Boom or bust?

December 1, 2017

Last week, the OECD published its latest World Economic Outlook.   WARNING GRAPHICS OVERLOAD AHEAD!

The OECD’s economists reckon that “The global economy is now growing at its fastest pace since 2010, with the upturn becoming increasingly synchronised across countries. This long-awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth.”

While world economic growth is accelerating a bit, the OECD reckons that “on a per capita basis, growth will fall short of pre-crisis norms in the majority of OECD and non-OECD economies.” So the world economy is still not yet out of the Long Depression that started in 2009.

The OECD went on: “Whilst the near-term cyclical improvement is welcome, it remains modest compared with the standards of past recoveries. Moreover, the prospects for continuing the global growth up-tick through 2019 and securing the foundations for higher potential output and more resilient and inclusive growth do not yet appear to be in place. The lingering effects of prolonged sub-par growth after the financial crisis are still present in investment, trade, productivity and wage developments. Some improvement is projected in 2018 and 2019, with firms making new investments to upgrade their capital stock, but this will not suffice to fully offset past shortfalls, and thus productivity gains will remain limited.”

The OECD also thinks that much of the recent pick-up is fictitious, being centred on financial assets and property. “Financial risks are also rising in advanced economies, with the extended period of low interest rates encouraging greater risk-taking and further increases in asset valuations, including in housing markets. Productive investments that would generate the wherewithal to repay the associated financial obligations (as well as make good on other commitments to citizens) appear insufficient.”  Indeed, on average, investment spending in 2018-19 is projected to be around 15% below the level required to ensure the productive net capital stock rises at the same average annual pace as over 1990-2007.

The OECD concludes that, while global economic growth will be faster in 2017 and 2018, this will be the peak.  After that, world economic growth will fade and stay well below the pre-Great Recession average.  That’s because global productivity growth (output per person employed) remains low and the growth in employment is set to peak.  That’s a ‘slow burn’ of slowing economic growth.

But even more worrying for global capitalism is the prospect of a new economic slump, now that we are some nine years since the last one.  In a chapter of the World Economic Outlook, the OECD’s economists raise the issue of the very high levels of debt (both private and public sector) that linger on since 2009.  “Despite some deleveraging in recent years, the indebtedness of households and nonfinancial businesses remains at historically high levels in many countries, and continues to increase in some.”  The debt of non-financial firms (NFC) rose relative to GDP during the mid-2000s, generally peaking at the onset of the global financial crisis and remaining stable thereafter.

After a limited downward adjustment during the post-crisis period, NFC debt-to-GDP ratios have increased again since.

Household debt-to-income ratios also rose significantly up to 2007 and stabilised thereafter at historically high levels in most advanced economies. The rise in the debt-to-income ratio was driven by the acceleration in debt accumulation prior to the crisis, with subdued household income growth impeding deleveraging thereafter.

And as I have reported before in previous posts, non-financial companies (NFC) in the so-called emerging economies have sharply increased their debt burdens over the last nine years, so that now, ‘rolling over’ this debt as it matures for repayment amounts to about half of the gross issuance of international debt securities in 2016.  In other words, debt is being issued to repay earlier debt at an increasing rate.

The OECD points out that there is empirical evidence that high indebtedness increases the risk of severe recessions. Also, if the prices of ‘fictitious’ assets like property or stocks get well out of line with the value of productive assets (ie capital investment), that is another indicator of a coming recession. Currently, there is no OECD economy in recession (defined as two consecutive quarters of a fall in GDP), but the global house price index is reaching a peak level over the trend average that has signalled recessions in the past.

Credit is necessary to capitalism to overcome the ‘lumpiness’ in capital investment and smooth over cash liquidity.  But as Marx argued, ‘excessive’ credit expansion is a sign that the profitability of productive investment is falling.  As the OECD puts it: “If borrowing is well used, higher indebtedness contributes to economic growth by raising productive capacity or augmenting productivity. However, in many advanced economies, the post-crisis build-up of corporate debt has not translated into a rise in corporate capital expenditure.”

So the OECD concludes that the post-crisis combination of rising corporate debt and historically high share buybacks may suggest that, rather than financing investment, firms took on debt to return funds to shareholders. This reflects “pessimism about future demand and economic growth, leading corporations to defer capital spending and return cash to their shareholders for want of attractive investment opportunities.”  Moreover, firms with a persistently high level of indebtedness and low profits can become chronically unable to grow and become “zombie” firms. And zombie “congestion” may thus reduce potential output growth by hampering the productivity-enhancing reallocation of resources towards more dynamic higher productivity firms.

So the OECD story is that world economic growth is picking up and there is little sign of any slump in production in the immediate future, even if growth may stay well below the pre-crisis average.  But there are risks ahead because the still very high levels of debt and speculation in financial assets that could come a cropper if profitability and growth should falter.

This is much the same story that the IMF told in latest IMF report on Global Financial Stability that I referred to in a recent post.  As the IMF put it: “Private sector debt service burdens have increased in several major economies as leverage has risen, despite declining borrowing costs. Debt servicing pressure could mount further if leverage continues to grow and could lead to greater credit risk in the financial system.”  

The IMF comments: “While debt accumulation is not necessarily a problem, one lesson from the global financial crisis is that excessive debt that creates debt servicing problems can lead to financial strains. Another lesson is that gross liabilities matter. In a period of stress, it is unlikely that the whole stock of financial assets can be sold at current market values— and some assets may be unsellable in illiquid conditions.” So “if there are adverse shocks, a feedback loop could develop, which would tighten financial conditions and increase the probability of default, as happened during the global financial crisis.”  

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

The IMF posed an even nastier scenario for the world economy than the OECD by 2020.  Yes, the current ‘boom’ phase can carry on.  Equity and housing prices can continue to climb.  But this leads to investors to drift beyond their traditional risk limits as the search for yield intensifies despite increases in policy rates by central banks.  Then there is a ‘Minsky moment’.

There is a bust, with declines of up to 15 and 9 percent in stock market and house prices, respectively, starting at the beginning of 2020.  Interest rates rise and debt servicing pressures are revealed as high debt-to-income ratios make borrowers more vulnerable to shocks. “Underlying vulnerabilities are exposed and the global recovery is interrupted.” The IMF estimates that the global economy could have a slump equivalent to about one-third as severe as the global financial crisis of 2008-9 with global output falling by 1.7 percent from 2020 to 2022, relative to trend growth.

Will the high debt in the corporate sector globally eventually bring down the house of cards that is built on fictitious capital and engender a new global slump?  When is credit excessive and financial asset prices a bubble?

The key for me, as readers of this blog know, is what is happening to the profitability of capital in the major economies.  If profitability is rising, then corporate investment and economic growth will follow – but also vice versa.  But if profitability and profits are falling, debt accumulated will become a major burden.  Eventually the zombies will start to go bankrupt, spreading across sectors and a slump will ensue.  Financial prices will quickly collapse toward the real value of their underlying productive assets.

Indeed, according to Goldman Sachs economists, the prices of financial assets (bonds and stocks) are currently at their highest against actual earnings since 1900!

What the OECD and IMF reports show is that if there is a downturn in profitability, the next slump will be severe, given that private debt (both corporate and household) has not been ‘deleveraged’ in the last nine years – indeed on the contrary.  As I said, in my paper on debt back in 2012: “Capitalism is now left with a huge debt burden in both the private and public sector that will take years to deleverage in order to restore profitability.  So, contrary to the some of the conclusions of mainstream economics, debt (particularly private sector debt) does matter.”

For now, the world economy is making a modest recovery from the stagnation that appeared to be setting in from the end of 2014 to mid-2016.  The Eurozone economic area is seeing an acceleration of growth to its highest rate since the end of the Great Recession.

Japan too is picking up, based on a weak currency that is enabling exports to be sold.  And the latest figures for the US show an annualised rise of 3.3% in third quarter of 2017, putting year on year growth at 2.3%, still below the rates achieved in 2014 but much better than in 2016 (1.6%).  And the forecast for this current quarter is for similar.

As for corporate profits and investment, the latest data show that US corporate profits were rising at over 5-7% yoy before tax, although stripping out the mainly fictitious profits of the financial sector reveals that the mass of profit is still well below the peak of end-2014.

And as I showed in a recent post, profitability has fallen since 2014.

There is a high correlation and causality between the movement of profits and productive investment.

And that is confirmed in the latest data for the US.  As corporate profits have recovered from the slump of 2015-16, so business investment has made a modest improvement.

As for global corporate profits, we don’t have all the data for Q3 2017, but it looks as though it will continue to be on the up.

So overall, global economic growth has improved in 2017 and, so far, looks likely to do so in 2018 too.  Corporate profits are rising and that should help corporate investment.  But profitability of capital  remains weak and near post-war lows and corporate debt has never been higher.

Any sharp upswing in interest rate costs (and the US Fed continues to hike) will increase the debt servicing burden.  So if corporate profits should peak and falter in the next year or so, a major recession will be on the agenda.

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Neoliberalism works for the world?

