Profitability, investment and the pandemic

May 17, 2020

Last week’s speech by US Federal Reserve Chair Jay Powell at the Peterson Institute for International Economics, Washington was truly shocking.  Powell told his audience of economists that “The scope and speed of this downturn are without modern precedent”. One shocking fact that he announced was that, according to a special Fed survey of ‘economic well-being’ among American households, “Among people who were working in February, almost 40% households making less than $40,000 a year had lost a job in March”!!!

Powell went on to warn his well-paid audience sitting at home watching on Zoom that “while the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks”. Indeed, if the continual downgrading of forecasts of global growth are anything to go by, then the number of optimists about a V-shaped recovery are beginning to dwindle to just the leaders of governments and finance.

Another study projects that US GDP will decline by 22% compared to the pre-COVID-19 period and 24% of US jobs are likely to be vulnerable. The adverse effects are further estimated to be strongest for low-wage workers who might face employment reductions of up to 42% while high-wage workers are estimated to experience just a 7% decrease.

And Powell was worried that this collapse could leave lasting damage to the US economy, making any quick or even significant recovery difficult.  “The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy.”, said Powell, echoing the arguments presented in my recent post on the ‘scarring’ of the economy.

Powell reckoned the main problem in achieving any recovery once the pandemic was over was that “A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.”  See here.

And there was a serious risk that the longer the recovery took to emerge, the more likely there would be bankruptcies and the collapse of firms and eve n banks, as “the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.”

Indeed, last week, the Federal Reserve released its semi-annual Financial Stability Report, in which it concluded that “asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains re-emerge.”  The Fed report warned that lenders could face “material losses” from lending to struggling borrowers who are unable to get back on track after the crisis. “The strains on household and business balance sheets from the economic and financial shocks since March will probably create fragilities that last for some time,” the Fed wrote.  “All told, the prospect for losses at financial institutions to create pressures over the medium term appears elevated,” the central bank said.

So the coronavirus slump will be deep and long lasting with a weak recovery to follow and could cause a financial crash.  And working people will suffer severely, especially those at the bottom of the income and skills ladder. That is the message of the head of the world’s most powerful central bank.

But the other message that Jay Powell wanted to emphasise to his economics audience was that this terrifying slump was not the fault of capitalism.  Powell was at pains to claim that the cause of the slump was the virus and lockdowns and not the economy. “The current downturn is unique in that it is attributable to the virus and the steps taken to limit its fallout. This time, high inflation was not a problem. There was no economy-threatening bubble to pop and no unsustainable boom to bust.  The virus is the cause, not the usual suspects—something worth keeping in mind as we respond.”

This statement reminded me of what I said way back in mid-March when the virus was declared a pandemic by the World Health Organisation. “I’m sure when this disaster is over, mainstream economics and the authorities will claim that it was an exogenous crisis nothing to do with any inherent flaws in the capitalist mode of production and the social structure of society.  It was the virus that did it.”  My response then was to remind readers that “Even before the pandemic struck, in most major capitalist economies, whether in the so-called developed world or in the ‘developing’ economies of the ‘Global South’, economic activity was slowing to a stop, with some economies already contracting in national output and investment, and many others on the brink.”

After Powell’s comment, I went back and had a look at the global real GDP growth rate since the end of the Great Recession in 2009.  Based on IMF data, we can see that annual growth was on a downward trend and in 2019 global growth was the slowest since the GR.

And if we compare last year’s 2019 real GDP growth rate with the 10yr average before, then every area of the world showed a significant fall.

The Eurozone growth was 11% below the 10yr average, the G7 and advanced economies even lower, with the emerging markets growth rate 27% lower, so that the overall world growth rate in 2019 was 23% lower than the average since the end of the Great Recession.  I’ve added Latin America to show that this region was right in a slump by 2019.

So the world capitalist economy was already slipping into a recession (long overdue) before the coronavirus pandemic arrived.  Why was this?  Well, as Brian Green explained in the You Tube discussion that I had with him last week, the US economy had been in a credit-fuelled bubble for the last six years that enabled the economy to grow even though profitability has been falling along with investment in the ‘real’ economy.  So, as Brian says, “the underlying health of the global capitalist economy was poor before the plague but was obscured by cheap money driving speculative gains which fed back into the economy”.  (For Brian’s data, see his website here).

In that discussion, I looked at the trajectory of the profitability of capital globally. The Penn World Tables 9.1 provide a new series called the internal rate of return on capital (IRR) for every country in the world starting in 1950 up to 2017. The IRR is a reasonable proxy for a Marxian measure of the rate of profit on capital stock, although of course it is not the same because it excludes variable capital and raw material inventories (circulating capital) from the denominator.  Despite that deficiency, the IRR measure allows us to consider the trends and trajectory of the profitability of capitalist economies and compare them with each other on a similar basis of valuation.

If we look at the IRR for the top seven capitalist economies, the imperialist countries, called the G7, we find that the rate of profit in the major economies peaked at the end of the so-called ‘neoliberal’ era in the late 1990s.  There was a significant decline in profitability after 2005 and then a slump during the Great Recession, matching Brian’s results for the US non-financial sector.  The recovery since the end of the Great Recession has been limited and profitability remains near all-time lows.

The IRR series only goes up to 2017.  It would be possible to extend these results to 2019 using the AMECO database which measures the net return on capital similarly to the Penn IRR.  I have not had time to do this properly, but an eye-ball look suggests that there has been no rise in profitability since 2017 and probably a slight fall up to 2019.  So these results confirm Brian Green’s US data that the major capitalist economies were already significantly weak before the pandemic hit.

Second, we can also gauge this by looking at total corporate profits, not just profitability.  Brian does this too for the US and China.  I have attempted to extend US and China corporate profit movements to a global measure by weighting the corporate profits (released quarterly) for selected major economies: US, UK, China, Canada, Japan and Germany.  These economies constitute more than 50% of world GDP.  What this measure reveals is that global corporate profits had ground to a halt before the pandemic hit.  Marx’s double-edge law of profit was in operation.

The mini-boom for profits that began in early 2016 peaked in mid-2017 and slid back in 2018 to zero by 2019.

That brings me to the causal connection between profits and the health of capitalist economies.  Over the years, I have presented theoretical arguments for what I consider is the Marxian view that profits drive capitalist investment, not ‘confidence’, not sales, not credit, etc.  Moreover, profits lead investment, not vice versa.  It is not only the logic of theory that supports this view; it is also empirical evidence.  And there is a stack of it.

But let me bring to your attention a new paper by Alexiou and Trachanas, Predicting post-war US recessions: a probit modelling approach, April 2020. They investigated the relationship between US recessions and the profitability of capital using multi-variate regression analysis.  They find that the probability of recessions increases with falling profitability and vice versa.  However, changes in private credit, interest rates and Tobin’s Q (stock market values compared with fixed asset values) are not statistically significant and any association with recessions is “rather slim”.

I conclude from this study and the others before it, that, although fictitious capital (credit and stocks) might keep a capitalist economy above water for a while, eventually it will be the profitability of capital in the productive sector that decides the issue. Moreover, cutting interest rates to zero or lower; injecting credit to astronomical levels that boost speculative investment in financial assets (and so raise Tobin’s Q) and more fiscal spending will not enable capitalist economies to recover from this pandemic slump.  That requires a significant rise in the profitability of productive capital.

If we look at investment rates (as measured by total investment to GDP in an economy), we find that in the last ten years, total investment to GDP in the major economies has been weak; indeed in 2019, total investment (government, housing and business) to GDP is still lower than in 2007. In other words, even the low real GDP growth rate in the major economies in the last ten years has not been matched by total investment growth.  And if you strip out government and housing, business investment has performed even worse.

By the way, the argument of the Keynesians that low economic growth in the last ten years is due to ‘secular stagnation’ caused by a ‘savings glut’ is not borne out.  The national savings ratio in the advanced capitalist economies in 2019 is no higher than in 2007, while the investment ratio has fallen 7%.  There has been an investment dearth not a savings glut.  This is the result of low profitability in the major capitalist economies, forcing them to look overseas to invest where profitability is higher (the investment ratio in emerging economies is up 10% – I shall return to this point in a future post).

What matters in restoring economic growth in a capitalist economy is business investment.  And that depends on the profitability of that investment.  And even before the pandemic hit, business investment was falling.  Take Europe. Even before the pandemic hit, business investment in peripheral European countries was still about 20 per cent below pre-crisis levels.

Andrew Kenningham, chief Europe economist at Capital Economics, forecast eurozone business investment would fall 24 per cent year on year in 2020, contributing to an expected 12 per cent contraction in GDP. In the first quarter, France reported its largest contraction in gross fixed capital formation, a measure of private and public investment, on record; Spain’s contraction was also near-record levels, according to preliminary data from their national statistics offices.

In Europe, manufacturers producing investment goods — those used as inputs for the production of other goods and services, such as machinery, lorries and equipment — experienced the biggest hit to activity, according to official data. In Germany, the production of investment goods fell 17 per cent in March compared with the previous month, more than double the fall in the output of consumer goods. France and Spain registered even wider differences

Low profitability and rising debt are the two pillars of the Long Depression (ie low growth in productive investment, real incomes and trade) that the major economies have been locked into for the last decade.  Now in the pandemic, governments and central banks are doubling down on these policies, backed by a chorus of approval from Keynesians of various hues (MMT and all), in the hope and expectation that this will succeed in reviving capitalist economies after the lockdowns are relaxed or ended.

This is unlikely to happen because profitability will remain low and may even be lower, while debts will rise, fuelled by the huge credit expansion.  Capitalist economies will remain depressed, and even eventually be accompanied by rising inflation, so that this new leg of depression will turn into stagflation.  The Keynesian multiplier (government spending) will be found wanting as it was in the 1970s.  The Marxist multiplier (profitability) will prove to be a better guide to the nature of capitalist booms and slumps and show that capitalist crises cannot be ended while preserving the capitalist mode of production.

The debt dilemma

May 10, 2020

I have mentioned many times on this blog that rising global debt reduces the ability of capitalist economies to avoid slumps and find quick way to recover (and see ‘Debt Matters’ in my book, The Long Depression and also in World in Crisis).

As Marx explained, credit is a necessary component in oiling the wheels of capitalist accumulation, by making it possible for investment in longer and larger projects to be financed when recycled profits are not sufficient; and in more efficiently circulating capital for investment and production.  But credit becomes debt and, while it can help expand capital accumulation, if profits do not materialise sufficiently to service that debt (ie pay it back with interest to the lenders), the debt becomes a burden that eats into the profits and ability of capital to expand.

Moreover, two other things happen.  In order to meet the obligations of existing debt, weaker companies are forced into borrowing more to cover debt servicing, and so debt spirals upwards.  Also, the return over risk on lending for creditors can now appear to be higher than investing in productive capital, especially if the borrower is the government, a much safer debtor.  So speculation in financial assets in the form of bonds and other debt instruments increases.  But if there is a crisis in production and investment, perhaps partly caused by excessive debt servicing costs, then the ability of capitalist corporations to recover and start a new boom is weakened because of the debt burden.

In the current coronacrisis, the slump is accompanied by high global debt, both public, corporate and household. The Institute of International Finance, a trade body, estimates that global debt, both public and private, topped $255tn at the end of 2019. That is $87tn higher than at the onset of the 2008 crisis and it is undoubtedly going to be very much higher as a result of the pandemic. As Robert Armstrong of the FT put it: “the pandemic poses especially big economic hazards to companies with highly leveraged balance sheets, a group that now includes much of the corporate world. Yet the only viable short-term solution is to borrow more, to survive until the crisis passes. The result: companies will hit the next crisis with even more precarious debt piles.”

