall in the average real wage growth for Germans particularly in this last year before the vote.  The election took place just as many Germans were starting to feel the pinch for the first time since the last election.

The profitability of German capital has risen steadily, on the whole, since the end of the global profitability crisis of the 1970s, which affected all the major economies.  The real take-off in German profitability began with the formation of the Eurozone in 1999, generating two-thirds of all the rise from the early 1980s to 2007.  German capitalism benefited hugely from expanding into the Eurozone with goods exports and capital investment until the Great Recession hit in 2008, while other Euro partners lost ground.  Also, the Hartz labour reforms that opened up a bigger gap between productivity growth and wages in Germany than anywhere else in Europe.

But the fall in profitability during the Great Recession was considerable and profitability since has remained below pre-crisis levels.  That tells us that Germany will struggle to grow much more than it has done over the last few years.

So what happens now?  The formation of a new German government will probably take months to work out.  As the SPD currently refuses to join a new coalition, Mrs Merkel will have to try to form what is called a ‘Jamaica’ coalition (based on the black, yellow and green party colours of the CDU, the FDP and the Greens).  If that is formed, and it remains an ‘if’, it is likely to be much more unstable than the last government. The FDP and the CDU want to carry out even more neo-liberal measures, including large cuts in corporate tax for big business.  And the FDP is opposed to any further integration in Europe or fiscal transfers to the weaker euro area states.  The Greens want a total end to nuclear power and other environmental measures unacceptable to the FDP.

This election shows that, even in Germany, there is growing disillusionment with the ‘success’ of capitalism that has given just a few crumbs for the working class off the table of bounty for German business – less than one in four adult Germans voted for the main party of capital.  So far, that disillusionment has been expressed in a partial switch to nationalism.  If there is a new global recession in the next four years, the so-called ‘stability’ of German politics will crumble further.

Capital.150 part two: the economic reason for madness

September 23, 2017

The evening session of the first day of Capital.150 was about how the class struggle would ‘map out’ in the 21st century.  Was Marx’s Capital still relevant in explaining where the hotspots for class battles would be concentrated?

Professor David Harvey made the first contribution.  David Harvey (DH) is probably the most well-known Marxist scholar in the world.  A renowned academic geographer with many awards, DH has become the leading expert on Marx’s Capital and its modern relevance through many books and presentations.  His website contains lectures on each chapter of Marx’s Capital and youtube is full of his presentations.

At this session, he presented his view of how class struggle, or ‘anti-capitalist’ struggle as he preferred to call it, is to be found in modern capitalism.  A video of this session will soon be available but you can get the gist of what DH said from previous video presentations – the latest of which is here (his recent LSE lecture) or here on his website.  DH’s thesis is also expounded in his latest book, Marx, Capital and the madness of economic reason.

DH started with saying that capital is ‘value in motion’ – and it is a circuit of capital starting with money, then going into the production of surplus value; and then, just as important, onto the realisation of that value through sale on the market (circulation); and then onto the distribution of that realised value between sections of capitalists (industrial, landlords and finance) and to workers in wages, taxes to government.

DH likens this circuit to the geographical circuit of the planet’s water cycle – from atmosphere to sea to land and back.  But the circuit of capital is not a simple cycle like that, but a spiral. It must continually accumulate and circulate and distribute ever more or it will reverse into a ‘bad infinity’ (to use a Hegelian term), spiralling down.

DH’s argues that Volume One of Capital only deals with the production part of the circuit (the production of value and surplus value).  Volume Two deals with the realisation and circulation of capital between sectors in its reproduction, while Volume 3 deals with the distribution of that value.  And while Marx gives a great analysis of the production part, his later volumes are not complete and have been scratched together by Engels.  And thus Marx’s analysis falls short of explaining developments in modern capitalism.

You see, as DH put at his LSE lecture, production is “just a small sliver of value in motion”.  The more crucial points of breakdown and class struggle are now to be found outside the traditional battle between workers and capitalists in the workplace or point of production.  Yes, that still goes on but the class struggle is much more to be found in battles in the sphere of circulation (here I think DH means, for example, consumers fighting price-gouging by greedy pharma companies, the manipulation of people’s ‘wants, needs and desires’ in what they buy and think they need); and in distribution in battles over unaffordable rents with landlords or unrepayable debts like Greece or student debt.  These are the new and more important areas of ‘anti-capitalist’ struggle outside the remit of Volume One of Capital.  They are in communities and streets and not in the workplace. To quote DH again, the big fights are elsewhere “from the process of production”.

