Archive for the ‘Profitability’ Category

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

July 2, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The productivity puzzle again

June 29, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Erdogan’s Turkey

June 25, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

Brazil: austerity, debt and trade

June 19, 2018

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

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

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

Unemployment remains near highs.

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

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

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

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

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

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

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

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

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

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

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

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

Trump’s tantrums and the world economy

June 10, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: David Rosenberg

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

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

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

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

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

China workshop: challenging the misconceptions

June 7, 2018

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

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

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

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

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

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

I argued that there are really three models of development that could explain China’s growth miracle and whether it would last.  I deal these in detail in my paper on China for the Leeds IIPPE conference in 2015.  So please consult that for a fuller account than this post can provide.  https://thenextrecession.files.wordpress.com/2015/09/china-paper-july-2015.pdf

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

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

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

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

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

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

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

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

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

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

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

Spain: the challenge for Sanchez

June 1, 2018

The right-wing Popular Party (PP) minority government in Spain has been voted out by the Spanish parliament because of the recent corruption court decision that PP officials were taking money from corporations illegally for their coffers. PM Rajoy said he knew nothing about it – but even the court judge did not believe him.  A combination of the opposition Socialists, radical left Podemos and the nationalist Catalan and Basque parties managed to pass a vote of no confidence over the PP and the pro-business Citizens party that had backed Rajoy.

So now Socialist leader Pedro Sanchez will take over as prime minister of the world’s 13th largest and the Eurozone’s fourth-largest economy.  Sanchez was an economist and ‘political adviser’ for the European parliament – so has never done a proper job in his life. Sanchez’s doctoral thesis was published as “La nueva diplomacia económica europea”, where Sanchez appears to consider the relationship between the state and the corporate sector and how politicians should engage in ‘economic diplomacy’, namely how the Spanish national state engages in relations with a supra-national entity like the EU.  Now Sanchez will be testing his thesis in practice.

He takes over as PM in a minority socialist government depending on the votes of Podemos and the nationalists. And he faces a lot of economic challenges that the PP had failed to solve. As I argued at the time of the 2016 general election (which left Rajoy without a majority in parliament), before the Great Recession, economic growth in Spain had been largely due to investment in property, unproductive in capitalist terms.

Spain’s much-heralded economic boom saw 3.5% real growth a year during the 1990s but it stopped being based on productive investment for industry and exports in the 2000s and turned into a housing and real estate credit bubble, just like Ireland’s Celtic Tiger boom did.  As the IMF summed it up: “The pre-crisis period was characterized by decreasing productivity of capital, measured as output per units of capital stock, both in absolute terms and relative to the euro area average. This is because capital flew to nontradable sectors, in particular construction and real estate, characterised by higher profitability but lower marginal returns. By contrast, investment in information and communication technologies or intellectual property remained below that of other euro area countries.”

Since the end of Great Recession things have improved for Spanish capital only by keeping real wages down and employing cheap labour rather than making investments in new technology to raise productivity.  Gross fixed capital formation in still well below pre-crisis levels. And this includes all investment, private and government; productive investment has recovered even less.

Indeed, the Spanish investment rate to GDP has fallen way more compared to pre-crisis rates than its EU rivals.

Why is this?  As I said in my book, The Long Depression, the Achilles heel of Spanish capitalism is the long-term decline in its profitability. Every measure of Spanish capital’s profitability reveals the same long-term decline.  Here is the AMECO measure as calculated by me, but in our (Carchedi, Roberts) upcoming book, World in Crisis, Juan Pablo Mateo has more comprehensive measures that confirm the AMECO version.  And Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century also agrees.

The recovery in profitability since the end of the Great Recession has been modest.  The rate of profit is still some 7% below where it was in 2007.  And that is despite the huge cuts in government spending, reductions in employment and wages.

I quote from the IMF’s latest report on Spain: “Since 2009, unemployment has declined for all age groups, but remains higher than before the crisis disproportionately affecting low-skilled workers Those out of jobs more than a year account for roughly half of the unemployed. Involuntary part-time employment remains high, well above the EU average More than a quarter of workers are under temporary contracts

and the share of temporary employment among the youth is above its pre-crisis level.” 

http://www.imf.org/en/Publications/CR/Issues/2017/10/06/Spain-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-Executive-45319

Moreover, Spain recorded the lowest real wage growth of all EU countries in 2017 – namely zero!  And this year, real wage growth will be negative, only Italian and British workers will suffer a larger fall.

