Modern monetary theory – part 1: Chartalism and Marx

January 28, 2019

Modern monetary theory (MMT) has become flavour of the time among many leftist economic views in recent years.  The new left-wing Democrat Alexandria Ocasio-Cortez is apparently a supporter; and a leading MMT exponent recently discussed the theory and its policy implications with UK Labour’s left-wing economics and finance leader, John McDonnell.

MMT has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up budget deficits and public debt without fear of crises – and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.

So, in this post and in other posts to follow, I shall offer my view on the worth of MMT and its policy implications for the labour movement.  First, I’ll try and give broad outline to bring out the similarities and difference with Marx’s monetary theory.

MMT has its base in the ideas of what is called Chartalism.  Georg Friedrich Knapp, a German economist, coined the term Chartalism in his State Theory of Money, which was published in German in 1905 and translated into English in 1924. The name derives from the Latin charta, in the sense of a token or ticket. Chartalism argues that money originated with state attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt.

Chartalism argues that generalised commodity exchange historically only came into being after the state was able to create the need to use its sovereign currency by imposing taxes on the population. For the Chartalist, the ability of money to act as a unit of account for credit/debt depends fundamentally on trust in the sovereign or the power of the sovereign to impose its will on the population.  The use of money as a unit of account for debts/credits pre-dates the emergence of an economy based around the generalised exchange of commodities.  So Chartalism argues that money first arose as a unit of account out of debt and not out of exchange. Keynes was very much a fan of Chartalism, but it is clearly opposed to Marx’s view that money is analytically inconceivable without understanding commodity exchange.

Can the Chartalist/Modern Monetary Theory (MMT) and Marxist theory of money be made compatible or complementary or is one of them wrong? My short answers would be: 1) money predates capitalism but not because of the state; 2) yes, the state can create money but it does not control its price. So confidence in its money can disappear; and 3) a strict Chartalist position is not compatible with Marxist money theory, but MMT has complementary features.

Let me now try to expand those arguments.

Modern monetary theory and the Marxist theory of money are complementary in that both are endogenous theories of money. They both reject the quantity theory of money, namely that inflation or deflation is dependent on the decisions of central banks to pump in credit money or not. On the contrary, it is the demand for money that drives the supply: i.e. banks make loans and as a result deposits and debt are created to fund the loans, not vice versa. In that sense, both MMT and Marxist theory recognise that money is not a veil over the real economy, but that the modern (capitalist) economy is a monetary one through and through.

Both Marx and the MMT guys agree that the so-called quantity theory of money as expounded in the past by Chicago economist Milton Friedman and others, which dominated the policy of governments in the early 1980s, is wrong.  Governments and central banks cannot ameliorate the booms and slumps in capitalism by trying to control the money supply.   The dismal record of the current quantitative easing (QE) programmes adopted by major central banks to try and boost the economy confirms that.   Central bank balance sheets have rocketed since the crisis in 2008, but bank credit growth has not; and neither has real GDP growth.

But the Marxist theory of money makes an important distinction from the MMT guys.  Capitalism is a monetary economy. Capitalists start with money capital to invest in production and commodity capital, which in turn, through the expending of labour power (and its exploitation), eventually delivers new value that is realised in more money capital.  Thus the demand for money capital drives the demand for credit.  Banks create money or credit as part of this process of capitalist accumulation, but not as something that makes finance capital separate from capitalist production.  MMT/Chartalists argue that the demand for money is driven by the “animal spirits‟ of individual agents (Keynesian) or by the state needing credit (Chartalist). In contrast, the Marxist theory of money reckons that the demand for money and thus its price is ultimately set by the pace of accumulation of capital and capitalist consumption.

The theory and history of money

That raises the underlying issue between Modern Monetary Theory, its Chartalist origins and the Marxist theory of money. Marx’s theory of money is specific to capitalism as a mode of production while MMT and Chartalism is ahistorical. For Marx under capitalism money is the representation of value and thus of surplus value. In M-C-P-C’-M’, M can exchange with C because M represents C and M’ represents C’. Money could not make exchange possible if exchangeability were not already inherent in commodity production, if it were not a representation of socially necessary abstract labour and thus of value. In that sense, money does not arise in exchange but instead is the monetary representation of exchange value (MELT), or socially necessary labour time (SNLT).

Marx’s theory analyses the functions of money in a capitalist-commodity economy. It is a historically specific theory, not a general theory of money throughout history, nor a theory of money in pre-capitalist economies. So if it is true that money arose first in history as a unit of account for taxes and debt payments (as the Chartalists and Keynes argue), that would not contradict Marx’s theory of money in capitalism.

Anyway, I have considerable doubts that, historically, state debt was the reason for the appearance of money (I’ll return to that in a future post). David Graeber, the anarchist anthropologist, appears to argue this in his book, 5000 years of debt. But it does not wash well with me. Marx argues that money emerges naturally as commodity production is generalised. The state merely validates the money form – it doesn’t invent it.  Indeed, I think Graeber’s quote from Locke on p.340 in his book summarises the argument well. “Locke insisted that one can no more make a small piece of silver more by relabeling it a ‘shilling’ than one can make a short man taller by declaring there are now fifteen inches in a foot.”

In the classic statement of chartalism, Knapp argued that states have historically nominated the unit of account, and by demanding that taxes be paid in a particular form, ensured that this form would circulate as means of payment. Every taxpayer would have to get their hands on enough of the arbitrarily defined money and so would be embroiled in monetary exchange.  Joseph Schumpeter refuted this approach when he said: “Had Knapp merely asserted that the state may declare an object or warrant or token (bearing a sign) to be lawful money and that a proclamation to this effect that a certain pay-token or ticket will be accepted in discharge of taxes must go a long way toward imparting some value to that pay-token or ticket, he would have asserted a truth but a platitudinous one. Had he asserted that such action of the state will determine the value of that pay-token or ticket, he would have asserted an interesting but false proposition.” [History of Economic Analysis, 1954].  In other words, Chartalism is either obvious and right OR interesting and wrong.

Money as a commodity or out of thin air

Marx argued that money in capitalism has three main functions: as a measure of value, as a means of exchange, and “money as money” which includes debt payments. The function of measure of value follows from Marx’s labour theory of value and this is the main difference with the Chartalists/MMT, who (so far as I can tell) have no theory of value at all and thus no theory of surplus-value.

In effect, for MMT exponents, value is ignored for the primacy of money in social and economic relations.  Take this explanation by one supporter of MMT of its relation to Marx’s value theory: “Money is not a mere “expression” or “representation” of aggregate private value creation. Instead, MMT supposes that money’s fiscal backbone and macro-economic cascade together actualize a shared material horizon of production and distribution…Like Marxism, MMT grounds value in the construction and maintenance of a collective material reality. It accordingly rejects neoclassical utility theory, which roots value in the play of individual preferences. Only, in contrast to Marxism, MMT argues that the production of value is conditioned by money’s abstract fiscal capacity and the hierarchy of mediation it supports. MMT hardly dismisses the pull of physical gravitation on human reality. Rather, it implicitly de-prioritizes gravity’s causality in political and economic processes, showing how the ideal conditions the real via money’s distributed pyramidal structure.”

If you can work through this scholastic jargon, I think you can take this to mean that MMT differs from Marx’s theory of money by saying that money is not tied to any law of value that drags it into place like ‘gravity’ but has the freedom to expand and indeed change value itself.  Money is the primary causal force on value, not vice versa!

In my view, this is nonsense.  It echoes the ideas of French socialist Pierre Proudhon in the 1840s who argued that what was wrong with capitalism was the monetary system itself, not the exploitation of labour and the capitalist mode of production. Here is what Marx had to say about Proudhon’s view in his Chapter on Money in the Grundrisse: “can the existing relations of production and the relations of distribution which correspond to them be revolutionised by a change in the instrument of circulation?” For Marx, “the doctrine that proposes tricks of circulation as a way of , on the one hand, avoiding the violent character of these social changes and on the other, of making these changes appear not to be a presupposition but gradual result of these transformations in circulation” would be a fundamental error and misunderstanding of the reality of capitalism.

In other words, separating money from value and indeed making money the primary force for change in capitalism fails to recognise the reality of social relations under capitalism and production for profit. Without a theory of value, the MMTers enter a fictitious economic world, where the state can issue debt and have it converted into credits on the state account by a central bank at will and with no limit or repercussions in the real world of productive capital, although it is never as simple as it seems.

For Marx, money makes money through the exploitation of labour in the capitalist production process.  The new value created is embodied in commodities for sale; the value realised is represented by an amount of money. Marx started his theory of money as a commodity like gold or silver, whose value could be exchanged with other commodities. So the price or value of gold anchored the monetary value of all commodities. But, if the value or price of gold changed because of a change in the labour time taken for gold production, then so did the value of money as priced in other commodities. A sharp fall in gold’s production time and thus a fall in its value would lead to a sharp rise in the prices of other commodities (Spain’s gold from Latin America in the 16th century) – and vice versa.

The next stage in the nature of money was the use of paper or fiat currencies fixed to the price of gold, the gold exchange standard and then finally to the stage of fiat currencies or ‘credit money’. But, contrary to the view of MMT or the Chartalists, this does not change the role or nature of money in a capitalist economy. Its value is still tied to the SNLT in capitalist accumulation. In other words, commodity money has/contains value while non-commodity money represents/reflects value, and because of this both can measure the value of any other commodities and express it in price-form.

Modern states are clearly crucial to the reproduction of money and the system in which it circulates. But their power over money is quite limited – and as Schumpeter said (and Marx would have said), the limits are clearest in determining the value of money. The mint can print any numbers on its bills and coins, but cannot decide what those numbers refer to. That is determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms.

This makes the value of state-backed money unstable. Actually, this is acknowledged by the Chartalist theory. According to it, the main mechanism by which the state provides value to fiat money is by imposing tax liabilities on its citizenry and proclaiming that it will accept only a certain thing (whatever that may be) as money to settle those tax liabilities. But Randall Wray, one of most active writers in this tradition, admits that if the tax system breaks down “the value of money would quickly fall toward zero.”  Indeed, when the creditworthiness of the state is seriously questioned, the value of national currencies collapse and demand shifts to real commodities such as gold as a genuine hoard for storing value. The gold price skyrocketed with the start of the current financial crisis in 2007 and another rise of larger scale was propelled in early 2010 when the debt crisis of the southern Euro countries aggravated the situation.