There are two things here: first, the theoretical and empirical basis for DH’s conclusions; and second, whether class struggle is now to be found (mainly) outside the confines of Volume One.

DH provides a theoretical base to his class struggle thesis by arguing that crises under capitalism are at least as likely, if not more so, to be found in a breakdown in circulation or realisation (as DH claims Marx argued in Volume 2) than in the production of surplus value.  And crises are more likely now to happen in finance and over debt due to financialisation (from Volume 3).

Well, as Carchedi showed in his paper (see my post Part One), behind financial crises lies the crises in the production of surplus value, to be found in Marx’s law of general accumulation (from Volume One) and his law of the tendency of the rate of profit to fall (this law is actually found in Volume 3 – thus disputing DH’s claim that Volume 3 is all about ‘distribution’).

In my view, Volumes One, Two and Three link together to give us a theory of crises under capitalism based on the drive for profit and the accumulation of surplus value in capital which falls apart at regular and recurring intervals because of the operation of Marx’s la of profitability. As Paul Mattick Snr put it back in the 1970s, “Although it first appears in the process of circulation, the real crisis cannot be understood as a problem of circulation or of realisation, but only as a disruption of the process of reproduction as a whole, which is constituted by production and circulation together. And, as the process of reproduction depends on the accumulation of capital, and therefore on the mass of surplus value that makes accumulation possible, it is within the sphere of production that the decisive factors (though not the only factors) of the passage from the possibility of crisis to an actual crisis are to be found … The crisis characteristic of capital thus originates neither in production nor in circulation taken separately, but in the difficulties that arise from the tendency of the profit rate to fall inherent in accumulation and governed by the law of value.”[i]

When you put it like that, two weaknesses spring out from DH’s schema.  First, he makes no mention of the Marx’s law of the tendency of the rate of profit to fall. He did not mention it in his presentation nor does he in his latest book.  DH has already made it clear why in debates with me and others: he thinks the law is irrelevant and even wrong; and moreover (adopting the view of Michael Heinrich – also at Capital.150 – that Marx actually dropped it himself).  And yet there is the law clearly expressed in Volume 3 and offering a coherent theory of regular and recurrent crises of capital that can be tested (and many scholars have done so).

And that brings me to the second weakness: crises are regular and recurrent but DH’s thesis offers no explanation for this regularity.  Moreover, this regularity can be found going back 150 years since Capital was first published (and even before) without the modern role of finance or the modern manipulation of ‘wants, needs and desires’.  Does this not offer a different explanation from DH’s?

For example, DH wants to tell us that crises occur because wages are squeezed down to the limit, as they have been in the neo-liberal period after the 1970s (thus a realisation of, not a production of, surplus value problem).  But was the first simultaneous slump in post-war capitalism in 1974-5 due to low wages?  On the contrary, most analysts (including Marxists) at the time argued that wages were ‘squeezing’ profits and that caused the slump.  And most Marxists agree that this was a profitability crisis, as was the ensuing slump in 1980-2.  And moreover, I have shown that when ‘social wages’ (benefits etc) are taken into account, wage share in the neo-liberal period did not fall that much, at least until the early 2000s.

Carchedi’s paper shows too that slumps have never been a result of a realisation problem (wages and government spending were always rising before each (recurrent) slump in the post-war period, including the Great Recession in 2008-9.  The credit crunch and the euro debt crisis were the result of falling profitability and the switch to financial assets to raise profits, eventually leading to a financial crisis – and thus were the consequence of a crisis in the profitability of production not in its distribution.

DH reckoned capitalism worked well in the 1950s because wages were high and unions strong, presumably creating effective demand.  The alternative scenario is that capitalism had a golden age because profitability was high after the war and capital could thus make concessions to maintain production and accumulation.  When profitability started to fall in most of the major economies after the mid-1960s, the class battle intensified (in the workplace) and, after the defeat of labour, we entered the neo-liberal period.

That brings me to my paper, as I was the other contributor in this session (Capital.150 presentation).  Here I argued that the production of surplus value and the accumulation of capital remain central to Marx’s explanation of capitalism and its contradictions that lead to recurrent crises.  As Marx put it: “The profit of the capitalist class has to exist before it can be distributed.”  It is not “a small sliver of value in motion” but the largest, both conceptually for Marx and also quantitatively, because in any capitalist economy, 80% of gross output is made up of means of production and intermediate goods compared to consumption.