As Armstrong points out, “in the US, non-financial corporate debt was about $10tn at the start of the crisis. At 47 per cent of gross domestic product, it has never been greater. Under normal conditions this would not be a problem, because record-low interest rates have made debt easier to bear. Corporate bosses, by levering up, have only followed the incentives presented to them. Debt is cheap and tax deductible so using more of it boosts earnings.  But in a crisis, whatever its price, debt turns radioactive. As revenues plummet, interest payments loom large. Debt maturities become mortal threats. The chance of contagious defaults rises, and the system creaks.”

He goes on,“this is happening now and, as they always do, companies are reaching for more debt to stay afloat. US companies sold $32bn in junk-rated debt in April, the biggest month in three years.”  Armstrong is at a loss to know what to do.  “Containing corporate debt by regulating lenders is also unlikely to work. After the financial crisis, bank capital requirements were made stiffer. The leverage merely slithered off of bank balance sheets and re-emerged in the shadow banking system. A more promising step would be to end the tax deductibility of interest. Privileging one set of capital providers (lenders) over another (shareholders) never made sense and it encourages debt.”

Martin Wolf, the FT’s economics guru, reckons he has an answer.  You see, the problem is that there is too much saving in the world and not enough spending.  And this ‘savings glut’ means that debtors can borrow at very low interest rates in a never-ending spiral upwards.  Wolf bases his analysis on the work of mainstream economists, Atif Mian and Amir Sufi.  Mian and Sufi wrote a book a few years ago entitled House of Debt, which I reviewed at the time. It was considered by Keynesian guru, Larry Summers as “the best book this century”! 

For the authors, debt is the main problem of capitalist economies, so all we have to do is sort it. What is odd about their argument is that, while they recognise that public sector debt was not the cause of the Great Recession as neoliberal austerity economists try to claim, they put the blame for the Great Recession not on corporate debt nor on financial panic, but on rising household debt.  They claim that “both the Great Recession and Great Depression were preceded by a large run-up in household debt… And these depressions both started with a large drop in household spending.” Mian and Sufi show with a range of empirical studies that the bigger the debt rises in an economy, the harder the fall in consumer spending in the slump. But they fail to note that it is a fall in business investment that presages crises in capitalist production, not a fall in household spending.  I and others have provided much empirical evidence on this.

In their original book, Mian and Sufi do not address the reason for the inexorable rise in debt, corporate and household, from the early 1980s onwards. Now in new studies, cited by Martin Wolf, Mian and Sufi offer a reason.  The spiral of (household) debt was caused by the rich getting richer and saving more, while the bottom of the income ladder got less and so saved less.  The rich did not invest their extra riches in productive investment but hoarded it, or put it into financial speculation, or lent it back to the poor through mortgages.  So household debt spiralled because a “savings glut” of the rich.

The rich got richer and saved more, while investment in productive assets slipped away.

So the ‘savings glut’ of the rich is the cause of the low investment and productivity growth of major capitalist economies.

Mian and Sufi argue in their second paper that because poorer households borrowed more, forced by low incomes and encouraged by low interest rates made possible by the savings glut of the rich, household debt spiralled to the point that it reduced ‘aggregate demand’ and slowed down economic growth in a form of ‘secular stagnation’.  This theory of ‘indebted demand’ is when “demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap”.  This is how much debt servicing would have cost if interest rates had not dropped after the 1980s.

Wolf cites another version of the same argument that too much debt is caused by too much saving and is the cause of crises in capitalism. This comes from the post-Keynesian Minsky school.  David Levy, head of the Jerome Levy Forecasting Center argues in a paper, Bubble or Nothing, that “aggregate debt grew faster than aggregate income” so “making financial activity increasingly hazardous and compelling riskier behavior.”  Levy sees the risk not in the size of the debt so much as its increasing fragility, as Minsky argued.

Unlike Mian and Sufi however, Levy correctly points to the importance of rising corporate debt, not household debt. The nonfinancial corporate sector’s debt-to-gross-value-added ratio is near a new all-time high.

Moreover, if one excludes the largest 5% of listed corporations, the corporate leverage picture is more extreme and worrisome (chart 45). One indication of the risk associated with this increased corporate leverage is the profound rise in the proportion of companies with ratings just above junk levels in the past 10 years.”

Again Levy shows that “since the mid-1980s, the U.S. economy has been swept up in a series of increasingly balance-sheet-dominated cycles, each cycle involving to some degree reckless borrowing and asset speculation leading to financial crisis, deflationary pressures, and prolonged economic weakness.”  In other words, rather than invest in productive assets, corporations switched to mergers and financial speculation so that much of their profits increasingly came from capital gains rather than profits from production.

Profitability relative to the stock market value of companies fell sharply – or more precisely, the stock market value of companies rocketed compared with annual earnings from production.

Levy concludes that “without balance sheet expansion (ie buying financial assets), it is exceedingly difficult to achieve the profits necessary for the economy to function. Moreover, once those profits are achieved, it is also exceedingly difficult to stop households and businesses from responding by borrowing and investing, thus reaccelerating balance sheet expansion and defeating the entire purpose. Bubble or nothing.”

What do we really learn from all this?  Mian and Sufi emphasise rising inequality from the 1980s, a shift in income from the poorer to the top 1%, leading to a rise in household debt and a savings glut.  But they do not explain why there was rising inequality from the early 1980s and they ignore the rise in corporate debt which is surely more relevant to capital accumulation and the capitalist economy.  Household debt rose because of mortgage lending at cheaper rates, but in my view that was the result of the change in nature of capitalist accumulation from the 1980s, not the cause.

And actually Mian and Sufi hint at this. They note that the rise in inequality from the early 1980s “reflected shifts in technology and globalization that began in the 1980s.”  Exactly. What happened in the early 1980s?  The profitability of productive capital had reached a new low in most major capitalist economies (the evidence for this overwhelming – see World in Crisis).

The deep slump of 1980-2 decimated manufacturing sectors in the global north and weakened labour unions for a generation.  The basis was set for so-called neoliberal policies to try and raise the profitability of capital through a rise in the rate of exploitation.  And it was the basis for a switch of capital out of productive sectors in the ‘global north’ to the ‘global south’ and into the fictitious capital of the financial sector.  Ploughing profits and borrowed money into bonds and equities drove down interest rates and drove up capital gains and stock prices.  Companies launched a never-ending programme of buying back their own shares to boost stock prices and borrowing to do so.

But this did not reduce ‘aggregate demand’; on the contrary, household consumption rose to new highs.  What ended this speculative credit boom was the turning down in the profitability of capital from the end of the 1990s, leading to the mild ‘hi-tech’ bubble burst of 2001 and eventually to the financial crash and Great Recession of 2008. A ‘savings glut’ is really one side of an ‘investment dearth’.  Low profitability in productive assets became a debt-fuelled speculative bubble in fictitious assets.  Crises are not the result of an ‘indebted demand’ deficit; but are caused by a profitability deficit.

But how does capitalism get out of this debt trap? This is the debt dilemma.

Wolf and Mian and Sufi reckon that it is through the redistribution of income.  Wolf cites Marriner Eccles, head of the US Federal Reserve in the Great Depression of the 1930s.  In 1933, Eccles told Congress, “It is for the interests of the well to do . . . that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.” So you see, it is in the interests of the rich to let the government take some of their money to help the poor to boost consumption.

Mian and Sufi say: “Escaping a debt trap requires consideration of less standard macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.”  So we need to reduce the high inequality by addressing “structural sources”. In my view, that means addressing structural features like the rising concentration and centralisation of the means of production and finance, not just a rising inequality of income.

Indeed, Wolf appears to take a more radical view: “we have a huge opportunity now to replace government lending to companies in the Covid-19 crisis with equity purchases. Indeed, at current ultra-low interest rates, governments could create instantaneous sovereign wealth funds very cheap!” So the state should intervene and buy up the shares of those companies with large debts that they cannot service.  But in effect, this would mean governments buying weak companies that are already ‘zombies’, while the powerful and profitable corporations remain untouched.  This is government aiming to save capitalism, not replace it.  Here Wolf follows closely the line of the FT itself that “Free markets must be protected through the pandemic, with sensible and targeted state intervention that can help capitalism to thrive post-crisis.”

In contrast, Levy is pessimistic that there is any solution that avoids slumps: “there is neither a realistic set of federal policies to painlessly solve the Big Balance Sheet Economy dilemma nor even a blueprint of what the optimal policies should be.”  Marx would agree that the only way out of this slump is through the slump.  Former IMF chief, the (infamous) Dominic Strauss Kahn reckons that the strategists of capital must just allow the liquidation of the zombies and unemployment to rise because then “the economic crisis, by destroying capital, can provide a way out. The investment opportunities created by the collapse of part of the production apparatus, like the effect on prices of support measures, can revive the process of creative destruction described by Schumpeter.”  

To end the spiral of debt and fictitious capital will require much more than taxing the rich more or buying up weaker companies with government debt.  As Wolf says: “We will have to adopt more radical alternatives. A crisis is a superb a time to change course. Let us start right now.”  Of course, he means to save capitalism, not replace it.

The scarring

May 2, 2020

Optimism reigns in global stock markets, particularly in the US.  After falling around 30% when the lockdowns to contain COVID-19 virus pandemic were imposed, the US stock market has jumped back 30% in April.  Why? Well, for two reasons. The first is that the US Federal Reserve has intervened to inject humungous amounts of credit through buying up bonds and financial instruments of all sorts. The other central banks have also reacted similarly with credit injections, although nothing compares with the Fed’s monetary impulse.

As a result, the US stock market’s valuation against future corporate earnings has rocketed up in line with the Fed injections. If the Fed will buy any bond or financial instrument you hold, how can you go wrong?

The other reason for a stock market rally at the same time as data for the ‘real’ economy reveal a collapse in national output, investment and employment nearly everywhere (with worse to come) is the belief that the lockdowns will soon be over; treatments and vaccines are on their way to stop the virus; and so economies will leap back within three to six months and the pandemic will soon be forgotten.

For example, US Treasury Secretary Mnuchin, reiterated his view expressed at the beginning of the lockdowns that “you’re going to see the economy really bounce back in July, August and September”.  And White House economics advisor, Hassett reckoned that by the 4th quarter, the US economy “is going to be really strong and next year is going to be a tremendous year”.  Bank of America’s CEO, Moynihan reckoned that consumer spending had already bottomed out and would soon rise nicely again in the 4th quarter, followed by double digit GDP growth in 2021!

That US personal consumption had bottomed out seems difficult to justify when you look at the Q1 data. Indeed, in March, personal spending in the US dropped 7.5 percent month-over-month, the largest decline in personal spending on record.

But it’s not just the official and banking voices who reckon that the economic damage from the pandemic and lockdowns will be short if not so sweet.  Many Keynesian economists in the US are making the same point.  In previous posts, I pointed to the claim by Keynesian guru, Larry Summers, former Treasury Secretary under Clinton, that the lockdown slump was just the same as businesses in summer tourist places closing down for the winter. As soon as summer comes along, they all open up and are ready to go just as before. The pandemic is thus just a seasonal thing.

Now the Keynesian guru of them all, Paul Krugman, reckons that this slump, so far way worse on its impact on the global economy than the Great Recession, was not an economic crisis but “a disaster relief situation”.  Krugman argues that this is “a natural disaster, like a war, is a temporary event”. So the answer is that “it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.”  Once this spending worked, the economy would return just as before and the spending deficit will only be ‘temporary’. And Robert Reich, the supposedly leftist former Labour Secretary, again under Clinton, reckoned that the crisis wasn’t economic but a health crisis and as soon as the health problem was contained (presumably this summer) the economy would ‘snap back’.