The policy conclusions

I often hear various MMTers saying that “money can be created out of nothing‟. ‘Bank money does not exist as a result of economic activity. Instead, bank money creates economic activity.’ Or this: ‘The money for a bank loan does not exist until we, the customers, apply for credit.’ (Ann Pettifor).  The short reply to this slogan is that “yes, the state can create money, but it cannot set its price”, or value. The price of money will eventually be decided by the movement of capital as fixed by socially necessary labour time.  If a central bank ‘prints’ money or deposits credits with the state accounts, that gives the state the money it needs to launch programmes for jobs, infrastructure etc without taxation or issuing bonds. This is the policy conclusion of the MMT. It is the ‘way out’ of the capitalist crisis caused by a slump in private sector production.

The MMT and Chartalists propose that private sector investment is replaced or added to by government investment ‘paid for’ by the ‘creation of money out of thin air’. But this money will lose its value if it does not bear any relation to value created by the productive sectors of the capitalist economy, which determine the SNLT and still dominate the economy. Instead, the result will be rising prices and/or falling profitability that will eventually choke off production in the private sector. Unless the MMT proponents are then prepared to move to a Marxist policy conclusion: namely the appropriation of the finance sector and the ‘commanding heights’ of the productive sector through public ownership and a plan of production, thus curbing or ending the law of value in the economy, the policy of government spending through unlimited money creation will fail.  As far as I can tell, MMT exponents studiously avoid and ignore such a policy conclusion – perhaps because like Proudhon they misunderstand the reality of capitalism, preferring ‘tricks of circulation’; or perhaps because they actually oppose the abolition of the capitalist mode of production.

Of course, none of this has been tested in real life, as MMT policy has never been implemented (nor for that matter, has Marxist policy in a modern economy).  So we don’t know if inflation would explode from creating money indefinitely to fund investment programmes. MMT people say ‘monetising the deficit’ would be ended once full employment is reached. But that begs the question of whether the private sector in an economy can be subjected to the fine manipulation of central bank and state policy. History has shown that it is not and there is no way governments can control the capitalist production process and prices of production ‟in such a finely managed” way.

Even leading MMT man Bill Mitchell is aware of this risk. As he put it in his blog, “Think about an economy that is returning from a recession and growing strongly. Budget deficits could still be expanding in this situation, which would make them obviously pro-cyclical, but we would still conclude the fiscal strategy was sound because the growth in net public spending was driving growth and the economy towards full employment. Even when non-government spending growth is positive, budget deficits are appropriate if they are supporting the move towards full employment. However, once the economy reached full employment, it would be inappropriate for the government to push nominal aggregate demand more by expanding discretionary spending, as it would risk inflation.” (my emphasis).

It seems that MMT eventually just boils down to offering a theory to justify unrestricted government spending to sustain and/or restore full employment. That’s its task, no other. This is why it attracts support in the left of the labour movement.  But this apparent virtue of MMT hides its much greater vice as an obstacle for real change.  MMT says nothing about why there are convulsions in capitalist accumulation, except that the state can reduce or avoid cycles of boom and slump by a judicious use of government spending within a capitalist-dominated accumulation process. So it has no policy for radical change in the social structure.

The Marxist explanation is the most comprehensive as it integrates money and credit into the capitalist mode of production but also shows that money is not the decisive flaw in the capitalist mode of production and that sorting out finance is not enough.  Thus it can explain why the Keynesian solutions do not work either to sustain economic prosperity.

In future posts. I’ll look more closely at the history of money and monetary theory; and at the international implications of MMT, particularly in the so-called emerging economies.

Davos: climate and inequality

January 23, 2019

The two issues that the rich and famous in world capital like to discuss with wringing hands and weeping are: global warming and climate change; and rising inequality of incomes and wealth.  Davos realises that the popular reaction to these issues is threatening the destruction of what they call the “liberal order” ie the free and untrammeled movement of capital and commodities to where profits can be maximised.

It may be snowing and freezing in Davos, but the hypocrisy of the deliberations at Davos on these issues is exposed every year by the news that over 1500 individual private jet flights are made by the participants to get to the Swiss ski resort venue for the World Economy Forum – that’s some carbon footprint.  The Davos devotees are transported to a special airfield in Dubendorf so they do not have to mix with the unwashed.  It makes a cruel joke of the Davos session led by famous anthropologist David Attenborough telling the audience that urgent action was needed on climate change.  The number of private jet flights grew by 11% last year. “There appears to be a trend towards larger aircraft, with expensive heavy jets the aircraft of choice, with Gulfstream GVs and Global Expresses both being used more than 100 times each last year,” said Andy Christie, private jets director at ACS.

As for rising inequality, every year at the same time as Davos, Oxfam, the international poverty charity, publishes its report on the degree of inequality of personal wealth globally.  This year, its headline story was that just 26 people own as much wealth as the poorest 50% (3.8 billion) of people in the world.  Apparently, between 2017 and 2018 a new billionaire was created every two days.  Oxfam said the wealth of more than 2,200 billionaires across the globe had increased by $900bn in 2018 – or $2.5bn a day. The 12% increase in the wealth of the very richest contrasted with a fall of 11% in the wealth of the poorest half of the world’s population.  The world’s richest man, Jeff Bezos, the owner of Amazon, saw his fortune increase to $112bn. Just 1% of his fortune is equivalent to the whole health budget for Ethiopia, a country of 105 million people.

Mainstream economists often like to make the point that global poverty (as defined by the World Bank threshold) has been falling fast.  But Oxfam respond that most of this reduction is due to China’s rapid growth over the past four decades.  This is something that I have shown in previous posts.

And global inequality expert, Branco Milanovic in a lecture taking place at the same time as Davos, showed that such is the improvement in real incomes of hundreds of millions of Chinese, that now 70% of the Chinese population have incomes within the range of incomes earned by Americans, up from 23% just 15 years ago!

In contrast, Oxfam add that the World Bank data show that the rate of poverty reduction had halved since 2013. Indeed, in sub-Saharan Africa, extreme poverty was on the increase.

Oxfam said its methodology for assessing the gap between rich and poor was based on global wealth distribution data provided by the Credit Suisse global wealth data book, covering the period from June 2017 to June 2018. The wealth of billionaires was calculated using the annual Forbes billionaires list published in March 2018.  I have commented on the Credit Suisse report before, but now in a brand new paper by Gabriel Zucman has updated the data on global wealth inequality.  He finds a rise in global wealth concentration since the start of globalisation and the ‘liberal world order’ in the 1980s. For China, Europe, and the United States combined, the top 1% wealth share has increased from 28% in 1980 to 33% today, while the bottom 75% share hovered around 10%.

The rise in the wealth of the very, very rich that the Oxfam report concentrates on is truly staggering in the US: at its highest degree in 100 years.

And this underestimates the full degree of inequality because the very, very rich hide much of their wealth in secret tax havens.

Despite this staggering data, the Davos crowd are not keen on any attempt at redistribution.  Oxfam makes a modest call for a 1% wealth tax similar to the call made by French economist Thomas Piketty in his World Inequality Report 2018, which showed that between 1980 and 2016 the poorest 50% of humanity only captured 12 cents in every dollar of global income growth. By contrast, the top 1% captured 27 cents of every dollar.  Left-wing Democrat congresswoman Alexandria Ocasio-Cortez has also called for a higher marginal tax rate on the richest Americans. But the great and good at Davos have poured cold water on all these modest policy measures.

Zucman and Emmanuel Saez outlined the case for tax action in a recent NYT article.  “We have a climate crisis, we have an inequality crisis. Over more than a generation, the lower half of income distribution has been shut out from economic growth: Its income per adult was $16,000 in 1980 (adjusted for inflation), and it still is around $16,000 today. At the same time, the income of a tiny minority has skyrocketed. For the highest 0.1 percent of earners, incomes have grown more than 300 percent; for the top 0.01 percent, incomes have grown by as much as 450 percent. And for the tippy-top 0.001 percent — the 2,300 richest Americans — incomes have grown by more than 600 percent.

A common mainstream objection to elevated top marginal income tax rates is that they hurt economic growth – an argument voiced again by the Davos crowd.  But Zucman and Saez point out that the US grew more strongly in the 1950s when it had a top marginal tax rate around 90%. Of course, what this shows is that when US capitalism was growing fast and profitability was high, the elite could afford to allow progressive taxes – if pressured. It was the same story with Japan after the war. As Zucman and Saez say “maybe in those years the United States, as the hegemon of the post-World War II decades, could afford “bad” tax policy?”  In contrast, when Russia was taken over by capitalism, top marginal tax rates were cut from 85% to flat rate tax for all at 13%. The bottom 50% of the population suffered a massive cut in real living standards for over a decade and inequality in Russia rocketed.

Zucman and Saez echo Marx’s view when they say that “Progressive income taxation cannot solve all our injustices. But if history is any guide, it can help stir the country in the right direction, …. Democracy or plutocracy: That is, fundamentally, what top tax rates are about.”  Having said that, the cause of high and rising inequality is to be found in the process of capital accumulation itself.  It is not primarily the lack of progressive taxation of incomes or the lack of a wealth tax; or even the lack of intervention to deal with tax havens.  Such policy measures would make certainly help improve things.  But if pre-tax income from capital (profit, rent and interest) continues to rise at the expense of income from labour (wages), then there is a built-in tendency for inequality to rise.

Branco Milanovic shows that is just what has been happening in the major capitalist economies over the last 50 years.  The very rich capitalists have been getting richer compared to the less rich capitalists and the higher paid income earners have gained relatively to the lower paid.

Rising global inequality will not be reversed by a redistribution of wealth or income through taxation alone.  It will require a complete restructuring of the ownership and control of the means of production and resources globally. Meanwhile Davos will continue to offer crocodile tears.

Davos and the ‘liberal order’

January 22, 2019

This year’s World Economic Forum starts in Davos, Switzerland today.  Two years ago, Chinese President Xi made the keynote speech, in which he argued for more trade and investment globally as opposed to the newly-elected US President Donald Trump’s threats to impose tariffs to protect (supposedly) American workers.  Then last year, Trump himself turned up to tell the audience of corporate chiefs, finance and hi-tech social media moguls, as well as other government leaders, that ‘America First’ would continue and that the trade war with China would hot up.

This year, such is the political disruption in all the major economies that neither Trump (because of government shutdown squabble over building the ‘wall’) nor Xi will be in Davos; nor will French President Macron (with his giles jeunes protests to deal with), nor the UK’s Theresa May (with the Brexit debacle to cope with).  Only the Japanese PM Abe and ‘lame duck’ German Chancellor Merkel will be there.

Davos is the debating hub of the leaders and supporters of global capital and globalisation (free movement of multinational capital and trade without national restrictions).  Globalisation is part of the neoliberal project to maximise profits, although this aim is cloaked in the respectable mainstream economics view that it will bring growth and incomes to all.