As Engels explained, Marx’s great discovery was the existence of surplus value as the specific driver of the capitalist accumulation and labour’s immiseration.  For Marx, the production of surplus-value comes first and is logically paramount, before circulation and distribution.  Production and circulation are not considered by Marx as having the same explanatory power in the analysis of capitalism. Marx is clear that production is more fundamental than circulation.  As Marx says, it is the production of surplus value that is the defining character of the capitalist mode of production, not how that surplus value it is circulated or distributed at the surface level.

In Volume One, Marx shows that the accumulation of capital takes the form of expanding investment in the means of production and technology while regularly shedding labour into a reserve army and thus keeping the labour content of value to a minimum.  This leads to a rising organic composition of capital (the value of means of production rises relative to the value of labour power).  But that very rise creates a tendency for the profitability of capital to fall over time, because value is only created by labour power.

Over history, the rate of profit in capitalism should therefore fall (despite counteracting factors).  This fall will periodically lead to slumps in production and slumps will devalue and destroy capital and thus revive profitability for a while.  Thus we have recurrent and regular cycles of boom and slump. But there is no permanent escape for capital.  The capitalist mode of production is transient because it cannot escape from the inexorable decline in profitability due to the increasingly difficult task of producing enough surplus value.

In this sense, Capital is not so much about the ‘madness of economic reason’ but about the ‘economic reason for madness’.

In my paper, I concentrated on Britain in the 150 years after Marx published Capital.  I showed from Bank of England statistics how the overall rate of profit of British capital has fallen – not in a straight line because there were periods when the counteracting factors (a rising rate of surplus value and falling cost of technology) operated against the general tendency.

Indeed, these periods, in my view, provide crucial indicators for mapping out the intensity of the class struggle.  I found, using the profitability data with the strikes data available for Britain, that whenever profitability was falling in a period when the labour movement was strong and confident then the class struggles (measured in the number of strikes) reached peaks.  This was the case in Britain both prior and just after the First World War and again in the 1970s.

However, when the labour movement was defeated and weak and profitability was rising (partly as a result), as in the neo-liberal period; or when profitability was falling or low in the depressions of the 1930s and now, then the class struggle in the workplace was low too.  In ‘recovery’ periods when profitability picked from lows and unions reformed (1890s and 1950s), strikes were also low but gradually rose.

Thus class struggle in the workplace was at its height when capitalist profitability started falling, but the labour movement was strong after a period of recovery.  Then the best objective conditions for revolutionary change were in place.

This analysis puts the class struggle in the workplace at the centre of capitalism because it is about the struggle over the division of value between surplus value and labour’s share, as Marx intended with the publication of Volume One.  This is not to deny that capitalism creates inequalities, conflicts and battles outside the workplace over rents, debt, taxes, the urban environment and pollution etc that DH focuses on, nor that the struggle does not enter the political plane through elections etc.

But none of these iniquities of capitalism can be ended without control of the means of production by working people and the ending of the capitalist mode of production (namely, production for profit of the few not the need of the many).  And the working-class as a working class, not workers as consumers or debtors, remains the agency of change from capitalism to socialism.  The working class (by any definition) remains the largest social force in society and globally (even defined narrowly as industrial) it has never been larger – way larger than when Marx published Capital.

‘Accumulation by dispossession’ (Accumulation by dispossession) or ‘profit from alienation’ i.e. cheating, fraud, price gouging; speculation against currencies etc, that DH puts forward as the main driver of class struggle now, has existed in many class societies before capitalism, and is thus part of capitalism too. But Marx’s Capital makes it clear that the heart of the class struggle under capitalism is the battle over the production of value, unique to capital.  What happens to value is key and, in this sense, the health of any capitalist economy can be measured by the level and direction of the profitability of capital.

Capitalism has an irreversible contradiction in its ability to extract enough surplus value that brings capitalism into recurrent crises.  These cannot be resolved by higher wages, more government spending or more state regulation of finance, as alternative economic theories argue.  DH told us in the session that capitalism was saved in 2008 by Keynesian-type government spending measures in China.  China ran up huge debts to do this and then had to export excess money capital abroad.  This thesis suggests that Keynesian policies might work to avoid slumps (at least for a while) and thus there may be method in this madness of economic reason.  I don’t agree and I explain why in my paper.  I’ll deal with China in a future post, but in the meantime you can read what I had to say on China here.

