Facing up to Libra

June 29, 2019

Libra is the name that Facebook, the global social network company, is calling its planned international digital currency.  What is Facebook’s purpose with this planned new currency?

According to Facebook, Libra is “a simple global currency and financial infrastructure that empowers billions of people”. In its statement, the company says that: “The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.” Securing your financial assets on your mobile device should be simple and intuitive. Moving money around globally should be as easy and cost-effective as—and even more safe and secure than—sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn. New product innovation and additional entrants to the ecosystem will enable the lowering of barriers to access and cost of capital for everyone and facilitate frictionless payments for more people.”

So the professed aim is to provide a currency for everybody using the internet to buy and sell goods and services to each other across the world, seamlessly and with near-zero transaction costs.  International banks and national currencies would be by-passed and all their costs and fees would be avoided.  Moreover, all transactions would be private and not viewable by the authorities or banks.  And supposedly over one and half billion people without bank accounts would be able to carry out transactions globally on their phones and laptops, not using cash.

Libra’s setup may make international transactions a little faster, but actually not nearly as fast as traditional payments processors. It looks like Libra can do about 1,000 transactions per second. A traditional payments processor like Visa can do about 3,000 transactions per second.

In principle, any digital currency ought to make payments for goods and services simpler and cheaper so that people do not need to carry wads of cash about (eg flying to country with a suitcase).  A digital currency seems the way to go in the 21st century – but it immediately poses issues.  Who controls this currency and what about people who want to hold cash and do not want to be forced to have a bank account or a Libra ‘wallet’ to buy things?

Facebook is not a pioneer here – already a digital payments service operates in China with WeChat and Alipay.  The issue here is the sheer size of Libra’s global grasp, with the billions of Facebook users and also the number of large multinationals that have pledged to back and take the new currency.

Libra is the latin word for pound in weight of silver or gold.  It was a universal measure of value in Roman times.  But Facebook’s Libra will be no such thing. It is not the future people’s currency controlled by the people.  It is a privatized currency for commercial gain for Facebook and its investment backers. It will be owned and controlled by a board of multi-national corporate investors who will pledge capital to get it going.

The US dollar currency is owned by the US government.  This is the same for other national currencies.  As such, there are regulations and laws on how national currencies are issued.  None of that will apply to Libra.  Holders of Libra will have to trust Facebook and the investing board, not any government, that nothing will go wrong with their money.

Facebook says it will be using blockchain technology, the decentralized digital settlement system that is behind such so-called cryptocurrencies, like bitcoin.  Cryptocurrencies aim to eliminate the need for financial intermediaries by offering direct peer-to-peer (P2P) online payments. Blockchain is a ‘ledger’ containing all transactions for every single unit of currency. It differs from existing (physical or digital) ledgers in that it is decentralized, i.e., there is no central authority verifying the validity of transactions. Instead, it employs verification based on cryptographic proof, where various members of the network verify “blocks” of transactions approximately every 10 minutes. The incentive for this is compensation in the form of newly “minted” cryptocurrency for the first member to provide the verification.

The purpose of money in a capitalist economy is first as a universal means of payment, then as a store of value and finally as a unit of account in balance sheets.  Cryptocurrencies are nowhere meeting these three criteria.  Their function as a unit of account and store of value are greatly impaired by their speculative nature. The value of bitcoin is very volatile because it is really only bought and sold by speculators and not used by the general public or corporations for transactions or savings.

Libra does not even have the ambition of bitcoin to be a universal decentralized digital currency for people.  It will be a private currency designed to extend Facebook’s control over the purchasing power of its 4bn users and make money.

Libra is really, in financial jargon, an exchange traded fund (ETF), where the value of Libra is based on a ‘basket’ of five national currencies (dollars, euros, yen, sterling and Swiss franc) according to a weighted ratio. Libra is not a true international digital currency in its own right but dependent on the value of these major national currencies.  It’s a private currency for Facebook users. It will be similar to the Special Drawing Rights (SDR) used by the IMF for the settlement of contributions and payments by national governments to the IMF. SDRs are also tied to the value of national currencies like the dollar.

And here is the rub.  If you buy some Libra and hold it in your Facebook Libra ‘wallet’ for future purchases, you won’t get any interest as you would if you held dollar deposits in a bank. But this Libra sitting in wallets around the world will be invested by the multi-national board in financial assets to make money for them.  In effect, all interest goes to the owners of this private currency – it’s a form of seignorage, previously only available to national governments and central banks for the use of their currencies.  As the white paper puts it: “Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jump-start the ecosystem, and support further growth and adoption…..Users of Libra do not receive a return from the reserve.”

Indeed, the huge amounts of Libra that build up in Facebook users ‘wallets’ would become available for the board to speculate in financial assets globally, thus adding a new dimension to the possibility of credit bubbles and financial crashes that could come back to hit billions of Libra users.  The regulation of the banks and other financial institutions has not worked, as the global financial crash proved.  And the huge rise of private sector debt continues alongside the rise in public sector debt that mushroomed to bail out the global banking system. With a successful Libra, there would be another new layer of credit-fuelled debt created, with repercussions for billions of people and this time without any deposit insurance from governments!

What is worrying from global capital’s view is that if a large section of a country’s population were to use Libra instead of the sovereign currency, central banks could be left powerless or unable to stop the rapid conversion of currency into Libra during periods of financial distress.  Now you might say that’s good news for people, if not for capital.  People need to break away from the control of central banks, commercial banks and governments and ‘free up’ the currency and reduce the cost of our transactions.

But Libra will not deliver on this aim.  Libra’s claim that the currency will be designed and operated “as a public good” with “decentralised governance” is hard to tally with an operating structure comprised of unaccountable and highly-centralised global corporations such as Facebook, Uber and Paypal.  With cash use increasingly restricted, we’re already reliant on a handful of big banks to manage our money and make payments, while Visa and Mastercard have achieved almost total dominance of the card market. Visa now accounts for 98% of debit cards issued in the UK.  Libra is really a corporate attempt to assert even greater control over our money.

What we really want from a digital currency is transparency in its operations and privacy with your data – Facebook’s Libra is the mirror opposite of that.  What it does show is the bureaucratic, inefficient and autocratic control of our money by the state and its institutions is now under threat from mega-global tech companies using their control of social media.  This is ironic just when the supporters of Modern Monetary Theory are telling us that it is the state that controls and creates money so we can use the state to get employment and incomes for all.  Now it seems the state will be challenged by mega private monopolies for the control of our money.

What we really need is democratic control of financial institutions and the take over of mega-tech companies like Facebook, Google and Amazon.  Governments should then use technological innovation to develop an international digital currency controlled and run in the public interest.  But such a public digital currency would require common ownership and control of financial institutions and digital monopolies.  In the meantime it will be the US dollar or Libra… maybe.

Economics for the summer

June 23, 2019

Last week Martin Wolf, the FT economics journalist, listed the new economics books that he would recommend for summer reading.

He started off with Austerity: When It Works and When It Doesn’t, by Alberto Alesina, Carlo Favero and Francesco Giavazzi, Princeton, RRP£27/$35.  Wolf commented that “this is an extremely important book. It uses empirical evidence to assess the effects of fiscal austerity through spending cuts versus tax increases. It concludes that the negative effects on output of spending cuts are far smaller than those of tax increases. Moreover, spending-based plans are more effective in lowering the growth of debt than tax increases. Yet, it should be noted that the costs are assessed only in terms of aggregate output and so ignore the distributional impacts of spending cuts versus tax rises.”