The Davos elite see that this propaganda has been exposed by the evidence of global poverty and inequality. So the Davos organisers want to focus on reversing the further decline of ‘globalisation’ ie free trade and movement of capital (and labour?) in the face of sluggish, depressed growth since the Great Recession and the rise of ‘populism’ in the government of Italy, Hungary and Poland in Europe, Trump in the US and Bolsonaro in Brazil (he is there today).

Yet, as the rich and the great meet to discuss the world, the IMF has released its latest forecast for world real GDP growth and it has lowered its forecast for the second time in three months. It now expects the global economy to expand by 3.5% in 2019, less than in 2018.  This would be the lowest rate since 2016.  It appears that the optimistic hopes of a return to pre-Great Recession rates of growth in trade and output have been dashed again.  The Long Depression of low growth, low trade, low investment and, above all (for labour) low real income growth, will continue into an 11th year. “The global expansion is weakening and at a rate that is somewhat faster than expected.”  The IMF still reckons growth will pick up to 3.6% in 2020, but the risks nevertheless “tilt to the downside”.

The IMF report came in the same week as news that China’s real GDP growth in the 4th quarter of 2018 had slowed to just 6.4% yoy, the slowest rate since the Great Recession.  Of course, this rate of growth is still way higher than any of the top G7 capitalist economies, which can only muster growth between zero (Italy) and 2.5% (US).  Earlier this month, Europe’s powerhouse economy, Germany, recorded that 2018 delivered the weakest growth rate in five years. And China’s growth rate is still higher than any other G20 economy except India (and the GDP measure there is even more dubious than mainstream economists reckon China’s is).

Global trade growth in the era of globalisation from the mid-1980s onwards grew faster than global GDP by an average ratio of around 2 to 1.  And financial assets rocketed.  But since the Great Recession, trade growth has barely matched a lower world GDP growth rate and global financial assets have stagnated relative to world GDP.

The Davos team are desperately hyping the cause of globalisation in their reports. “Globalization is alive and well. An effective and resilient international order, comprising strong nation-states, thus remains essential”, they tell us.  The challenges to globalisation remain: rising inequality, the damage of climate change, the loss of jobs from digital technology and end of the hegemonic role of the US in the world.  But Davos still hopes for a new wave of globalisation to preserve the “current liberal order” and restore optimism on “global unity” by making “economic inclusion and equity a priority”.

A supporter of the ‘liberal order”, Martin Wolf of the Financial Times once wrote a book called Why globalisation works.  That was in 2004.  Since the Great Recession and the Long Depression, he has had to eat his words and recognise that “The elites – the policymaking business and financial elites – are increasingly disliked”.  So “you need to make policy which brings people to think again that their societies are run in a decent and civilised way.”

Yet only this week, he posted his hopes that ‘globalisation’ would be revived through the ‘globotics’, the integration of robots with AI.  This will promote globalisation” as “many tasks now carried out by people will be done by AI and robots, revolutionising many service activities, with profound and highly destabilising economic and social effects.  This hardly sounds like a trend that will bring global unity and preserve the liberal order, but, according to Wolf, “discovering new ways of annihilating distance and jumping barriers” means that “in the long run”, the liberal order “will probably win” and globalisation proceed, even if “the short run looks very bumpy”.  Hmm.

From amber to red?

January 15, 2019

Today’s news that the German economy, the powerhouse of Europe, had narrowly avoided a ‘technical recession’ in the second half of 2018 is another red light flashing for the world economy.  In 2018, German real GDP growth was 1.5% down from 2.2% in 2017.  This was the weakest growth rate in five years  And in the second half of last year, the growth was slowing fast, up only 1.1% yoy compared to 2% in Q2 2018.  It fell 0.2% in Q2 over Q1 and rose just 0.3% in Q3.

As for Germany’s industrial sector, that clearly is in recession. Industrial production in Germany decreased 4.7% in November of 2018 over the same month in the previous year.

German companies have been hit by poorer sales from a world economic slowdown and political uncertainty surrounding Brexit and the trade war between the US and China. The UK, US and China are all among German makers’ biggest markets.

The collapse is particularly noticeable in the very important auto sector, where the global slowdown, sharp drops in demand and the restrictions on diesel car emissions have destroyed the auto sector globally.  Passenger vehicle sales in China, the world’s largest car market, fell for the first time last year since the early 1990s, down 4.1%.  Sales in December were down 15.8 per cent from the same month last year, the steepest monthly fall in more than six years and the sixth consecutive month of declining sales.

Germany has dragged down industrial production in the Euro Area.  It fell 3.3% year-on-year in November.  It is the first annual fall in industrial output since January of 2017 and the biggest since November of 2012.

Indeed, the German experience is being followed in varying degrees across the globe, at least in the major economies.  The global PMI, the key business activity indicator, shows a slowing down. The level of activity is still above 50 (and therefore indicates expansion) and is not yet down to the recession depths of 2012 or 2016, but it is on its way.

And the global PMI for ‘new orders’ shows a slowdown in both manufacturing and services globally.

And among the so-called ‘emerging economies’, emergence is being replaced by submergence.  Real GDP in Latin America as a whole is contracting on annualised basis, according to investment bank JP Morgan.

Among the so-called BRICS (the major emerging economies), China’s industrial production slowed in November to 5.4% yoy, the smallest rate since the mini-recession of early 2016. Industrial production in Brazil contracted 0.9% in November, while Russia’s industrial production slowed to 2.4% yoy from 3.7% in October. Russian manufacturing output stopped growing altogether. Manufacturing output growth in South Africa slowed to 1.6% November from 2.8% in October. Even the fastest-growing major economy in the world, India, took a hit. India’s industrial production growth slowed sharply to 0.5% yoy in November, the smallest gain since June 2017 and manufacturing output actually fell 0.4%.

My post outlining an economic forecast in 2019 offered several different short-term indicators for the direction of the world economy.

The first was credit and the so-called ‘inverted yield curve’ ie the difference in the interest rate received for buying 10yr US government bonds and 2yr government bonds.  In a ‘normal’ situation, the interest rate earned for holding a longer term bond will be higher because the bond purchaser cannot get the bond back for ten years and there is higher risk from changes in inflation or default compared to a bond held over two years.  But on some rare occasions, the interest rate on two-year bonds can go higher than on ten-year ones.  This is because the interest rate is being driven up by hikes in the central bank rate and/or because investors are fearful of a recession, so they want to hold as much government paper as possible.  They sell their stocks and buy bonds.  Every time the yield curve inverts, an economic recession in the US at least follows within a year or so.

Well, investors have been selling stocks and the stock market has dived.  But we still don’t have an inverted yield curve yet, partly because the Federal Reserve appears to have decided not to raise its policy rate so quickly any more – precisely because it does not want to provoke a recession when the world is slowing down.

The second indicator is the price of copper.  As copper enters much of the components of industrial output, its price can be a good short-term gauge of the strength of economic activity globally.  Well, the copper price is down from its peak in 2017 but still not at levels seen in the mini-recession of early 2016.

The most important indicator in my view is the movement of profits for the capitalist sector of the major economies.  This drives investment and employment and thus incomes and spending.  But it is not possible to get such a high frequency measure – indeed most profit reports are quarterly at best.  Goldman Sachs, the investment bankers have made some forecasts, however for this year.  Their economists conclude that “In terms of profits, we do expect a sharp slowdown. In every region we expect profit growth to be below the current bottom-up consensus, and to be around 5% in 2019. In the case of the US, in particular, this would represent a very sharp slowdown from the 22% EPS growth expected for 2018.”  They ‘benchmark’ this profit forecast against their measure of ‘growth momentum’ and find that it “implies a further sharp deterioration in growth.”  But not yet a recession forecast.

These indicators all suggest a sharp slowdown in global growth, particularly in manufacturing and industry.  The US yield curve is close to inversion but not yet inverted; the copper price is down but not yet at lows; and global profits growth has slowed but is not yet falling.  So the amber light for a global slump in 2019 has still not turned red – yet.

ASSA 2019 part 2 – the radical: profitability, growth and crises

January 8, 2019

While hundreds attend the big meetings of the mainstream sessions at the annual meeting of the American Economics Association (ASSA 2019), only tens go to the sessions of the radical and heterodox wing of economics.  And even that is thanks to the efforts of the Union of Radical Political Economics (URPE), which celebrated its 50th year in 2018 that even these sessions take place.  URPE provides an umbrella and platform for radical, heterodox and Marxian analysis.  But it is also true that the AEA has included URPE (and other evolutionary and institutional economics associations) in its annual sessions – a mainstream concession not offered by economic associations in the UK or continental Europe.

This year the keynote address within the URPE sessions was the David Gordon Memorial Lecture by Professor Anwar Shaikh of the New School of Social Research in New York.  Anwar Shaikh has made an enormous contribution to radical political economy over more than 40 years, with the body of his work compiled in his monumental book, Capitalism, competition, conflict, crises, published in 2016.

Shaikh’s presentation was entitled Social Structure and Macrodynamics, which was an envelope for discussing the differences between mainstream economics (both micro and macro) and radical (Marxist?) political economy – and the resultant policy solutions offered to avoid and/or restore capitalist economies in crisis.  Shaikh argued that political economists must recognise the social structure of capitalism, including the reality of imperialism – something denied or ignored by the mainstream.  Instead of looking at the social structure of economies, the mainstream deliberately locks itself into the arcane and unrealistic world of ”free markets’’ and such things as game theory.

On crises, Shaikh delineated orthodox or mainstream theory as arguing that ‘austerity’ ie cuts in public spending and wage restraint was necessary to restore an economy in a slump, painful as it might be.  Heterodox (radical Keynesian) theory opposed this and imagined that spending through monetary and fiscal stimulus could restore growth to the benefit of both capital and labour.  Both sides ignored the social structure of capitalism, in particular that it is a system of production for the profit of the owners of capital.  Shaikh put it: “The truth is that successful stimulus requires attention to both effective demand and profitability”.

Those who read my blog regularly know that I would go further or indeed put it differently.   Capitalist economies go into slumps because of a collapse in profits and investment and this leads to a collapse in “effective demand”, not vice versa as the Keynesians (in whatever species) would have it.  So a restoration of profitability is necessary to restore growth under capitalism- this is what I (and G Carchedi) have called the Marxist multiplier compared to the Keynesian multiplier.

What is wrong with Keynesian theory and thus policy is that it denies this determinant role of profitability.  Indeed, in a way, the neoclassical mainstream has a point – that it is necessary (rational?) to drive down wages, weaken labour through unemployment and reduce the burden of the state on capital to revive profits and the economy. Of course, the mainstream cannot explain crises; often deny they can happen; and have no policy for recovery except to make labour pay.