You would expect the Trump advisors and Wall Street chiefs to proclaim a quick return to normal (even though economists in investment houses mainly take a different view), but you may find it surprising that leading Keynesians agree. I think the reason is that any Keynesian analysis of recessions and slumps cannot deal with this pandemic.  Keynesian theory starts with the view that slumps are the result a collapse in ‘effective demand’ that then leads to a fall in output and employment.  But as I have explained in previous posts, this slump is not the result of a collapse in ‘demand’, but from a closure of production, both in manufacturing and particularly in services.  It is a ‘supply shock’, not a ‘demand shock’.  For that matter, the ‘financialisation’ theorists of the Minsky school are also at a loss, because this slump is not the result of a credit crunch or financial crash, although that may yet come.

So the Keynesians think that as soon as people get back to work and start spending, ‘effective demand’ (even ‘pent-up’ demand) will shoot up and the capitalist economy will return to normal. But if you approach the slump from the angle of supply or production, and in particular, the profitability of resuming output and employment, which is the Marxist approach, then both the cause of the slump and the likelihood of a slow and weak recovery become clear.

Let us remind ourselves of what happened after the end of the Great Recession of 2008-9.  The stock market boomed year after year, but the ‘real’ economy of production, investment and workers’ incomes crawled along. Since 2009, US per capita GDP annual growth has averaged just 1.6%.  So at the end of 2019, per capita GDP was 13% below trend growth prior to 2008. That gap was now equal to $10,200 per person—a permanent loss of income.

And now Goldman Sachs is forecasting a drop in per capita GDP that would wipe out even those gains of the last ten years!

The world is now much more integrated than it was in 2008.  The global value chain, as it is called, is now pervasive and large.  Even if some countries are able to begin economic recovery, the disruption in world trade may seriously hamper the speed and strength of that pick-up.  Take China, where the economic recovery from its lockdown is under way. Economic activity is still well below 2019 levels and the pace of recovery seems slow – mainly because Chinese manufacturers and exporters have nobody to sell to.

This is not a phenomenon of the virus or a health issue. Growth in world trade has been barely equal to growth in global GDP since 2009 (blue line), way below its rate prior to 2009 (dotted blue line).  Now the World Trade Organisation sees no return to even that lower trajectory (yellow dotted line) for at least two years.

The massive public sector spending (over $3trn) by the US Congress and the huge Fed monetary stimulus ($4trn) won’t stop this deep slump or even get the US economy back to its previous (low) trend.  Indeed, Oxford Economics reckons that there is every possibility of a second wave in the pandemic that could force new lockdown measures and keep the US economy in a slump and in stagnation through 2023!

But why are capitalist economies (at least in the 21st century) not jumping back to previous trends?  Well, I have argued on this blog in many posts that there were two key reasons. The first was that the profitability of capital in the major economies has not returned to levels reached in the late 1990s, let alone in the ‘golden age’ of economic growth and mild recessions of the 1950s and 1960s.

And the second reason is that in order to cope with this decline in profitability, companies increased their debt levels, fuelled by low interest rates, either to sustain production and/or to switch funds into financial assets and speculation.

But linked to these underlying factors is another: what has been called the scarring of the economy, or hysteresis.  Hysteresis in the field of economics refers to an event in the economy that persists into the future, even after the factors that led to that event have been removed. Hysteresis is the argument that short-term effects can manifest themselves into long term problems which inhibit growth and make it difficult to ‘return to normal’.

Keynesians traditionally reckon that fiscal stimulus will turn slump economies around.  However, even they have recognized that short-run economic conditions can have lasting impacts. Frozen credit markets and depressed consumer spending can stop the creation of otherwise vibrant small businesses. Larger companies may delay or reduce spending on R&D.

As Jack Rasmus put it well in a recent post on his blog: “It takes a long time for both business and consumers to restore their ‘confidence’ levels in the economy and change ultra-cautious investing and purchasing behavior to more optimistic spending-investing patterns. Unemployment levels hang high and over the economy for some time. Many small businesses never re-open and when they do with fewer employees and often at lower wages. Larger companies hoard their cash. Banks typically are very slow to lend with their own money. Other businesses are reluctant to invest and expand, and thus rehire, given the cautious consumer spending, business hoarding, and banks’ conservative lending behavior. The Fed, the central bank, can make a mass of free money and cheap loans available, but businesses and households may be reluctant to borrow, preferring to hoard their cash—and the loans as well.” In other words, an economic recession can lead to “scarring”—that is, long-lasting damage to the economy.

A couple of years ago, the IMF published a paper that looked at ‘scarring’.  The IMF economists noted that after recessions there is not always a V-shaped recovery to previous trends. Indeed, it has been often the case that the previous growth trend is never re-established. Using updated data from 1974 to 2012, they found that irreparable damage to output is not limited to financial and political crises. All types of recessions, on average, lead to permanent output losses.

“In the traditional view of the business cycle, a recession consists of a temporary decline in output below its trend line, but a fast rebound of output back to its initial upward trend line during the recovery phase (see chart, top panel). In contrast, our evidence suggests that a recovery consists only of a return of growth to its long-term expansion rate—without a high-growth rebound back to the initial trend (see chart, bottom panel). In other words, recessions can cause permanent economic scarring.”

And that does not just apply to one economy, but also to the gap between rich and poor economies.  The IMF: “Poor countries suffer deeper and more frequent recessions and crises, each time suffering permanent output losses and losing ground (solid lines in chart below).”

The IMF paper complements the view of the difference between ‘classic’ recessions and depressions that I outlined in my book of 2016, The Long Depression.  There I show that in depressions, the recovery after a slump takes the form, not of a V-shape, but more of a square root, which sets an economy on new and lower trajectory.

I suspect that there will be plenty of scarring of the capitalist sector from this pandemic slump.  Min Ouyang, an associate professor at Beijing’s Tsinghua University, found that in past recessions the ‘scarring’ of entrepreneurs from the collapse of cash flow outweighed the beneficial effects of forcing weak companies to shut down and ‘cleansing’ the way for those who survive. “The scarring effect of this recession is probably going to be more severe than of any past recessions….If we say that pandemics are the new normal, then people will be much more hesitant to take risks,” she says.

Households and companies would want more savings and less risk to protect against possible future shutdowns, while governments would need to stockpile emergency equipment and ensure they could rapidly manufacture more within their own borders. Even if the pandemic turns out to be a one-off, many people will be reluctant to socialize once the lockdown ends, extending the pain for companies and economies that rely on tourism, travel, eating out and mass events.

And this slump will accelerate trends in capitalist accumulation that were already underway: Lisa B. Kahn, a Yale economist has found that after slumps companies try to replace workers with machines and so force workers returning to employment to accept lower incomes or find other jobs, which pay less.  Research  After all, that is one of the purposes of the ‘cleansing’ process for capital: to get labour costs down and boost profitability.  It scars labour for life.

“This experience is going to leave deep scars on the economy and on consumer/investor/business sentiment. This is going to scar a generation just as deeply as the Great Depression scarred our parents and grandparents.” John Mauldin

Comments

May 1, 2020

Guys

My patience has been exhausted.  The comments page on this blog has been used by some to post very long comments plus diatribes and attacks on other commentators, some times reaching beyond what is acceptable in tone and fairness.  I have put up with this for years as long as people were not racist or violent.  But now I have had enough.  People who submit long comments (that sometimes match the length of my own posts) are abusing the purpose of this blog and so should get their own blog and post there.  People who attack others in a personal and threatening manner will be blocked.  Expect some of you ‘regulars’ to disappear from the comments page.  You can attack me or others on your own blog.

The Greek tragedy: Act Three

April 25, 2020

On Thursday night, EU leaders again failed to agree on how to provide proper fiscal support for hard-hit member states to cope with the health costs of the coronavirus pandemic and collapse of their economies from the lockdowns.

The EU leaders have already agreed to a €540bn package of emergency measures.  This sounds a lot but is really just a bunch of loans from the European Stability Mechanism, which lends only on strict conditions on spending and repayment by member states who borrow.  Only E38bn has been offered without conditions for health system support across the whole Eurozone.  The so-called coronavirus mutual bond where the debt is shared by all is a dead duck.

At Thursday’s meeting the countries hardest hit, backed by France, demanded a massive direct fiscal boost.  But the ‘frugal four’ of Germany, Austria, Netherlands and Finland again rejected straight grants in any proposed ‘recovery fund’.  While the EU Commission President von der Leyen talked about a E1trn fund, this would be mostly just more loans.  Guy Verhofstadt, a former Belgian prime minister, said piling more loans on embattled countries risked causing a “new sovereign debt crisis”. “Grants are like water in a fire fight while loans are the fuel,” he said.

Lucas Guttenberg of the Jacques Delors Centre said there was a temptation for the EU to come up with huge headline figures for the fund, but this needed to be backed with significant transfers of cash to the worst affected countries, not just guarantees for private investment projects and loans that added to their debts.  “The question is do we want to create an instrument that gives Italy and Spain significantly more fiscal space?” he said. “That requires a lot more real money on the table.” 

But Germany’s Merkel insisted that any funding borrowed on the markets must ultimately be paid back. There were “limits” on what kind of aid could be offered, she told leaders, adding that grants “do not belong in the category of what I can agree”. So the recovery plan looks like offering just more loans plus guarantees in return for increased investment by private sector companies.  But “we are at a moment where companies are not going to invest because there is a lot of uncertainty,” said Grégory Claeys, a research fellow at Bruegel, the think-tank. What economies needed was direct public spending, he added, because the private sector will do little.

The EU Commission is going to fund its plan by doubling the EU annual budget from 1% of EU GDP to 2% along with some borrowing in capital markets.  But as I argued in a previous post, this will be far too little to turn Europe’s weaker economies around once the lockdowns are over.  What Europe needs is an outright public investment programme, budgeted at around 20% of EU GDP.  This should by-pass the banks and launch directly employed public projects in health, education, renewable energy and technology across borders in Europe.  But there is no chance of that.

While the EU Commission ponders what to do and reports back next month, Europe as a whole, and the weaker economies of the south in particular, are spiralling into a slump that will exceed the depths of the Great Recession in 2008-9.  Much has been talked about the impact on relatively large economies like Italy and Spain.  But there is less talk about the country that was crushed by the Great Recession, the euro debt crisis and the actions of the Troika (the EU, ECB and IMF) – Greece.

I have followed the Greek drama in a dozen posts on this blog since 2012 (search for ‘Greece’).  Now the tragedy of the Greece has become a drama of three acts.  The first was the global financial crash and ensuing slump that exposed the faultlines in the so-called boom of the early years of Greece’s membership of the Eurozone.  The second was the terrible period of austerity imposed by the Troika to which the left Syriza government eventually capitulated, despite the referendum vote of the Greek people to reject the Troika’s draconian measures.

Since then, the Greek capitalist economy has struggled to recover.  By 2017, the deep depression ended and there was some limited growth.  But the real GDP level is still some 25% below its 2010 level.  And real GDP growth started to slow again (as it did in many countries) just before the pandemic hit. Productive investment has been flat for seven years, while employment is down by one-third because so many educated Greeks (half a million) have emigrated to find work.  Large parts of the capitalist sector are in a zombie state – over one-third of loans made by Greek banks are not being serviced and Greek banks have the highest level of non-performing loans in Europe

Above all, Greek capital has experienced low and falling profitability.  According to the Penn World Tables, the internal rate of return fell 23% from 1997 to 2012.  From then to 2017, it recovered by just 14%.  But in 2017, profitability was still 12% below 1997.  Since 2017, according to AMECO data, profitability improved, but was still 10% below the pre-crisis level of 2007.

But now Greece’s tragedy is in its third act with the pandemic.  The global economy has entered a slump in production, trade investment and employment that will outstrip the Great Recession of 2008-9, previously the deepest slump since the 1930s.  And Greece is right in the firing line.  Around 25% of its economy is in tourism and that is being decimated.