Alesina et al have been leading supporters of the positive impact of ‘austerity’ on economic growth, in contrast to the pile of evidence from the IMF and other sources that the policies of austerity have not helped (instead hindered) economic recovery in any of the major capitalist economies.

When they first published a paper on this, Alesina et al reckoned that “fiscal adjustments based upon cuts in spending are much less costly, in terms of output losses, than those based upon tax increases. ….spending-based adjustments generate very small recessions, with an impact on output growth not significantly different from zero.”  And “Our findings seem to hold for fiscal adjustments both before and after the financial crisis. We cannot reject the hypothesis that the effects of the fiscal adjustments, especially in Europe in 2009-13, were indistinguishable from previous ones”.  In other words, cutting government spending (austerity) had little effect on the real GDP growth rate and that applied to the post-crisis ‘austerity policies of European governments.

At the time, I wrote in a post that “economic growth in capitalist economies depends on an expansion of business investment and that depends ultimately on the profitability of those investments. If we look at the multiplier effects of government spending, taxation and borrowing on growth through the prism of profitability, we find that it is very unlikely that extra government spending, whether financed by taxes or borrowing, would boost profitability in the business sector and therefore raise capitalist investment and economic growth.” In other words, raising or cutting government spending will have only marginal impact on growth.  The change in the profitability of capital is what matters in a capitalist economy.

Wolf’s second recommendation was Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy, by Anders Aslund, Yale University Press, RRP£25/$35. Wolf comments that “This superb book shows why Putin’s regime is a leading catastrophe of the 21st century. Russia’s president has constructed what Aslund calls “an iron quadrangle of four circles of power”: vertical state power; big state enterprises; his cronies; and the “Anglo-American havens, where he and the cronies can safely keep their money”.  According the author what is needed is “radical transparency over the beneficial ownership of wealth held in the west.”

In other words, we need to expose the money laundering and tax avoidance of Russian oligarchs that has been assisted by Western banking.  After the scandals of the Panama papers and the Deutsche Bank and Danske bank tax scams, that is a forlorn hope. As Gabriel Zucman  and Thomas Wright have shown in a meticulous and in-depth analysis of the size and extent of tax havens and tax avoidance, far from them being reduced or controlled, on the contrary, such schemes are an increasing part of international corporate profits, organised and transacted by the banks. About half of all the foreign profits of US multinationals are booked in tax havens.

The next book Wolf highlights is The Globotics Upheaval: Globalization, Robotics and the Future of Work, by Richard Baldwin, Weidenfeld & Nicolson, RRP£20.  According to Wolf, “Globotics” describes the integration of artificial intelligence with robotics. Improvements in technology will make it far easier to collaborate at a distance. Moreover, many tasks now carried out by people will be done by AI and robots. The combination will, he argues, transform (and threaten) the economic opportunities of huge numbers of relatively educated people in high-income countries.

In other words, AI and robots will boost trade but reduce jobs in areas that previously assisted trade and investment.  Yes, it’s a dialectical issue. Reducing the labour time, particularly transport and logistics time, can only increase productivity.  But under capitalism, that does not mean less working time for all, but a loss of jobs that technology replaces. Those jobs must be replaced by new jobs associated with the new technology. That can happen.

But as Marx pointed that does not mean a seamless process of change. “workers who have been thrown out of work in a given branch of industry can no doubt look for employment in another branch…even if they do find employment, what a miserable prospect they face! Crippled as they are by the division of labour, these poor devils are worth so little outside their old trade that they cannot find admission into any industries except a few inferior and therefore over-supplied and under-paid branches. Furthermore, every branch of industry attracts each year a new stream of men, who furnish a contingent from which to fill up vacancies, and to draw a supply for expansion. As soon as machinery has set free a part of the workers employed in a given branch of industry, the reserve men are also diverted into new channels of employment, and become absorbed in other branches” (Grundrisse).

Wolf also recommends The Sex Factor: How Women Made the West Rich, by Victoria Bateman, Polity, RRP£16.99.  Bateman is the Cambridge academic, notorious for her “naked protests” on TV against Brexit.  Apparently she argues that “women’s freedom is vital for economic prosperity. It boosts wages, skills, saving and entrepreneurial spirit, and it delivers a democratic and capable state.”

Although Bateman is a feminist, she believes, against many feminists, that markets “have . . . been central to building women’s freedom”.  Wolf thinks she is right on that.  But does the evidence support the view that capitalism and markets have helped make women freer? Yes, capitalist accumulation has led to a sharp increase in the employment of women, but also to the increased exploitation of female labour power (at lower wages than men). Yes, women have made Western capitalism rich, but not vice versa.

The most self-serving of the books recommended by Wolf is Firefighting: The Financial Crisis and its Lessons, by Ben S Bernanke, Timothy F Geithner and Henry M Paulson Jr, Penguin, RRP$16/Profile, RRP£9.99.  In this we are told by the very men that ensured the bailout of US banking and financial institutions with taxpayer money how they saved the world (for capitalism).  Wolf agrees “If what these three men did during the financial crisis had not been done, the world would, in my view, have experienced a second great depression.” 

This book is really a repeat of Ben Bernanke’s own memoir published four years ago when he defended his role as head of the US Federal Reserve. In that book he would like us to think that he “courageously” saved the world by adopting unconventional monetary policies learnt from the lessons of the Great Depression and in the teeth of orthodox opposition.  But he did not save the world but only the banks (the biggest ones) and his unconventional monetary policy has not revived the US economy, let alone the world, but only fuelled a new credit-led stock market and bond boom for the 1%.

Wolf admits that “the story told in this short book contains a sober warning. Despite stronger regulation and more robust financial systems, further financial crises will happen. Policymakers need tools to put out these fires. But, in the US at least, their ability to do so is now less than it was before the crisis. We must pray that we do not learn to regret this.”

Perhaps the answer is to adopt a policy of massive monetary injections directly to the public, by-passing the banks.  This is the policy recommended to save the world economy in the next crisis in The Case for People’s Quantitative Easing, by Frances Coppola, Polity, RRP£35. Wolf: “The alternative, she argues, is for central banks to create money in a crisis that provides people with purchasing power directly. The view that this must be part of the policy arsenal is right. We should think about how this is to be done when a crisis hits once again.”  The ‘money trick’ continues to dominate the thinking of Keynesian and post-Keynesian economists like Coppola, Pettifor and, of course, the Modern Monetary Theorists.  My views on these ideas and policies are expressed in several posts.

In The Wealth Effect: How the Great Expectations of the Middle Class Have Changed the Politics of Banking Crises, by Jeffrey M Chwieroth and Andrew Walter, Cambridge University Press, RRP£29.99/$39.99, Wolf tells us that future financial crises will require yet more bailouts by government and this book says there is no way out of this. “We have ended up in a race between the regulatory capacity of the state and the financial sector’s ability to discover new ways to collapse. There is no straightforward way out of this dangerous red queen’s race.”

In many posts and papers, I have argued that there is a way out of recurring financial crises.  Regulation has not worked and will not work.  Public ownership and public banks under democratic control is the only way to end speculation, money laundering and tax evasion by the financial sector. To quote Lenin: “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.”

Wolf praises the next book Democracy and Prosperity: Reinventing Capitalism through a Turbulent Century, by Torben Iversen and David Soskice, Princeton, RRP$29.95/£24 because it reckons that ‘democracy’ and capitalism go together and cannot be separated: “democracy and markets have proved highly successful over the past century and, in all probability, will continue to be so in future.” This rosy-glassed view stands in opposition to the reality that when it comes to a choice between preserving capitalism and the profits of the owners of capital and sustaining ‘democracy’, the latter has always been sacrificed for the former.