[i] Economic Crisis and Crisis Theory. Paul Mattick 1974, https://www.marxists.org/archive/mattick-paul/1974/crisis/ch02.htm

Capital.150 part one: measuring the past to gauge the future

September 21, 2017

About 230 people attended the Capital.150 symposium that I, along with Kings College lecturers Alex Callinicos and Lucia Pradella, dreamed up some time earlier this year.  The aim was to discuss the modern relevance of Marx’s Capital, published for the first time in September 1867.

Of course, this was not an original idea and there have been several such conferences around the world on this theme already. But Capital.150 did manage to attract some leading Marxist scholars to present papers and the initial feedback from those attending seems to be that the speakers’contributions were good, but that there was not enough time for discussion from the floor.  I agree, especially as those attending knew what they were talking about when it comes to Marx and Capital. The lesson for any future such events (if ever!) is: less speakers, less sessions and more time in each.

The symposium kicked off on the first day with papers on Marx’s theory of crises and its application to modern capitalism.  Guglielmo Carchedi delivered a long paper for the symposium but was ill (Carchedi The old and the new).  So I was forced to present it as best I could.

Carchedi argued that we could measure the exhaustion of post-1945 capitalism in the increasing number of financial crises and slumps as the 20th century ended.  He did so by identifying indicators that could reveal why and when slumps took place.

Carchedi based his analysis on Marx’s law of the tendency of the rate of profit to fall as the underlying driver of regular and recurrent slumps in capitalist production. He used data from the US economy to show that if you stripped out the effect of any rise in the rate of exploitation in the US corporate sector (CE-ARP), there was a clear secular decline in the rate of profit from 1945 to now, running inversely with the rise in organic composition of capital.  Even if you relaxed the condition of an unchanged rate of exploitation (VE-ARP), the average rate of profit in the US economy still fluctuated around a secular fall.

Carchedi also showed that the three major countertendencies to Marx’s tendential law of falling profitability: namely a rising rate of surplus value; a falling cost of means of production and technology cheapening constant capital; and in the neo-liberal era, a shift from productive to financial investment to boost profitability, did not succeed in reversing Marx’s law. The tendency overcame the countertendencies in post-war US.

Now this result is nothing new, as many scholars have found a similar result.  But what was new in Carchedi’s paper was that he identified some extra tendential forces driving down profitability AND key indicators for when crises actually occur.

The secondary tendential factors, as Carchedi called them, were: steadily falling employment relative to overall investment: and steadily falling new value as a share of total value.  It is these factors that demonstrate the progressive exhaustion of capitalism in its present phase – according to Carchedi.

Going further, Carchedi identified three indicators for when crises occur: when the change in profitability (CE-ARP), employment and new value are all negative at the same time.  Whenever that happened (12 times), it coincided with a crisis or slump in production in the US.  This is a very useful indicator – for example, it is not happening in 2017 in the US, where employment is rising and so is new value (just).  So, on the Carchedi gauge, a slump is not imminent.

The other great innovation in Carchedi’s new paper is to show that financial crises were the product of a crisis of profitability in the productive sectors, not vice versa as the ‘financialisation’ theorists claim.  He shows that financial crises occur when financial profits fall, but more important, they must also coincide with a fall in productive sector profits.

As Carchedi points out, “the first 30 years of post WW2 Us capitalist development were free from financial crises”.  Only when profitability in the productive sector fell in the 1970s, was there a migration of capital to the financial unproductive sphere that during the neo-liberal period delivered more financial crises.  “The deterioration of the productive sector in the pre-crisis years is thus the common cause of both financial and non-financial crises… it follows that the productive sector determines the financial sector, contrary to the financialisation thesis.”

Carchedi goes on to show that it was not the lack of wage demand that caused crises or the failure to boost government spending as the Keynesians argue – of the 12 post-war crises, eleven were preceded by rising wages and rising government spending!