And the government is no financial position to spend to save industry, jobs and incomes.  For years, under the imposition of the Troika first, and later the EU, Greek governments have been forced to run large primary surpluses on their budgets – in other words the government must tax people much more than any spending on public services.

The difference has been used to pay the rising burden of interest on the astronomical level of public debt.  Every year, 3.6% of GDP is paid in interest on public debt that continued to mount to 180% of GDP.

Now the slump will drive down real GDP by 10% according to the IMF and send the debt level to 200% of GDP.  This year, the gross financing needs of the government will reach 25% of GDP (that’s the budget deficit and maturing debt repayments).  Unless fiscal support comes from the rest of the EU, the Greek people will be plunged into another long round of austerity once the lockdown is over.

And there is little sign that Greece will get any more help than it did in Act Two – except to absorb yet more debt.

The failure of the EU leaders to give fiscal support produced a frustrated reaction from former Syriza finance minister and ‘rockstar’ economist Yanis Varoufakis.  Now recently elected as an MP, Varoufakis took note of the EU leaders’ reaction to plight of Italy and Greece.  He thought that “the disintegration of the eurozone has begun. Austerity will be worse than in 2011″.  As he argued back in 2015 during Greek debt crisis, the northern states ought to see “common sense” as it was in their interest to help the likes of Italy and Greece to save the euro.  But if they will not,then Varoufakis reckoned that “the euro was a failed project” and all his work to save Greece and keep it in the euro had been wasted.

Back in 2015, Varoufakis, the self-styled ‘erratic Marxist’, as Syriza’s finance minister, had tried to persuade the Euro leaders of the need for unity.  He had argued that the long depression of the last ten years was “not an environment for radical socialist policies after all”. Instead “it is the Left’s historical duty, at this particular juncture, to stabilise capitalism; to save European capitalism from itself and from the inane handlers of the Eurozone’s inevitable crisis”. He said “we are just not ready to plug the chasm that a collapsing European capitalism will open up with a functioning socialist system”. So his solution at the time was that he should “work towards a broad coalition, even with right-wingers, the purpose of which ought to be the resolution of the Eurozone crisis and the stabilisation of the European Union… Ironically, those of us who loathe the Eurozone have a moral obligation to save it!”

In 2015, the role of Tsipras and the Syriza was even worse.  I’m singling out Varoufakis because he claims allegiance to Marxism, of a sort, and opposition to the capitulation by Syriza in Act Two.  But in his memoirs covering the period of his negotiations with the EU ‘right-wingers’ called Adults in the Room, Varoufakis shows that he went all the way and back to get a deal from the Troika that would not throw Greece into permanent penury – but failed.

In a new book, Capitulation between Adults, Eric Toussaint, scathingly exposes the wrongheaded approach of the ‘erratic marxist’.  Toussaint, who at the time acted as a consultant on debt for the Greek parliament, argues that there was an alternative policy that Syriza and Varoufakis could have adopted.

In a recent interview, Varoufakis was asked “what would I have done differently with the information I had at the time? I think I should have been far less conciliatory to the troika. I should have been far tougher. I should not have sought an interim agreement. I should have given them an ultimatum: “a restructure of debt, or we are out of the euro today”.

Too late for that change of view now.  Instead Act Three of the tragedy has begun.

COVID-19 and containment

April 20, 2020

It is a risky thing to start analysing the COVID stats and coming up with some conclusions at this still early stage of the pandemic.  It is even riskier for an economist to delve into areas beyond his or her supposed expertise.  But after looking at myriads of articles, heaps of data and lots of presentations by people who ought to know what they are talking about, I cannot resist putting my dollar on the table.

The first point that I want to make is on the severity of the COVID-19 virus.  On any reasonable estimate of the mortality rate, assuming no containment measures, then we could expect up to 60% of the population on average to be infected before the virus wanes with so-called ‘herd immunity’.  The mortality rate is very difficult to be clear about, varying from the 3-4% that the World Health Organisation (WHO) reckons based on existing cases, down to some local studies that put the rate at more like 0.3-0.4% on extrapolating the number of infections from mass testing.  Even that rate would be three to four time the average annual influenza mortality rate.

Anyway, if I make an arbitrary rate of 1% of the population- an estimate that many epidiemologists seem to latch onto, then in a global population of 7.8bn, and given a 60% ‘herd immunity’ level, that would mean about 45m deaths globally.  Given that there are on average about 57m deaths a year, an uncontained virus would have raised 2020’s death rate by 80%.  For individual countries, that increase would vary between 65% to double.  Even if the (uncontained) mortality rate turns out be half that, then over 20m people would die, or some 40% more than usual.

But the Malthusian argument could then be presented.  As something like 70-80% of these deaths would be for those 70 years and over and there are negligible deaths among those under 40 years, the impact of the virus does not matter.

Indeed, some in financial circles argue that the virus is ‘getting rid’ of the old and the sick who are mostly unproductive in generating value and profit.  After the pandemic is over, the world will be ‘leaner and fitter’ and able to expand more ‘productively’.

Marx and Engels were vehement in their condemnation of Malthus’ ‘survival of the fittest’ theory; Engels calling it “this vile, infamous theory, this hideous blasphemy against nature and mankind”.  But they did not condemn it on anti-humane grounds only, but also that Malthus was wrong economically too.  Productivity growth does not depend on keeping the population down but on increasing the productive forces and on the march of science and technology.  It is not an issue of overpopulation but one of inequality and poverty bred by capitalist accumulation and appropriation of value created by the power of labour.

That is the key reason for attempting to contain COVID-19; to save lives that can be saved.  The other reason is that if the pandemic was allowed to spread unchecked, health systems would be overwhelmed, disrupting their ability to deal with existing patients and people with other illnesses; and probably causing an increase in such secondary mortality rates (and this time in younger fitter people too).  Most governments on the globe are not in a position of opting for Malthus and ignoring public pressure if the bodies of loved, old or sick, pile up.  If they did, they would not survive.

So containment of the virus was necessary.  But containment can mean many things.  It can mean from total lockdown of all economic and social movement and activity to more relaxed measures, down to simply testing everybody for the virus, isolating and quarantining those infected and shielding the old, while hospitalising those with severe conditions.  If a country had full testing facilities and staff to do ‘contact and trace’ and isolation; along with sufficient protective equipment, hospital beds including ICUs), then containment along these lines would work – without significant lockdown of the economy.

But nearly all countries were not prepared or able to provide the facilities and resources to do that.  Germany has come close and I shall show how successful that has been in a moment.  South Korea also maybe.  But in both countries, there has also been some important social and economic ‘lockdowns’.  Every other country with major infections has been forced to into a major lockdown of movement and isolation for weeks in order to contain the pandemic. China is the most exceptional example of a high level lockdown in one large province.  New Zealand applied a high level lockdown from day one and reduced deaths to the bare minimum.

Here is an estimate of the varying degrees of lockdown adopted by countries.

If you look at the average lines, you can see that on the Google mobility trend, Spain has delievered a 66% reduction in economic and social activity, while in Sweden it has been only 6%.

Has containment worked? It certainly has.  And here I am entering the risky territory of trying to measure the success of containment.  As above, I estimate that without any containment, there would have been about 45m deaths from COVID-19 in 2020.  But with containment, and partly using the forecast estimates of the Institute for Health Metric and Evaluation (IHME), I reckon that death toll will have been reduced to “just” 250-300,000.

Here are my estimates for various countries comparing the ‘no containment’ deaths with forecast accumulated deaths after containment.

Deaths (‘000s)

US UK Spa Ita Bel Fra Ger Swe Kor Jap Chi Ind Russ Bra World
No contain 1974 402 282 360 69 402 498 61 312 756 8400 7872 882 1260 43200
Contain 60 37 24 26 8 23 5 6 0.4 0.4 7 0.8 0.6 4 248

As you can see, containment will enable countries to reduce the potential uncontained mortality rate by 90-99%!  As a result, if sustained, containment will curb extra mortality above the normal annual average to less than 1%.

So containment works.  But as it has been achieved mostly by drastic lockdowns, it is only at the cost of pushing the world economy off a cliff into a deep slump in production, jobs, investment – to be followed by a very slow recovery over years if containment has to be maintained at extreme levels to curb a re-occurrence of the pandemic, and/or until an effective vaccine can be produced along with mass testing and isolation methods.

Could the lockdowns have been avoided?  Well, as I said, I think if there had been facilities and staff for mass testing, contact and trace; enough hospital resources and a vaccine, lockdowns would not have been necessary.  Even poor countries have had success with these methods – see ‘Communist’ Kerala.

Are the extreme lockdowns imposed by China and some other countries unnecessary?  The Swedish authorities have opted to what might be called ‘lockdown-lite’, with restrictions only on mass gatherings and relying voluntary social isolation.  Is this working as well as draconian lockdowns in other countries?

Well, the evidence of potential accumulated deaths as projected by IHME for various countries suggests not.

Sweden is heading for one of the highest death rates in the world, only likely to be beaten by Belgium among the larger countries.  And compared to its Scandinavian neighbours (where restrictions are nearly double that of Sweden’s – see the mobility graph above), the Swedish mortality rate will be some two or three times greater.  It seems that the Swedish authorities have failed to protect the old, as the privatised residential homes have been engulfed with infections, just as they have been elsewhere.

But Belgium has a lockdown and will have a heavier mortality rate than Sweden, while Germany will do way better than countries like Spain and Italy where there are much more strict lockdowns.  What that suggests is that containment does not just depend on the level of restrictions and lockdown, but also on the level of hospital facilities and testing.

Germany’s surplus of hospital beds is much higher than in the rest of Europe.

And it is testing much more, if at still a low rate.

Sweden and Belgium have fewer beds and are doing less testing.

The Swedish ‘lockdown lite’ means more deaths per capita.  But the argument for it is that eventually the Swedish population will achieve ‘herd immunity’ and the economy can continue in the meantime without being shut down.  The first proposition is full of uncertainty: how will the authorities know that they have achieved such immunity?  The second proposition is clearly false.  No economy is an island.  Even if the Swedish economy continues to be open for business, where are its exports going to when much of the rest of the world is locked down?

So my tentative conclusions are that:

  • COVID-19 has a much higher mortality rate than flu
  • Without containment it would have increased the annual mortality rates of most countries by over 80%
  • Containment has worked in driving down potential deaths from millions to thousands
  • Because most governments were unprepared and lacked sufficient healthcare facilities, they were forced into varying degrees of lockdowns, bringing the world economy to a standstill
  • The more severe the lockdown and the more health facilities available means generally that there will be fewer deaths
  • The ‘lockdown lite’ approach risks more deaths without offering a stronger economy as a trade-off.

The euro’s corona crisis

April 19, 2020

This coming Thursday 23 April there is a video conference meeting of the EU leaders to discuss once again what to do about the coronavirus pandemic and the ensuing lockdown of production across the area.  In particular, there is the vexed question of how to help out those EU members states like Italy and Spain that have been hit hardest by the pandemic.  (Here are the latest figures compiled by John Ross).

Last week, over three days and two nights of teleconference, the finance ministers of the Eurozone fumbled their way towards an emergency response to the Covid-19 pandemic. The PIGS (Portugal, Italy, Greece, Spain) aimed high with a demand that the Eurozone states share the burden of the crisis with a jointly issued debt instrument known as a coronabond. The FANGs (Finland, Austria, Netherlands, Germany) or ‘frugal four’ beat them back down, proposing that each member of the currency union bear its debts alone.

The Dutch finance minister Wopka Hoekstra played bad cop. He rejected a ‘mutual bond’ guaranteed by all states, arguing that it was Italy’s fault that it had such high public debt that it could not afford to pay for the pandemic itself.  He did not trust the ‘profligate’ spending ways of the likes of Italy. This echoed the Eurogroup’s callous stance against Greece during the so-called ‘euro debt crisis’ of 2012-15.