Then there is China. Wolf recommends The State Strikes Back: The End of Economic Reform in China, by Nicholas Lardy, Peterson Institute for International Economics, RRP$23.95.  Lardy’s new book promotes his argument that “China has moved away from market-oriented reform towards a more state-controlled economy, partly in order to strengthen the control of the party-state. This, he argues, is a mistake. Among other things, China cannot simultaneously promote a state-controlled domestic economy and argue for an open world economy. It must choose. The current path will prove damaging for both China and the world.”

Lardy has regularly forecast the collapse of the Chinese economy unless it fully adopts markets and gets rid of state control.  And yet the evidence of China’s economic success stands in contradiction to this view. Yes, China is an autocratic, one-party state increasingly dominated by one man. But a switch to open markets, free trade and opening up to foreign investment will not deliver ‘democracy’, but the very economic collapse Lardy claims it will avoid.

That markets are no solution to economic prosperity and democracy is actually hinted at in The Third Pillar: The Revival of Community in a Polarised World, by Raghuram Rajan, William Collins, RRP£30/Penguin Press, RRP$30.  Rajan, former governor of the Reserve Bank of India, argues that the balance between the market economy and the state has been disrupted. The solution is to empower a third pillar: the local community. He recommends shifting “from maximising shareholder value to maximising the overall economic value of businesses, taking in investments by workers and suppliers.”  Rajan has claimed in the past that he was one of the few mainstream economists that warned about the dangers of financial speculation before the global financial crash but he was dismissed.  Now it seems that his solution is the utopian one of ‘community politics’ and ‘shareholder democracy’.  More sophistry.

In The Power of Capitalism: A Journey Through Recent History Across Five Continents, by Rainer Zitelmann, LID Publishing, RRP£23.79/$33.42 , we get the true voice of capital.  According to Wolf, “Capitalism is the only economic system that has proven to be successful, in the long term. This is the core argument of Zitelmann’s lively polemic. As is true of most ideologues, he oversimplifies. He understates the costs of high inequality. He also understates the fragility of free-market financial systems. But, at a time when socialism is becoming politically attractive, he rightly points to the proven economic superiority of market economies built on private property.”

Zitelmann is in no doubt that capitalism is the best of all possible worlds.  Wolf agrees and he does not want ‘socialism’ either, except that he is concerned that the financial sector is unstable and capitalism may create inequality.  There you have it.  One wing of the mainstream is all out for capital and markets; the other wing is too, but wants to manage it better and make it fairer.

Strikes in the Long Depression

June 18, 2019

Jorg Nowak, a fellow at the University of Nottingham, UK has just published Mass Strikes and Social Movements in Brazil and India:: popular mobilisation in the Long Depression.  Nowak argues that in the 21st century and in this current long depression in the major economies, industrial action is no longer led by organised labour ie trade unions, and now takes the form of wider ‘mass strikes’ that involve unorganised workers and wider social forces in the community.  This popular mobilisation is closer to Rosa Luxemburg’s concept of mass strikes than the conventional ’eurocentric’ formation of trade unions.

The nature of global labour struggles against capital and the changing forms of class conflict is important.  But what also interested me was Nowak’s chapter on the political economy of mass strikes in the current global capitalist crisis – and in particular the section on strikes and economic cycles (pp113-117).

In that section, Nowak develops the argument that the intensity of class conflict between labour and capital varies with stages in the economic cycle of capitalist economic upswings and downswings.  He cites various authors who seek to show that when capitalism is in a general upswing in growth, investment and employment, class conflict as expressed in the number of strikes rises, particularly near the peak of the upswing.

Nowak surveys the work of those authors (including my own) that assert evidence for a Kondratiev-type cycle or wave in capitalist expansion. The mostly likely length of a full Kondratiev cycle is put at 64-72 years (longer than traditionally claimed).  If that K-cycle is broken down into ‘seasons’; first there is the ‘spring’ period of recovery from depression, with rising profitability of capital and a revival of labour organisation; then there is a summer period of falling profitability and strong labour forces.  Those two seasons complete the K-cycle upswing.  Then in the downswing comes autumn (rising profitability but weakened labour) and finally winter (economic depression).  Nowak reckons that the two periods of most intensive class conflict are at the cusp of spring through into summer seasons (as in 1964-82, for example).  Then there are weaker more local struggles towards the end of the downswing in the winter season. Nowak presents two case studies based on India and Brazil in the period 2010-14 to argue for this theory and to generalise it internationally.

Back in 2006, in my book, The Great Recession (2009), I also argued that K-cycles could be correlated with the intensity of class struggle.  I developed this further in my book, The Long Depression (2016).  More recently, I wrote a chapter on the UK in World in Crisis (2018) in which I outlined the trajectory of the UK rate of profit since 1855 and how it matched broadly the ‘seasons’ in the K-cycle.

In 2017, I took this scenario further in a paper to the Capital:150 conference held in London to commemorate the publication of Marx’s Capital Volume One.  In that paper, I attempted to map out the class struggle in relation to the movement in the rate of profit for the UK.

When Marx was writing Capital, the UK economy was experiencing a boom in profitability and growth and British capital was ruling the world and at its zenith.  However, from the late 1860s, profitability turned down and the UK, along with other major economies entered a long depression through the mid-1880s (longer in the US).  Depression weakened the old unions and class struggle faded.  After the crushing of the Paris Commune in 1871, the first international was dispatched to retirement in New York by Marx.

If we look at the history of British capital after Marx’s death in 1883, I think we can link the profitability of capital to the intensity of class struggle as defined by the level of strikes.  In the period from the 1890s to WW1, we find that strikes were initially high as new mass unskilled unions formed as British capital recovered some profitability after the end of the depression of 1880s.  But strikes dropped off after the late 1890s as profitability rose and wage demands were met.  However, from the 1900s profitability of capital began to diminish and in the years leading up to the war, strong unions and a rising labour movement engaged in more intensified struggle.

After the end of the war, that struggle resumed.  But with the defeat of the transport unions in 1921 and the general strike in 1926, UK profitability jumped up and intense class struggle dropped away through to the end of the WW2.

The post-1945 period started with high profitability and growth (after 1946), leading to a recovery in trade unions (in new industries).  Strikes rose a little but class struggle was generally ameliorated by concessions and wage increases.  However, from the mid-1960s, UK capital entered a long profitability crisis (as in other economies).  Capital needed to reverse this by crushing labour power.  Strong unions took on capital in the most intense class battle since the early 1920s.  Two big slumps and other neo-liberal measures eventually defeated union power and the class struggle subsided.  The neoliberal period ended in the 2000s and capitalism entered a long depression after the Great Recession.  There has been no recovery in the labour movement or class struggle (at least as measured by strike rates).

This map of the class struggle in Britain implies that only a sustained recovery in profitability in capital that also allows labour to recover its organised strength in new industries and sectors can create the conditions for intensified struggle when profitability eventually drops back again – as it will.  That suggests a generation ahead before we can see intense class struggle as experienced in the 1910-26 period or in the 1970s.  This is a similar conclusion reached by Nowak (p115).

Nowak considers two case studies of mass strike waves in the winter season of the current cycle – the Long Depression.  I presented a paper to the Society of Political Economy in Brazil last year (The rate of profit and class struggle) that also looked at the Brazil experience using macroeconomic data.  Noronha et al. (1998) conducted a study about the evolution of strikes in Brazil, identifying some key characteristics observed from the end of decade of 1970s and until the beginning of decade of 1990[i].