Although ‘austerity’ in the guise of cuts in government spending, higher taxes and running budget surpluses (before interest costs) stopped in 2015, the state is still heavily burdened with debts built up from bailing out Spain’s reckless and corrupt banking system.  According to the IMF, annual gross financing needs are the highest in the euro area…even higher than debt-ridden Italy.

No wonder, the IMF reckons that “post-crisis, potential growth is projected to remain subdued with a lower investment rate.”

This long depression has also begun to break up the Spanish state, as last year’s unresolved Catalan separatist crisis exposed. Spain’s regional governments are deeply in debt and yet are being asked to make huge spending cuts. That’s why richer regional areas with their own nationalist interests, as in Catalonia and the Basque Country, have been making noises about separation from Madrid.  The Sanchez government will now be depending on their votes.

I don’t need to change what I said back in my 2016 post.  “The Spanish depression is a result of the collapse in capitalist investment. To reverse that requires a sharp rise in profitability. Until investment recovers, the depression will not end.  And there is the probability of a new economic recession in Europe ahead, while the political leadership of Spanish capital is divided and uncertain what to do.”

The fallacy of composition and the law of profitability

May 30, 2018

In mainstream economics, the concept of the ‘fallacy of composition’ is often used.  In a general sense, the fallacy of composition arises when it assumed that the sum of all individual parts will equal the whole.  Sometimes, it does not.  There are many examples: if you stand up at a concert, you can usually see better. But if everyone stands up, everyone cannot see better as it will lead to obscured views for the majority of attendees. Therefore, what might be true for one individual in the crowd is not true for the whole crowd.  This phenomenon happens because the interaction of individual moves can affect the overall result.

The fallacy of composition is often cited in economics.  Paul Samuelson in his ubiquitous Economics textbook for university students reckoned “the fallacy of composition is one of the most basic and distinctive principles to be aware of in the study of economics”. And it is invariably used by Keynesian economists in their advocacy of government spending to boost the economy.  This is the paradox of thrift.  This is the belief that if one individual can save more money by spending less, then society or an economy can also save more money by spending less. But if every household reduces spending, then the overall demand for products and services would decline. This decline would lead to lower sales revenue and profits for businesses. As a result, businesses would have to lower wages or lay off individuals. People would have less income and would save even less. What is true for an individual in the economy is not necessarily true for the whole economy.

The fallacy of composition in this context has been used by Keynesians to attack the view of the neoclassical and Austrian schools that economies are like individual households. Good housekeeping is good economic policy. But it may be good for a household to tighten its belt but not for whole economies.  So the Keynesians say that there is no crime in running budget deficits and avoiding ‘austerity’, even if it means rising public debt levels.

Now I have discussed the issue of whether rising debt (public and private) matters for a capitalist economy in many places.  So I’m not going over that ground again in this post.

What interests me is that the fallacy of composition applies in another area too – in the refutation of one major critique of Marx’s law of the tendency of the rate of profit to fall.  The most famous modern argument against the law is that by Nobuo Okishio, a Japanese Marxist economist.  Okishio argued way back in 1961 that under competitive capitalism, a profit-maximising individual capitalist will only adopt a new technique of production if it reduces the production cost per unit or increases profits per unit at going prices.  So capitalist accumulation must lead to a rise in the rate of profit not a tendency to fall – otherwise why would any capitalist invest in new technology?  And Marx is used to back up this argument: no capitalist ‘ever voluntarily introduces a new method of production … so long as it reduces the rate of profit’. Marx 1978a, p. 264

Yes, no individual capitalist would introduce a new technology unless it contributed to raising profits and market share, the individual rate of profit.  But this is where the fallacy of composition comes in.  The innovating capitalist steals a march on others through lowering the costs of production against the prevailing market price.  Its profits go up.  But that is being achieved by the profits of the other capitalists beginning to fall as they lose competitive advantage.  They must react by introducing the new technology (or even better technology) that lowers their costs too.  But then the productivity of the existing or probably reduced labour force for all the capitalists rises and thus lowers the value per unit of product.  Once all the capitalists have adopted the new technology, the organic composition of capital (the ratio of money spent on equipment versus wages) will have risen and, ceteris paribus, the general rate of profit will have fallen.

Professor Simon Mohun provided an excellent example from game theory to show why innovation under capitalism and competition can lead to fall in average rate of profit, contrary to Okishio.

There are two capitalists: A and B.  Each starts with 3 in profit.  If neither A and B innovate to reduce costs and boost profits, A stays at 3 and B stays at 3.