The southern states, backed by France, protested that the Dutch minister’s position stood against the whole idea of the European project, supposedly designed to bring warring European nations into one integrated and harmonious whole.  “We leave nobody behind,’ the European Commission president, Ursula von der Leyen, proclaimed in her opening speech to the EU parliament at the beginning of 2020. “We need to rediscover the power of co-operation,’ she told the World Economic Forum in Davos three months ago, ‘based on fairness and mutual respect. This is what I call “geopolitics of mutual interests”. This is what Europe stands for.’

These fine words turned to dust at the finance ministers meeting. In the end, the weak southern states capitulated to the ‘frugal four’, as they had no alternative. Mário Centeno, the Portuguese finance minister and current Mr Euro, brokered a late night compromise. ‘At the end of the day, or should I say, at the end of the third day,’ he announced, ‘what matters the most is that we rose to the challenge.’  

But the ‘compromise’ falls way short of helping Italian capitalism out of its mess.  The finance ministers agreed on a package of 500 billion euros to alleviate the crisis. An ESM credit line will be established (up to 240 billion euros), which, although only subject to minor conditionality, will be limited to covering “direct and indirect” health costs. But this credit line will probably not be used by Italy, already burdened by sky-high public sector debt (only surpassed by Greece).

There will be a EU programme to grant member states cheap loans without conditions to support short-time work, which is called SURE (Support to Mitigate Unemployment Risks in an Emergency). This will enable the EU to borrow on the markets and to pass on the funds to the member states. But this is just a short-term measure.  Furthermore, there will be loan guarantees from the European Investment Bank for companies.

And the ECB is now buying up government bonds on a large scale under the PEPP (“Pandemic Emergency Purchase Programme”). The PEPP program is thus currently ensuring that the Italian government can continue to refinance itself at very low cost during the corona crisis.

But all these are short-term measures or leave Italy burdened with yet more debt.  Greece got the same treatment in the euro crisis and now has so much debt that it will never be able to pay it off this century, while the interest on that debt eats into the available tax revenues needed to provide public services and investment.

French President Macron has wailed at the Euro finance ministers’ decision.  He warned that the EU was in danger of unravelling unless it embraces ‘financial solidarity’.  His solution was a joint virus recovery fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies.  “You cannot have a single market where some are sacrificed,” he added. “It is no longer possible . . . to have financing that is not mutualised for the spending we are undertaking in the battle against Covid-19 and that we will have for the economic recovery.”  Yes, he knows that this was “against all the dogmas, but that’s the way it is”. He meant mainstream neoclassical austerity measures.

Macron recalled France’s “colossal, fatal error” in demanding reparations from Germany after the first world war, which triggered a populist German reaction and the disaster that followed.  “It’s the mistake that we didn’t make at the end of the second world war,” he said. “The Marshall Plan, people still talk about it today . . . we call it ‘helicopter money’ and we say, ‘we must forget the past, make a new start and look to the future’.”

Here Macron echoed the criticism of John Maynard Keynes in his famous critique of the imposition of reparations  imposed by France, Britain and the US on Germany after WW1.  Keynes called for a Scheme for the Rehabilitation of European Credit where Germany would issue bonds and the former enemy nations would guarantee the German bonds severally and jointly, in certain specified proportions. This Keynesian solution is in essence what is being proposed now with EU coronabonds, to be financed and guaranteed by all member states.

But even if coronabonds were introduced would that be enough or even the right ‘solution’ to the massive slump that is now hitting Italy and all the weaker states of the EU?  As right-wing Italian ‘populist’ Matteo Salvini commented: ‘I don’t trust loans coming from the EU. I don’t want to ask for money from loan sharks in Berlin or Brussels … Italy has given and continues to give billions of euros each year to the EU and it deserves all the necessary support, but not through perverse mechanisms that would mortgage the country’s future.’

Italy has a huge public sector debt burden, not because the government has engaged in profligate spending.  On the contrary, the government has adopted permanent austerity, running annual surpluses of tax revenues over spending (excluding debt interest) for 24 out of the last 25 years!

This austerity has meant the running down of public services, the degradation of the health system so it could not cope with pandemic and has added to the terribly poor growth in productivity and investment for over two decades.  As a result, Italian government support in the pandemic will be minimal.  The immediate fiscal impulse for Germany (in the form of additional government spending on medical equipment, short-time work, subsidies for small and medium-sized enterprises, etc.) amounts to around 7% of economic output in 2020, compared with only 0.9% for Italy.

The Italian economy has been in permanent crisis, but the negative economic effects of the Corona shock have worsened it.  On its own, Italy will not be able to get the economy back on track after the Corona lockdown. According to the latest estimates by the IMF, nobody in Europe will have higher gross financing needs (maturing debt and budget deficit) than Italy.

All a coronabond would do is tide Italy’s finances over for the period of the slump, but offer no way to restore the economy, employment and investment.  After the slump, Italy’s public debt would be even higher than the 130% of GDP it is now.  The IMF expects the annual primary surplus on government finances to turn into a 5% of GDP deficit, while debt to GDP rises to 155%.  That is why the interest being demanded by those prepared to buy Italian government bonds has been rising, especially relative to Germany, where the interest is actually negative.

Italian 10yr government bond yield (%)

The reality is that Italian capitalism (like that of Greece) is just too weak to turn things around.

I shall return to the unending tragedy of Greece and its prospects in the COVID crisis in a future post.  But why is Italian capitalism so weak?  And more to the point, why has Italy’s membership of the Eurozone not produced a stronger Italian economy?  The answer lies with the nature of capitalist accumulation.  Unifying various nation states into one fiscal and monetary unit poses huge problems for capitalism.  Historically, it has only been achieved through military conquest or civil war (the federal union of the US was achieved that way by the military defeat of the southern states).

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.

When the Euro was devised, the aim was to bring about closer convergence and integration of EU states by monetary union.  But the EU leaders 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.

As I have explained in previous posts, 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 is 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/exports 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.

This explains why the core countries of EMU have diverged from the periphery since the formation of the Eurozone.  With a single currency, the value differentials between the weaker states (with 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).

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.  So German profitability has risen under the euro while France and the periphery have declined.

A recent paper confirms this explanation of why there is divergence, not convergence, within the Eurozone.

“The emergence of export-driven growth in core countries and debt-driven growth in the Eurozone periphery can be traced back to differences in technological capabilities and firm performance… the macroeconomic divergence between core and periphery countries is driven by the co-existence of two different growth trajectories (export-led vs. demand-driven models), which themselves can be traced back to a ‘structural polarisation’ in terms of technological capabilities.”

The authors conclude that “considering the central role of technological capabilities for the assessment of (future) economic developments, our results suggest that one cannot expect a natural convergence process to materialise in the Eurozone. It is also apparent that the ‘one-size-fits-all’ approach of fiscal consolidation in the crisis-ridden periphery countries from 2010 onwards was bound to fail spectacularly…  Fiscal austerity is adverse to the restoration of strong productive sectors in the Eurozone. Since structural polarisation fuels macroeconomic divergence, the Eurozone must indeed be expected to disintegrate eventually, if the ‘lock-in’ of industrial specialisation between core and periphery countries is not broken up by targeted policy interventions.”

The Italian economy has an ailing banking sector, which is far too large, holds many bad loans and has cost taxpayers many billions in recent years as a result of repeated state bailouts.  There is weak productivity growth and worsening polarisation between northern and southern Italy.  Far from the Eurozone providing new opportunities for Italian capital to expand, it has kept the Italian economy into a quasi-permanent smouldering crisis.  While the German economy grew by an average of 2.0% in real terms and the euro area by 1.4% per year over 2010-2019, real GDP growth in Italy was only 0.2% in the same period.

While per capita GDP (in purchasing power parities) in Italy in 1999 was still around €1000 above the Euro area average, 20 years later – just before the corona crisis began – it had fallen almost €4000 below the Euro area average. Germany, on the other hand, where per capita incomes were already slightly higher than in Italy when it joined the euro, continued to chip away over the same period, resulting in an increasing GDP per capita gap. Italy had already lost two decades in its economic development before the corona crisis.

Indeed, mutual coronabonds, so beloved of the Keynesians and post-Keynesians, is a pathetic response to this crisis.  What is needed is a massive increase in the EU budget from the current ridiculously low figure of 1% of EU GDP to 20%, along with harmonised tax measures to end the ‘race to the bottom’ in taxing corporations, which Ireland leads.  Such a budget could begin to plan investment, employment and public services on a huge scale to benefit all in the EU.  It would be needed to finance a Marshall plan for Europe which Macron talks of, but where the useless major banks of the EU are taken over, along with the public ownership of the major sectors of productive industry.  Then the basis for a real United States of Europe could be laid, where the periphery grows with the help of the core.

Without that, the coronavirus pandemic has the potential to cause an irrevocable break-up of the existing monetary union.  The core countries of the Eurozone are not prepared to achieve a full fiscal union and the redistribution of resources to raise productivity and employment in the periphery. Anyway, full and harmonious development leading to convergence is not possible under the capitalist mode of production. On the contrary, the experience of EMU has been divergence.

The people of southern Europe may have to endure yet more years of austerity in paying back debt to the north.  Even so, 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. The governments of northern Europe may eventually decide to ditch the likes of Italy, Spain, Greece etc and form a strong ‘NorEuro’ around Germany, Austria, Benelux and Poland.   No wonder Macron is seriously worried.

The post-pandemic slump

April 13, 2020

The coronavirus pandemic marks the end of longest US economic expansion on record, and it will feature sharpest economic contraction since WWII.

The global economy was facing the worst collapse since the second world war as coronavirus began to strike in March, well before the height of the crisis, according to the latest Brookings-FT tracking index.

2020 will be the first year of falling global GDP since WWII. And it was only the final years of WWII/aftermath when output fell.

JPMorgan economists reckon that the pandemic could cost world at least $5.5 trillion in lost output over the next two years, greater than the annual output of Japan. And that would be lost forever.  That’s almost 8% of GDP through the end of next year. The cost to developed economies alone will be similar to that in the recessions of 2008-2009 and 1974-1975.  Even with unprecedented levels of monetary and fiscal stimulus, GDP is unlikely to return to its pre-crisis trend until at least 2022.

The Bank for International Settlements has warned that disjointed national efforts could lead to a second wave of cases, a worst-case scenario that would leave US GDP close to 12% below its pre-virus level by the end of 2020.  That’s way worse than in the Great Recession of 2008-9.

The US economy will lose 20m jobs according to estimates from @OxfordEconomics, sending unemployment rate soaring by greatest degree since Great Depression and severely affecting 40% of jobs.

And then there is the situation for the so-called ‘emerging economies’ of the ‘Global South’.  Many of these are exporters of basic commodities (like energy, industrial metals and agro foods) which, since the end of the Great Recession have seen prices plummet.

And now the pandemic is going to intensify that contraction.  Economic output in emerging markets is forecast to fall 1.5% this year, the first decline since reliable records began in 1951.

The World Bank reckons the pandemic will push sub-Saharan Africa into recession in 2020 for the first time in 25 years. In its Africa Pulse report the bank said the region’s economy will contract 2.1%-5.1% from growth of 2.4% last year, and that the new coronavirus will cost sub-Saharan Africa $37 billion to $79 billion in output losses this year due to trade and value chain disruption, among other factors. “We’re looking at a commodity-price collapse and a collapse in global trade unlike anything we’ve seen since the 1930s,” said Ken Rogoff, the former chief economist of the IMF.

More than 90 ‘emerging’ countries have inquired about bailouts from the IMF—nearly half the world’s nations—while at least 60 have sought to avail themselves of World Bank programs. The two institutions together have resources of up to $1.2 trillion that they have said they would make available to battle the economic fallout from the pandemic, but that figure is tiny compared with the losses in income, GDP and capital outflows.