Thus Carchedi concludes that Marx’s law of profitability remains the best explanation of crises under capitalism and its secular fall, particularly in the productive sector, reveals that capitalism is exhausting its productive potential.  It will require a major destruction of capital values, as in WW2, to change this.  What happens after that is an open question.  As he puts it in the title of his paper, taken from a Gramsci quote, The old is dying but the new cannot be born – and to rephrase: what will the new be?

Now I have dwelt on Carchedi’s paper in some depth because I think it has much to tell us with lots of evidence to back up Marx’s contribution to an understanding of crises in modern capitalism – and also because it hardly got a mention from the discussant in this session, Professor Ben Fine from SOAS.  Although Ben said he did ‘agree with’ Marx’s law of the tendency of the rate of profit to fall, he ignored the relevance of Carchedi’s paper because he reckoned the modern ‘structure of capital’ had changed so much through ‘financialisation’.  Ben did not have any time to explain what he meant, but presumably the changing financial structure of capitalism has made Marx’s law of profitability irrelevant to crises.

The other participant in this session was Paul Mattick Jnr who also had nothing to say on Carchedi’s paper, but for a different reason (Mattick Abstraction and Crisis).  For Paul, even trying to estimate the rate of profit a la Marx is impossible and unnecessary.  It is impossible because Marxian categories are in value terms and modern bourgeois national accounts do not allow us to delineate measures of value to test Marx’s law.  And it is unnecessary because the mere facts of regular financial crises and slumps in capitalist production show that Marx was right.  In Capital, Marx provides us with abstractions that enables us to explain the concrete reality of crises.  We can still describe these crises, but we cannot and don’t need to try to ‘test’ Marx’s laws in some pseudo natural science way with distorted bourgeois data.

Now Paul has presented this view on Marxist scientific analysis before, when he was discussant at Left Forum in New York on a critique of my book, The Long Depression, and he is soon to publish a new book on the subject.  As I replied then, “Using general events or trends to ‘illustrate’ the validity of a law can help.  But that is not enough.  To justify Marx’s law of profitability, I reckon we need to go further scientifically.  That means measuring profitability and connecting it causally with business investment and growth and slumps. Then we can even make predictions or forecasts of future crises.  And only then can other theories be dismissed by using a body of empirical evidence that backs Marx’s law.”  This may be difficult but not impossible.  Moreover, it is necessary.  Otherwise, alternative theories to Marx’s theory will continue to claim validity and hold sway.  And that is bad news because these alternative theories deliver policies that look to ‘manage’ or ‘correct’ capitalism rather than replace it. So they will not work in the interests of the majority (the working class) and will instead perpetuate the iniquities and horrors of capitalism.

Moreover, I think that was Marx’s view to test things empirically, at least according to the evidence shown by Rolf Hecker in another paper in this session (Hecker 1857-8 Crisis).  Rolf is a top scholar on Marx’s original writings and notebooks.  And in looking at Marx’s analysis of the 1857-8 general economic crisis, he found that Marx compiled detailed data (a la excel) on credit, interest rates and production (Hecker Crisis PP) in the search for empirical indicators of the direction and depth of the 1857 crisis.

Rolf reproduced Marx’s work in modern graphic form.

Apparently, Marx did not think it a waste of time to do empirical testing of his theories.  And now we have a great advantage over Marx.  We can stand on his shoulders and use the last 150 years of crises and data to test Marx’s laws against reality.  Carchedi’s paper adds further explanatory power to that task.

And so did other papers at Capital.150.  But more on that in part two of my review of the symposium.

The end of QE

September 21, 2017

It’s an historic day in global central bank monetary policy since the end of the Great Recession.  The US Federal Reserve Bank feels sufficiently confident about the state of the US economy and, for that matter the rest of the major economies, to announce that it has not only ended quantitative easing (QE)  but that it is now going to reverse the process into quantitative tightening.

QE was the policy of pumping money (by creating bank reserves) into the financial sector by buying government and corporate bonds (and even shares) in order to create enough cash in the banks to lend onto households and companies and keep interest rates (the cost of borrowing) to near zero (or even below in some countries).  QE was the key monetary policy of the financial authorities in the major economies, particularly in the light of little fiscal or government spending as a second or alternative weapon.  Fiscal austerity was applied (with varying degrees of success) while monetary policy was ‘eased’.

But QE was really a failure.  It did not lead to a revival of economic growth or business investment.  Growth of GDP per head and investment in the major economies continue to languish well below pre-crisis rates.  As I have argued in this blog, that is because profitability in capitalist sector remains below pre-crisis levels and well below the peaks of the late 1990s.