November 27, 2017

Noah Smith is a regular economics blogger of the mainstream Keynesian persuasion and writes regularly for Bloomberg now.  A recent piece by him was headlined “free markets improved more lives than anything ever”.  And he delivered the now usual argument that capitalism has actually been a great success in delivering better lives for billions compared to any previous mode of production and social organisation and, as far as he can see, it will remain the ‘market leader’ for human beings.

Smith is keen to refute the ‘mixed economy’, anti free trade ideas that have been sneaking into mainstream economics since the Great Recession, namely that ‘neo-liberalism’ and free markets are bad for living standards.  Instead, a little dose of protectionism on trade (Rodrik) and state intervention and regulation (Kwak) helps capitalism to work better.

But no, says Smith. Neoliberalism works better.  He cites China’s growth phenomenon as his main example!  In China, “the shift from a rigid command-and-control economy to one that blended state and market approaches — and the liberalization of trade — was undoubtedly a neoliberal reform. Though Deng’s changes were mostly done in an ad-hoc, common sense manner, he did invite famed neoliberal economist Milton Friedman to give him advice.”

He then adds India to this argument:  “A decade after China began its experiment, India followed suit. In 1991, after a sharp recession, Prime Minister Narasimha Rao and Finance Minister Manmohan Singh scrapped a cumbersome system of business licensing, eased curbs on foreign investment, ended many state-sanctioned monopolies, lowered tariffs and did a bunch of other neoliberal things.

Boy, does this take the biscuit.  China’s economy is an example of successful neoliberal economic policy!?  In several posts I have shown that China is not a free market economy by any stretch of the evidence and may not even be described as capitalist.  It is state-owned and controlled with investment and production state-directed, with profit secondary to growth as the objective.  Indeed, the IMF data on the size of public investment and stock globally put China in a different league compared to any other economy in the world.

As for India, the state sector also remains significant, something which continually upsets the World Bank and neoliberal economists.  The policy measures of the 1990s can hardly be used as the explanation of the pick-up in economic growth in India.  During the 1990s, productivity growth in all the major ‘emerging economies’ picked up – only to fall back again after the Great Recession.  Globalisation and foreign capital were drivers then everywhere.

Anyway it is not really true that Indian government policy is ‘neo-liberal’ – on the contrary.  In contrast, the clear shock switch to neoliberal capitalism by Russia’s post-Soviet governments and its oligarchs was a total disaster (Smith calls it a ‘mixed success’!).  Growth, living standards and life expectancy collapsed.  Indeed, the conclusion that might be drawn is not that ‘neo-liberal reforms’ have driven the relative economic success of China and India in the last 30 years but their resistance to such policies.

The other main argument presented by Smith for the success of capitalism is the supposed decline in global poverty since Marx wrote Capital 150 years ago.  “All of the evidence above suggests that the population living in extreme poverty has fallen very substantially in the last 200 years across the world. As we have noted, on aggregate, the global population in extreme poverty went from 80% in 1820 to 10% in the latest estimates.”

Now Marx was the first to note the tremendous boost to production that the capitalist mode of production delivered compared to previous modes.  But as I have shown in previous posts, there is another side to capitalism’s early years: the immiseration of the working class.   And that is a different reality from Smith’s claims.

Back in 2013, the World Bank released a report that there were 1.2bn people living on less than $1.25 a day, one-third of whom were children.  The World Bank raised its official poverty line to $1.90 a day and Smith refers to sources based on this threshold.  This merely adjusted the old $1.25 figure for changes in the purchasing power of the US dollar.  But it meant that global poverty was reduced by 100m people overnight.

And, as Jason Hickel points out, this $1.90 is ridiculously low.  A minimum threshold would be $5 a day that the US Department of Agriculture calculated was the very minimum necessary to buy sufficient food. And that’s not taking account of other requirements for survival, such as shelter and clothing.  Hickel shows that in India, children living at $1.90 a day still have a 60% chance of being malnourished. In Niger, infants living at $1.90 have a mortality rate three times higher the global average.

In a 2006 paper, Peter Edward of Newcastle University used an “ethical poverty line” that calculates that, in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.  In the past, that was $5 a day. Using the World Bank’s new calculations, it’s about $7.40 a day. That delivers a figure of about 4.2 billion people living below that level today; or up 1 billion over the past 35 years.

Some argue that the reason there are more people in poverty is because there are more people!  The world’s population has risen in the last 25 years.  You need to look at the proportion of the world population in poverty and, at a $1.90 cut-off, the proportion under the line has dropped from 35% to 11% between 1990 and 2013.  So Smith is right after all.  But this is disingenuous, to say the least.

The absolute number of people in poverty, even at the ridiculously low threshold level of $1.25 a day, has still increased, even if not as much as the total population in the last 25 years.  And even then, all this optimistic expert evidence is really based on the dramatic improvement in average incomes in China (and to a lesser extent in India).

Smith says that “the reduction of global poverty has been substantial even when we do not take into account the poverty reduction in China. In 1981, almost one third (29%) of the non-Chinese world population was living in extreme poverty. By 2013, this share had fallen to 12%.“

However Peter Edward found that there were 1.139bn people getting less than $1 a day in 1993 and this fell to 1.093bn in 2001, a reduction of 85m.  But China’s reduction over that period was 108m (no change in India), so all the reduction in the poverty numbers was due to China.  Exclude China and total poverty was unchanged in most regions, while rising significantly in sub-Saharan Africa.  And, according to the World Bank, in 2010, the “average” poor person in a low-income country lived on 78 cents a day in 2010, compared to 74 cents a day in 1981, hardly any change.  But this improvement was all in China and India. In India, the average income of the poor rose to 96 cents in 2010, compared to 84 cents in 1981, while China’s average poor’s income rose to 95 cents, compared to 67 cents.

Moreover, poverty levels should not be confused with inequality of incomes or wealth.  On the latter, the evidence of rising inequality of wealth globally is well recorded .  The latest annual report by Credit Suisse on global personal wealth found that top 1% of personal wealth holders globally now have over 50% of the world’s wealth – up from 45% ten years ago. Actually, the majority of people in the major advanced capitalist economies will be in the top 10% of wealth holders because billions of people have no wealth at all!

Credit Suisse found that global wealth rose 6.4% over the past year – the fastest since 2012 – thanks to rising share markets and house prices.  But the weakest growth was in Africa, the poorest region, where household wealth rose just 0.9%. Taking in into account population changes, wealth per adult fell by 1.9% in Africa. The fastest growth was in North America, where it rose 8.8% per adult.

And on current trends, inequality will rise further. The outlook for the millionaire segment looks much better than for the bottom of the wealth pyramid (less than $10,000). The former is expected to rise by 22%, from 36 million millionaires today to 44 million in 2022, while the group occupying the lowest tier of the pyramid is expected to shrink by only 4%.  In the US, the three richest people in the US – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the US population, or 160 million people.

As for incomes, if you take China out of the figures, global inequality, however you measure it, has been rising in the last 30 years.  The global inequality ‘elephant’ presented by Branco Milanovic found that the 60m or so people who constitute the world’s top 1% of income ‘earners’ have seen their incomes rise by 60% since 1988. About half of these are the richest 12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese, French and German, and the top 1% of several other countries, including Russia, Brazil and South Africa. These people include the world capitalist class – the owners and controllers of the capitalist system and the strategists and policy makers of imperialism.

But Milanovic also found that those who have gained income even more in the last 20 years are the ones in the ‘global middle’.  These people are not capitalists.  These are mainly people in India and China, formerly peasants or rural workers have migrated to the cities to work in the sweat shops and factories of globalisation: their real incomes have jumped from a very low base, even if their conditions and rights have not. The biggest losers are the very poorest (mainly in African rural farmers) who have gained nothing in 20 years.

The empirical evidence supports Marx’s view that, under capitalism, poverty (as defined) and inequality of income and wealth have not really improved under capitalism, neoliberal or otherwise. Any improvement in poverty levels globally, however measured, is mainly explained by in state-controlled China and any improvement in the quality and length of life comes from the application of science and knowledge through state spending on education, on sewage, clean water, disease prevention and protection, hospitals and better child development.  These are things that do not come from capitalism but from the common weal.

So Marx’s prediction 150 years ago that capitalism would lead to greater concentration and centralisation of wealth, in particular, the means of production and finance, has been borne out.  Contrary to the optimism and apologia of mainstream economists like Smith, poverty for billions around the world remains the norm, with little sign of improvement, while inequality within the major capitalist economies increases as capital is accumulated and concentrated in ever smaller groups.

Budget and Brexit

November 22, 2017

Today’s UK budget could be the last by a British Conservative chancellor (finance minister) in this decade.  Last June the Conservative government lost its majority after a snap election was called by the new prime minister Theresa May.  Instead of increasing her small majority that she inherited from previous PM Cameron, May found that she had to beg and bribe the extreme right wing ‘Democatic’ Unionists group in Northern Ireland to back her government and stay in office.

And then there is Brexit. The cabinet is split between the so-called hard Brexiters (supporters of leaving the EU) and the ‘Remainers’ in negotiating with the EU.  As a result, nothing has been achieved for over a year in the negotiations for a new arrangement with the EU.  In the meantime, the pound sterling has slumped and inflation has spiralled.