According to those authors, the phenomenon of Brazilian strikes began around 1978 in the main industrial area of the country and identified three major cycles of strikes: first cycle had an upward trajectory, ranging from 1978 to 1984, where the organization of unions began in Sao Paulo and spread to other regions in the country; the second cycle occurred between 1985 and 1989 and presents a flat evolution path; finally, the third cycle was characterized by a decline in stoppages after 1990.[ii]  Thus a rise in strikes matched a period of falling profitability from the mid-1970s to the mid-1980s.  Strikes flattened out with the flattening out of profitability up to the end of the 1980s. The rise in the rate of profit in the 1990s and the adoption of neo-liberal policies saw a decline in class struggle.

In Brazil, unionization rates experienced a small decline during the 1990s, yet between 2000 and 2006 this trend was reversed.[iii]  The number of strikes nearly tripled between 2002 (298 strikes) and 2012 (873) while the number of working-hours lost more than tripled in the same period. According to Brazil DIEESE’s estimates, in 2002 working-hours lost due to strikes amounted to around 116.6 million while in 2012 it was around 381.7 million.

The profitability of capital in Brazil peaked in the late 1990s and early 2000s on the measures above.  But Brazil’s labor movement strengthened in the early 2000s, so when profitability began to fall again and employers applied pressure to control the cost of labour, there was a class reaction through increased strikes.  The Great Recession did not affect Brazil’s economy severely until the commodity price boom collapsed in 2011.  The strike wave faded in the initial period of the global crash but started to rise again from 2010 – up to 2016 according to Nowak.

So it seems that class struggle (as measured by strikes) tends to be more intense in the summer ‘season’ of the K-cycle, when profitability has been falling but the labour movement and workers’ confidence has not yet been crushed.  Eventually, labour defeats and economic slumps usher in a period (neo-liberal) when class conflict is subdued.  This continues in the ‘winter’ period of low profitability and weak growth, although Nowak provides evidence that there can also be a strike wave towards the end of this period (2010-14), perhaps from new sectors of the economy that had not been in action before.

[i] Noronha, E. G;. Gebrin, V.; Elias Jr. J. Explicacoes para um Ciclo Excepcional de Graves: o Caso Brasileiro. XXI Congresso internacional do LASA, Latin American Studies Association, 1998.

[ii] Aricieri Devidé Júnior, José Raimundo Carvalho,Strike Duration after Collective Bargaining Legislation Changes: A Reappraisal of the 1988 Brazilian New Federal Constitution with Better Micro Data

[iii] Walter Arno Pichler, Giovana Menegottol, Union membership and industrial action in Brazilian public sector in the 2000s

The heroes of finance and Powell’s put

June 10, 2019

At the weekend G20 meeting of finance ministers and central bankers in Japan, the world’s finance leaders tried to put a brave face on the situation.  Tension over the intensifying trade war between China and the US was the biggest talking point at the meetings. Officials also wrangled over wording for a final communique on how to describe their concerns for world growth. While they flagged that it appears to be ‘stabilizing’, they also warned that the risks were tilted to the downside. “Most importantly, trade and geopolitical tensions have intensified. We will continue to address these risks, and stand ready to take further action”, the communiqué said.

But where is this action to avoid a new global recession going to come from? The world’s central banks, it seems. “Central banks are heroes,” OECD Secretary General Angel Gurria told Bloomberg Television in an interview during the meetings. “The question is: how much armoury do they still have, how many bullets, particularly silver bullets?”

In other words, what monetary policy weapons do the major central banks have left after ten years of keeping policy interest rates near or even below zero, and after massive injections of money through ‘quantitative easing’, buying up all the debt of governments and corporations from banks in order to encourage them to lend for investment?

Well, we are about to find out in the US.  The Federal Reserve led by Jay Powell, having gradually raised its policy rate for the last four years, is now indicating that it will reverse this policy and take its rate down again in order to boost the American and world economy. Powell told markets and the G20 ministers that the Fed stood ready to cut interest rates, saying it would “act as appropriate to sustain the expansion”.

A put is financial jargon for betting on a rise in financial assets in futures markets.  In the mid-1990s the then Fed chair Alan Greenspan reduced interest rates to boost the stock and property markets.  The Greenspan ‘put’ ‘took the stock market to a new peak in 2000, (but it was followed by the huge ‘dot.com’ bust).  We are about to have the Powell put to do the same.  Financial markets are now betting that the Fed will cut rates and keep the cost of borrowing really low in order to speculate further in financial markets. Jay Powell is set to be the new hero.

Thus the fantasy world of financial markets may be extended.  But will cutting interest rates avoid a recession in the ‘real’ economy?  Everywhere the ‘hard data’ are showing a sharp slowdown in economic growth, a collapse of the world car industry, and outright slumps in many large so-called emerging economies.  Above all, there is a significant a contraction in world trade as the trade and technology war instigated by the US against China hots up.

US economic growth had accelerated (from 2% to 3% a year) in 2018 after the Trump corporate tax cuts boosted profits – and unemployment dropped to post-war lows.  But last Friday’s May employment growth figures were the lowest in years and wage growth that had been accelerating also dropped off.  So there are signs that Trumponomics has been exhausted.  Now Jay Powell must step up to the proverbial baseball plate (after being ‘encouraged’ by Trump).

Elsewhere in the world, two key G7 economies continue to show a significant slowdown in economic growth. German industrial production plunged 1.9% from a month earlier in April.  That was the biggest drop in output since August 2015.  Year-on-year, industrial production dropped 1.8% over April 2018, following a 0.9% fall in March. Manufacturing output dropped 3.4% over the year!. Both German exports and imports fell.  German growth is now the slowest in five years. As a result, the German Bundesbank central bank cuts its GDP growth forecast for this year to just 0.6%, down from 1.6% at the beginning of 2019.

At the same time,the G20’s host, Japan announced that wages had fallen for the fourth consecutive month and overall household spending slowed sharply. Unemployment, currently at record lows, was now set to rise.  And most important, China’s economic growth rate is at its lowest level in over a decade – even if the rate of 6%-plus is around three times the average in the rest of the G20 economies.

In its semi-annual report on Global Economic Prospects, the World Bank cuts it forecast for global economic growth (that’s all countries including China and India) for this year by 0.3% percentage points to 2.6%. “There’s been a tumble in business confidence, a deepening slowdown in global trade and sluggish investment in emerging and developing economies,” said new (Trump-appointed) World Bank President David Malpass, “Momentum remains fragile.”

World trade growth is expected to fall to its lowest level since the global financial crash of 2008. The bank also warned that risks are skewed “firmly” to the downside, citing reignited trade tensions between the U.S. and China, financial turbulence in emerging markets and sharper-than-expected weakness in advanced nations, particularly Europe. Hidden in the back of its report, World Bank economists reckon that “A sharper-than expected deceleration of activity in systemically large economies—such as China, the Euro Area, and the United States—could also have broad ranging repercussions. The probability of growth in 2020 being at least 1 percentage-point below current projections is estimated at close to 20 percent. Such slowdown would be comparable to the 2001 global downturn.”

Another sign that the world capitalist economy is turning sour is what’s happening in the smaller G20 economies.  Growth in the Australian economy fell to its weakest rate in almost a decade in the first three months of this year. The economy grew by just 1.8 per cent year on year in the first quarter, and down from 2.3 per cent year on year in the preceding fourth quarter. This is Australia’s worst quarterly growth showing since the end of 2009.

Among the so-called BRICS (Brazil, China, India, Russia and South Africa), it is looking even worse. The South African economy is now suffering its worst slump in a decade. Output in Africa’s most industrialised nation dropped by an annualised 3.2 per cent in the first quarter, its largest quarterly fall since 2009. Power-intensive industries such as manufacturing and mining recorded the biggest drops in activity in the quarter. Mining activity fell by more than 10 per cent while manufacturing dropped 8.8 per cent.