Since January, about $96 billion has flowed out of emerging markets, according to data from the Institute of International Finance, a banking group.  That’s more than triple the $26 billion outflow during the global financial crisis of a decade ago.  “An avalanche of government-debt crises is sure to follow”, he said, and “the system just can’t handle this many defaults and restructurings at the same time” said Rogoff.

Nevertheless, optimism reigns in many quarters that once the lockdowns are over, the world economy will bounce back on a surge of released ‘pent-up ‘ demand.  People will be back at work, households will spend like never before and companies will take on their old staff and start investing for a brighter post-pandemic future.

As the governor of the Bank of (tiny) Iceland put it:  “The money that now being saved because people are staying at home won’t disappear – it will drip back into the economy as soon as the pandemic is over.  Prosperity will be back.”  This view was echoed by the helmsman of the largest economy in the world.  US Treasury Secretary Mnuchin spoke bravely that : “This is a short-term issue. It may be a couple of months, but we’re going to get through this, and the economy will be stronger than ever,”

Former Treasury Secretary and Keynesian guru, Larry Summers, was in tentative concurrence: “the recovery can be faster than many people expect because it has the character of the recovery from the total depression that hits a Cape Cod economy every winter or the recovery in American GDP that takes place every Monday morning.”  In effect, he was saying that the US and world economy was like Cape Cod out of season; just ready to open in the summer without any significant damage to businesses during the winter.

That’s some optimism.  For when these optimists talk about a quick V-shaped recovery, they are not recognising that the COVID-19 pandemic is not generating a ‘normal’ recession and it is hitting not a just a single region but the entire global economy.  Many companies, particularly smaller ones, will not return after the pandemic.  Before the lockdowns, there were anything between 10-20% of firms in the US and Europe that were barely making enough profit to cover running costs and debt servicing. These so-called ‘zombie’ firms may have found the Cape Cod winter the last nail in their coffins.  Already several middling retail and leisure chains have filed for bankruptcy and airlines and travel agencies may follow.  Large numbers of shale oil companies are also under water (not oil).

As leading financial analysts Mohamed El-Erian concluded: “Debt is already proving to be a dividing line for firms racing to adjust to the crisis, and a crucial factor in a competition of survival of the fittest. Companies that came into the crisis highly indebted will have a harder time continuing. If you emerge from this, you will emerge to a landscape where a lot of your competitors have disappeared.”

So it’s going to take a lot longer to return to previous output levels after the lockdowns.  Nomura economists reckon that Eurozone GDP is unlikely to exceed Q42019 level until 2023!

And remember, as I explained in detail in my book The Long Depression, after the Great Recession there was no return to previous trend growth whatsoever. When growth resumed, it was at slower rate than before.

Since 2009, US per capita GDP annual growth has averaged 1.6%.  At the end of 2019, per capita GDP was 13% below trend growth prior to 2008. At the end of the 2008–2009 recession it was 9% below trend. So, despite a decade-long expansion, the US economy fell further below trend since the Great Recession ended. The gap is now equal to $10,200 per person—a permanent loss of income.  And now Goldman Sachs is forecasting a drop in per capita GDP that would wipe out all the gains of the last ten years!

Then there is world trade.  Growth in world trade has been barely equal to growth in global GDP since 2009 (blue line), way below its rate prior to 2009 (dotted line).  Now even that lower trajectory (dotted yellow line).  The World Trade Organisation sees no return to even this lower trajectory for at least two years.

But what about the humungous injections of credit and loans being made by the central banks around the world and the huge fiscal stimulus packages from governments globally.  Won’t that turn things round quicker?  Well, there is no doubt that central banks and even the international agencies like the IMF and the World Bank have jumped in to inject credit through the purchases of government bonds, corporate bonds, student loans, and even ETFs on a scale never seen before, even during the global financial crisis of 2008-9.  The Federal Reserve’s treasury purchases are already racing ahead of previous quantitative easing programmes.

And the fiscal spending approved by the US Congress last month dwarfs the spending programme during the Great Recession.

I have made an estimate of the size of credit injections and fiscal packages globally announced to preserve economies and businesses.  I reckon it has reached over 4% of GDP in fiscal stimulus and another 5% in credit injections and government guarantees. That’s twice the amount in the Great Recession, with some key countries ploughing in even more to compensate workers put out of work and small businesses closed down.

These packages go even further in another way. Straight cash handouts by the government to households and firms are in effect what the infamous free market monetarist economist Milton Friedman called ‘helicopter money’, dollars to be dropped from the sky to save people.  Forget the banks; get the money directly into the hands of those who need it and will spend.

Post-Keynesian economists who have pushed for helicopter money, or people’s money, are thus vindicated.

In addition, suddenly the idea, which up to now was rejected and dismissed by mainstream economic policy, has become highly acceptable, namely fiscal spending financed, not by the issue of more debt (government bonds), but by simply ‘printing money’, ie the Fed or the Bank of England deposits money in the government account to spend.

Keynesian commentator Martin Wolf, having sniffed at MMT before, now says:abandon outworn shibboleths. Already governments have given up old fiscal rules, and rightly so. Central banks must also do whatever it takes. This means monetary financing of governments. Central banks pretend that what they are doing is reversible and so is not monetary financing. If that helps them act, that is fine, even if it is probably untrue. …There is no alternative. Nobody should care. There are ways to manage the consequences. Even “helicopter money” might well be fully justifiable in such a deep crisis.”

The policies of Modern Monetary Theory (MMT) have arrived! Sure, this pure monetary financing is supposed to be temporary and limited but the MMT boys and girls are cock a hoóp that it could become permanént, as they advocate.  Namely governments should spend and thus create money and take the economy towards full employment and keep it there.  Capitalism will be saved by the state and by modern monetary theory.

I have discussed in detail in several posts the theoretical flaws in MMT from a Marxist view.  The problem with this theory and policy is that it ignores the crucial factor: the social structure of capitalism.  Under capitalism, production and investment is for profit, not for meeting the needs of people.  And profit depends on the ability to exploit the working class sufficiently compared to the costs of investment in technology and productive assets.  It does not depend on whether the government has provided enough ‘effective demand’.

The assumption of the radical post-Keynesian/MMT boys and girls is that if governments spend and spend, it will lead to households spending more and capitalist investing more.  Thus, full employment can be restored without any change in the social structure of an economy (ie capitalism).  Under MMT, the banks would remain in place; the big companies, the FAANGs would remain untouched; the stock market would roll on.  Capitalism would be fixed with the help of the state, financed by the magic money tree (MMT).

Michael Pettis is a well-known ’balance sheet’ macro economist based in Beijing.  In a compelling article, entitled MMT heaven and MMT hell, he takes to task the optimistic assumption that printing money for increased government spending can do the trick.  He says: “the bottom line is this: if the government can spend these additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true.

He adds: “creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment…  If U.S. companies are reluctant to invest not because the cost of capital is high but rather because expected profitability is low, they are unlikely to respond to the trade-off between cheaper capital and lower demand by investing more.” You can lead a horse to water, but you cannot make it drink.

I suspect that much of the monetary and fiscal largesse will end up either not being spent but hoarded, or invested not in employees and production, but in unproductive financial assets – no wonder the stock markets of the world have bounced back as the Fed and the other central banks pump in the cash and free loans.

Indeed, even leftist economist Dean Baker doubts the MMT heaven and the efficacy of such huge fiscal spending.  “It is actually possible that we could be seeing too much demand, as a burst of post-shutdown spending outstrips the immediate capacity of the restaurants, airlines, hotels, and other businesses. In that case, we may actually see a burst of inflation, as these businesses jack up prices in response to excessive demand.”  – ie MMT hell.  So he concludes that “generic spending is not advisable at this point.”

Well, the proof of the pudding is in its eating and we shall see.  But the historical evidence that I and others have compiled over the last decade or more, shows that the so-called Keynesian multiplier has limited effect in restoring growth, mainly because it is not the consumer who matters in reviving the economy, but capitalist companies.

And there’s new evidence on the power of Keynesian multiplier. It’s not been one to one or more, as often claimed, ie. 1% of GDP increase in government spending does not lead to a 1% of GDP increase in national output.  Some economists looked at the multiplier in Europe over the last ten years. They concluded that “in contrast to previous claims that the fiscal multiplier rose well above one at the height of the crisis, however, we argue that the ‘true’ ex-post multiplier remained below one.”

And there is little reason that it will be higher this time round.  In another paper, some other mainstream economists suggest that a V-shaped recovery is unlikely because “demand is endogenous and affected by the supply shock and other features of the economy. This suggests that traditional fiscal stimulus is less effective in a recession caused by our supply shock. … demand may indeed overreact to the supply shock and lead to a demand-deficient recession because of “low substitutability across sectors and incomplete markets, with liquidity constrained consumers.” so that “various forms of fiscal policy, per dollar spent, may be less effective”.

But what else can we do?  So “despite this, the optimal policy to face a pandemic in our model combines as loosening of monetary policy as well as abundant social insurance.”  And that’s the issue.  If the social structure of capitalist economies is to remain untouched, then all you are left with is printing money and government spending.

Perhaps the very depth and reach of this pandemic slump will create conditions where capital values are so devalued by bankruptcies, closures and layoffs that the weak capitalist companies will be liquidated and more successful technologically advanced companies will take over in an environments of higher profitability.  This would be the classic cycle of boom, slump and boom that Marxist theory suggests.

Former IMF chief and French presidential aspirant, the infamous Dominique Strauss-Kahn, hints at this: “the economic crisis, by destroying capital, can provide a way out. The investment opportunities created by the collapse of part of the production apparatus, like the effect on prices of support measures, can revive the process of creative destruction described by Schumpeter.”

Despite the size of this pandemic slump, I am not sure that sufficient destruction of capital will take place, especially given that much of the bailout funding is going to keep companies, not households, going.  For that reason, I expect that the ending of the lockdowns will not see a V-shaped recovery or even a return to the ‘normal’ (of the last ten years).

In my book, The Long Depression, I drew a schematic diagram to show the difference between recessions and depressions. A V-shaped or a W-shaped recovery is the norm, but there are periods in capitalist history when depression rules. In the depression of 1873-97 (that’s over two decades), there were several slumps in different countries followed weak recoveries that took the form of a square root sign where the previous trend in growth is not restored.

The last ten years have been similar to the late 19th century.  And now it seems that any recovery from the pandemic slump will be drawn out and also deliver an expansion that is below the previous trend for years to come.  It will be another leg in the long depression we have experienced for the last ten years.

Lives or livelihoods?

April 6, 2020

There are now two billion people across the world living under some form of lockdown as a result of the coronavirus pandemic. That’s a quarter of the world’s population. The world economy has seen nothing like this. Nearly all economic forecasts for global GDP in 2020 are for a contraction of 3-5%, as bad if not worse than in the Great Recession of 2008-9.

According to the OECD, output in most economies will fall by an average of 25% (OECD) while the lockdowns last and the lockdowns will directly affect sectors amounting to up to one third of GDP in the major economies. For each month of containment, there will be a loss of 2 percentage points in annual GDP growth.

This is a monstrous way of proving Marx’s labour theory of value, namely that “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.”  (Marx to Kugelmann, London, July 11, 1868).

The lockdowns in several major economies are having a drastic effect on production, investment and, above all, employment. The latest jobs figures for March out of the US were truly staggering, with a monthly loss of 700,000 and a jump in unemployment to 4.4%.

In just two weeks, nearly 10m Americans have filed for unemployment benefit.

All these figures surpass anything seen in the Great Recession of 2008-9 and even in the Great Depression of the 1930s.