Even before Brexit, the UK economy, was already showing serious signs of frailty.  In a previous post, I showed: the underlying feebleness of output growth (the slowest growing G7 economy); productivity among the lowest among advanced economies (and not rising); and investment to GDP that has been falling for over 30 years.  This failure of capitalist production in the UK has meant that the average British household has experienced no ‘recovery’ at all income since the end of the Great Recession in 2009.  Real wage growth is at its slowest since the mid-19th century. Indeed, the UK is one (and the largest) of six countries in the 30-country OECD bloc where earnings are still below their 2007 levels (the UK is joined by Greece and Portugal).

In his budget speech, Hammond made two ridiculous claims.  The first was that it was “Labour’s Great Recession”.  The only correct bit in this statement was that there was terrible slump in 2008-9 globally that hit the UK too when a Labour government was in office.  But it was not Labour’s recession but that of global capitalism.  The financial crash, the slump in production and rise in unemployment, along with a rocketing budget deficit and debt was a failure of capitalism under which Labour was helpless.

The other ludicrous claim from Hammond was that income inequality in Britain was improving under the Conservatives and was now at its most equal in 30 years.  This claim is based on the gini coefficient of income inequality.  This indeed has fallen slightly since 1987 after reaching an all-time high under the Thatcher government.  But the main part of that fall was after the Great Recession when incomes for the rich (from financial assets and property) took a bit of hit.

The slight improvement in the inequality ratio from an all-time high did not come from any government action on taxes or benefits at all.  So Hammond can hardly claim the credit, especially as Labour governments were in office for nearly half that time.  Hammond pointed out that top 1% of income earners are paying more income tax than ever before.  But then they have never earned so much!  The richest 20% of Brits still have around five times more to spend after taxes and benefits than the poorest 20%.

And as for the ‘economic recovery’ under the Conservatives since 2010, it has been very poor. The Institute for Fiscal Studies (IFS) points out that national income per adult was 15% lower at the last Budget in March than it would have been if pre-2008 trends had continued. By 2022, the gap is set to grow to 18%, performance the IFS describes as “astonishing”.  The UK economy is currently growing at its slowest since the end of the Great Recession.  And the official forecast for real GDP growth has been revised down to 1.5% for this year and 1.4% in 2018.  Indeed, the long-term forecast (and that assumes no slump) out to 2022 is just 1.4% a year, down from a previous forecast of 1.9% a year. Real GDP is now expected to grow by 5.7% between 2017-18 and 2021-22 – down from 7.5% forecast last March.

The main reason is that official forecast for productivity growth has been reduced after successive optimistic forecasts proved wrong.  Even so, the productivity forecast for the next five years remains well above the current rate (which is virtually static).  And even that means a per capita growth rate of under 1% a year until 2023, or half the long-term average.

As a result, the Conservatives great aim to reduce the annual budget deficit to zero has been pushed out yet again to 2023 and beyond, some 20 years after the Great Recession drove it up to 10% of GDP.  And the public sector net debt ratio to GDP, which more than doubled during the recession will only peak this year (if Hammond is right) at about 86.5% of GDP (closer to 100% on a gross basis).  And it will fall back only a little to 79% by 2023 – still double its pre-crisis level in 2006.

Moreover, the government’s debt forecast includes £15bn from the sale of the taxpayer’s stake in the Royal Bank of Scotland (at a loss, as the current share price is 271p compared to the break-even price of 502p) – and by moving local housing association debt off the books.  So the small debt reduction is achieved by selling off public assets at a loss and by changing the accounting rules.

And even that improvement will require yet more measures of ‘austerity’, ie cuts in government spending and services.  Austerity will continue into the next decade if this government has its way.  Analysis by the IFS finds that existing plans mean welfare, the health service and prisons face further deep cuts, regardless of the budget, leaving departments such as justice and work and pensions facing a real-terms cut of as much as 40% over the decade to 2020.  There will be a further £12bn cut in welfare spending by 2020/21, that the NHS will face its tightest funding period since the 1950s and that prisons will see a real-terms cut of 22%.

Hammond announced some extra funding of the National Health Service, mainly to get it through a major crisis this winter as the old and infirm struggle.  But the extra spending of about £3bn over two years is little more than the spending on Brexit planning.  Without Brexit, the government could have doubled its funding.  And the NHS will still be badly underfunded and, according to the IFS, “If anything, it looks like the funding increases over the next few years get a bit harder rather than a bit easier”.  For example, the NHS budget increased by 8.6% a year between 2001/2 and 2004/5, but increases will average just 1.1% a year from 2009/10 to 2020/21.  Public funding for health care as a proportion of GDP is now forecast to fall from 7.6% in 2009/10 to 6.8% by 2019/20. Growth in health spending will not keep pace with the growing and ageing population, so NHS spending per person will fall by 0.3% next year.

Hammond announced the removal of taxes on buying a home under £300k, supposedly to help first-time buyers.  But it is the law of unintended consequences here – this will just drive prices up even more.

Overall, Hammond’s budget injects about 0.4% of GDP into the economy, mainly through government spending on R&D, infrastructure and housing incentives.  That is nowhere near compensating for the downward revisions in the prospects for economic growth as business investment and productivity stagnate.

Britain has been a rentier economy extraordinaire, with the highest dependence on the financial sector of all major economies.  And the biggest fall in productivity growth has been in this sector since 2007.

Moreover, with Brexit, the City of London is set to lose many facilities and expertise to Europe.  And another recession is due before the end of this decade. Even the reduced growth forecasts look optimistic.

Market power again

November 21, 2017

In a previous post, I covered the arguments of several mainstream economists who sought to explain the slowdown in productivity and investment growth especially since the beginning of the 2000s as due to market power.

Now there is yet another round of mainstream economic papers trying to explain why investment in the major economies has fallen back since the end of Great Recession in 2009.  And again most of these papers try to argue that it is the rise in ‘market power’ ie monopolistic trends, especially in finance, that has led to profits being accumulated in finance, property or in cash-rich techno giants that do not invest productively or innovatively.

That investment in productive assets has dropped in the US is revealed by the collapse in net investment (that’s after depreciation) relative to the total stock of fixed assets in the capitalist sector.

Note that the fall in this net investment ratio took place from the early 2000s at the same time as financial profits rocketed.  That suggests that a switch took place from productive to financial investment (or into fictitious capital as Marx called it).

In a new paper, Thomas Philippon, Robin Döttling and Germán Gutiérrez looked at data from a group of eight Eurozone countries and the US. They first establish a number of stylised facts. They found that the corporate investment rate was low in both the Eurozone and the US, with the share of intangibles (investment in intellectual property such as computer software and databases or research and development) increasing and the share of machinery and equipment decreasing.  But they also found that investment tracked corporate profits in the Eurozone, but fell below in the US.  In other words, productive investment slipped in the Eurozone because profitability did too.

But there appeared to be an ‘investment gap’ in the US.

But there is an important issue here of measurement.  As I showed in my previous post, these mainstream analyses use Tobin’s Q as the measure of accumulated profit to compare against investment.  But Tobin’s Q is the market value of a firm’s assets (typically measured by its equity price) divided by its accounting value or replacement costs.  This is really a measure of fictitious profits.  Given the credit-fuelled financial explosion of the 2000s, it is no wonder that net investment in productive assets looks lower when compared with Tobin Q profits.  This is not the right comparison.  Where the financial credit and stock market boom was much less, as in the Eurozone, profits and investment movements match.

Nevertheless, mainstream/Keynesian economics continues to push the idea that there is an ‘investment gap’ because the lion’s share of the profits has gone into monopolistic sectors which do not invest but just extract ‘rents’ through their market power.  This argument has even been taken up by the United Nations Conference on Trade and Development (UNCTAD) in its latest report.  In chapter seven of its 2017 report, UNCTAD waxes lyrical about the great insights of Keynes about the ‘rentier’ capitalist, who is unproductive, unlike the entrepreneur capitalist who makes things tick.  UNCTAD’s economists conclude that there has been “the emergence of a new form of rentier capitalism as a result of some recent trends: highly pronounced increases in market concentration and the consequent market power of large global corporations, the inadequacy and waning reach of the regulatory powers of nation States, and the growing influence of corporate lobbying to defend unproductive rents”.

But is the rise of rentier capitalism the main cause of the relative fall in investment?  As I have pointed out above, the rentier appears to play no role in the low investment rate of the Eurozone: it’s just low profitability.  However, there does seem a case for financial market power or financialisation as a cause for low productive investment in the US.

Marx considered that there were two forms of rent that could appear in a capitalist economy.  The first was ‘absolute rent’ where the monopoly ownership of an asset (land) could mean the extraction of a share of surplus value from the capitalist process without investment in labour and machinery to produce commodities.  The second form Marx called ‘differential rent’.  This arose from the ability of some capitalist producers to sell at a cost below that of more inefficient producers and so extract a surplus profit – as long as the low cost producers could stop others adopting even lower cost techniques by blocking entry to the market, employing large economies of scale in funding, controlling patents and making cartel deals.  This differential rent could be achieved in agriculture by better yielding land (nature) but in modern capitalism, it would be through a form of ‘technological rent’; ie monopolising technical innovation.

Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up potential competitors.  But the mainstream explanations go too far.  Technological innovations also explain the success of these big companies.  Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate any ‘eternal’ monopoly, a ‘permanent’ surplus profit deducted from the sum total of profits which is divided among the capitalist class as a whole.  The continual battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors.

The history of capitalism is one where the concentration and centralisation of capital increases, but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally). The substitution of new products for old ones will in the long run reduce or eliminate monopoly advantage.  The monopolistic world of GE and the motor manufacturers did not last once new technology bred new sectors for capital accumulation.  The world of Apple will not last forever.

‘Market power’ may have delivered rental profits to some very large companies in the US, but Marx’s law of profitability still holds as the best explanation of the accumulation process.  Rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’ but do not create profit.  Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour.

The key to understanding the movement in productive investment remains its underlying profitability, not the extraction of rents by a few market leaders.  If that is right, the Keynesian/mainstream solution of regulation and/or the break-up of monopolies will not solve the regular and recurrent crises or rising inequality of wealth and income.

US rate of profit update

November 18, 2017

The latest data for net fixed assets in the US have been released, enabling me to update the calculations for the US rate of profit a la Marx up to 2016.

Last year, I did the calculations with the help of Anders Axelsson from Sweden, who not only replicated the results to ensure their accuracy (and found mistakes!), but also produced a manual for carrying out the calculations that anybody could use.

As I did last year and in previous years, I have also updated the rate of profit using the method of calculation by Andrew Kliman (AK) that he first carried out in his book, The failure of capitalist production AK measures the US rate of profit based on corporate sector profits only and using the BEA’s historic cost of net fixed assets as the denominator.

I also calculate the US rate of profit with a slight variation from AK’s approach, in that I depreciate gross profits by current depreciation rather than historic depreciation as AK does, but I still use historic costs for net fixed assets.  The theoretical and methodological reasons for doing this can be found here and in the appendix in my book, The Long Depression, on measuring the rate of profit.

The results of the AK calculation and my revised version are obviously much the same as last year – namely that AK’s measure of the rate of profit falls persistently from the late 1970s to a trough in 2001 and then recovers during the credit-fuelled, ‘fictitious capital period’ up to 2006.  The 2006 peak in the rate is higher than the 1997 one.   My revised version of AK’s measure shows a stabilisation of the profit rate at the end of the 1980s, after which profitability does not really rise much (although there are various peaks up to 2006).  What the new data for 2016 do reveal, however, is that profitability (on both measures) has remained below the peak of 2006 (i.e. for the last ten years) and has fallen for the last two.  And, of course, the long-term secular decline in the US rate is confirmed on both measures, some 25-30% below the 1960s.

But readers of my blog and other papers know that I prefer to measure the rate of profit a la Marx by looking at total surplus value in an economy against total productive capital employed; so as close as possible to Marx’s original formula of s/c+v.  So I have a ‘whole economy’ measure based on total national income (less depreciation) for surplus value; net fixed assets for constant capital; and employee compensation for variable capital.  Most Marxist measures exclude a measure of variable capital on the grounds that it is not a stock of invested capital but circulating capital that cannot be measured from available data.  I don’t agree and G Carchedi and I have an unpublished work on this point.  Indeed, even inventories (the stock of unfinished and intermediate goods) could be added as circulating capital to the denominator for the rate of profit, but I have not done so here as the results are little different.

Updating the results from 1946 to 2016 on my ‘whole economy’ measure shows more or less the same result as last year, as you might expect.  I measure the rate in both historic and current cost terms.  This shows that the overall US rate of profit has four phases: the post-war golden age of high profitability peaking in 1965; then the profitability crisis of the 1970s, troughing in the slump of 1980-2; then the neoliberal period of recovery or at least stabilisation in profitability, peaking more or less in 1997; then the current period of volatility and eventual decline.  Actually, the historic cost measure shows no recovery in the rate of profit during the neoliberal period.  The current cost measure always shows much greater upward or downward movement.  On this measure, the post-war trough was in 1982 while on the historic cost measure, it is 2009 at the bottom of the Great Recession.

What is new about the 2016 update is that the US rate of profit fell in 2016, after a fall in 2015.  So the rate of profit has fallen in the last two successive years and is now 6-10% below the peak of 2006.

One of the compelling results of the data is that they show that each economic recession in the US has been preceded by a fall in the rate of profit and then by a recovery in the rate after the slump.  This is what you would expect cyclically from Marx’s law of profitability.

In a recent paper, G Carchedi identified three indicators for when crises occur: when the change in profitability; employment; and new value are all negative at the same time.  Whenever that happened (12 times since 1946), it coincided with a crisis or slump in production in the US.  This is Carchedi’s graph.

My updated measure for the US rate of profit to 2016 confirms the first indicator is operating.  The graph above shows that in the last two years there has been a 5%-plus fall.  However, new value growth is slowing but not yet negative; and employment growth continues.  So on the basis of these three (Carchedi) indicators, a new recession in the US economy is not imminent.  Also the mass of profit or surplus value rose (if only slightly) in 2016, and so again does not provide confirmation of an imminent slump.

What the updated data do confirm is my guess last year that 2016 would show a fall in the US rate of profit – and by all the measures mentioned. And, of course, Marx’s law of profitability over the long term is again confirmed.  There has been a secular decline in US profitability, down by 28% since 1946 and 15-20% since 1965; and by 6-10% since the peak of 2006.  So the recovery of the US economy since 2009 at the end of the Great Recession has not restored profitability to its previous level.

Also, the driver of falling profitability has been the secular rise in the organic composition of capital, which has risen nearly 20% since 1965 while the main ‘counteracting factor’, the rate of surplus value, has fallen 4%.  Indeed, even though the rate of surplus value has risen 5% since 1997, the rate of profit has fallen 5% because the organic composition of capital has risen over 12%.

Has the US rate of profit slowed further in 2017?  We can use quarterly data from the US Federal Reserve on the non-financial corporate sector to get a rough idea.  The Fed data suggest that the rate of profit in the first half of 2017 was flat at best.

So, if the rate of profit is a good indicator of an upcoming slump in capitalism, then the jury is out on the likelihood of slump in 2018.  However, the rate of profit is still down from its peaks of 1997 and 2006 and now appears to be flat lining at best.

Value, class and Capital

November 12, 2017

This year’s Historical Materialism conference in London focused on the Russian revolution as well as the 150th anniversary of the publication of Marx’s Volume One of Capital.  Naturally, I concentrated on presentations that flowed from the latter rather than the former.

Indeed, the main plenary at HM was on Marx’s theory of value and class – and the annual winner of the Isaac Deutscher book prize announced at the HM was William Clare Roberts’ Marx’s Inferno, which seemed to be a ‘political theory’ of capital seen through the prism of Dante’s famous poem.  Maybe, more on that later.

The plenary speakers were Moishe Postone, Michael Heinrich and David Harvey – an impressive line-up of heavyweight Marxist academics.  Postone is co-director of the Chicago Center for Contemporary Theory and faculty member of the Chicago Center for Jewish Studies.  His 30-min speech was difficult to understand, being couched in polysyllabic academic jargon. But I think the gist of it was that we cannot consider the class struggle under capitalism as just between exploited workers and capitalists any longer, as it now involves race, creed and gender and a new populism of the right.  So we need to rethink Marx’s theory of class.

For this reason, “orthodox Marxism” is a hindrance.  The old meaning of class struggle is not essential.  As for Marx’s theory of value, it is specific to capitalism, but it has changed and exploitation is now over the amount of time we all have rather than over the production of surplus value.  Now I think that is the gist of what he said, but frankly, I cannot be sure because Postone’s exposition was so incomprehensible.

The next speaker was Michael Heinrich, the well-known German expert of Marx’s Capital and close researcher of Marx’s original writings in the so-called MEGA project.  Now readers of this blog will know that Heinrich and I have debated before on whether Marx’s law of the tendency of the rate of profit is logical and whether Marx himself dropped it; and we published on this issue.

In his presentation, Heinrich agreed with Postone that value is a category specific to capitalism, but he reckons that Marx changed his conception of both class and value over his lifetime.  So it is not possible to pull quotes from Marx like random rocks in a stone quarry.  Each quote must be placed in its context and time.  For example, Marx’s definition of class struggle as found in the Communist Manifesto in 1848 differs with his later definitions of class at the end of Capital Volume 3.

Similarly, Marx’s concept of value changed over time.  Early on, value is seen to come from the production process and the exploitation of labour power by capital.  Later on, Marx revised this view to argue that value was only created at the point of exchange into money.  Similarly, Marx thought that a rising organic composition of capital would lead to a fall in the rate of profit, but later he recognised that more machines could raise the rate of surplus value and so the rate of profit may not fall.