Turkey went into a recession earlier this year under Turkey’s Trump, President Erdogan.  Argentina was already in a slump in 2018 under the governance of the right-wing administration of President Macri.  The country is now experiencing vicious austerity measures at the behest of the IMF which is bailing out the Macro government with the biggest loans in its history.

But the likely trigger of a new recession is the ongoing and intensifying trade and technology war between the US and China.  Neither side appears to be ready to back down and, as a result, world trade growth is diving while there is the prospect of increased tariffs and protectionist measures that will hit world growth.  Bloomberg economists reckon that if tariffs expand to cover all US-China trade in the next few months, then global GDP will take a $600bn hit in 2021. With 25% tariffs on all bilateral trade, GDP would be down 0.8% for China: 0.5% for the US and 0.5% for the world economy compared to no trade war.  That spells global recession.

And Trump seems bent on widening the trade war to other economies.  He has just temporarily delayed introducing a range of tariffs on Mexican imports, including imports of car and car parts that American companies make inside the Mexican border with the US.  The world car industry is already in major crisis driven by the end of diesel and slowing demand in China, Europe and Japan.  Now American car companies face new problems with Trump’s plans.

Thus while financial markets may be set to boom with the Powell put, that’s likely to have little effect on the struggling world economy.  The recovery since the Great Recession ended in mid-2009 has reached its tenth year, making it the longest from a slump in 75 years.  But it is also the weakest recovery since 1945.  Trend real GDP growth and business investment remains well down from the rate before 2007.

The trade and technology war is settling in for the long haul.  What makes it likely that the trade war will not be resolved amicably to avoid a global recession is that the battle between the US and China is not just over ‘unfair trade’, it is much more an attempt by the US to maintain its global technological superiority in the face of China’s fast rise to compete. The attack on Huawei, globally organised by the US, is just the start.

US investment bank Goldman Sachs has noted that, since 2010, the only place where corporate earnings have expanded is in the US.  And this, according to Goldmans, is entirely down to the super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies).  And now it is just this sector that will suffer from the technology war.

The risk of a new recession, as measured by various methods, continues to rise.  Here is the New York Fed’s index of the probability of a recession based on analysing financial market and economic data.

Then there is the supposedly reliable indicator of the inverted yield curve in bond markets.  Normally, the interest rate of long-term bonds (ie 10 years or more) is much higher than the short-term interest (less than one year). So the ‘curve’ of interest rates from 3m to 10 years is up (or steep).  But when the 10-year rate drops below the three-month rate, this has invariably heralded a new recession within a year.  Why?  Because it implies that investors are so worried about the future that they want to hold ‘safe’ assets like government bonds rather than invest, to the point that long-term interest rate on these bonds falls below even the rate set by the Federal Reserve for short-term loans.

The yield on benchmark U.S. government bonds hit new 2019 lows near 2% before the G20 meeting.  Yields on 10-year bonds in both Germany and Japan were below zero!  About $11 trillion of bonds around the world, concentrated in Europe and Japan, carry negative yields, now account for about 20% of all debt world-wide.

And US yield curve has now inverted. The inversion has only just happened and it needs to continue for a few months to justify its reliability as a recession indicator. So watch this space. Maybe the central bank heroes can save the day.

 

Keynes: socialist, liberal or conservative?

June 5, 2019

James Crotty is emeritus professor of economics at the University of Massachusetts Amherst.  Along with his colleague Sam Bowles, he is one of the few radical heterodox economists to gain tenure at a leading American university.

Crotty’s main contribution to economics has been to try and synthesise Marx and Keynes.  This ended up with Crotty arguing in his 1985 article “The Centrality of Money, Credit, and Financial Intermediation in Marx’s Crisis Theory”, “that Marx’s vision of capitalist crises cannot be understood except in terms of the development of the credit and the financial system, and that his discussion of these ideas anticipated the ideas on financial fragility later developed by Minsky and other Post Keynesians.” (quoted in an interview with JW Mason)  In other words, Marx was really a post-Keynesian Minskyite.

I won’t discuss the validity of that view here because Crotty has a new book out, entitled Keynes Against Capitalism: His Economic Case for Social Liberalism, in which he claims that, far from being a conservative Keynes was in fact a socialist, if not a revolutionary one like Marx.  “Keynes did not set out to save capitalism from itself as many think, but instead reckoned it needed to be replaced by a liberal form of socialism.”

Crotty argues that Keynes’s Liberal Socialism began to take shape in his mind in the mid-1920s, evolved into a more concrete institutional form over the next decade or so, and was laid out in detail in his work on postwar economic planning at Britain’s Treasury during WWII.

In Crotty’s reconstruction, the analysis goes something like this: “Keynes writes in many places that he’s a socialist. He gives speeches to the Labour Party saying ‘I’m a socialist.’ What does he mean? He thinks we need to organize capital investment decisions, bring them all under a board of national investment. And we have to bring together all the sources of savings that are in our economy in one place. And, he goes through all of these incredible, important things you can do with this capital if you can control it. In 1942 or 43, he says if the state can control two-thirds to three-quarters of large-scale capital investment through this national board of investment, we’ll be fine. The only way you can do this is if you drive the interest rate down towards zero, and that’s what you should do. So you have to have strict capital controls, otherwise, people will take their money out.”

Crotty interprets Keynes’ s policy ideas as socialist. “His socialist plan, means, we’re going to have to manage our trade, we should have industrial policies, we should have wage policies, we should have geographical location policies. And all of this to achieve not just full employment, but the creation of arts, the building of cities, the building of housing, and so on. In his socialism, there’s still private markets, but they are small. He keeps saying if we don’t have socialism, we’re going to have chaos, we’re going to have revolution.

But does this view of Keynes the ‘socialist’ really hold water? Crotty argues that it does because Keynes “decisively rejected the traditional theory of perfect competition, applauded the ongoing trend toward increased reliance on public corporations, and argued that the government should not only accept the current movement toward cartels, holding companies, trade associations, pools and other forms of monopoly power, but should proactively assist and accelerate this trend in order to regulate and control it. Keynes argued that an increasing part of the country’s largest and most important private companies were evolving toward a status that could make them as easy to regulate as public corporations.”

As Crotty puts it, Keynes’ central point was that the emerging importance of the system of public and semipublic corporations and associations combined with the evolution of collusive oligopolistic relations in the private sector already provided the foundation for a qualitative increase in state control of the economy.  Crotty concludes “Keynes was unabashedly corporatist.”  Indeed – I would add that his concept of corporatism was not dissimilar to that actually being implemented in fascist Germany and Italy at the time.

And who was to run this corporate capitalist/socialist state?  According to Keynes’ biographer, Robert Skidelsky, it would be “an interconnected elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge and imbued with a public service ethic, would come to run these organs of state, whether private or public, and make them hum to the same tune.” (Skidelsky 1992, 227-28).

Keynes rejected laissez-faire and “doctrinaire State Socialism” because what is “needed now is neither free-market competition nor quantitative central planning but “regulated competition” (19, 643).  Keynes goes on, “we must also be prepared to experiment with all kinds of new sorts of partnership between the state and private enterprise.  The solution lies neither with nationalisation nor with unregulated private competition; it lies in a variety of experiments, of attempts to get the best of both worlds. The Government must recognise the trend of soundly run business toward trusts and combines.  It must be prepared to recognise their existence as beneficent institutions in right conditions; and it must adopt an attitude towards them at the same time of encouragement and regulation.” (19, 645)  In this way, we “will get the best both of large units and of the advantages that might be expected of nationalisation, whilst maintaining the advantages of private enterprise and decentralised control.”(19, 649).