The debate continues between the two wings of mainstream economics over fiscal and monetary stimulus.  Former chief economist of the IMF, Olivier Blanchard was the outgoing President of the AEA and in his address at ASSA 2019 he argued that, because yields on bonds were so low now, the interest cost of debt was very low; and so governments can run up budget deficits (ie reverse austerity) without causing a problem.

This view was echoed by that arch Keynesian policy exponent, Larry Summers in a recent article warning of an upcoming slump and the need for governments to provide counter cyclical infrastructure spending to avoid it.  “Fiscal policymakers should realise the very low real yield on government bonds is a signal that more debt can be absorbed. It is not too soon to begin plans to launch large-scale infrastructure projects if a downturn comes.”

Blanchard and Summers’ support for fiscal stimulus was attacked by the austerity exponents like Kenneth Rogoff (the controversial debt crisis history expert) who responded that fiscal stimulus a la Keynes is and would ineffective in avoiding a crisis: “those who think fiscal policy alone will save the day are stupefyingly naive…. Over-reliance on countercyclical fiscal policy will not work any better in this century than in it did in the last.

And so the debate within the mainstream goes on, blithely (or deliberately?) ignoring the social structure of macrodynamics (as Shaikh put it), namely that capitalism is a ‘money-making’ mode of production for owners of capital and so profitability not demand (or even debt) is what counts for the health or otherwise of economies.

So what has happened to the profitability of capital since the end of the Great Recession in 2009?  Two papers in the URPE sessions considered this.  David Kotz, the well-known Marxist economist from University of Massachusetts, Amherst, looked at the Rate of Profit, Aggregate Demand and Long Term Economic Expansion in the US since 2009.  Kotz (therateofprofitaggregatedemandan_preview) noted, as many others have, including myself in my book, The Long Depression, that the US recovery since 2009 has been the weakest since the 1940s.  Indeed, the last ten years are better considered as ‘persistent stagnation’.

Kotz made the point that the onset of recession in the US economy in the period since World War II has always been preceded by a decline in the rate of profit.  After a sharp drop in 2009, the profit rate recovered through 2012-13. It then declined from 2013 through 2016, then rose slightly in 2017. Kotz asked the question: why was the three-year decline in the profit rate not followed by a recession? His tentative conclusion was that “a likely explanation is that the profit rate remained relatively high after 2013 compared to past experience in the neoliberal era.”  I would argue differently: the modest fall in profitability from 2014-2016 was actually accompanied by a mini-recession, as I have shown.  Indeed, fixed investment plummeted in 2016 to near zero, as Kotz also shows.  So the connect between profits and investment and growth is still there.

Kotz does not think that the 2008 recession was the “consequence of a falling profit rate but rather was set off by a deflating real estate bubble and severe financial crisis”.  It may have been “set off”, but was that underlying cause?  There is no space to deal with this old argument about the Great Recession.  I can only refer you to these papers here – and my new book, World in Crisis.

Even though the rate of accumulation followed the movement in profitability after 2009, it remained low compared to its pre-recession level.

As Kotz says, this is a good explanation of why US productivity growth was also poor in the long depression or stagnation since 2009.  Kotz’s stats also reveal that the major contribution to the recovery after the end of the Great Recession was business investment, contributing 53.3% of GDP growth, almost as large as the 61.8% contribution from consumer spending growth, even though the latter constitutes 60-70% of GDP and business investment only 10-15%.  After 2013, consumer spending became more important as investment tailed off, leading to the mini-recession of 2014-16.

Kotz wants to distinguish the period of 1948-79 as one of ‘regulated capitalism’ and the period 1979-2017 as the ‘neoliberal era’, by showing that investment spending growth was much higher than consumption spending growth in the first period and lower in the second period. This leads him to conclude that “neoliberal capitalism is stuck in its structural crisis phase, a condition that can be overcome within capitalism only by the construction of a new institutional form of capitalism. However, there is no sign yet of the emergence of a viable new institutional structure for U.S. capitalism.”

But I don’t think that flows from Kotz’s data.  Actually in the neo-liberal period, both investment and consumer spending growth slowed and so did growth.  The swing factor was investment growth, which halved, while consumer spending fell only 20%.  Professor Kotz may not agree but I think his analysis tells us is that business investment is still the driver of growth under capitalism, while consumption is the dependent variable in aggregate demand.  It’s the same story in the neoliberal period as in the ‘regulated period’. What happens to profitability and investment is thus the crucial indicator of the future, not the emergence of any ‘new institutional structure’.

In this light, there was a revealing paper presented by Erdogan Bakir of Bucknell University and Al Campbell of the University of Utah.  They looked at the before-tax profit rate of US capital, unlike Kotz who looked at the after-tax rate of non-financial companies.  Bakir and Campbell conclude that the before tax rate is “a good predictive of cyclical downturn in the U.S. economy.”  In a typical business cycle, profit rate peaks at a certain stage of the business cycle expansion and then starts to decline while economic growth continues. This initial decline in the profit rate during what they call the “late expansion phase of the business cycle” becomes a reliably good predictor of cyclical contraction.  This very much matches my own view of profit cycle under capitalism.  Unfortunately, I don’t have the details of this paper to hand, so I’ll have review its conclusions another time.

The gap between the levels of profitability and investment since 2000 in several major capitalist economies have been subject of much debate.  In the past, it has revolved round the view that profits and investment are not connected causally and investment is driven by other factors ie demand or animal spirits a la Keynes or financialisation, where investment is going into financial speculation and away from productive investment (see here).

More recently, this ‘puzzle’ has centred on the measurement of investment – in particular, that investment increasingly takes the form of ‘intangibles’ (brand names, trademarks, copyrights, patents etc in ‘’intellectual property’.  Ozgur Orhangazi at Kadir Has University took this up in another paper
He presents the usual facts showing the gap between profitability and tangible investment. He argues that this gap can be explained by missing intangible investments. Intellectual property as a share of capital stock has doubled since the 1980s.

However, I note from his graph that, in the period of the 2000s, this share did not move very much and yet this is the period of the apparent ‘puzzle’.  Orhangazi draws lots of conclusions from his analysis which I shall leave the reader of his paper to consider but the key one is, as he says “All in all, these findings are in line with the suggestion that the increased use of intangible assets enables firms to have high profitability without a corresponding increase in investment.”  If this is correct it suggests, post-2009, that the causal connection between profits and tangible investment has weakened and that capitalism is actually doing ok and investing well (in intangibles) and just does not need so much profit to expand. That begs the question on whether ‘intangibles’ like ”goodwill’’ are really value-creating.

But is this argument of mismeasurement factually correct? In his AEA presidential address, Olivier Blanchard also looked at US profitability.  Like Marxist analyses of US (pre-tax) profitability, he noted that there was a big fall from the 1960s to the late 1970s and a stabilisation afterwards.

Blanchard noted that the ‘market value’ of firms had doubled compared to the stock of tangible capital invested (Tobin’s Q) since the 1980s.  But he dismisses the argument of mismeasurement of investment in intangibles to explain this:  “A number of researchers have explored this hypothesis, and their conclusion is that, even if the adjustment already made by the Bureau of Economic Analysis is insufficient, intangible capital would have to be implausibly large to reconcile the evolution of the two series: Measured intangible capital as a share of capital has increased from 6% in 1980 to 15% today. Suppose it had in fact increased by 25%. This would only lead to a 10% increase in measured capital, far from enough to explain the divergent evolutions of the two series.”

Blanchard says the ‘puzzle’ is more likely due to monopoly rents.  My own explanation and critique of these explanations can be found here.  But the essential point for explaining slumps in capitalism and predicting new ones is intact, in my view,: it depends on the relation between profitability and capitalist (productive) investment that leads to new value.

I have not got the space to deal with all the other interesting papers in the URPE sessions.  They include an analysis by Margarita Olivera of the Federal University of Brazil of the obstacles to industrial development in Latin America posed by trans-national companies and the new free trade agreements like TPP.  Eugenia Correa of UNAM and Wesley Marshall of UAM Mexico analysed the new counter-revolution in economic policy ahead as right-wing governments take over in Argentina, Brazil and Ecuador.  And again, I shall have to neglect an analysis of China’s industrial development provided by Hao Qi of Renmin University (semiproletarianizationinatwosector_preview).

There were also several papers from a post-Keynesian perspective with Michalis Nikioforos of the Levy Institute presenting the usual wage-led, profit-led theory of crises. Daniele Tavani and Luke Petach of Colorado State University presented an insightful alternative to the explanation by Thomas Piketty of rising inequality of wealth and income based on the switch to neo-liberal policies in the 1980s driving down the share of labour, not Piketty’s neoclassical marginal productivity argument (incomesharessecularstagnationand_preview).  And Lela Davis, Joao Paulo, and Gonzalo Hernandez presented a paper that showed financial fragility was to be found in smaller new firms entering and exiting – this was the weak link in the debt story for capital (theevolutionoffinancialfragilitya_preview).

Finally, there were several papers on developments in international finance.  Ingrid Kvangravenof the University of York looked at changing views on the beneficial role of international finance for capitalism; Carolina Alves of Girton College, Cambridge reckoned that ‘financial globalisation’’ and neoliberal policies have led the economic strategy of international institutions to drop fiscal stimulus policy and Keynesian-style intervention for monetary management.  Devika Dutt from Amherst reckoned that international reserve accumulation particularly in so-called emerging economies encourages volatile capital inflows that make those economies vulnerable to financial crises (canreserveaccumulationbecounterprodu_powerpoint).

To sum up ASSA 2019.  The mainstream still avoids explaining the global financial crash and the Great Recession, ten years since it ended.  So it is still confused about what economic policies would avoid a new slump; are they monetary, ‘macro-prudential’ or fiscal?  This is because it denies the social structure of capitalism, namely that is a mode of production for profit to the owners of capital who are engaged in a class struggle to extract value from labour.  The irreconcilable contradiction between profitability and growth over time was at the core of Marx’s insight as the underlying cause of regular recurring and unavoidable crises of capitalism.  This is what the mainstream does not accept and where radical political economy comes up front.

ASSA 2019 part one – the mainstream: avoiding recessions

January 7, 2019

Past annual conferences of the American Economics Association have had some dominant themes: rising inequality, slowing productivity and secular stagnation.  But in 2018 and in the 2019 conferences, the focus switched – at least among the mainstream economic stream that overwhelmingly dominate ASSA – to whether there will be a new recession in the US and globally, which could be perhaps triggered by a trade war between the US and its main economic rival China. At ASSA 2019, the big issue was whether mainstream economics had learnt the right lessons from the debacle of the Great Recession; and what monetary and fiscal policies of stimulus are best to avoid another slump or at least get out of one quickly?