Of course, the hope is that this disaster will be short-lived because the lockdowns will be removed within a month or so in Italy, Spain, the UK, the US and Germany.  After all, the Wuhan lockdown is ending this week after 50 days and China is gradually returning to work – if only gradually.  In other countries (Spain and Italy), there are signs that the pandemic has peaked and the lockdowns are working. In others (UK and US), the peak is still to come.

So once the lockdowns are over, then economies can quickly get back to business as usual. That’s the claim of US treasury secretary Mnuchin: “This is a short-term issue. It may be a couple of months, but we’re going to get through this, and the economy will be stronger than everKeynesian guru Larry Summers echoed this view: “I have the optimistic guess—but it’s only an optimistic guess—that the recovery can be faster than many people expect because it has the character of the recovery from the total depression that hits a Cape Cod economy every winter or the recovery in American GDP that takes place every Monday morning.”

During the lockdowns, various governments have announced cash handouts and boosted unemployment benefits for those laid off or ‘furloughed’ until business is restored.  And small businesses are supposedly getting relief in rates and cheap loans to tide them over.  That should save people’s livelihoods during the lockdowns.

One problem with this view is that, such have been the cuts in public services over the last decade or so, there is just not enough staff to process claims and shift the cash.  In the US, it is reckoned that many will not get any checks until June, by which time the lockdowns might be over!  Moreover, it is clear that many people and small businesses are not qualifying for the handouts for various reasons and will fall through this safety net.

For example, 58% of American workers say they won’t be able to pay rent, buy groceries or take care of bills if quarantined for 30 days or less, according to a new survey from the Society for Human Research Management (SHRM).  One in five workers said they’d be unable to meet those basic financial needs in less than one week under quarantine. Half of small businesses in the U.S. can’t afford to pay employees for a full month under quarantine conditions. More than half of small businesses expect to see a loss in revenue somewhere between 10-30%.

Indeed, many people are being forced to work, putting their health at risk because they cannot work at home like better paid, office-based workers.

Many small businesses in travel, retail and services will never come back after the lockdowns end. Even large companies in retail, travel and energy could well go bust, causing a cascade effect through sectors of economies. For example, the US Federal Reserve requires banks to run stress tests that assume certain bad scenarios to make sure the banks can weather a market downturn. The worst-case scenario had GDP falling by 9.9% in Q2 2020 with unemployment jumping to 10% by Q3 2021. Based upon recent estimates from Goldman Sachs, GDP will likely fall over 30% and unemployment could end up at a similar level… within weeks.

Also there are huge amounts of corporate debt issued by fairly risky companies which were not making much revenue and profit anyway before the pandemic.  And as I have said in previous posts, even before the virus hit the world economy, many countries were heading into recession.  Mexico, South Africa and Argentina among the G20 nations and Japan in the G7 were already in recession.  The Eurozone and the UK were close and even the best performer, the US, was slowing fast.  Now all that corporate debt that built up in the years since the end of the Great Recession could come tumbling down in defaults.

That is especially the case in the impoverished ‘Global South’ economies, which have experience an unprecedented $90bn outflow of capital as foreign investors leave the sinking ship.  And there is little or no safety net being offered by the likes of the IMF or the World Bank. Things are only going to get worse in the coming quarter and recovery may not be anywhere near the optimists’ view in H2 2020.

Clearly these lockdowns cannot go on forever, otherwise billions of people are going to be destitute and governments will be spending more and more, funded by more and more debt and/or the printing of money to make cash handouts and buy yet more debt.  You cannot go on doing that if there is no production or investment.  Jobs will disappear forever and inflation will eventually rocket.  We shall enter a world of permanent depression alongside hyper-inflation.

It seems that several European countries, encouraged by the peaking of cases are preparing to end their lockdowns by the end of this month.  But even if they do, a return to ‘normal’ will take months as it will depend on mass testing to gauge whether the virus will come back as it surely will and whether it could then be contained while gradually restoring production.  So any global recovery is not going to quick at all.  A German Ifo study predicted the German economy could shrink by up to 20% this year if the shutdown lasted three months and was followed by only a gradual recovery.

And the latest US forecasts from Goldman Sachs show the trough of the US recession being reached in the second quarter of 2020, with GDP likely to be 11-12 per cent below the pre-virus reading. This would involve a dramatic decline at an annualised rate of 34 per cent in that quarter.  GDP is then projected to rise very gradually, not reaching its pre-virus path before the end of 2021. This pattern, implying almost two “wasted” years in the US, has been common in recent economic forecasts. A similar picture is expected in the eurozone, which is experiencing a collapse in manufacturing output more precipitous than in the 2012 euro crisis.

But the gradual plan is the only óptimal’ option, says one bunch of economists: “importantly, the level of the lockdown, its duration, and the underlying economic and health costs depend critically on the measures that improve the capacity of the health system to cope with the epidemic (testing, isolating the vulnerable, etc.) and the capacity of the economic system to navigate through a period of suspended economic activities without compromising its structure.”

Could the lockdowns have been avoided?  The evidence is increasingly clear that they could have been.  When COVID-19 appeared on the scene, governments and health systems should have been ready.  It is not as if they had not been warned by epidemiologists for years.  As I have said before, COVID-19 was not an ‘unknown unknown’.  In early 2018, during a meeting at the World Health Organization in Geneva, a group of experts (the R&D Blueprint) coined the term “Disease X”: They predicted that the next pandemic would be caused by an unknown, novel pathogen that hadn’t yet entered the human population. Disease X would likely result from a virus originating in animals and would emerge somewhere on the planet where economic development drives people and wildlife together.

More recently, last September the UN published a report warning that there is a “very real threat” of a pandemic sweeping the planet, killing up to 80 million people. A deadly pathogen, spread airborne around the world, the report said, could wipe out almost 5 percent of the global economy.  “Preparedness is hampered by the lack of continued political will at all levels,” read the report. “Although national leaders respond to health crises when fear and panic grow strong enough, most countries do not devote the consistent energy and resources needed to keep outbreaks from escalating into disasters.”  The report outlined a history of deliberate ignoring of warnings by scientists over the last 30 years.

Governments ignored the warnings because they took the calculated view that the risk was not great and therefore spending on pandemics prevention and containment was not worth it.  Indeed, they cut back spending in pandemic research and containment.  It reminds me the decision of Heathrow airport in the UK to buy only two snow ploughs because it hardly ever snowed or froze in London, so the expense was not justifiable.  The airport was badly caught out one winter day and everything stopped.

How could the lockdowns have been avoided? If government had been able to test everybody for the virus, to provide protective equipment and huge armies of health workers to test and contract trace and then quarantine and isolate those infected.  The old and sick should have been shielded at home and supported by social care.  Then it would have been possible for everybody else to go to work, just as essential workers must do so now.  Small countries like Iceland (and Taiwan, South Korea) with high quality health systems have been able to do this.  Most countries with privatised or decimated health systems have not.  So lockdowns have been the only option if lives are to be saved.

The policy of the lockdowns is only partly to save lives; it is also to try and avoid health systems in countries being overwhelmed with cases, leaving medics with the Hobson choice of choosing who will die or will get help. The aim is to ‘flatten the curve’ in the rise in virus cases and deaths so that health system can cope.  The problem is that flattening the curve in the pandemic by lockdowns increases downward curve in jobs and incomes for hundreds of millions.

And yet if the pandemic were allowed to run riot, historical studies show that it also would eventually destroy an economy.  A recent Federal Reserve paper, looking at the impact of the Spanish flu epidemic in the US, found that the then uncontrolled pandemic reduced manufacturing output by 18%. So lockdowns may be less damaging in the end.  It seems you cannot win either way.

Lives or livelihoods?  Some right-wing ‘neoliberal’ experts reckon that the capitalist economy is more important than lives.  After all, the people dying are mostly the old and the sick.  They do not contribute much value to capitalist production; indeed they are a burden on productivity and taxes.  In true Malthusian spirit, in the executive suites of the financial institutions, the view is prevalent that governments should let the virus rip and once all the young and healthy get immune, the problem would be solved.

This view also connects with some health expert studies that point out that every day, hospital doctors must make decisions on what is the most ‘cost effective’ from the point of view of health outcomes.  Should they save a very old person with COVID-19 if it means that some younger person’s cancer treatment is delayed because beds and staff have been transferred to the pandemic?

Here is that view: “if funds are not limitless – then we should focus on doing things whereby we can do the most good (save the most lives) for the least possible amount of money. Or use the money we have, to save the most lives.” Health economics measures the cost per QALY.  A QALY is a Quality Adjusted Life Year. One added year of the highest quality life would be one QALY.  “How much are we willing to pay for one QALY? The current answer, in the UK, is that the NHS will recommend funding medical interventions if they cost less than £30,000/QALY. Anything more than this is considered too expensive and yet the UK’s virus package is £350bn, almost three times the current yearly budget for the entire NHS. Is this a price worth paying?”  This expert reckoned that “the cost of saving a COVID victim was more than eleven times the maximum cost that the NHS will approve.” At the same time cancer patients are not being treated, hip replacements are being postponed, heart and diabetes sufferers are not being dealt with.

Tim Harford in the FT took a different view.  He points out that the US Environmental Protection Agency values a statistical life at $10m in today’s money, or $10 per micromort (one in a million risk of death) averted.  “If we presume that 1 per cent of infections are fatal, then it is a 10,000 micromort condition. On that measure, being infected is 100 times more dangerous than giving birth, or as perilous as travelling two and a half times around the world on a motorbike. For an elderly or vulnerable person, it is much more risky than that. At the EPA’s $10 per micromort, it would be worth spending $100,000 to prevent a single infection with Covid-19.  You don’t need a complex epidemiological model to predict that if we take no serious steps to halt the spread of the virus, more than half the world is likely to contract it. That suggests 2m US deaths and 500,000 in Britain — assuming, again, a 1 per cent fatality rate.  If an economic lockdown in the US saves most of these lives, and costs less than $20tn, then it would seem to be value for money.”  The key point for me here is that this dilemma of ‘costing’ a life would be reduced if there had been proper funding of health systems, sufficient to provide ‘spare capacity’ in case of crises.

There is the argument that the lockdowns and all this health spending are based on an unnecessary panic that will make the cure worse than the disease.  You see, the argument goes, COVID-19 is no worse than bad flu in its mortality rate and will have way less impact than lots of other diseases like malaria, HIV or cancer, which will kill more each year.  So stop the crazy lockdowns, just protect the old, wash your hands and we shall soon see that COVID is no Armageddon.

The problem with this argument is that evidence is against the view that COVID is no worse than annual flu.  It’s true that, so far, deaths have only reached 70,000 by April, some 40,000 less than flu this year and only quarter of the deaths from malaria.  But the virus ain’t over yet.  So far, all the evidence suggests that the mortality rate is at least 1%, ten times more deadly than annual flu; and is way more infectious. So if COVID-19 were not contained it would eventually affect up to 70% of the population before ‘herd immunity’ would be sufficient to allow the virus to wane.  That’s 50 million deaths at least!  Annual mortality rates would be doubled in most countries (see graph).

Moreover, this is a virus that is novel and different from flu viruses and there is no vaccine yet.  It is very likely to come back and mutate and so require yet more containment.

Some governments are risking people’s lives by trying to avoid total or even partial lockdowns to preserve jobs and the economy.  Some governments have put in place sufficient testing and contact tracing along with self-isolation, to claim that they can keep their economies going during the crisis .Unfortunately for them, even if that works, the lockdowns elsewhere have so destroyed trade and investment globally, even these countries cannot avoid a slump with global supply chains paralysed.

There is another argument against the lockdowns and saving lives.  A study by some Bristol University ‘safety experts’ reckoned that a “business as usual” policy would lead to the epidemic being over by September 2020, although such an approach would lead to a loss of life in the UK nearly as much as it suffered in the Second World War. But conversely, lockdowns could decrease GDP per head so much that the national population loses more lives as a result of the countermeasures than it saves.