Keynes’s ‘socialism’ was really the so-called mixed economy of capitalist combines and government control, all run by “an elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge.”  This is what Crotty describes as ‘liberal socialism’.  For me, it is neither liberal nor socialist; but elitist and capitalist.

What were the practical economic policies of Keynes’ socialism, according to Crotty. Keynes proposed a National Investment Board that would have funds of between 4-8% of GDP to invest to ensure that economies moved in productive directions.  This proposal was part of the Liberal Party Manifesto in 1928 – and not accidentally is now part of the UK Labour Party’s in 2019 under Corbyn and McDonnell.  This apparently, according to Crotty, is what Keynes meant by his famous phrase, the “socialisation of investment”.

But just in case you think that Keynes wanted only his elite to run this corporate capitalist state, he also patronisingly advocated that “To make the worker feel that “he is treated as a partner and not as a mere tool,” (238), (he) proposed that every firm be legally required to form a “Works Council” to facilitate “permanent, regular, and established methods of consultation [between management and labor] in every factory and workshop of substantial size” (472).  Shades of the ‘social market economy’ with its workers councils of modern Germany!

That’s Crotty’s evidence that Keynes was against capitalism and for socialism.  For me, it merely shows that Keynes reckoned that capitalism was no longer a system of ‘perfect competition’ (it never was of course) but had evolved into ‘monopoly capitalism’. And this was a good (‘beneficent’) thing, requiring only the nudging and direction of a ‘wise educated elite (of men)’, dutifully supported by the workers, in order to deliver prosperity for all.

And there is plenty of evidence in Keynes’ writings that he really stood for ‘managed capitalism’, and not socialism by any reasonable definition.  As he wrote: “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”

The profit motive must remain: “The loss of profit may be due to all sorts of causes, but short of going over to communism there is no possibility of curing unemployment except by restoring to employers a proper margin of profit.” As Keynes argued that “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.” As  American economic historian, Bruce Bartlett explains: “He offered for the economy a hierarchical ideal.  The creative center of the system was the skilled entrepreneur and the goal of policy was to cultivate his skills and ensure his inducement to invest.”

In his later years, Keynes praised the very laissez-faire ‘liberal’ capitalism that he appeared to condemn in the 1920s. In 1944, he wrote to Friedrich Hayek, the leading ‘neo-liberal’ of his time and ideological mentor of Thatcherism, in praise of his book, The Road to Serfdom, which argues that economic planning inevitably leads to totalitarianism.  Keynes wrote: “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”!

And did he stick to his view of ‘socialised investment’ as Crotty claims?  This is what Keynes said in his last years: “If our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.” So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Keynes was a strong opponent of national economic planning, which was much in vogue after the Second World War. “The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far,” he wrote.

Contrary to Crotty, Bartlett reckons that “Keynes was almost in every respect a conservative, both in philosophy and temperament, although he identifies himself as a liberal throughout his life. His conservatism was largely a function of his class.  When asked why he was not a member of the Labour Party, he replied; “to begin with it is a class party and that class in not my class.. and the class war will find me on the side of educated bourgeoisie.” Conservative icon Edmund Burke was one of his political heroes. Keynes expressed contempt for the British Labour Party, calling its members “sectarians of an outworn creed mumbling moss-grown demi-semi Fabian Marxism.”  He also termed the British Labour Party an “immense destructive force” that responded to “anti-communist rubbish with anti-capitalist rubbish.”

Keynes’ ‘socialism’ was openly designed as an alternative to the dangerous and erroneous ideas of what he thought was Marxism.  State socialism, he said, “is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago.”  Keynes told George Bernard Shaw that the whole point of The General Theory was to knock away the ‘Ricardian’ foundations of Marxism and by that he meant the labour theory of value and its implication that capitalism was a system of the exploitation of labour for profit. He had little respect for Karl Marx, calling him “a poor thinker,” and Das Kapital “an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world.”

John Kenneth Galbraith, the great heterodox economist of the Roosevelt and post-war years, and whose politics were well to the left of Keynes, reckoned, “The broad thrust of his efforts, like that of Roosevelt, was conservative; it was to ensure that the system would survive”.  Keynes’s friend and biographer Harrod tells us that underneath his veneer of trendy liberalism, “Keynes was always deeply conservative. He was not a Socialist. His regard for the middle-class, for artists, scientists and brain workers of all kinds made him dislike the class-conscious elements of Socialism. He had no egalitarian sentiment; if he wanted to improve the lot of the poor…that was not for the sake of equality, but in order to make their lives happier and better.” (without their involvement, we might add.)

It has always been difficult to be sure where Keynes stood on many issues as he changed and adapted his views continually.  Hayek criticised him for this and Keynes replied that “If the facts change, I change my views, don’t you?”  Even so, it seems that Professor Crotty may be on his own in thinking Keynes was an anti-capitalist socialist.

Global slump: the trade and technology trigger

May 26, 2019

Despite all the optimistic talk by President Trump about the state of the US economy, the latest data on economic activity and industrial production suggest that America is joining Europe and Japan in a sharp slowdown as we enter the second half of 2019.  And this is at a time when the trade and technology war between the US and China has moved up another gear and so threatens to trigger an outright global recession before the year is out.

JP Morgan economists report that the so-called flash May PMIs for the US, Europe and Japan G-3 point to a 0.7-pt decline, consistent with just 2.5% annual growth in global GDP. Purchasing Managers Indexes (PMIs) are surveys of company views on their current and future sales and purchases.  They have proved to be reasonable guides to actual production.  And 2.5% growth globally is considered to be the ‘stall speed’ for the world economy, below which a recession is indicated.

JP Morgan find that global manufacturing is suffering most – being nearly at 50 in the PMI (anything below 50 means contraction).  But services, which constitute 70-80% of most major economies (at least in the official definition), are also sliding towards the levels of the mini-recession of 2015-6.

Most concerning, “the global manufacturing and services expectations measures look set to fall roughly 2-pts in May and would push the indexes beneath the lows set in early 2016.”  (JPM).

Like other forecasters, the OECD’s Economic Outlook, published last week, predicts slower growth this year than last in most big economies — in some cases much slower. What is more, even in 2020, global growth will not return to the pace it reached in the past few years, it says.  Angel Gurría, its secretary-general, said: “The world economy is in a dangerous place.”

Up to now, it has been in Europe and Japan that signs of a slowdown and even an outright recession were visible.  But now the US economy may be joining them.  The US Manufacturing PMI dropped to 50.6 in May, implying almost stagnation. It was the lowest reading since September 2009 as new orders fell for the first time since August 2009 while output and employment rose less.

US Manufacturing PMI

The services sector also dropped back. The overall economic indicator showed the weakest expansion in the private sector since May 2016.  Then on Friday, we had actual data for US manufactured durable goods. In May new orders fell 2.1% from a month earlier in April 2019.  Transportation equipment, also down two of the last three months, drove the decrease.  The Atlanta Fed’s GDPNow model estimate (a very reliable indicator of future growth) puts US real GDP growth in the second quarter of 2019 at just 1.3%.

When we get to Europe, the latest figure for Europe’s powerhouse, German manufacturing activity, makes particularly dismal reading.  The May reading pointed to a fifth month of contraction in the manufacturing sector, as new orders continued to fall sharply largely due to lower demand across the car industry and the effects of customer destocking. In addition, the rate of job losses accelerated to the quickest since January 2013.