Heinrich has the advantage over us in reading Marx’s original words in German, but they remain his interpretations of Marx’s meaning. Heinrich, in effect, argues that value is not a material substance, namely the expenditure of human energy in labour that can be measured in labour time, but only exists in the form of money.  In my view and in the view of many other Marxists, this denies the role of exploitation of labour in production, which comes first.  Yes, you can only see value in the form of money, but then you cannot see electricity until the light comes on, but that does not mean it does not exist before the light glows.  For an excellent critique of Heinrich’s interpretation of Marx’s value theory, see G Carchedi’s book, Behind the Crisis, chapter 2).

Does any of this matter, you might say?  Are we not just discussing how many angels are there on the head of a needle, as medieval Catholic theologians did?  Well, yes.  But I think there are some consequences from deciding that value is only created in exchange and also that class struggle is not really centred (any longer) on workers and capitalists in the production process.  For me, such theories lead to the idea that crises under capitalism are caused by faults in the ‘circulation of money and credit’ and not in the contradictions of capitalism between productivity and profitability in the production of surplus value, as I think Marx argued.  And the revisions of the nature of class struggle could lead to the removal of the working class as the agent for socialist change.

There is a similar problem with David Harvey’s presentation.  Again, Harvey has made a massive contribution to expounding and defending Marx’s ideas as expressed in Capital to explain the workings of the capitalist mode of production.  I have presented my critique of Harvey’s more novel propositions on this blog before and he has also criticised my ‘orthodox’ view.

In his presentation, Harvey again looked to be ‘innovatory’ in an attempt to raise new categories in Capital.  Yes, value is ‘phantom-like’ (can’t be seen), but objective (i.e. real) and only appears as money.  But Harvey wants us to consider new terms like ‘anti-value’.  What does Harvey mean by this?  Apparently, money and credit can be created without the backing of value.  Marx called this ‘fictitious capital’ because it was not real capital based on the production of value and surplus value by the exploitation of labour, but merely the title to assets that may or may not be supported by new value.  In that sense, investment in financial assets produces fictitious profits.

Now Harvey wants to change the name of this category to ‘anti-value’ because he thinks that in doing so it can show that there are obstacles to the flow of capital (value) in the realisation of value.  Thus crises can originate or be caused from breaks in the circuit of capital outside the production process itself.  Similarly, Harvey came up with what he called ‘value regimes’.  ‘World money’ as represented by gold no longer controls the value of fiat money (money ‘printed’ and backed by governments), particularly after the US dollar came off the gold standard in 1971.  So now we have ‘value regimes’ like the dollar area, the euro and more recently, the Chinese yuan.  Again, I think all this was saying was that various economic national state powers are trying to gain the biggest shares of global value and in so far as they are successful, their currencies will be stronger relative to others over time.  I failed to see why we needed new terms or concepts to ‘explain’ this.  But there we are.

Of course, things have changed over the last 150 years since Marx formulated his critique of capitalism and political economy and published Capital.  Capitalism is now global, finance capital has expanded dramatically, imperialist power blocs have developed and capital has become ever more concentrated and centralised.  But it seems to me that the laws of motion in the capitalist mode of production have not so fundamentally changed that we need new categories to explain them; or we need to drop Marx’s basic value theory or his main law of the contradiction between productivity and profitability to explain crises and instead search for other explanations in the money and credit circuit.

If we do that, then we also reduce the role of the proletariat as the main agency for revolutionary change.  And in my view, it still is, if only by the absence of success in the last 150 years.  Revolutions based on the peasantry (China) or isolated in one country (Russia) have not delivered socialism even if they have removed capitalism, for a while.  Only the global proletariat in unity can do that.

The idea that Marx’s theory of value and crises is out of date and needed amending was the theme of my own paper at HM.  I quoted John Maynard Keynes in commenting that Capital was “an obsolete textbook which I know to be not only scientifically erroneous but without interest or application for the modern world”.  I wanted to defend Marx against this view of Keynes, which is still prevalent not only in bourgeois analysis, but also in recent biographies of Marx by former Marxist historians who claim that Marx was a man of 19th century with little to tell us about the 21st.

My paper above all aimed to show that Keynesian ideas have nothing in common with Marx’s critique of capitalism and are thoroughly designed to restore capitalism in crisis and make it work better.  HM London November 2017 This, I think, is important, because Keynesian theory and policies dominate the minds of the labour movement everywhere, as though they were a workable and radical alternative, while Marxist theory is ignored.

Of course, this is no accident because if you accept Marx’s critique of capitalism, you are compelled to require a revolutionary transformation of the capitalist mode of production – something that remains frightening, not just to the leaders of the labour movement, but also to many activists who fear the risks involved in revolutionary change.

My paper argued that, contrary to Keynes’ view, the labour theory of value provides a logical and empirically verifiable explanation of the capitalist mode of production, while, in contrast, the mainstream ‘marginalist’ theory is false, indeed unfalsifiable.  Marx’s great discovery about capitalism is that it is a system of exploitation of labour power to appropriate value produced by workers as surplus value or profit through sale on the market for commodities.  That is where profit comes from.  Keynes, like all mainstream economics, denied profit is the result of unpaid labour.  For him, profit is the marginal return on investment and justified to the capitalist.

Marx’s theory of crises means that rising productivity of labour through increased investment in means of production relative to labour will lead to the contradictory fall in profitability, engendering recurring crises.  Keynes, instead, saw slumps or depressions as due to a collapse in the ‘animal spirits’ of entrepreneurs and/or to too high interest rates charged by financiers. Crises are a ‘technical problem’ that can be corrected by boosting the ‘confidence’ of capitalists and lowering interest rates, or in the extreme, getting governments to spend to prime the pump of private industry.

For Keynes, once such measures are used to deal with these occasional slumps, then capitalism will be set fair for a golden future where hours of toil will fall dramatically with the use of technology; scarcity and poverty would disappear; and the main problem would be how to use our leisure time.  Well, now 80 years after Keynes argued this, more than 2bn people are in dire poverty, inequality has never been greater, technology is threatening to take away many jobs and the average working life has not fallen at all.  Moreover, the Keynesian prescriptions of easy money (QE) and government spending have signally failed to revive capitalism in the major economies since the Great Recession.  The Long Depression, as I have called it, remains.

Indeed, in my session, veteran French Marxist Francois Chesnais presented his thoughts from his book, Finance Capital Today, which was short listed for the Deutscher prize.  Chesnais argued that the current depression would never end.  The rate of profit globally is still falling and global debt is steadily rising.  The Great Recession has not ‘cleansed’ the system. And now global warming threatens to destroy the planet.

Now I am not quite so ‘pessimistic’ (or is it optimistic?) that capitalism is in its last throes.  But it is possible that capitalism could sink into ‘barbarism’ or the collapse of living standards, as the Roman slave empire did after 400AD, without being replaced by a new mode of production.  As Carchedi put it in a recent paper at the Capital.150 symposium, ‘the old is dying but the new cannot be born’ (Gramsci).  But capitalism could also stagger on with some revival in profitability after new slumps and the renewed opportunity to exploit new sources of labour in Africa and the periphery.  It will require the action of the global working class to achieve socialism.  It won’t come just because capitalism flounders economically.

Marx’s Capital provides us with the clearest and most compelling analysis of the nature of the capitalist mode of production and also its irreconcilable contradictions that show why capitalism is transient and cannot last forever, contrary to what the apologists for capital claim.

I don’t think we need to invent new and often confusing terms or categories to explain modern capitalism 150 years since Capital was published; or deny the role of exploitation in the creation of value at the heart of capitalism; or reduce the role of the global proletariat in ending it.

Brazil: the debt dilemma

November 10, 2017

Brazil faces a presidential election in October 2018.  This will offer a new benchmark for which way Brazilian politics and the economy will go.  Will a coalition of pro-big business parties and a president win or will a coalition led by the Workers party return to power under a leftist president (possibly Lula, the former president)?

Nobody I met in my visit to Brazil last week was sure what would happen.  International capital is optimistic that the current neo-liberal administration will gain a four-year term, possibly under former vice-president Temer or maybe Sao Paulo Mayor Joao Doria, a businessman and former TV show host.  Doria has expressed presidential ambitions and urged ‘centrist parties’ (ie pro-big business) to forge a common platform to combat ‘extremist candidates’ (Workers party). He appears to be Brazil’s version of Donald Trump.  He wants to “gradually” sell off Brazil’s greatest state asset, oil giant Petrobras. “There is no need for Petrobras to keep being a state-owned company. Brazil is isolated in the world. We can’t be afraid to do what’s necessary to insert Brazil in the global and liberal economy,” he said.  He is also in favour of privatizing Brazil’s electricity utility Eletrobras, ports, airports, railways, and waterways.

And he backs the usual neo-liberal measures (called “structural economic reforms”) designed to boost the rate of exploitation: weakening the unions; making it easier to fire workers; reducing their rights and conditions etc.  He also wants to cut pension terms and cut taxes for the rich and corporations. “The next president will have to prioritize pension reform,” he says.

All this is much in line with the policies of the current President Temer who got the job after Congress (controlled by the right parties) managed to get elected Workers party President Dilma Rousseff impeached and removed on charges of corruption (operation car wash).