What QE did do was fuel a new speculative bubble in financial assets, with stock and bond markets hitting ever new heights.  As a result, the very rich who own most of these assets became much richer (and inequality of income and wealth has risen even further).  And the very large companies, the FANG (Facebook, Amazon, Netflix and Google) in the US, became flush with cash and doubled-up on borrowing even more at near zero rates so that they could buy up their own shares and drive up the stock price, hand out big dividends to shareholders and use funds to buy up even more companies.

But now eight years after QE was launched in the US, followed by the Bank of Japan, the Bank of England and eventually the European Central Bank, the US Fed is preparing to reverse the policy.  It has announced that it will start selling off its huge stock of bonds ($4.5trn or 25% of US GDP at the last count) over the next few years.  The sell-off will be gradual and the Fed is cautious about the impact on the financial sector and the wider economy.  And it should be.

Financial markets won’t like it.  The drug of cheap (virtually interest-free) money is being slowly withdrawn.  The plan is to avoid ‘cold turkey’, but even so the stock and bond markets are likely to sell off as the supply of free money begins to fall back.  More important is what will happen to the productive sectors of the US economy and, for that matter, to the global economy, as this cheap money slowly declines.

The Fed sounds confident.  As Janet Yellen, the head of the Fed put it in the press conference yesterday: “The basic message here is US economic performance has been good; the labour market has strengthened substantially.  The American people should feel the steps we have taken to normalise monetary policy are ones we feel are well justified given the very substantial progress we have seen in the economy.”

This confidence is being increasingly backed up by the mainstream economic forecasters.  For example, Gavyn Davies, former chief economist at Goldman Sachs and now columnist at the FT, reports that his Fulcrum ‘nowcast’ activity measures reveals the “growth rate in the world economy is being maintained at the firmest rate recorded since the early days of the recovery in 2010. The growth rate throughout 2017 has been well above trend for both the advanced and emerging economies, and the acceleration has been more synchronised among the major blocs than at any time since before the Great Financial Crash.”  He has the advanced economies growing at 2.7% and the world economy at 4.1%, with the US growth rate now around 3%.  This all sounds good.

And yet the long-term forecasts of the Fed policy makers for economic growth and inflation remain low.  Indeed, there are some important caveats to this seeming confidence.  First, there is little sign of any recovery in business investment.

Second, far from profits in the productive sectors racing ahead, overall non-financial corporate profits in the US are falling.

And equally important, as the recent Bank for International Settlements quarterly review has highlighted, corporate debt is very high and rising, while the number of ‘zombie’ companies (those hardly able to meet their debt payments) are at record levels (16% in the US).  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.  That suggests that increased costs of debt servicing from rising interest rates driven by the Fed’s ‘normalisation’ policy could tip things over, unless profitability recovers for the wider corporate sector.

As the BIS summed it up, “Even accounting for the large cash balances outstanding, leverage conditions in the United States are the highest since the beginning of the millennium and similar to those of the early 1990s, when corporate debt ratios reflected the legacy of the leveraged buyout boom of the late 1980s.  Taken together, this suggests that, in the event of a slowdown or an upward adjustment in interest rates, high debt service payments and default risk could pose challenges to corporates, and thereby create headwinds for GDP growth.”

And this is just at a time when the US Fed has decided to hike its short-term policy interest rate and cut back on the lifeline of cheap money to the banks.  As I have pointed out before, during the Great Depression of the 1930s, the Fed did something similar in 1937, reversing its policy of cheap credit when it thought the depression was over.  That led to a new slump in production in 1938 that only the second world war ended.  The risk of repeat remains.

 

UK: full employment, but falling incomes

September 13, 2017

Britain’s unemployment rate has fallen to a new 42-year low of 4.3% in the three months to July. That’s down from 4.4% a month ago and the lowest since 1975.  That sounds good news for all – until we look at what is happening to average wages for British workers after inflation is deducted.  Average weekly earnings only rose by 2.1% per year in the quarter, weaker than expected and the same as last month.  But inflation jumped from 2.6% to 2.9%.  So real wages are falling and the decline is accelerating – for the average.

When adjusted for inflation, the real value of people’s earnings has fallen 0.4% over the last year.