But if A innovates and B does not; then A gets a higher profit (4) while B loses market share and gets less profit (1).  Alternatively, if A does not innovate and B does, then A gets 1 and B gets 4.  If both innovate, then A gets 2 and B gets 2.

There is a drive to innovate because A or B could raise profit from 3 to 4.  So there cannot be an agreement not to innovate, leaving A on 3 and B on 3.  But if one innovates first to get 4, then the other must do so or its profit will fall to 1.  But with both innovating, they both end up on 2 instead of 3 (if they had done nothing).  So innovation boosts the individual profit of the leader but eventually when both innovate, the profit is lower.

Again, this is over time.  If A and B could simultaneously introduce the innovation (as Okishio assumes), then they may not do so, and stay at 3, rather than fall to 2.  But that would not be reality.  Reality is temporal.

The Okishio theorem is an example of the fallacy of composition.  It simply sums the gain of one individual capitalist to the whole capitalist economy.  But what is good for each individual capitalist is not good for the profitability of the whole capitalist economy.  When everybody does it, overall profitability falls.

Moreover, each individual capitalist is not doing this ‘voluntarily’ after all, but of necessity to compete and not lose market share.  As Marx says, the law of value and profitability operates ‘behind the backs’ of the capitalists – it is not in their conscious control.  For Adam Smith, it is the ‘invisible hand’ of the market, for Marx, it is an ‘invisible Leviathan’, to use Murray Smith’s metaphor (Murray Smith, Invisible Leviathan, Historical Materialism, forthcoming 2018).

British capital: productivity and profitability

May 26, 2018

In the first quarter of 2018, the UK economy slowed almost to a standstill.  It grew by just 0.1% in real terms. This was the lowest growth rate for over five years since a 0.1% contraction in Q4 2012. Household spending rose the least in over three years and business investment shrank the most in nearly three years.

The government and the Bank of England have tried to pass this slowdown off as due to bad weather in early 2018.  But while acknowledging that bad weather had hit construction and parts of the retail sector, the official statistical agency, ONS, said “its overall impact was limited” and there was also an underlying slowdown in the growth of consumer spending.

The UK economy is now growing the slowest of the top G7 capitalist economies, as productivity has slowed to under 1% a year. Indeed, before the 2008-09 economic crisis, Britain’s output per hour worked grew steadily at an annual pace of 2.2% a year. In the decade since 2007, that rate has dropped to 0.2%.  If the previous trends had continued, the UK’s national income would be 20% higher than it is today.

The ONS points out that the UK has the largest “productivity puzzle” – the difference between post-downturn productivity performance and the pre-downturn trend in the G7; this was 15.6% in 2016, around double the average of 8.7% across the rest of the G7.  Indeed, only Italy has experienced a worse productivity performance since 2007 than the UK among the top G7 economies.

What this shows is that the UK capitalist economy is not suffering from bad weather or even the just the ”uncertainty” caused by Brexit, but instead there are deep underlying structural problems.  I have dealt with the reasons for these before. British capitalism has become a ‘rentier” economy, where surplus value increasingly comes from extracting ‘rents’ and financial profits from productive sectors in other parts of the world.

Now there have been some further new studies on the reasons for British capitalism’s poor productivity record.  It seems that poor productivity growth stems not from small local businesses that sell products and services within a small area, but failure lies with the heart of British capital’s big multi-national exporting companies.

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

The graph below shows that the top companies have still improved their productivity more than the small companies but at a slower pace than before the Great Recession and so overall productivity growth has slowed and fallen even further behind other capitalist economies.

Looking at individual companies on a regional basis, a study by the Centre for Cities showed that it is again the most successful companies, normally those with highly skilled employees and exposed to international competition through exports, that drive success across the UK.   “This idea that if only we can make the bottom 20 per cent of businesses more productive . . . is a bit of a red herring,” said Paul Swinney, head of policy and research at the Centre for Cities. “The fundamental problem is that we’ve got a low productivity economy outside the South-East.”

Why is productivity growth so poor in Britain, especially among the key big British multi-nationals?  The answer is clear: reduced business investment.  The latest business investment figure for Q1 2018 showed an absolute fall in investment.  Business investment growth has been on a steady trend down since the end of the Great Recession.

Indeed, total UK investment to GDP has been lower than most comparable capitalist economies and has been declining for the last 30 years.