Interestingly, Doria does not agree with Trump on protectionism.  In contrast, he wants a more “open economy” and a floating exchange rate. “We must avoid any protectionism that limits the country’s economic growth.”   Doria also wants to preserve Brazil’s central bank independence – classic position of finance capital – keeping it out of democratic accountability.  All this is pretty similar to Temer.  Indeed, if Doria became president, he would probably keep the same economic and financial team as Temer has.

However, the problem for the pro-capitalist forces is that Doria and Temer’s economic platform is unpopular among the majority of Brazilians – not surprisingly.  Indeed, Doria is careful to say that he will ‘preserve’ the highly popular Bolsa Familia benefit scheme for the poor that the Lula administration introduced.  As the World Bank has shown, 62% of the decline in extreme poverty in Brazil between 2004 and 2013 was due to changes in non-labor income (mainly conditional cash transfers under the Bolsa Família program).

Also, Temer is extremely unpopular, with poll ratings well below even Trump’s in the US.  That’s because he usurped the job from Dilmar and also avoided charges of corruption because of the backing of the right-wing majority in Congress.  Lula is now the most popular politician in Brazil again and could win the presidency, except he too has been found guilty of corruption in the courts and thus faces being banned as a candidate.

Meanwhile, the big economic issue is whether Brazil can recover from the deep recession that it entered in 2014 and only now is making a mild and weak recovery.

Temer is relying on foreign investment from multi-nationals and speculative investor flows to sustain this limited recovery but he may well be disappointed.  As a result of the slump, public sector debt has rocketed along with successive large deficits on the annual government budget.

Discretionary spending (education, health, transport etc) has been cut to the bone and now Temer, Doria and their backers want to destroy the state pension scheme in order to reduce debt and ‘balance the budget’.

Together with the increase in retirement age, the government is proposing the elimination of pensions by length of service and increasing from 15 to 25 the number of years of contributions necessary to qualify for an old age pension.

Brazil’s 27 states are also in deep trouble. Rio de Janeiro has had to delay payment of civil servant salaries (currently with a two months’ delay) and defaulted on its debt repayments. Rio Grande do Sul and Minas Gerais are also close to insolvency, while almost all other states are facing liquidity constraints and several are running up growing arrears with suppliers and employees.  In response the Temer government wants to introduce a 20-year fiscal austerity plane and shift the debt of the states into the hands of a separate off-balance sheet agency that will ‘manage’ the debt using taxpayer revenues.

I participated in a public hearing at the Brazilian Senate committee on human rights and an international conference on this issue of debt.  Both events were organised by Brazil’s Citizens Audit, a group with labour union support, that has been campaigning to explain why Brazil’s public debt is so high and the iniquity of the planned ‘privatising’ of debt management into the hands of the banking sector with losses for taxpayers and major liabilities.

I presented paper along with many other academics and activists from Latin America attending.  In my paper, I emphasised the huge rise in public sector debt globally – the result of the bailouts of the global banking crash and subsequent global recession of 2008-9 – and the role played by international agencies in taking over the management of debt in distressed economies at the expense of public services.

In Brazil’s case, the public sector debt has always been high compared to other so-called emerging economies, despite public services being poor, because of very high interest rates on the debt and because tax revenues are relatively low.

The World Bank claims that “a large structural fiscal imbalance lies at the heart of Brazil’s present economic difficulties. While revenues are cyclical and have declined during the recession, spending is rigid and driven by constitutionally guaranteed social commitments, in particular on generous pension benefits.”  So it is the fault of too much spending and too generous pensions, according to the World Bank.  But this is ideological nonsense.

Brazil is the most unequal society in the G20 (apart from South Africa).  But its tax system allows the richest income and wealth holders to get off lightly while the poor pay more – in other words, the tax system is very regressive and the tax base avoids the rich.  As a result, interest costs on the public debt relative to tax revenues are the highest in the world.

Indeed, Brazil’s Oxfam has shown in a recent report that, if the tax system was made progressive; tax avoidance schemes were stopped; and tax evasion (including the use of offshore funds a la the Panama and Paradise papers) was ended, Brazil’s tax revenues would be more than enough to improve public services, protect pensions and social benefits.

The economic collapse of 2014-16 has been followed by a weak recovery.  Indeed, the latest report on South America by the World Bank makes dismal reading.  The bank says: “economic activity remains on track to recover gradually in 2017-18, but long-term growth remains stuck in low gear”Growth has only turned positive because the world economy has picked up in the last year.  As the bank says: “A favorable external environment is helping the recovery. Global demand is getting stronger and easy global financial conditions—low global market volatility and resilient capital inflows—are boosting domestic financial conditions.”

But “despite this ongoing recovery, prospects for strong long-term growth in Latin America and the Caribbean look dimmer. In the next 3-5 years, Latin America is projected to grow 1.7 percent in per capita terms. This growth rate is almost identical to the region’s performance over the past quarter century and only marginally better than those in advanced economies, raising concerns that the region is not catching up to income levels in advanced countries.”

The World Bank, along with the IMF, forecasts just 0.7% growth this year for Brazil and 1.5% in 2018.  The domestic economy remains very weak.  Industrial production is up only on exports.  Capital investment remains down.

Average real incomes are still below the peak of 2014 even though inflation has dropped off from the recession.

The underlying reality is that Brazilian capital is still suffering from a long-term fall in its profitability from which it seems unable to escape, despite squeezing the labour force.

The World Bank points out that corporate debt as a share of GDP increased from an average of 23% of GDP in 2009 to 25% in December 2016) and a large share of corporates are overleveraged.  It is Brazil’s capitalist sector that is in trouble.  Naturally, the World Bank and the IMF suggest as solutions the usual batch of neo-liberal measures already adopted by Temer and proffered by Doria.

When the Brazilian economy boomed with the commodity price explosion of the 2000s, Brazil “experienced an unprecedented reduction in poverty and inequality” (World Bank) and 24 million Brazilians escaped poverty. And the gini coefficient of inequality of incomes fell from the shocking height of 0.59 to 0.51.

But after the recession of 2014-16 and under the Temer presidency, it is rising again.  The international agencies, foreign investors and Brazilian big business want an administration in power for four more years from 2018 to impose austerity, labour ‘flexibility’ and privatisations.  That will drive up inequality further.  Ironically, it won’t reduce the public sector debt because economic growth and tax revenues will be too low.  Indeed, the IMF forecasts debt will be much higher by 2002.

The World Bank sums up the state of affairs: “As the 2018 elections approach, the unity of the ruling coalition is likely to be increasingly tested. The 2018 presidential race remains very open and may result in new alliances which could reshuffle the political landscape. Further, the debate on the need for and the appropriate strategy to carry out fiscal adjustment and microeconomic reforms remains polarized.”

The Russian revolution: some economic notes

November 8, 2017

It’s almost exactly 100 years to the day (on the modern calendar) since the revolutionary insurrection in St Petersburg that led to the Bolshevik wing of the Russian Social Democrats gaining control of the major organs of power and establishing the rule of workers Soviets.

There has been much written about the ‘Russian revolution’ since and in past few weeks and months.  As this is a blog about economics, I shall just make a few notes about the economic foundations of the revolution and the ‘experiment’ of a planned, non-capitalist economy in a poor country amid the world of capital.

In hindsight, that the Russian people decided to end the 370-year rule of the Ivanov monarchy in 1917 was no surprise.  The world was changing: capitalism was becoming dominant and, with it, industrialisation.  An absolute monarchy sitting on a peasant country that was industrialising in the cities was an anachronism.  What was unique was that the Russian people went on to establish a republic and eventually a state where capitalism and imperialism had no control within just a few months.

The objective conditions for change were ripe. Russia was a poor country. It had great resources but these were ‘locked in’ by the vast size of the country and the extreme climate. Even in 1914, 85 per cent of the population were still peasants. Peasants had to practise subsistence farming. Economically, the vast majority of the population contributed very little to Russian society.  Rural peasants had been emancipated from serfdom in 1861, but the land was still owned by a few: 1.5% of the population owned 25% of it.

Workers too had good reasons for discontent: overcrowded housing, long hours at work- usually as much as 10 hours a day, six days a week- very poor safety and sanitary conditions, harsh disciplines, and maybe worst of all, inadequate wages with concurrently rising inflation; a recipe for economic turmoil. In one 1904 survey, it was found that an average of 16 people shared each apartment in St Petersburg, with as many as 6 people in each room.

But from the 1890s, under a succession of Tsarist ministers railways were built, foreign investment attracted and landholdings partially reformed. Economic growth rates averaged 9 per cent from 1894–1900. These were huge rates of change, even though most industrial investment was wasted on armaments because Tsar Nicholas II wanted to protect Russia’s position as a great power in competition with Japan in the east and Germany in the west.

The Witte years of economic reform from 1890-1905 brought some certain modernization and industrialization with them, but this expansion was uneven and depended on foreign capital, mainly French bank loans. Then there were five consecutive years of bad harvests from 1901-1905.  And the defeat by Japan in the 1906 war was the straw that broke the camel’s back and sparked the 1905 revolution – the dress rehearsal for 1917.