Of course, there were way more subjects discussed by the 13,000 participants attending the Atlanta Georgia ASSA 2019.  In the hundreds of papers and panels presented, there were some important longer term themes debated, in particular, the impact on jobs of robots and AI, whether China would become the leading economic power in the 21st century or was heading for a fall; and a continual subject for economists, namely whether the assumptions of mainstream economic theory bore any relation to reality.

In this review, I cannot possible cover all the issues, facts and fallacies presented.  So let me first concentrate on the headline panel discussions where the leading economic policy officials and economic gurus spoke.  On Friday, there was a heavily publicised and TV broadcast session with the current Federal Reserve chair Jay Powell and the two previous chairs, Janet Yellen (under Obama) and Ben Bernanke (under Bush).

The pronouncements of Jay Powell that the Fed was going to be cautious about pursuing further interest rate increases in 2019 and would look at the data rallied the stock markets where investors are clearly worried that global growth is slowing and further hikes by the Fed could provoke a recession.  But the overall line of the Fed chairs was that the US economy was looking good, there would be no recession and measures to avoid a new financial crash, while not fully perfect, were much better than back in 2007.

But when asked about what the economics profession needed to do, Janet Yellen said that the profession failed to see the global financial crash and the Great Recession coming. So now more research is needed on “systemic risk” (ie financial collapse). Jay Powell admitted that the Fed still did not have all the “tools” to avoid credit crashes in non-bank areas. And Bernanke was worried about rising inequality which he could not explain.

It seems that mainstream economics is putting its faith in what it calls macroprudential policies to avoid or mitigate future crises ie reducing risks of instability in the finance sector, where the last crisis is supposed to have originated. As Kristin Forbes of MIT put it: “Macroprudential regulations currently focus on where the last set of vulnerabilities arose, especially in banks and mortgage markets. These are critically important, but the next crisis could start in other sectors. In fact, the success of existing regulations in reducing the risks in banks could be contributing to the build-up of vulnerabilities elsewhere, such as by shifting exposures to currency and liquidity risk to the corporate sector and shadow financial system—sectors about which regulators have less information and where entities may be less prepared to handle surprises. Macroprudential policy has made impressive progress and significantly reduced the probability of another crisis unfolding in the banking system as it did in 2008. Macroprudential policy still has some way to go, however, to ensure that there is not another crisis and economists are not asked again by a future monarch: “Why did no one see it coming?”
(macroprudentialpolicywhatweknowdo_preview). Indeed. See here for my view on whether regulation of the finance sector will do the trick next time.

As for the current state of the economy, in another session, President Trump’s top economic adviser, Kevin Hassett, made what one observer called “a victory lap” over what he considered were the successful corporate and personal tax cuts and reductions in repatriating profits enshrined in the so-called flagship Taxes Consolidation Act (TCA).  Hassett claimed that his model that supported the large reduction in the corporate tax rate and predicted a sharp jump in business investment and economic growth as a result had been vindicated.

Hassett said the model predicted a substantial jump in business investment and a rise in the US growth rate by up to 1.4% pts in a year. With US real GDP hitting 3% in 2018, he had been proved right.  Interestingly, this showed that the trend growth rate of the US since the end of the Great Recession was just 1.6%, the lowest rate of expansion of any ‘recovery’ after a slump since the 1930s.

Hassett had to admit that his model was ‘ceteris paribus’ and there could be other factors that caused an acceleration in US growth from 2017 through 2018.  I can think of a few: heavy investment in energy sectors as oil prices rose; a pick-up in growth in Europe and Asia.  But it’s certainly true that the tax cut dramatically raised profits for US business (after tax profits were up 20% yoy in Q3 2018) and that has had an effect on getting business investment rising.  But most of the increased profit has been used by companies to buy back their own shares and raise dividends, leading to the stock market boom in 2017 and most of 2018.

The other counter to Hassett’s boasting is that the corporate tax cut is really a one-off and its apparent effect will dissipate as we go into this year.  According to two right-wing economic scholars, Robert Barro and Jason Furman of Harvard, in their paper, the tax cut could raise growth by 0.9% from trend in 2019 (taking growth to 2.5%).  But the long-term impact of the tax cut, if sustained for ten years would be to add a cumulative 0.4-1.2% to real GDP or just 0.04-0.13% a year!  But that boost would be cut if interest rates rose during that period.

Hassett was keen to argue that the poorest American workers would gain the most from the tax cuts. He put up a graph to show that there had been faster wage growth for low-paid workers.

The faster growth of the bottom 10% of wage workers was very slight however compared to the top 10% (and the latter’s wages are way larger!).  Moreover, back in 2013, the bottom 10% had bigger nominal wage increases than the top 10% when there was no special tax cut.  A more likely reason for the small acceleration in the wage growth of the bottom 10% was the recent hike in the federal minimum wage and the success of labour in some areas in raising the ‘living wage’.

Do corporate and personal tax cuts really boost economic growth?  Think of it the other way round: would higher taxes on the top 1% damage growth?  When left-wing Democrat Alexandria Ocasio-Cortez recently called for a 70% top rate of income tax for those ‘earning’ above $10m a year in the US, she was attacked for damaging growth.  Keynesian guru Paul Krugman rushed to her defence.  He claimed with this graph (below) that there was no correlation between a high personal tax rate and economic growth.  On the contrary, as the top marginal rate was cut over the decades, average economic growth slowed.

Clearly there is no long-term correlation because there are many factors in between the tax rate on income and the creation of that income from work or other sources.  Higher profits can mean that higher tax rates can be absorbed.  But when profitability falls then capitalist policy goes in the direction of cutting taxes on the rich (among other neo-liberal measures) to sustain profits and income for capital to invest and spend.  The real correlation is between profits and investment and investment and growth, the Marxist multiplier.  Indeed, that is what Hassett’s model shows.  When corporate taxes are cut, it provides a short-term boost to profits and thus to business investment and economic growth. But that does not last (as Barro and Furman show (macroeconomiceffectsofthe2017taxre_preview) and cannot reverse indefinitely any tendency in the capitalist accumulation for profitability and profits to fall.

Previous ASSA conferences had observed that the great period of globalisation: (rising world trade and capital flows) had ended with the Great Recession and ensuing Long Depression or slowdown since 2009. But in ASSA 2019, the big name headline speakers were concerned to talk about the end of globalisation slipping into outright trade war given the tit-for-tat trade tariff hikes already begun by the US and China during 2018.

A panel chaired by the IMF deputy director David Lipton were generally concerned that a trade war would be ‘disruptive’ to jobs in both the US and China. But as Jay Shambaugh at the Brookings Institution said, so was globalisation.  Yipian Huang from Peking University appeared optimistic that the US-China trade war would be avoided and things would improve (maybe that’s the Chinese leadership line).  Adam Posen, head of the Peterson Institute, was convinced that the trade war had been started by the US as a deliberate policy to isolate and weaken China.  And it could morph into a serious divergence bringing fragmentation to a previously US-dominated world.  For my view on that see here.

There were many papers at ASSA 2019 on China, its current situation and its future. US economists are putting a lot of effort into estimating where China is going, no doubt hoping they can find faultlines. I counted well over 70 papers on China, both from the mainstream and the radical. I cannot review these this post, however. I’ll be doing a a deeper analysis of China’s future development as a conference paper later this year.

But the theme that was highlighted most at ASSA 2019 is the impact of robots and AI on future productivity and jobs.  David Autor of MIT delivered the Richard Ely lecture called Work of the Past, Work of the Future .

Autor takes the view that robots and Ai are generally jobs creating and will not necessarily increase inequality of wealth and income in society.  He reckons that “it is great time to be young and educated” but not a clear “land of opportunity for non-college adults in the US.” One big problem is that young people are leaving the rural areas and moving to the cities to get qualifications and then staying there.  In the cities there are high wage, high education jobs that are less vulnerable to robots, but there are large numbers of jobs requiring less qualifications and mainly held by women that are vulnerable.  And the new jobs that will be created by the new technology displacing the old less qualified jobs constitute only 13% of total labour hours worked (see pix below).

Low skilled jobs that pay poorly like ‘gift wrappers’, baristas, marriage counsellors, wine waiters etc in leisure and care sectors are increasing but ‘mid-skill’ jobs are “falling off a cliff”.  Middle-skill work in cities has been hollowed out since 1980. Non-college educated workers have been pushed to do low-skill work in cities. In the 1950s, people living in cities were on average five years older than those in rural areas; now they are six years younger.  The rural areas and small towns are dying.

In another paper, Daron Acemoglu, MIT and Pascual Restrepo, Boston University reckoned that the aging population of the US and other countries will be the major contributor to automation
It’s why older nations like Germany and Japan are on the forefront of replacing workers with robots.  It will soon be a driver in China where the population is about to peak at 1.44bn in 2029 and decline steadily afterwards as the population gets older.  Acemoglu and Restrepo took a balanced view of the future with automation.  capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect.  This reduces the share of labour in value-added.  But the effects of automation counterbalanced by the creation of new tasks in which labor has a comparative advantage: the reinstatement effect.  The slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, and a weaker reinstatement effect, and slower growth of productivity than in previous decades.”  They leave open the question of which way it will go from here.

In another paper (recentunitedstateseconomicperformanc_preview) in this session, Dale Jorgenson, Mun Ho and Jon project long-term growth of only 1.8% per year for US GDP growth, derived from a 0.50 pts of hours growth (more labour), 0.45 points from TFP (robots), 0.76 points from capital deepening (investment), and only 0.12 pts from labor quality (more skill). So as robots take over, education will matter less and less!  Interestingly, Robert J Gordon, the arch pessimist in the past on US productivity growth in 21st century took a more optimistic view for the near future in his paper

So will robots, AI and automation mean less jobs or more?  The answer of the mainstream experts seems to be that there will be less jobs in the middle (manufacturing and clerical), some more jobs for a future workforce in new sectors but many more poorly paid jobs in sectors like leisure services and social care.  My own view is outlined here. Automation can create new jobs and income and destroy it. The balance will depend on the trend of profitability in an economy; if profitability is rising, companies will expand investment and production in new sectors to compensate for labour-shedding in other areas – and vice versa.

The issues of poverty and inequality that have dominated previous ASSA meetings have not disappeared. Bruce Meyer at the University of Chicago analysed US poverty and inequality of income over the last two decades.  He suggested that poverty and inequality was not as bad as researchers like Thomas Piketty and Gabriel Zucman have claimed because they have underreported transfer incomes from various US ‘safety nets’ in housing and medicare.

Indeed an argument over measuring the data has broken out between Davids Auten and Splinter
and the Piketty researchers. Auten and Splinter reckon that Piketty’s tax return based measures are biased. Correcting for this bias reduces the increase in top 1% income shares by two-thirds! Further, accounting for government transfers reduces the increase over 80%! However, in another session, Zucman questioned the assumptions and methods used by Auter and Splinter.