But the Bristol study is just a risk assessment.  Proper health studies show that recessions do not increase mortality at all. A recession – a short-term, temporary fall in GDP – need not, and indeed normally does not, reduce life expectancy. Indeed, counterintuitively, the weight of the evidence is that recessions actually lead to people living longer. Suicides do indeed go up, but other causes of death, such as road accidents and alcohol-related disease, fall.

Marxist health economist Dr Jose Tapia (also an author of one of the chapters in our book World in Crisis) has done several studies on the impact of recessions on health.  He found that mortality rates in industrial countries tend to rise in economic expansions and fall in economic recessions. Deaths attributed to heart disease, pneumonia, accidents, liver disease, and senility—making up about 41% of total mortality—tend to fluctuate procyclically, increasing in expansions. Suicides, as well as deaths attributable to diabetes and hypertensive disease, make up about 4% of total mortality and fluctuate countercyclically, increasing in recessions. Deaths attributed to other causes, making up about half of total deaths, don’t show a clearly defined relationship with the fluctuations of the economy.  “All these effects of economic expansions or recessions on mortality that can be seen, e.g., during the Great Depression or the Great Recession, are tiny if compared with the mortality effects of a pandemic,” said Tapia in an interview.

In sum, the lockdowns could have been avoided if governments had taken notice of the rising risk of new pathogen pandemics.  But they ignored those warnings to ‘save money’. The lockdowns could have been avoided if health systems had been properly funded, equipped and staffed, instead of being run down and privatised over decades to reduce costs and raise profitability for capital.  But they weren’t.

And there is the even bigger picture.  If you have enough firemen and equipment, you can put out a bush fire after much damage, but if climate change is continually raising temperatures, another round of fires will inevitably come along.   These deadly new pathogens are coming into human bodies because the insatiable drive for profit in agriculture and industry has led to the commodification of nature, destroying species and bringing nature’s dangers closer to humanity.  Even if after this pandemic is finally contained (at least this year) and even if governments spend more on prevention and containment in the future, only ending the capitalist drive for profit will bring nature back into harmony with humanity.

For now, we are left with saving lives or livelihoods and governments won’t manage either.

Engels on nature and humanity

April 2, 2020

In the light of the current pandemic, here is a rough excerpt from my upcoming short book on Engels’ contribution to Marxian political economy on the 200th anniversary of his birth.

Marx and Engels are often accused of what has been called a Promethean vision of human social organisation, namely that human beings, using their superior brains, knowledge and technical prowess, can and should impose their will on the rest of the planet or what is called ‘nature’ – for better or worse.

The charge is that other living species are merely playthings for the use of human beings.  There are humans and there is nature – in contradiction.  This charge is particularly aimed at Friedrich Engels, who it is claimed, took a bourgeois ‘positivist’ view of science: scientific knowledge was always progressive and neutral in ideology; and so was the relationship between man and nature.

This charge against Marx and Engels was promoted in the post-war period by the so-called Frankfurt School of Marxism, which reckoned that everything went wrong with Marxism after 1844, when Marx and Engels supposedly dumped “humanism”.  Later, followers of the French Marxist Althusser put the blame on Fred himself.  For them, everything went to hell in a hand basket a little later, when Engels dumped ‘historical materialism’ and replaced it with ‘dialectical materialism’, in order to promote Engels’ ‘silly belief’ that Marxism and the physical sciences had some relationship.

Indeed, the ‘green’ critique of Marx and Engels is that they were unaware that homo sapiens were destroying the planet and thus themselves.  Instead, Marx and Engels had a touching Promethean faith in capitalism’s ability to develop the productive forces and technology to overcome any risks to the planet and nature.

That Marx and Engels paid no attention to the impact on nature of human social activity has been debunked recently in particular by the ground-breaking work of Marxist authors like John Bellamy Foster and Paul Burkett.  They have reminded us that throughout Marx’s Capital, Marx was very aware of capitalism’s degrading impact on nature and the resources of the planet.  Marx wrote that “the capitalist mode of production collects the population together in great centres and causes the urban population to achieve an ever-growing preponderance…. [It] disturbs the metabolic interaction between man and the earth, i.e., it prevents the return to the soil of its constituent elements consumed by man in the form of food and clothing; hence it hinders the operation of the eternal natural condition for the lasting fertility of the soil. Thus it destroys at the same time the physical health of the urban worker, and the intellectual life of the rural worker.” As Paul Burkett says: “it is difficult to argue that there is something fundamentally anti-ecological about Marx’s analysis of capitalism and his projections of communism.”

To back this up, Kohei Saito’s prize-winning book has drawn on Marx’s previously unpublished ‘excerpt’ notebooks from the ongoing MEGA research project to reveal Marx’s extensive study of scientific works of the time on agriculture, soil, forestry, to expand his concept of the connection between capitalism and its destruction of natural resources. (I have a review pending on Saito’s book).

But Engels too must be saved from the same charge.  Actually, Engels was well ahead of Marx (yet again) in connecting the destruction and damage to the environment that industrialisation was causing.  While still living in his home town of Barmen (now Wuppertal), he wrote several diary notes about the inequality of rich and poor, the pious hypocrisy of the church preachers and also the pollution of the rivers.

Just 18 years old, he writes: “the two towns of Elberfeld and Barmen, which stretch along the valley for a distance of nearly three hours’ travel. The purple waves of the narrow river flow sometimes swiftly, sometimes sluggishly between smoky factory buildings and yarn-strewn bleaching-yards. Its bright red colour, however, is due not to some bloody battle, for the fighting here is waged only by theological pens and garrulous old women, usually over trifles, nor to shame for men’s actions, although there is indeed enough cause for that, but simply and solely to the numerous dye-works using Turkey red. Coming from Düsseldorf, one enters the sacred region at Sonnborn; the muddy Wupper flows slowly by and, compared with the Rhine just left behind, its miserable appearance is very disappointing.”

Barmen in 1913

He goes on: “First and foremost, factory work is largely responsible. Work in low rooms where people breathe more coal fumes and dust than oxygen — and in the majority of cases beginning already at the age of six — is bound to deprive them of all strength and joy in life.

He connected the social degradation of working families with the degradation of nature alongside the hypocritical piety of the manufacturers. “Terrible poverty prevails among the lower classes, particularly the factory workers in Wuppertal; syphilis and lung diseases are so widespread as to be barely credible; in Elberfeld alone, out of 2,500 children of school age 1,200 are deprived of education and grow up in the factories — merely so that the manufacturer need not pay the adults, whose place they take, twice the wage he pays a child. But the wealthy manufacturers have a flexible conscience and causing the death of one child more or one less does not doom a pietist’s soul to hell, especially if he goes to church twice every Sunday. For it is a fact that the pietists among the factory owners treat their workers worst of all; they use every possible means to reduce the workers’ wages on the pretext of depriving them of the opportunity to get drunk, yet at the election of preachers they are always the first to bribe their people.”

Sure, these observations by Engels are just that, observations, without any theoretical development, but they show the sensitivity that Engels already had to the relationship between industrialisation, the owners and the workers, their poverty and the environmental impact of factory production.

In his first major work, Outlines of a Critique of Political Economy, again well before Marx looked at political economy, Engels notes how the private ownership of the land, the drive for profit and the degradation of nature go hand in hand. To make earth an object of huckstering — the earth which is our one and all, the first condition of our existence — was the last step towards making oneself an object of huckstering. It was and is to this very day an immorality surpassed only by the immorality of self-alienation. And the original appropriation — the monopolization of the earth by a few, the exclusion of the rest from that which is the condition of their life — yields nothing in immorality to the subsequent huckstering of the earth.” Once the earth becomes commodified by capital, it is subject to just as much exploitation as labour.

Engels’ major work (written with Marx’s help), The Dialectics of Nature, written in the years up to 1883, just after Marx’s death, is often subject to attack as extending Marx’s materialist conception of history as applied to humans, into nature in a non-Marxist way.  And yet, in his book, Engels could not be clearer on the dialectical relation between humans and nature.

In a famous chapter “The Role of Work in Transforming Ape into Man.”, he writes: “Let us not, however, flatter ourselves overmuch on account of our human conquest over nature. For each such conquest takes its revenge on us. Each of them, it is true, has in the first place the consequences on which we counted, but in the second and third places it has quite different, unforeseen effects which only too often cancel out the first. The people who, in Mesopotamia, Greece, Asia Minor, and elsewhere, destroyed the forests to obtain cultivable land, never dreamed that they were laying the basis for the present devastated condition of these countries, by removing along with the forests the collecting centres and reservoirs of moisture. When, on the southern slopes of the mountains, the Italians of the Alps used up the pine forests so carefully cherished on the northern slopes, they had no inkling that by doing so they were … thereby depriving their mountain springs of water for the greater part of the year, with the effect that these would be able to pour still more furious flood torrents on the plains during the rainy seasons. Those who spread the potato in Europe were not aware that they were at the same time spreading the disease of scrofula. Thus at every step we are reminded that we by no means rule over nature like a conqueror over a foreign people, like someone standing outside nature — but that we, with flesh, blood, and brain, belong to nature, and exist in its midst, and that all our mastery of it consists in the fact that we have the advantage over all other beings of being able to know and correctly apply its laws.” (my emphasis)

Engels goes on: “in fact, with every day that passes we are learning to understand these laws more correctly and getting to know both the more immediate and the more remote consequences of our interference with the traditional course of nature. … But the more this happens, the more will men not only feel, but also know, their unity with nature, and thus the more impossible will become the senseless and antinatural idea of a contradiction between mind and matter, man and nature, soul and body. …”

Engels explains the social consequences of the drive to expand the productive forces.  “But if it has already required the labour of thousands of years for us to learn to some extent to calculate the more remote natural consequences of our actions aiming at production, it has been still more difficult in regard to the more remote social consequences of these actions. … When afterwards Columbus discovered America, he did not know that by doing so he was giving new life to slavery, which in Europe had long ago been done away with, and laying the basis for the Negro slave traffic. …”

The people of the Americas were driven into slavery, but also nature was enslaved. As Engels put it: “What cared the Spanish planters in Cuba, who burned down forests on the slopes of the mountains and obtained from the ashes sufficient fertilizer for one generation of very highly profitable coffee trees–what cared they that the heavy tropical rainfall afterwards washed away the unprotected upper stratum of the soil, leaving behind only bare rock!” .

Now we know that it was not just slavery that the Europeans brought to the Americas, but also disease, which in its many forms exterminated 90% of native Americans and was the main reason for their subjugation by colonialism.

As we experience yet another pandemic, we know that it was capitalism’s drive to industrialise agriculture and usurp the remaining wilderness that has led to nature ‘striking back’, as humans come into contact with more pathogens to which they have no immunity, just as the native Americans in the 16th century.

Engels attacked the view that ‘human nature’ is inherently selfish and will just destroy nature.  In his Outline, Engels described that argument as a “repulsive blasphemy against man and nature.”  Humans can work in harmony with and as part of nature.  It requires greater knowledge of the consequences of human action.  Engels said in his Dialectics: “But even in this sphere, by long and often cruel experience and by collecting and analyzing the historical material, we are gradually learning to get a clear view of the indirect, more remote, social effects of our productive activity, and so the possibility is afforded us of mastering and controlling these effects as well.”

But better knowledge and scientific progress is not enough. For Marx and Engels, the possibility of ending the dialectical contradiction between man and nature and bringing about some level of harmony and ecological balance would only be possible with the abolition of the capitalist mode of production. As Engels said: “To carry out this control requires something more than mere knowledge.”  Science is not enough. “It requires a complete revolution in our hitherto existing mode of production, and with it of our whole contemporary social order.” The ‘positivist’ Engels, it seems, supported Marx’s materialist conception of history after all.