While most mainstream economic studies accept that the reason for the UK’s poor productivity record, particularly since the end of the Great Recession, is due to low investment in key productive sectors by key large companies, nobody has an explanation for this.

In my view, it is also clear why.  The profitability in the productive sectors of the British economy remains low relative to before the Great Recession and even back to the 1990s.  Profitability reached a peak in 1997.  Since then, overall profits have risen in nominal terms by about 60%.  But despite the credit boom of the early 2000s and the recovery since the Great Recession, profitability (ie profits per the stock of capital invested) remains below that peak.  As a result, British capital has invested in financial assets or hoarded cash in tax havens or invested abroad rather than in the UK.

British capitalism has increasingly become a ‘rentier’ economy that aims to make money from money (finance capital) rather than from investing in new technology to boost the productivity of productive labour.  This trend accelerated under the neo-liberal policies of Thatcher and successive governments and under global competitive pressure on old industrial and manufacturing sectors.  While German capitalism maintained its manufacturing sectors through new technology, investment and exports (and relocation to the east), British capitalism opted for finance and related services over production.

The final straw was the global financial crash and the Great Recession – that led to a severe blow to the financial sector.  Profitability in the non-financial sectors remains below the level before the global financial crash and well below the level of the last 1990s.  While that continues, business investment will fail to recover sufficiently to raise productivity growth back to levels seen prior to the global financial crash.

Greece: the spectre of debt

May 22, 2018

I’ve just got back from a visit to Greece to speak at a conference on my book, Marx 200.  While I was there I talked to several left activists and academics and it seems that little has improved for the Greek people since my last visit two years ago.  Back in 2010, Greece started to sink fast under the Aegean, hitting the bottom in 2015.  But since then, the economy has remained stuck in the mud and hardly moved.

In my book, The Long Depression I characterised the difference between a ‘normal’ slump in capitalist production and a depression.  The slump takes the form of a V in investment and output, down and then back up.  But a depression is more like a square root: down, then a small recovery but not to the previous level but staying trending below.  The Greek economy since the beginning of its crisis in 2010 fits that perfectly.

Greece’s economy grew 1.4% last year, marking the first time that real GDP growth has exceeded 1% since 2007.  But national output is still down 22% from its peak, an output collapse unprecedented in the annals of modern Europe and one that rivals the severity of the Great Depression in the United States while average real living standards (real wages, pensions, social welfare) are down 40% from the peak. Unemployment remains over 20% and youth unemployment is closer to 40%.

More than 600,000 working age Greeks have left the country seeking work.

And Greek capital remains prostrate.  Gross investment as a share of GDP is about half of its pre-crisis value.

Moreover, part of gross investment is the replacement of depreciating capital – such as replacing worn-out machines, or renovating decaying hotels. Net investment (i.e. gross investment, minus depreciation) was about 10% of GDP before the crisis, indicating that the capital stock was increasing at that time. But net investment has fallen absolutely since 2010, so the effective capital stock of the country is decaying.

Investment by the Greek private sector is constrained by low corporate profits (limiting its own funds available for investment) and weak bank balance sheet positions, as reflected by the approximately 40% share of total loans made by Greek banks that are non-performing loans (which constrains available bank lending).  Indeed, although the profitability of Greek capital has finally recovered a little, based on the liquidation of the weak and smaller businesses, huge unemployment and a reduction in real wages, the rate of profit is still below the level of 2010.

And small businesses and workers also face the huge burden of sharply increased taxes.  This is to meet the fiscal targets set by the Troika (the ECB, the IMF and the Eurogroup) imposed in a series of ‘bailout’ programmes introduced since 2010.  Greek public debt was about 80% of GDP in 2010 as the tsunami generated by the global financial crash and the Great Recession reached weak Greek capitalism.  That public debt is now around 180% of GDP.  Why?

Because the German and French banks demanded full face value repayment of the Greek government and bank bonds that they had bought before 2010 when interest yield was so high. But Greek banks could no longer service these bonds because Greek capitalists were going bust or defaulting on their bank loans.

The Greek state was also unable to bail out its banks and meet its bond obligations as the economy collapsed.  The rising cost of unemployment and welfare and falling tax revenues drove up the government budget deficit to record levels.

Austerity was now the order of the day.  Workers, as taxpayers, had to take on the burden of servicing and repaying the capitalist sector’s debt.  First, Greek conservative governments agreed with the Troika on a series of cuts in public sector jobs and services, privatisations and pension reductions to ‘stabilise’ the debt.  But despite the sacrifices, successive bailout programs failed to restore the economy. So more loans from the official agencies were conjured up, along with yet more austerity.