German manufacturing PMI

Even with the services sector holding up, overall activity in Germany looks very weak. And the business morale survey is at its lowest for nearly five years. Activity in the Eurozone as a whole is also at a near five-year low.

Eurozone composite PMI

Japan’s economy is “worsening” for the first time in more than six years, according to one of the government’s main indicators.  The index of economic conditions compiled by Japan’s Cabinet Office fell 0.9% from February to March. That prompted government statisticians to cut their assessment of the economy from “weakening” to “worsening” — the lowest of five levels. The last time the Cabinet Office used the bottom grade to describe the economy was in January 2013.  Barclays economist Kazuma Maeda said that the “mechanical” downgrade in the assessment did not necessarily imply that a downturn was in prospect. But he added: “That said, there is mounting concern about an economic recession”

Nominal activity growth in Japan, which can be viewed as an up-to-date proxy for nominal GDP, has been falling since the end of 2017, since the decline in real output growth has been greater than the rise in inflation. On the core nominal activity measure, the rate of increase has now dipped to around 0.5 per cent, lower than it was at bottom of the 2016 deflationary shock.

As an aside, it is worth noting that Japan is supposed to be the poster child of Keynesian fiscal and monetary policy.  The Bank of Japan has negative interest rates and has bought virtually all government bonds available from the banks, as well corporate debt and stock, through massive credit injections in the last ten years.  And it has consistently run budget deficits to try and boost the economy; so much so that the government debt to GDP is the highest in the world. But nominal GDP growth and prices continue to stagnate.

Those who support Modern Monetary Theory should take note.  Yes, you can run budget deficits permanently and run up public debt without consequences for inflation or even the currency in an economy like Japan.  But you cannot get a permanent boost to growth if Japan’s corporations won’t invest or the government won’t either.  Creating money does not necessarily create value. The irony is that Prime Minister Abe plans to raise the sales tax later this year to try and lower the deficits and debt ratios in line with neo-liberal policy. The last time he did that, Japan went into recession.

Outside the imperialist blocs, the so-called ‘emerging market’ economies are also slowing.  Turkey, Argentina, Pakistan are already in recession.  Brazil and South Africa are on the brink.  And capital flows to these economies from the imperialist bloc are drying up, while public sector investment has nearly ground to a halt.

Net public investment in emerging market countries has fallen below 1% of GDP for the first time on record, raising fears of widening infrastructure gaps. The share of national output developing world governments are spending on investment in assets such as schools, hospitals and transport and power infrastructure, net of depreciation of the existing capital stock, has fallen from 3.3 per cent in 1997 to a low of just 0.9 per cent last year, according to data from the IMF. This is well below what the IMF believed was needed to meet basic needs and allow countries to close infrastructure gaps that are slowing the pace of development.

Indeed, if you exclude China, then investment growth is dropping in the rest of the G20 economies.  Only the US and India are keeping investment positive.  If they should falter, as investment is the driver, a global recession would follow.

If China is stripped out of the data, the weighted average for the rest of the emerging world is 3.9 per cent of GDP, markedly lower than the 4.8 per cent figure seen as recently as 2010. The 49 low-income developing countries, mainly in Africa but also encompassing the likes of Vietnam, Bangladesh and Moldova, are even more badly placed, with the IMF calculating they need to invest an additional 7.1 per cent of GDP a year until 2030 on roads, electricity and water alone. With health and education added in, this rises to a colossal 15.4 per cent of GDP, or $528bn, a year.

Low profitability explains above all else why corporate investment has been so weak since 2009.  What profits have been made have been switched into financial speculation: mergers and acquisitions, share buybacks and dividend payouts.  Also, there has been some hoarding of cash by the FAANGS.  All this is because the profitability of productive investment remains historically low.

The other key factor in the long depression has been the rise in debt, particularly corporate debt.  With profitability low, companies have run up more debt in order to fund projects or speculate.  The big companies like Apple or Microsoft can do this because they have cash hoards to fall back on if anything goes wrong; the smaller companies can only manage this debt spiral because interest rates remain at all-time lows and so servicing the debt is still feasible – as long as there is not a downturn in sales and profits.

When fundamentals like profitability and debt turn sour for capital, then anything can trigger a slump.  Each crisis has a different trigger or proximate cause.  The 1974-5 international recession was triggered by a sharp rise in oil prices and the US coming of the dollar-gold standard.  The 1980-82 slump was triggered by a housing bubble in Europe and a manufacturing crisis in major economies.  The 1990-2 recession was triggered by the Iraq war and oil prices.  The 2001 mild recession was the result of the bursting of the dot.com bubble.  And the Great Recession was started with the collapse of the housing bubble in the US and ensuing credit crunch brought on by the international diversification of credit derivatives. But underlying each of these crises was a downward movement in the profitability of productive capital and eventually a slowdown or decline in the mass of profits. (The profit investment nexus).

It now seems possible that brewing trade war between the US and China could be a new trigger for a global recession.  Certainly, US investment bank, Morgan Stanley has raised such a risk. “While a temporary escalation of trade tensions could be navigated without much damage at all, a lasting breakdown would inflict serious pain. If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining circa $300 billion of imports from China, we see the global economy heading towards recession,” the bank’s analysts said in a note.

The OECD also highlighted the danger coming from the trade war.  According to the OECD, international trade has slowed abruptly. Its rate of increase has fallen from 5.5 per cent in 2017 to what the OECD thinks will be 2.1 per cent and 3.1 per cent this year and next respectively. That is lower than projected economic growth, meaning trade is shrinking as a share of global economic activity.  Since 2009, it had been the slowdown in investment growth that has led to a slowdown in trade growth; and the IMF estimated that three-quarters of the trade growth slowdown could be attributed to weak economic activity, especially in investment.  But now the boot seems to be on the other foot.

The OECD numbers on aggregate investment are corroborated by more fine-grained data. Most big US companies’ investment spending, as reported in regulatory filings, has stalled dramatically. A Wall Street Journal investigation of 356 of the S&P 500 companies found that they spent only 3 per cent more on capital in the first quarter year on year; down from a 20 per cent growth rate a year earlier. For the biggest capital spenders, investment fell outright. Trade frictions seem the main cause — directly for businesses particularly reliant on Chinese demand, such as specialised chip producers, as well as indirectly through the increased uncertainty spreading through the economy. Another survey has found that many US companies operating in China are also holding off on investing.

Morgan Stanley also warned not underestimate the impact of trade tensions in a number of ways.  Firstly, the impact on the U.S. corporate sector would be more widespread as China could put up non-tariff barriers such as restriction of purchases. Given the global growth slowdown that would follow, profits from firms’ international operations would be hit and companies would not be able to fully pass through the tariff increases to consumers.

What makes it likely that the trade war will not be resolved amicably to avoid a global recession is that the battle between the US and China is not just over ‘unfair trade’, it is much more an attempt by the US to maintain its global technological superiority in the face of China’s fast rise to compete. The attack on Huawei, globally organised by the US, is just a start.

A chain reaction is under way as a giant industry braces for a violent shock.  US Investment bank Goldman Sachs has noted that, since 2010, the only place where corporate earnings have expanded is in the US.  And this, according to Goldmans, is entirely down to the super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies).

The growth slowdown is being driven by low investment and profitability in most economies and in most sectors.  Only the huge tech companies in the US have bucked this trend, helped by a recent profits bonanza from the Trump tax ‘reforms’.  But now the technology war with China will hit tech profits too – even if the US and China reach a trade deal.