Pascal Paul at the Federal Reserve Bank of San Francisco presented empirical evidence for the view that rising and extreme inequality of income plus low productivity growth are harbingers of financial crises (historicalpatternsofinequalityandpr_preview).  But, as he said, he only shows evidence of high correlation not a causal connection.  I remain sceptical that financial crises are caused by high inequality and low productivity – if anything it is the other way round.

Finally, there was an inconclusive debate about whether mainstream microeconomics and its assumptions (free markets and ‘rational expectations’) were necessary for (the Lucas critique) or not compatible (heterodox) with macroeconomics.  The neoclassical view was expressed by Harvard’s Jacob Furman that “more and more research shows you can’t think about macro without thinking about what’s going on with individuals and firms. Furman: Inequality matters for macro and we can’t think about inequality if we ignore microfoundations.”  In contrast, Keynesian Amir Sufi says: macro data are super useful. For example, Sufi said, higher debt leads to a much larger contraction in household spending in response to unemployment. This is now well established. This has big implications for macro. But it also means representative agent macro models shouldn’t be used for business cycles.

My problem is not just with the neoclassical Lucas critique , but also with Keynesian-style macro models based on neoclassical DSGE that start from the idea that economies grow harmoniously but then get hit by ‘shocks’. This approach fails to recognise the uneven development of capital accumulation.  Any way going from the micro to the macro cannot work because of the fallacy of composition – the whole can deliver a different result from the sum of its parts.

A couple of interesting facts from some other papers:  1) there is no simple causal relationship between economic conditions and the abuse of opioids.” in the US (unitedstatesemploymentandopioidsis_preview); 2) in 18 US states, budget spending on prisons is greater than spending on education!

In part two, I’ll try and cover the deliberations of the non-mainstream and radical economic sessions at this year’s ASSA.

The euro – part two will it survive another 20 years?

January 2, 2019

In part two of my analysis of the euro currency, I consider the impact of the global slump of 2008-9 and the ensuing euro debt crisis on prospects for the euro.

The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. The capitalist sectors of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead. The Eurosystem’s ‘Target 2’ settlement figures between the national central banks revealed this huge divergence within the Eurozone.

The imposition of austerity measures by the Franco-German EU leadership on the ‘distressed’ countries during the crisis was the result of the ‘halfway house’ of euro criteria.  There was no full fiscal union (tax harmonisation and automatic transfer of revenues to those national economies with deficits); there was no automatic injection of credit to cover capital flight and trade deficits (federal banking); and there was no banking union with EU-wide regulation and weak banks could be helped by stronger ones.  These conditions were the norm in full federal unions like the United States or the United Kingdom.  Instead, in the Eurozone, everything had to be agreed by tortuous negotiation among the Euro states.

In this halfway house, Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states.  Thus any bailout programmes were combined with ‘austerity’ for those countries to make the people of the distressed states pay with cuts in welfare, pensions and real wages, and to repay (virtually in full) their creditors (the banks of France and Germany and the UK).  The debt owed to the Franco-German banks was transferred to the EU state institutions and the IMF – in the case of Greece, probably in perpetuity.

The ECB, the EU Commission, and the governments of the Eurozone proclaimed that austerity was the only way Europe was to escape from the Great Recession. Austerity in the public spending could force convergence on fiscal accounts too (123118-euroeconomicanalyst-weekly). But the real aim of austerity was to achieve a sharp fall in real wages and cuts in corporate taxes and thus raise the share of profit and profitability of capital. Indeed, after a decade of austerity, very little progress has been achieved in meeting the fiscal targets (particularly in reducing debt ratios); and, more important, in reducing the imbalances within the Eurozone on labour costs or external trade to make the weaker more ‘competitive’.

The adjusted wage share in national income, defined here as compensation per employee as percentage of GDP at factor cost per person employed, is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year. Every capitalist economy had managed to reduce labour’s share of the new value created since 2009.  Labour has been paying for this crisis everywhere.

Reduction in labour’s share of new value added 2009-15 (%)

Source: AMECO, author’s calculations

The evidence shows that those EU states that got a quicker recovery in their profitability of capital were able to recover from the euro crisis (Germany, Netherlands, Ireland etc) faster, while those that did not improve profitability stayed deep in depression (Greece).

One of the striking contributions to the fall in labour’s share of new value has been from emigration.  This was one of the OCA criteria for convergence during crises and it has become an important contributor in reducing costs for the capitalist sector in the larger economies like Spain (and smaller ones like Ireland). Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal, and North Africa. Now there is net emigration even with these areas.

Keynesians blame the crisis in the Eurozone on the rigidity of the single-currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, like Germany. But the euro crisis is only partly a result of the policies of austerity.  Austerity was pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK. Alternative Keynesian policies of fiscal stimulus and/or devaluation where applied have done little to end the slump and still made households suffer income losses.  Austerity means a loss of jobs and services and nominal and real income. Keynesian policies mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates.

Take Iceland, a tiny country outside the EU, let alone the Eurozone.  It adopted the Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone.  But it still meant a 40% decline in average real incomes in euro terms and nearly 20% in krona terms since 2007.  Indeed, in 2015 Icelandic real wages were still below where they were in 2005, ten years earlier, while real wages in the ‘distressed’ EMU states of Ireland and Portugal have recovered.

Iceland’s rate of profit plummeted from 2005 and eventually the island’s property boom burst and along with it the banks collapsed in 2008–09. Devaluation of the currency started in 2008, but profitability up to 2012 remained well under the peak level of 2004. Profitability of capital in Iceland has now recovered but EMU distressed ‘austerity’ states, Portugal and Ireland, have actually done better and even Greek profitability has shown some revival.

Net return on capital for Iceland and Greece (2005=100)

Source: AMECO

Those arguing for exiting the euro as a solution to the Eurozone crisis hold that resorting to competitive devaluation would improve exports, production, wages, and profits.  But suppose Italy exits the euro and reverts to the lira while Germany keeps the euro. Under the assumption that there are international production prices, if Italy produces with a lower technology level than that used by the German producer, there is a loss of value from the Italian to the German producer. Now if Italy devalues its currency by half, the German importer can buy twice as much of Italy’s exports but the Italian importers can still only buy the same (or less) amount of German exports.  Sure, in lira terms, there is no loss of profit, but in international production value terms (euro), there is a loss. The fall in the value rate of profit is hidden by the improvement in the money (lira) rate of profit.

In sum, if Italy devalues its currency, its exporters may improve their sales and their money rate of profit. Overall employment and investments might also improve for a while.  But there is a loss of value inherent in competitive devaluation.  Inflation of imported consumption goods will lead to a fall in real wages. And the average rate of profit will eventually worsen with the concomitant danger of a domestic crisis in investment and production. Such are the consequences of devaluation of the currency.

The political forces that wish to break with the euro or refuse to join it have expanded electorally in many Eurozone countries.  This year’s EU elections could see ‘populist’ euro-sceptic parties take 25% of the vote and hold the balance of power in some states like Austria, Poland and Italy.  And yet, the euro remains popular with the majority.  Indeed, sentiment has improved in 13 member states since they joined, with double-digit bumps in Austria, Finland, Germany and Portugal. Even in Italy, which has witnessed a roughly 25-point decline, around 60% of people still favour sharing a currency with their neighbours.  Greeks are still 65% in favour. What this tells me is that working people in even the weaker Eurozone states reckon ‘going it alone’ outside the EU would be worse than being inside – and they are probably right.

Ultimately, whether the euro will survive in the next 20 years is a political issue.  Will the people of southern Europe continue to endure more years of austerity, creating a whole ‘lost generation’ of unemployed young people, as has already happened in?  Actually, the future of the euro will probably be decided not by the populists in the weaker states but by the majority view of the strategists of capital in the stronger economies.  Will the governments of northern Europe eventually decide to ditch the likes of Italy, Spain, Greece etc and form a strong ‘NorEuro’ around Germany, Benelux and Poland?  There is already an informal ‘Hanseatic league’ alliance being developed.

The EU leaders and strategists of capital need fast economic growth to return soon or further political explosions are likely.  But as we go into 2019, the Eurozone economies are slowing down (as are the US and the UK).  it may not be  too long before the world economy drops into another slump. Then all bets are off on the survival of the euro.

20 years of the euro – part one: has it been a success?

January 1, 2019

Today is the 20th anniversary of the launch of the euro and the Eurozone single currency area.  Starting with eleven members, two decades after its birth, membership has grown to 19 countries and the euro-area economy has swelled by 72% to 11.2 trillion euros ($12.8 trillion), second only to that of the US and positioning the European Union as a global force to be reckoned with.

The euro is now used daily by some 343 million Europeans. Outside Europe, a number of other territories also use the euro as their currency. And another 240 million people worldwide as of 2018 use currencies pegged to the euro. The euro is the second largest reserve currency as well as the second most traded currency in the world after the dollar. As of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the US dollar.

That’s one measure of success.  But it is not the most important benchmark considered by its founders.  The great European project that started after the WW2 had two aims: first, it was to ensure that there were never any more wars between European nations; and second, to make Europe an economic and political entity that could rival America and Japan in global capital.  This project would be led by Franco-German capital.  The euro project went further and aimed at integrating all European capitalist economies into one unit to compete with the US and Asia in world capitalism within a single market and with a rival currency to the dollar.

In part one, I’ll consider whether the euro has been a success for capital in the participating states; and whether it has been good news for labour.  In part two, I’ll consider whether the euro will still be here in another 20 years.

How do we measure the success of a single currency area in economic terms?  Mainstream economic theory starts with the concept of an Optimal Currency Area (OCA).  The essence of OCA theory is that trade integration and a common currency will gradually lead to the convergence of GDP per head and labour productivity among participants.

The OCA says it makes sense for national economies to share a common monetary policy if they (1) have similarly timed business cycles and/or (2) have in place economic ‘shock absorbers’ such as fiscal transfers, labour mobility and flexible prices to adapt to any excessive fluctuations in the cycle. If (1) is true, then a one-size-fits-all monetary policy is possible. If (2) holds, then a national economy can be on a different business cycle with the rest of the currency union and still do okay inside it. Equilibrium can be established if there is ‘wage flexibility’, ‘labour mobility’ and automatic fiscal transfers.

The European Union has shown a degree of convergence.  Common trade rules and the free movement of labour and capital between countries in the EU has led to ‘convergence’ among participants in the EU. Convergence on productivity levels has been as strong as in fully federal US, although convergence more or less stopped in the 1990s, once the single currency union started to be implemented.