From 1905-1914, the economy grew at an annual rate of growth of 6%. Between 1890 and 1910, the population of St Petersburg doubled from just over a million and Moscow experienced similar growth.  This created a new proletariat, a much more dangerous threat to Tsarism than the peasantry had been. From 1911 to 1914, political discontent grew.

The First World War only added to the chaos; the vast demand for war supplies and workers caused more strikes, at the same time as conscription stripped skilled workers from the cities, and had to be replaced by unskilled peasants. The war brought famine due to the poor infrastructure of the railways and the need for supplying soldiers at the front. Ultimately, the soldiers themselves turned against the Tsar, bringing him down and with the formation of a republic eventually under the Bolsheviks the war was ended through an agreement on harsh terms with the Germans.

In the two years following the Revolution, there was an economic catastrophe. By 1919, average incomes in Soviet Russia fell by half that of 1913, a fall that had not been seen in Eastern Europe since the 17th century (Maddison 2001).

Worse was to come. After another run of disastrous harvests, famine conditions began to appear in the summer of 1920. An average worker’s daily intake fell to 1,600 calories, about half the level before the war. Spreading hunger coincided with a wave of deaths from typhus, typhoid, dysentery and cholera. In 1921, the grain harvest collapsed further, particularly in the southern and eastern grain-farming regions. More than five million people may have died prematurely from hunger and disease. Russia suffered 13 million premature deaths from conflict and famine. This was one in ten of the population living within the future Soviet borders in 1913.  And all this while a savage civil war raged as invading foreign armies and reactionary domestic forces tried to displace Soviet rule.

Eventually, after the victory of the Soviet government in the civil war and the stabilisation of the regime, economic performance, particularly after the New Economic Policy reforms from 1924, began to pick up.

And then during the period up to 1945, there was a dramatic rise in GDP per capita with industrialisation under the planned economy. That accelerated after 1945 and up to the 1970s.  Indeed, from 1928-1970, the USSR was the fastest growing economy except for Japan!

And even compared to the Third World, its performance was remarkable.

In 1952, the Soviet Union was only behind Ireland and Western Europe as a whole. By 1975, the USSR had a higher GDP per capita than Mexico, Latin America, Colombia, South Korea and Taiwan.

The success of the Soviet extensive growth model in the 1950s and 1960s was undeniable. But a phase of economic stagnation began in the 1970s.  The attempt to move to a new regime of intensive accumulation to one based on high productivity growth failed. And the militarization of the economy because of the cold war used up valuable productive investment potential.  The Russian elite tried to alter the economic model to one relying on the export of resources, rather develop industry and technology.  The economy became a one trick pony.

The attempt of Perestroika to build ‘market socialism’ and dismantle the plan was the final straw. Gorbachev’s reforms disrupted the system of planning and distribution and provoked chronic excess domestic demand and in the need for foreign imports.

With the collapse of the Soviet state, the wealth acquired by Soviet state managers during the Perestroika allowed them to take advantage of the ‘shock therapy’ reforms in the 1990s, turning themselves into what we now call the Russian oligarchs.

The ‘shock therapy’ introduction of capitalism led to the worst peacetime collapse in a major economy since the Industrial Revolution. By 1998, Russia’s GDP was 39% below its 1991 level.

As the Russian economy imploded, the opposite was happening in China, where the relaxation of restrictions on private capital development was combined with state control and planned and state-led heavy investment.  In the subsequent 16 years China has enjoyed the greatest economic growth ever seen in human history.

The Russian capitalist economy eventually recovered with global commodity price boom after 1998, but by 2014, Russia’s average annual GDP growth was still only 1.0%.  Life expectancy in capitalist Russia has now been surpassed by the Chines economic model.

One key lesson that we can draw from the Russian experiment is that it could not succeed indefinitely in the face of world capital.  Marx and Engels remarkably anticipated the eventual failure of the Russian Revolution. Marx thought that successful communist revolution presupposed the existence of an integrated world economy.

“The proper task of bourgeois society is the creation of the world market … the colonisation of California and Australia and the opening up of China and Japan would seem to have completed this process. For us, the difficult QUESTION is this: on the Continent revolution is imminent and will, moreover, instantly assume a socialist character. Will it not necessarily be CRUSHED in this little corner of the earth, since the MOVEMENT of bourgeois society is still in the ASCENDANT over a far greater area?”

And yet Marx also saw that the socialist transformation would not have to wait for each national capitalist economy to ‘mature’.  As he wrote, “If the Russian Revolution becomes the signal for a proletarian revolution in the West, so that the two complement each other, the present common ownership of land may serve as the starting point for communist development.”

Unfortunately, the revolution in the West did not materialise.  While the planned economy succeeded in transforming the lives of millions, Russia was isolated, surrounded and very quickly the regime itself degenerated into a totalitarian dictatorship and finally into a corrupt capitalist autocracy far from the aims of the revolution of 1917.

These are just a few notes.  For a comprehensive description of how a socialist society might operate based on a commonly owned and controlled economy, see Ernest Mandel’s treatise, In defence of socialist planning.  And for a compelling arguments on the feasibility of a planned economy delivering the needs of people, see Cottrell and Cockshott’s paper, Socialist planning after the collapse of the Soviet Union.

 

 

Xi takes full control of China’s future

October 25, 2017

Xi Jinping has been consecrated as China’s most powerful leader since Mao Zedong after a new body of political thought carrying his name was added to the Communist party’s constitution.  The symbolic move came on the final day of a week-long political summit in Beijing – the 19th party congress – at which Xi has pledged to lead the world’s second largest economy into a “new era” of international power and influence.

At a closing ceremony in the Mao-era Great Hall of the People it was announced that Xi’s Thought on Socialism with Chinese Characteristics for a New Era had been written into the party charter. “The congress unanimously agrees that Xi Jinping Thought … shall constitute [one of] the guides to action of the party in the party constitution,” a party resolution stated.

At the same time, the new Politburo standing committee of seven was announced.  These supreme leaders are all over 62 and so will not be eligible to become party secretary in five years.  That almost certainly means that Xi will have an unprecedented third term as party leader through to 2029 and thus remain head of the Chinese state machine for a generation.

What this tells me is that, under Xi, China will never move towards the dismantling of the party and the state machine in order to develop a ‘bourgeois democracy’ based on a fully market economy and capitalist business.  China will remain an economy that is fundamentally state-controlled and directed, with the ‘commanding heights’ of the economy under public ownership and controlled by the party elite.

Foreign businesses don’t find this an appealing prospect, unsurprisingly. In a January survey of 462 US companies by the American Chamber of Commerce in China, 81 percent said they felt less welcome in China, while more than 60 percent have little or no confidence the country will further open its markets in the next three years.

Indeed, China still ranks 59th out of the 62 countries evaluated by the Organization for Economic Cooperation and Development in terms of openness to foreign direct investment. At the same time, FDI is becoming less important to the economy: in 2016 it accounted for a little more than 1 percent of China’s gross domestic product, down from around 2.3 percent in 2006 and 4.8 percent in 1996.

An even bigger cause for concern for multinationals are Beijing’s plans to replicate foreign technologies and foster national champions that can take them global. A program launched in 2015, called Made in China 2025, aims to make the country competitive within a decade in 10 industries, including aircraft, new energy vehicles, and biotechnology.  China, under Xi, aims not just to be the manufacturing centre of the global economy but also to take a lead in innovation and technology that will rival that of the US and other advanced capitalist economies within a generation.

Beijing aims to boost the share of domestically made robots to more than 50 percent of total sales by 2020, from 31 percent last year. Chinese companies such as E-Deodar Robot Equipment, Siasun Robot & Automation, and Anhui Efort Intelligent Equipment aspire to become multinationals, challenging the likes of Switzerland’s ABB Robotics and Japan’s Fanuc for leadership in the $11 billion market.

Under Xi, China has also redoubled efforts to build its own semiconductor industry. The country buys about 59 percent of the chips sold around the world, but in-country manufacturers account for only 16.2 percent of the industry’s global sales revenue, according to PwC. To rectify that, Made in China 2025 earmarks $150 billion in spending over 10 years.  A January 2017 report by the U.S. President’s Council of Advisors on Science and Technology detailed China’s extensive subsidies to its chipmakers, mandates for domestic companies to buy only from local suppliers, and requirements that American companies transfer technology to China in return for access to its market.

And American imperialism is scared.  U.S. Commerce Secretary Wilbur Ross has described the plan as an “attack” on “American genius.” In an excellent new book, The US vs China: Asia’s new cold war?, Jude Woodward, a regular visitor and lecturer in China, shows the desperate measures that the US is taking to try to isolate China, block its economic progress and surround it militarily.  But she also shows this policy is failing.  China is not accepting control by foreign multi-nationals; it is continually developing trade and investment links with the rest of Asia; and, with the exception of Abe’s Japan, it is succeeding in keeping the Asian capitalist states ambivalent between China’s ‘butter’ and America’s ‘arms’.’  As a result, China has been able to maintain its independence from US imperialism and global capitalism like no other state.