Then the leftist Syriza party won the election in 2015 pledged to oppose any further austerity and called for debt repudiation.  And as we know, in July 2015 the Greek people voted 60-40 to reject the Troika measures.  But within days of that referendum, the Syriza government capitulated to the pressure of capital as the ECB withdrew credit and support for Greek banks and the banks were closed.  Syriza signed up for a new program that took the debt up to its current 180% of GDP.

That program comes to an end in August this year and in the next few days the Eurogroup and the Syriza government must decide what to do next. But, as a recent report by some top mainstream economists, put it: “A spectre continues to haunt Greece and no less its creditors. Under plausible projections for growth, interest rates and fiscal performance, the government’s debt is unsustainable, as its official creditors have effectively acknowledged.”  Despite never-ending ‘austerity’ in the form of annual budget surpluses, the debt level has remained undisturbed – because as fast as the government cuts spending, the loans keep rising – but not to fund government services but to repay previous loans to the IMF and the ECB!

The Syriza government has done everything asked of it by the Troika and now, with just a maximum of a year to go before new elections, it is desperate to get the Eurogroup to agree to some ‘debt relief’ to convince voters that things are finally going to improve.  The IMF agrees that debt relief is needed, along with a less severe trajectory for further austerity.  But the Eurogroup does not.  It refuses, so far, to reduce further the interest rate on its loans (already pretty low) or extend the time scale of the maturity of the debt repayments (already well into 2030).  And it certainly does not want any actual cut in the face value of the debt outstanding (a write-off), which it sees as setting a precedent that future debtors can get away without paying eventually.

The Eurogroup claims that the Greeks should be able to service their debt and grow now that they have met the terms of latest program and so can return to ‘normal’ by borrowing on world markets.  The IMF and most economists disagree.  The IMF reckons the burden of the debt is too high for generations of Greeks to service through taxation and cuts indefinitely.  So the IMF supports a form of debt relief (extend loan maturities and lower interest rates).  But it also wants the Syriza government to pursue a neoliberal programme of: decimating trade union rights, deregulating markets and continuing privatisations.  As the recent IMF communique put it:“Despite progress on the structural front, Greece’s overarching challenge remains the liberalization of restrictions that impair its investment climate. Thus, the authorities should reconsider their plans to reverse cornerstone collective-bargaining reforms after the end of the program, and should instead focus on redoubling efforts to open up still protected product and service markets, so as to facilitate investment and create new jobs.”

The reality is that with the Greek economy unlikely to grow at more than 2% a year after inflation for the foreseeable future and the burden of financing the debt standing at 15% of GDP each year and rising, there is no way that Greek capitalism can escape of the spectre of the debtors prison.

At the end of 2015, 75% of Greek public debt was in the form of official loans. Bond holdings of European central banks amounted to an additional 6%, while some additional percentage was held by (largely state-owned) Greek banks. Even if Greece reaches an overall budget balance this year, new borrowing will be needed in the future. The current €16bn loan from the IMF needs to be repaid by 2021, and the €20bn bond holdings of the ECB and national central banks by 2026. The current stock of €3bn pre-2012 bonds, which were not restructured in 2012, also needs to be repaid. Repayment of the remaining €31bn bonds which resulted from the 2012 debt restructuring will start in 2023. The €53bn bilateral loans from euro-area partners granted in the first financial assistance programme will have to be repaid between 2020-2041, according to current schedule.

As the economists group put it starkly: “To achieve debt sustainability without face-value debt relief, ….would imply a large increase in the total exposure to Greece of the European official sector from currently expected end-2018 levels, that is, by 50% or more. It would also mean that Greece could still be paying off debts to European official creditors well into the 22nd century.”!

As the economy crawls along the bottom, the Syriza government can offer no relief to its voters from the grinding poverty and tax burdens they now suffer.  Indeed, on 1 January 2019, pensions, already cut heavily, face another cut of up to 18%.  The government calls for debt relief from the Troika but what is really needed is debt cancellation; proper taxation of the very rich who continue to avoid any severe measures; the public ownership of the banks and big businesses that rule Greek investment and a state plan for investment.   It was what was needed at the time of 2015 referendum when the Greek people voted down the Troika measures.  Three years later, nothing has really changed and, as a result, in the next election, voter turnout will plummet and Syriza is likely to lose and be replaced by a right-wing coalition.  The spectre of debt will remain.