So the move to a common market, customs union and eventually the political and economic structures of the EU has been a relative success.  The EU-12/15 from the 1980s to 1999 managed to achieve a degree of harmonisation and convergence with the weaker capitalist economies growing faster than the stronger (graph below shows growth per capita 1986-99)..

But that was only up to the point of the start of EMU and preparations for it in the 1990s.  The evidence for convergence since then has been much less convincing.  On the contrary, the experience of EMU has been divergence.

The idea that ‘free trade’ is beneficial to all countries and to all classes is a ‘sacred tenet’ of mainstream economics.  But it is a fallacious proposition based on the theory of comparative advantage:  that if each country concentrated on producing goods or services where it has a ‘comparative advantage’ over others, then all would benefit.  Trading between countries would balance and wages and employment would be maximised.  But this is empirically untrue.  Countries run huge trade deficits and surpluses for long periods; have recurring currency crises; and workers lose jobs from competition from abroad without getting new ones from more competitive sectors.

The Marxist theory of international trade is based on the law of value.  In the Eurozone, Germany has a higher organic composition of capital (OCC) than Italy, because it’s technologically more advanced.  Thus in any trade between the two, value will be transferred from Italy to Germany.  Italy could compensate for this by increasing the scale of its production/export to Germany to run a trade surplus with Germany.  This is what China does.  But Italy is not large enough to do this.  So it transfers value to Germany and it still runs a deficit on total trade with Germany.

In this situation, Germany gains within the Eurozone at the expense of Italy.  All other member states cannot scale up their production to surpass Germany, so unequal exchange is compounded across the EMU.  On top of this, Germany runs a trade surplus with other states outside the EMU, which it can use to invest more capital abroad into the EMU deficit countries.

The Marxist theory of a currency union thus starts from the opposite position of neoclassical mainstream OCA theory.  Capitalism is an economic system that combines labour and capital, but unevenly.  The centripetal forces of combined accumulation and trade are often more than countered by the centrifugal forces of development and unequal flows of value. There is no tendency to equilibrium in trade and production cycles under capitalism.  So fiscal, wage or price adjustments will not restore equilibrium and anyway may have to be so huge as to be socially impossible without breaking up the currency union.

The EU leaders had set convergence criteria for joining the euro that were only monetary (interest rates and inflation) and fiscal (budget deficits and debt).  There were no convergence criteria for productivity levels, GDP growth, investment or employment.  Why? Because those were areas for the free movement of capital (and labour) and where capitalist production must be kept free of interference or direction by the state.  After all, the EU project is a capitalist one.

This explains why the core countries of EMU diverged from the periphery.  With a single currency, the value differentials between the weaker states (lower OCC) and the stronger (higher OCC) were exposed with no option to compensate by the devaluation of any national currency or by scaling up overall production.  So the weaker capitalist economies (in southern Europe) within the euro area lost ground to the stronger (in the north).  The graph below shows how each member state has fared in growth relative to the Eurozone average.

Franco-German capital expanded into the south and east to take advantage of cheap labour there, while exporting outside the euro area with a relatively competitive currency.  The weaker EMU states built up trade deficits with the northern states and were flooded with northern capital that created property and financial booms out of line with growth in the productive sectors of the south.

Even so, none of this would have caused a crisis in the single currency union had it not been for a significant change in global capitalism: the sharp decline in the profitability of capital in the major EU states (as elsewhere) after the end of the Golden Age of post-war expansion. This led to fall in investment growth, productivity and trade divergence.  European capital, following the model of the Anglo-Saxon economies, adopted neo-liberal policies: anti trade union laws, deregulation of labour and financial markets, cuts in public spending and corporate tax, free movement of capital and privatisations.  The aim was to boost profitability. This succeeded somewhat for the more advanced EU states of the north, but less so for the south.

Then came the global financial crash and the Great Recession.  This exposed the fault-lines in the single currency area.

Forecast for 2019

December 28, 2018

Well, there has not been a year starting like this for a long time.  The US government is in disarray.  The President of the Unites States starts the second half of his four-year term having lost his majority in the lower house of Congress to the Democrats in a heavy polling defeat last November.  He starts with an acting chief of staff, an acting secretary of defense, an acting attorney general, an acting EPA administrator, no interior secretary and no ambassador to the UN. His former campaign manager, deputy campaign manager, national security adviser and personal lawyer have all pleaded guilty to criminal offences.  And the investigation by special prosecutor Mueller on the connections between the Trump presidential campaign and Russian intelligence will be stepped up.  Meanwhile, one-quarter of government departments are closed because of Trump’s budget fight with Congress.

Also the geopolitical environment has turned toxic.  The Trump administration has picked a fight with China over trade and technical know-how that threatens to intensify when the current ‘pause’ on the tit-for-tat trade tariffs ends in March.

This time last year, Trump was boasting that the US economy was booming, with record highs for the US stock market.  Back then, I said that “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 in April 2018, I posted that I thought the short boom in 2017 from the mini-recession of 2015-6 was over and that world growth had peaked.  And so it has proved.  2018 has ended with real GDP growth starting to slow nearly everywhere.

And at the end of 2018, stock markets suffered the deepest fall since the global financial crash in 2008.  Current US treasury secretary Mnuchin panicked and called a meeting of the top six US banks on Xmas eve to check that they were confident of standing firm, only making things worse.

As I have argued before, Marx said that what drives stock market prices is the difference between interest rates and the overall rate of profit. What has kept stock market prices rising since 2009 has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world, with zero short-term rates and quantitative easing (buying financial assets with credit injections).  The gap between returns on investing in the stock market and the cost of borrowing to do so has been high.

But in 2018 investors in fictitious capital (stocks and bonds) perceived that this situation was changing.  Interest rates are on the rise (driven by the US Fed) and there are signs that the recovery in the rate of return on capital in the major economies has peaked and is reversing.  US growth peaked in Q2 at a 4% annual rate and Q4 growth is expected to be closer to 2.5%.  The very latest indicator of US growth, the Richmond business activity indicator, suggests a sharp drop in growth in early 2019 – perhaps even to stagnation.

In Europe, hopes of a synchronised expansion matching that of the US have been dashed, as the leading European economies, France and Germany, have slowed, while the weaker ones like Italy have slipped back into recession.  UK real GDP growth is also dropping fast as companies apply an investment strike due to uncertainty over Brexit.  The Eurozone economy is now growing at only 1.6% compared to nearly double that rate this time last year.

And it is not just in the major advanced capitalist economies that the forecast end to the Long Depression since 2008 has been confounded.  In Asia too, there has been a slowdown in the second half of 2018.  Japan’s real GDP was static in Q3 2018.

The world’s largest manufacturing economy, China, has also slowed.

Korea too is slowing.

All the official growth forecasts (from the IMF, the OECD, World Bank etc) for are for a lower rate in 2019 compared to 2018.

Now a recession in mainstream economics is technically defined as two consecutive quarterly contractions in real GDP growth.  The consensus does not expect that in 2019.  But are the mainstream experts wrong; will the major economies drop into a slump this coming year?

Many argue that forecasts, let alone economic forecasts, are not worth the paper they are typed on.  I’m not sure that I agree. I would make a distinction between prediction in scientific analysis and forecasts.  But I won’t deal with that issue now.  Instead I’ll plough into my forecast for 2019.

So what now for 2019?  Well, what did I say were the key factors for 2018?  I said that “there are two things that put a question mark on the delivery of faster growth for most capitalist economies in 2018 and raise the possibility of the opposite.  The first is profitability and profits” and the second “is debt…global debt, particularly private sector (corporate and household) debt has continued to rise to new records.”

This is still true for 2019.  Global debt rose through 2018 and, most important, the cost of servicing that debt also began to rise as the US Federal Reserve continued with hiking its policy rate – with the last rise made just before the end of the year.

The Fed rate sets the floor for interest rates in the US and also the benchmark for international rates, given the dominant role of the dollar in international reserves and capital flows.  And other central banks have ended their cheap money injections – quantitative easing – which has now turned into quantitative tightening.

Thus “financial conditions” (the cost of debt, the state of stock markets and the value of the dollar against other currencies) have been tightening.

Just after Janet Yellen ended her term as Federal Reserve chair (her term was not renewed by Trump because he said she was “too short”), she declared that “there would be no more financial crises in our lifetime”, because of the new measures applied to ensure the banks won’t crash again.  But last month, she revised that view.  Apparently, there are “gigantic holes in the financial system” that she presided over and she now worries that “there could be another financial crisis” after all. This is because financial regulation is ‘unfinished” and she is not sure that the Fed and government are doing anything about that “in the way we should”. 

In a recent paper, Carmen Reinhart, a mainstream expert on the history of financial crises, drew attention to the sharp rise in unbacked corporate debt, called leveraged loans, with issuance hitting record highs in 2018.  Reinhart concluded that “the networks for financial contagion, should things turn ugly, are already in place.”

So the scene is set for a new credit crunch in 2019 if profits stop growing and the cost of servicing the accumulated corporate debt goes on rising.  If the Fed continues with its policy hikes, just as in 1937 during the Great Depression of the 1930s, it threatens to provoke a sharp downturn, not just in the price of fictitious capital but also in the so-called ‘real’ economy.  This fear provoked Trump to consider sacking Fed Chair Jay Powell in the New Year.

The Bank for International Settlements (BIS), the international research agency for central banks, warned that what it calls the ‘financial cycle’ implies that a new credit crunch is coming.  “Financial cycle booms can end in crises and, even if they do not, they tend to weaken growth.  Once financial cycles peak, the real economy typically suffers. This is most evident around financial crises, which tend to follow exuberant credit and asset price growth, ie financial cycle booms. Crises in turn tend to usher in deep recessions, as falling asset prices, high debt burdens and balance sheet repair drag down growth.”  And most important “the debt service ratio is particularly effective in this aspect”.

All the credit indicators for a recession are now flashing amber, if not red.  The most popular is the so-called inverted yield curve, namely when the interest rate on a long-term government bond falls below the Federal Reserve’s policy rate.  Whenever that happens, it nearly always indicates a recession within a year.  Why? Because what the inverted curve tells us is that investors think that a slump is coming so they are buying ‘safe assets’ like government bonds, while the Fed thinks the economy is fine and is hiking rates – but the market will decide.

As one analyst put it: “Think of an inverted yield curve as a fever. When your body gets a fever, the fever is not the cause of the sickness. It just says something’s wrong with your body. You have the flu, appendicitis, or some other ailment. The fever indicates you are sick but not necessarily what the sickness is. And typically, the higher the fever, the more serious the condition.  It is the same with the yield curve. The more inverted the yield curve is and the longer it stays that way, the more confident we are that something is economically wrong that may show up as a recession sometime in the future.”  The US yield curve has flattened but has not yet inverted.  So this reliable indicator has still not turned red yet.