This brings us to the question of whether China is a capitalist state or not?   I think the majority of Marxist political economists agree with mainstream economics in assuming or accepting that China is.  However, I am not one of them. China is not capitalist. Commodity production for profit, based on spontaneous market relations, governs capitalism. The rate of profit determines its investment cycles and generates periodic economic crises.  This does not apply in China.  In China, public ownership of the means of production and state planning remain dominant and the Communist party’s power base is rooted in public ownership.  So China’s economic rise has been achieved without the capitalist mode of production being dominant.

China’s “socialism with Chinese characteristics” is a weird beast.  Of course, it is not ‘socialism’ by any Marxist definition or by any benchmark of democratic workers control.  And there has been a significant expansion of privately-owned companies, both foreign and domestic over the last 30 years, with the establishment of a stock market and other financial institutions.  But the vast majority of employment and investment is undertaken by publicly-owned companies or by institutions that are under the direction and control of the Communist party. The biggest part of China’s world-beating industry is not foreign-owned multinationals, but Chinese state-owned enterprises.

And here I can provide some new evidence that, as far as I know, has not been noticed by any other commentators.  Recently the IMF published a full data series on the size of public sector investment and its growth going back 50 years for every country in the world.  This data delivers some startling results.

It shows that China has a stock of public sector assets worth 150% of annual GDP; only Japan has anything like that amount at 130%.  Every other major capitalist economy has less than 50% of GDP in public assets.  Every year, China’s public investment to GDP is around 16% compared to 3-4% in the US and the UK.  And here is the killer figure.  There are nearly three times as much stock of public productive assets to private capitalist sector assets in China.  In the US and the UK, public assets are less than 50% of private assets.  Even in ‘mixed economy’ India or Japan, the ratio of public to private assets is no more than 75%.  This shows that in China public ownership in the means of production is dominant – unlike any other major economy.

A report by the US-China Economic and Security Review Commission (http://www.uscc.gov/pressreleases/2011/11_10_26pr.pdf) found that “The state-owned and controlled portion of the Chinese economy is large.  Based on reasonable assumptions, it appears that the visible state sector – SOEs and entities directly controlled by SOEs, accounted for more than 40% of China’s non-agricultural GDP.  If the contributions of indirectly controlled entities, urban collectives and public TVEs are considered, the share of GDP owned and controlled by the state is approximately 50%.”  The major banks are state-owned and their lending and deposit policies are directed by the government (much to the chagrin of China’s central bank and other pro-capitalist elements).  There is no free flow of foreign capital into and out of China.  Capital controls are imposed and enforced and the currency’s value is manipulated to set economic targets (much to the annoyance of the US Congress and Western hedge funds).

At the same time, the Communist party/state machine infiltrates all levels of industry and activity in China.  According to a report by Joseph Fang and others (http://www.nber.org/papers/w17687), there are party organisations within every corporation that employs more than three communist party members. Each party organisation elects a party secretary. It is the party secretary who is the lynchpin of the alternative management system of each enterprise. This extends party control beyond the SOEs, partly privatised corporations and village or local government-owned enterprises into the private sector or “new economic organisations” as these are called.  In 1999, only 3% of these had party cells.  Now the figure is nearly 13%.  As the paper puts it: “The Chinese Communist Party (CCP), by controlling the career advancement of all senior personnel in all regulatory agencies, all state-owned enterprises (SOEs), and virtually all major financial institutions state-owned enterprises (SOEs) and senior Party positions in all but the smallest non-SOE enterprises, retains sole possession of Lenin’s Commanding Heights.

The reality is that almost all Chinese companies employing more than 100 people have an internal party cell-based control system.   This is no relic of the Maoist era.  It is the current structure set up specifically to maintain party control of the economy.  As the Fang report says: “The CCP Organization Department manag(es) all senior promotions throughout all major banks, regulators, government ministries and agencies, SOEs, and even many officially designated non-SOE enterprises. The Party promotes people through banks,regulatory agencies, enterprises, governments, and Party organs, handling much of the national economy in one huge human resources management chart. An ambitious young cadre might begin in a government ministry, join middle management in an SOE bank, accept a senior Party position in a listed enterprise, accept promotion into a top regulatory position, accept appointment as a mayor or provincial governor, become CEO of a different SOE bank, and perhaps ultimately rise into upper echelons of the central government or CCP — all by the grace of the CCP OD.”

China’s Communist party is now writing itself into the articles of association of many of the country’s biggest companies. describing the party as playing a core role in “an organised, institutionalised and concrete way” and “providing direction [and] managing the overall situation”.

There are 102 key state enterprises with assets of 50 trillion yuan that include state oil companies, telecom operators, power generators and weapons manufacturers.  Xiao Yaqing, director of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), wrote in the Central Party School’s Study Times, that, when a state-owned enterprise has a board of directors, its party boss also tends to be the board chairman. Communist Party members at state enterprises form the “the most solid and reliable class foundation” for the Communist Party to rule.  Xiao called the idea of the “privatisation of state assets” as wrong-headed thinking.

These 102 big conglomerates contributed 60 per cent of China’s outbound investments by the end of 2016.  State-owned enterprises including China General Nuclear Power Corp and China National Nuclear Corp have assimilated Western technologies—sometimes with cooperation and sometimes not—and are now engaged in projects in Argentina, Kenya, Pakistan and the UK.  And the great ‘one belt, one road’ project for central Asia is not aimed to make profit.  It is all to expand China’s economic influence globally and extract natural and other technological resources for the domestic economy.

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

Similarly, the great expansion of infrastructure investment after 2008 to counteract the impact of collapsing world trade from the global financial crisis and Great Recession hitting the major capitalist economies was no Keynesian-style government spending/borrowing, as mainstream and (some) Marxist economists argue.  It was a state-directed and planned programme of investments by state corporation and funded by state-owned banks.  This was proper ‘socialised investment’ as mooted by Keynes, but never implemented in capitalist economies during the Great Depression, because to do so would be to replace capitalism.

The law of value of the capitalist mode of production does operate in China, mainly through foreign trade and capital inflows, as well as through domestic markets for goods, services and funds.  So the Chinese economy is affected by the law of value.  That’s not really surprising.  You can’t ‘build socialism in one country’ (and if a country is under an autocracy and not under workers democracy, that is true by definition).  Globalisation and the law of value in world markets feed through to the Chinese economy.  But the impact is ‘distorted’, ‘curbed’ and blocked by bureaucratic ‘interference’ from the state and the party structure to the point that it cannot yet dominate and direct the trajectory of the Chinese economy.

It is true that the inequality of wealth and income under China’s ‘socialism with Chinese characteristics’ is very high.  There are growing numbers of  billionaires (many of whom are related to the Communist leaders). China’s Gini coefficient, an index of income inequality, has risen from 0.30 in 1978 when the Communist Party began to open the economy to market forces to a peak of 0.49 just before the global recession. Indeed, China’s Gini coefficient has risen more than any other Asian economy in the last two decades.  This rise was partly the result of the urbanisation of the economy as rural peasants move to the cities.  Urban wages in the sweatshops and factories are increasingly leaving peasant incomes behind (not that those urban wages are anything to write home about when workers assembling Apple i-pads are paid under $2 an hour).

 

But it is also partly the result of the elite controlling the levers of power and making themselves fat, while allowing some Chinese billionaires to flourish.  Urbanisation has slowed since the Great Recession and so has economic growth – along with that the gini inequality index has fallen back a little.

The Chinese economy is partially protected from the law of value and the world capitalist economy.  But the threat of the ‘capitalist road’ remains.  Indeed, the IMF data show that, while public sector assets in China are still nearly twice the size of capitalist sector assets, the gap is closing.

Under Xi, it seems that the majority of the party elite will continue with an economic model that is dominated by state corporations directed at all levels by the Communist cadres.  That is because even the elite realise that if the capitalist road is adopted and the law of value becomes dominant, it will expose the Chinese people to chronic economic instability (booms and slumps), insecurity of employment and income and greater inequalities.

On the other hand, Xi and the party elite are united in opposing socialist democracy as any Marxist would understand it.  They wish to preserve their autocratic rule and the privileges that flow from it.  The people have yet to play a role.  They have fought local battles over the environment, their villages and their jobs and wages.  But they have not fought for more democracy or economic power.

Indeed, the majority still back the regime.  The Chinese people support the government, but they are worried about corruption and inequality – the two issues that Xi claims that he is dealing with (but in which he will fail).

A recent survey by the Pew Research Center found that 77% of those asked believe that their way of life in China needs to be protected from “foreign influence”.  Political scientist Bruce Dickson collaborated with Chinese scholars to survey public perceptions of China’s ruling Communist Party. Researchers conducted face-to-face interviews with some 4,000 people in 50 cities across the country.  Dickson concluded: “No matter how you measure it, no matter what questions you ask, the results always indicate that the vast majority of people are truly satisfied with the status quo.”

It seems that Xi and his gang are here for a long time ahead.

 

Abe’s mandate

October 23, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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