Why is the UK’s unemployment rate so low and how is it possible that wages are not keeping up with prices when the labour market is at its tightest for over 40 years?

Well, as several posts on the excellent Flipchartfairytales blogsite show, British employers, rather than invest in new technology that could replace labour, have opted for cheap ‘unskilled’ labour, both British and immigrant, with the full knowledge that with little employment protection and weak trade union backing, they can hire and fire as they please.

Union membership has fallen to its lowest level since the government started counting in the 1970s. This is not just a feature of the UK. In most advanced economies, union density (the proportion of those in employment who are members of unions) has fallen over the last few decades

At the same time, much of the employment increase since the Great Recession has been in low-paid self-employment as people set up themselves on-line or take jobs as taxi drivers etc that do not involve wage employment.

As the recent report on the state of the British economy (Time for Change A New Vision for the British Economy The Interim Report of the IPPR Commission on Economic Justice) states: “The UK’s high employment rate has been accompanied by an increasingly insecure and ‘casualised’ labour market. Fifteen per cent of the workforce are now self-employed, with an increasing proportion in ‘enforced selfemployment’ driven by businesses seeking to avoid employer responsibilities. Six per cent are on short-term contracts, and almost 3 per cent are on zerohours contracts. More workers are on low pay than 10 years ago. Insecure and low-paid employment is increasing physical and mental ill-health.”

“There is a huge  sense of insecurity that has persisted since the recession. Even those in full-time jobs feel less secure than they did a decade ago and, when combined with the rise in more insecure forms of housing tenure, it is hardly surprising that people lack the confidence to ask for a pay rise.” – Flipchart.

The UK is the only major OECD country where GDP has risen since the recession but wages have still fallen.

Indeed, the UK is only one of six countries in the 30-nation OECD bloc where earnings after inflation are still below 2007 levels and the UK is the worst of the top seven G7 economies.

And what is also forgotten is that, if you allow for population growth (mainly immigration), the UK has barely seen any economic growth, with GDP per person only just above the level of 2007 and real consumer purchasing power still lower than in 2007.

Indeed, according to the Bank of England, UK workers are suffering from the lowest real wage growth in 160 years!

When you run of out more workers, then growth in output is dependent on raising the productivity of each worker.  In the UK, ‘full employment’ plus low economic growth has meant low productivity growth ie overall, output per worker is hardly rising.  UK productivity is 13% below the average for the richest G7 countries and has stalled since 2008.  According to the IPPR report, “UK leading firms are as productive as elsewhere, but we have a longer ‘tail’ of low-productivity businesses, in which weak management and poor use of skills leads to ‘bad jobs’ and low wages. A third of adult employees are overqualified for their jobs, the highest proportion in the European Union. This has been enabled by a labour market that is one of the most flexible, or deregulated, in the developed world. Too many sectors have effectively fallen into a low-pay, low-productivity equilibrium.”

The irony is that, since the Brexit vote, there has been a sharp reduction in immigration from the EU. With ‘full employment’ now achieved and the UK-born population no longer increasing, if EU labour stops coming to the UK, then serious shortages will appear in important sectors like hospitals, education, farm work, leisure staff etc.  And these ‘low-skilled’ jobs won’t be filled by British citizens or even those from outside the EU.

The reason that productivity has stalled is because British capital won’t invest in new technology.  Again, here is the IPPR report: “Public and private investment is around 5 percentage points of Gross Domestic Product (GDP) below the average for developed economies, and has been falling for 30 years. Corporate investment has fallen below the rate of depreciation – meaning that our capital stock is falling – and investment in research and development (R&D) is lower than in our major competitors. Among the causes are a banking system that is not sufficiently focussed on lending for business growth, and the increasing short-termism of our financial and corporate sector. Under pressure from equity markets increasingly focussed on short-term returns, businesses are distributing an increasing proportion of their earnings to their shareholders rather than investing them for the future.”

As I showed in a previous post, the rise in UK business investment since 2010, has mostly been in ‘real estate’ purchases and there has been no rise at all in hi-tech investment.  UK businesses have invested not in productive capital that could boost productivity and sustain economic growth and rising living standards but in speculative non-productive capital.  Total profits have risen as a result (red line in graph), but overall profitability against capital invested (orange line) is still below levels before the crisis.

The UK is probably at the peak in employment growth but not with inflation.  Real wages are set to fall further, while productivity and investment stagnates at best.