Another important indicator for a coming recession can be found, not in the credit markets, but in the global economy.  It’s the price of copper and other industrial metals.  Metals are central inputs in industrial production around the world and so if their prices fall, this suggests that companies are reducing investment in production and so using less metal components.

In 2018, the copper price fell back from a peak of 320 to 270 after July.  But since then it has steadied and remains well above 200 then it fell to in the mini-recession of early 2016.  So this suggests that while the world economy peaked back last summer, a recession is not yet with us.

Another indicator that the world economy is slowing down from its mini-boom in 2017 is the sharp fall in oil prices.  The price has plunged from $75/b in October to $45/b now. That will hit the profits of the energy companies and the trade balances of the oil producers.

The most important factor for analysing the health of the capitalist economy remains the profitability of the capitalist sector and the movement in profits globally.  That decides whether investment and production will continue.  This blog has presented overwhelming evidence that profits and investment are highly correlated and in that order – see our latest book, World in Crisis.

The US corporate sector ended 2018 with record levels of profits/earnings, rising some 20%, the highest rate since 2010, when the US economy rebounded from the Great Recession.  But this profit jump was a one-off.  It’s been driven by huge corporate tax cuts and exemptions from tax in repatriating cash reserves from abroad that the major US companies held.  And US corporate revenues have been boosted by a very sharp fall in input costs, namely the fall in the oil price during 2018.

Globally, profits were still growing in the middle of 2018.  But profits growth has slowed in Germany, China and Japan.  Only the US has experienced any acceleration.  And if the US profits growth is a one-off, as argued above, global profits growth is likely to fall away sharply in 2019.

Slowing profits growth and a rising cost of (corporate) debt, alongside all the politico-economic factors of an international trade war between China and the US, suggest that in 2019 the likelihood of a global slump has never been higher since the end of the Great Recession in 2009.

Books in 2018: value, crashes and socialism

December 24, 2018

Let me remind you of the books that I reviewed on the blog this year.  Of course, they are economics books only and not necessarily the best books published or let alone Marxist in approach.  But several got a big audience.

Factfulness. was a book that swept the popular media  Hans Rosling posthumously argues that, contrary to the conventional wisdom, the world is becoming a better place.  Global poverty is falling, life expectancy is rising; health levels are improving; people have more things and better services.  Even violence and wars are in decline; and democracy is on the rise.  The facts provided in the book lend support to these assertions.

As a result, many of the great and good have praised the book in countering the doom and gloom of many that capitalism is a failed and broken system.  For example, the world’s richest man, multi- billionaire Bill Gates of Microsoft, saw Factfulness as justifiying his view that things are getting better for the majority.  With the right policies on health, education, population, climate change etc, the world could progress without any change in its mode of production and social structure is the conclusion.

What Factfulness tries to ignore, however, is that inequality between rich and poor is widening, within and between many countries, including the rich ones.  And climate change and global warming are accelerating despite the technological possibilities for controlling it.  And Factfulness does not deal with or explain the causes of the recurring crises of production in world capitalism that regularly wipe out the living standards of millions for a generation.

Within the world of academic economics, one book got massive widespread coverage. Mariana Mazzucato’s The value of everything seemed to have caught the imagination of the liberal wing of mainstream economics.  So much so that Mazzacuto even got a spot on Desert Island Discs, a BBC radio programme that invites ‘celebrities’ to outline what music they would like to take with them if marooned on a desert island.  As I write, the Financial Times has again highlighted her work.

Mazzucato previously wrote an important book, The Entrepreneurial State, that ‘debunked’ the mainstream myth that only the capitalist sector contributes to innovation while the state sector is a burden and cost to growth.  In this new book, she took on a bigger task: trying to define who or what creates value in our economies, a subject that has been debated by the greatest economists of capitalism from Adam Smith onwards.

Her arguments were that 1) government is not recognised in national accounts as adding to value through its contribution to investment and innovation but should be; 2) finance has sneaked into accounts as productive and value-creating when in reality it ‘extracts’ value from productive sectors and breeds speculation and ‘short-termism’ etc.; and 3) there has been the growth of a monopoly sector in modern capitalism that is ‘rent-seeking’ rather than ‘value-creating’.

There are many powerful truths in Mazzucato’s theses.  But there are also serious weaknesses, in my view.  To argue that government ‘creates’ value is to misunderstand the law of value under capitalism.  Under capitalism, the commodities (things and services) are produced for sale to obtain profit.  Sure, commodities must have use value (be useful to someone) but they must also have exchange value (make a profit).  From that capitalist perspective, government does not create value – indeed, it can be seen as a (necessary) cost that reduces the profitability of capitalist production and accumulation.  It is the profitability of the productive sectors that is essential to a capitalist economy, not the overall amount of use values produced.

Finance is clearly ‘unproductive’ even in a capitalist sense.  But it is not just finance that is unproductive.  Real estate, commercial advertising and media and many other sectors are not ‘productive’ because the labour employed does not create new value but instead just circulates and redistributes value and surplus value already created.

The result of Mazzucato’s view is that finance is the enemy, not capitalism.  So she does not call for the replacement of capitalism but “how we might reform it” in order “to replace the current parasitic system with a type of capitalism that is more sustainable, more symbiotic – that works for us all.”  She wants a “partnership between government, multi-nationals and a ‘third sector’ (presumably social non-profit coops etc).” Indeed, she makes no mention of bringing the ‘parasitic’ finance sector into public ownership, let alone the ‘short-termist’, ‘rent-seeking’ monopolies.

The other academic book with huge impact in 2018 was that of economic historian Adam Tooze of Columbia University.  Crashed, How a decade of financial crises changed the world is an important contribution to the economic history of the global financial crash of 2008-9.  Tooze shows how it came about that the great credit boom of the early 2000s eventually led to the biggest financial disaster in modern economies and the ensuing deepest slump in capitalist production since the 1930s.  Tooze particularly emphasises that the crash was not so much a story of the US spreading its financial contagion to Europe. The credit boom was just as strong in Europe.

He shows how governments ensured that the stronger and luckier big banks gained at the expense of the weaker and smaller; and how government intervention provided funding for the culprits of the financial disaster at the expense of the victims, working people, tax payers and small businesses.  Crashed is a granular and fascinating account of the crash and its aftermath.  It powerfully shows what happened and how, but, in my view, does not adequately show why it happened.  For Tooze, the cause seems to be the previous deregulation of the banking system, financial greed and incompetent authorities.  For me, these are only symptoms or immediate catalysts of the underlying causes in the capitalist economy.  For the latter, we must go deeper to the nature and movement of profitability in capitalist economies.

The theme that the global financial crash and the Great Recession were caused by financial deregulation and reckless bankers was also promoted by Lord Robert Skidelsky in his new book Money and Government: A Challenge to Mainstream EconomicsLord Robert Skidelsky is emeritus professor of economics at Warwick University, England.  and the most eminent biographer of John Maynard Keynes and a firm promoter of his ideas.

Skidelsky’s book, its cover blurb says, is “to familiarise the reader with essential elements of Keynes’s ‘big idea’.“ Skidelsky starts from the premiss (like Keynes) that capitalism is the only viable and best mode of production and social relations possible – the alternative of a socialist system of planning based on public ownership is anathema to Skidelsky (as it was to Keynes).  But capitalism has fault-lines and successively recurring slumps and depressions reveal that. So Skidelsky’s job (as Keynes also saw it) is to save capitalism and manage these recurring crises to reduce or minimise their impact.

What does Skidelsky think we should do?  First, we must break up the big banks into smaller units and “institute controls over the type and destination of loans they make.” Second, we need to ‘manage’ capitalism with proper fiscal and monetary policies.  Third, we need to reduce inequality so that wages are sufficiently high to sustain “the consumption base of the economy”. Otherwise it “becomes too weak to support full employment.”  Thus Skidelsky seems to think that the causes of crises are low wages and consumption.  And like Tooze, Skidelsky says that unless we act along these lines to save capitalism, there is the danger of the rise of ‘populism’ and “the flight of voters toward political extremism.”

Mazzacuto’s attempt to resuscitate classical value theory is flawed, in my view.  In contrast, Professor Murray Smith of Brock University Canada offers a much clearer analysis, in his 2018 book, Invisible Leviathan, which, of course, has not got any acclaim or coverage from the left, let alone, the mainstream.  Smith critically explores the debate surrounding Karl Marx’s ‘capitalist law of value’ and its corollary, the law of the falling rate of profit.  The reader gets a clear account of the various interpretations of value theory and Smith makes his own significant contribution.  In my view, it is essential reading (not just because I wrote a foreword!).  The price set by the publishers, Brill, is prohibitive.  However, a paperback version will appear in 2019.

The capitalist mode of production is coming to an end.  But it is not being replaced by socialism. Instead, there is a new mode of production, based on a managerial class that has been forming in the last hundred years.  This managerial class does not exploit the working class for surplus value and its accumulation as capital.  The managers instead use power and control which they exercise through the management of transnationals and finance.  The working class will not be the ‘gravediggers’ of capitalism, as Marx expected.  The ‘popular classes’ instead must press the managerial class to be progressive and modern; and eliminate the vestiges of the capitalist class in order to develop a new meritocratic society. Such is the thesis of Managerial Capitalism, by Gerard Dumenil and Dominique Levy (D-L), two longstanding and eminent French Marxist economists.

For me, this seemed an old-fashioned, outdated and refuted scenario to present in 2018.  After all, Marx wrote about joint stock companies 150 years ago.  Surely, the real question is: in whose class interest do managers carry out their managerial labour? The very nature of the capitalist economy obliges the managers to manage in the interest of the 1%.  Their jobs depend on the decisions of the shareholders, the company share price and its earnings performance, however highly paid they are.  Capitalism has not really changed in its fundamentals in the last 150 years.

But one thing has changed – the ‘socialist’ alternative of the Soviet Union has disappeared.  What can we learn about the feasibility of socialism from this failed state?  In a new book, Varieties of Alternative Economic Systems, edited by Richard Westra, Robert Albritton and Seong Jeong, Marxist economists try to ‘look beyond’ just a critique of capitalism and consider ‘practical utopias’ for the socialist alternative.

How a socialist future might work is a badly neglected area of debate with most Marxists just relying Marx’s own short Critique of the Gotha Programme of the German Social Democrats, or occasional economic analyses that deny the feasibility of socialism. This book moves things on to discuss ‘positive practicalities’ with some ground-breaking work from the likes of Richard Westra, Al Campbell and Seong Jeong.  Factfulness argued that the future is bright – but this book shows that this is true only with the arrival of ‘practical’ socialism.