The IMF is very concerned.  New IMF chief economist, Gita Gopinath, commented. “While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardise the projected recovery in global growth in 2019.”  Roberto Azevêdo, director general of the World Trade Organization, said the US-China trade war was hurting the global economy. The WTO has been bypassed by the US as the Trump administration aims its attacks directly on China.  Azevêdo said that: “$580bn [£458bn] of restrictive measures were introduced in the last year, seven times more than the previous year. This is holding back investors, this is holding back consumers, and of course it is having an impact on the expansion of the global economy. Everyone loses … every single country will lose unless we find a solution for this.”

Indeed.

India: another China or another Brazil?

May 19, 2019

It’s five years since the right-wing nationalist Bharatiya Janata Party (BJP), led by Narendra Modi swept back to power in India’s Lok Sabha (parliament) elections.  Now in the world’s third largest economy (in PPP terms), over 800m Indians have voted in elections lasting six weeks to re-elect its leaders.

The BJP ruled before, from 1998 to 2004. But the BJP then proved to be an unreliable tool for Indian capital, riddled as it is with former members of what is basically a Hindu religious fascist party, the Rashtriya Swayamsevak Sangh (RSS), an organisation modelled on Mussolini’s Black Brigades. Modi was a long time member of the RSS who then moved seamlessly into the BJP.  But in the last five years, Modi is now seen as leading a ‘business-friendly’ government with what he likes to call Modinomics.

Modinomics boils down to neoliberal economic policies aiming to raise the rate of exploitation of labour so that the profitability of capital is boosted and thus provide an incentive to invest.  To do this, Modi has introduced new sales taxes on the population and abolished high-denomination banknotes in an attempt to ‘demonetise’ the economy and put the banks more firmly in control of credit.

In the first years of Modinomics it seemed that India was leaping forward, with real GDP growth even faster than in China and with rising incomes for the rural workers and farmers that the BJP relies on principally for its votes, while being backed by big business and Indian capital.  But those early years have given way to increasing problems.  The world’s fastest growing major economy is now headed for a slowdown.  The official economic growth figures slowed to 6.6% in the three months to December, the slowest in six quarters and now the same rate as in China.

And these GDP figures are dubious anyway. Back in 2015, India’s statistical office suddenly announced revised figures for GDP.  That boosted GDP growth by over 2% pts a year overnight.  Nominal growth in national output was now being ‘deflated’ into real terms by a price deflator based on wholesale production prices and not on consumer prices in the shops, so that the real GDP figure rose by some way. Moreover, this revision was not applied to the whole economic series, so nobody knows how the current growth figure compares with before 2015. Also the GDP figures are not ‘seasonally adjusted’ to take into account any changes in the number of days in a month or quarter or weather etc. Seasonal adjustment would have shown India’s real GDP growth well below the official figure.  A better gauge of growth may be found in the industrial production data.  And that has just hit zero.

Sales of cars and SUVs have slumped to a seven-year-low. Tractors and two-wheelers sales are down. Net profits for 334 companies (excluding banks and financials) are down 18% year-on-year, according to the Financial Express newspaper.  The vehicle industry’s rapid expansion under the Modi government had prompted predictions that India would soon overtake Japan and Germany to become the world’s third-biggest motor market. But last month, passenger vehicle sales were 17.7% lower than a year before.

The car sector has become one of the most prominent victims of a debt market crunch that began in the ‘shadow banking’ market in India last September, when defaults by infrastructure and finance group IL&FS triggered sharp outflows from mutual funds. That drained money from the commercial paper market, a major source of funding for nonbank financial companies that had driven the growth of loans as they took market share from the ailing state-controlled banks. The so-called NBFCs were particularly active in areas such as vehicle loans and lending to small businesses.

That’s not all. In March, passenger growth in the world’s fastest growing aviation market expanded at the slowest pace in nearly six years. Demand for bank credit has spluttered. Hindustan Unilever, India’s leading maker of fast moving consumer goods, has reported March quarter revenue growth of just 7%, its weakest in 18 months.

It seems that middle-class ‘consumer boom’ initiated by Modi has burnt itself out.  There is a fall in both urban and rural incomes. A crop glut has seen farm incomes drop. Kaushik Basu, former chief economist of the World Bank and professor of economics at Cornell University, believes the slowdown is “much more serious” than he initially believed. Export growth has been close to zero for the last five years. And now the domestic consumer boom is weakening.

Unlike China, India seems to be heading into what the World Bank has called a ‘middle-income’ trap, where the vast majority of population remain in poverty while the top 10% live well and spend, but there is no investment or drive to deliver employment, training, education and housing for the rest.  India will end up like Brazil, not China, Korea or Japan – just going nowhere.  Under Modi, unemployment is at an all-time high. The “Make in India” plan seems to have flopped. And no Boeing, Airbus or Apple has come to invest in factories in India.

Two-thirds of Indian workers are employed in small businesses with less than ten workers, where labour rights are ignored – indeed most are paid on a casual basis and in cash rupees, the so-called ‘informal’ sector that avoids taxes and regulations. India has the largest ‘informal’ sector among the main so-called emerging economies.  But small businesses are not very productive.

Indeed, India has the lowest productivity levels in Asia.  Between 1950 and 1980, labour productivity growth averaged a meagre 1.7%. The two decades to the turn of the millennium saw that average more than double to 3.8%. This was the period when India’s manufacturing and services sectors took off, leaching labour from the lower productivity agricultural sector. Labour productivity growth peaked at 10.2% in 2010 and has been on the decline since.  In 2016, it stood at 4.75%. This does not bode well for achieving the growth targets that are needed to raise living standards.

Productivity would rise if generally underemployed peasants could move to the cities and get manufacturing jobs in the cities. This is how China has transformed its workforce, of course, to be exploited more by capital, but also to raise productivity and wages. China has done this through state planning of labour migration and huge infrastructure building. India cannot, so its rate of urbanisation is way behind that of China. Indian and foreign capital are still not fully exploiting the huge reserves of mainly youthful labour for profit. As a result, employment growth is pathetically slow. An estimated 10-12m young Indian people are entering the workforce each year but many cannot find jobs due to their paucity or because they lack the right skills.

Already, India is one of the most unequal societies in the world.  The richest 1% of Indians now own 52% of the country’s wealth, according to the latest data on global wealth from Credit Suisse Group. The richest 10% of Indians have increased their share of the pie from 68.8% in 2010 to 77% by 2018.  In sharp contrast, the bottom half of the Indian people own a mere 4% of the country’s wealth.

The Gini coefficient is one way of measuring inequality, with a reading of 100% denoting perfect inequality and zero indicating perfect equality. According to Credit Suisse, the Gini wealth coefficient in India has gone up from 81.3% in 2013 to 85.4% in 2018, which shows inequality of income is very high and rising.

As the Credit Suisse report says: “While wealth has been rising in India, not everyone has shared in this growth. There is still considerable wealth poverty, reflected in the fact that 91% of the adult population has wealth below $10,000. At the other extreme, a small fraction of the population (0.6% of adults) has a net worth over $100,000.”

And there is the issue of basic resources for India’s 1.2 billion people. Mechanically pumped groundwater now provides 85% of India’s drinking water and is the main water source for all uses. North India’s groundwater is declining at one of the fastest rates in the world and many areas may have already passed “peak water”. The World Bank predicts that a majority of India’s underground water resources will reach a critical state within 20 years.

The big demand from Indian capital is to cut back the size of the state. Bureaucratic and inefficient as it is, India’s central and state government, as well as state enterprises set up in the early days of ‘socialist’ India, have provided some solidity to India’s economy. But the multi-nationals and large Indian capitalists want this to go. Central and state government run up significant annual budget deficits because they subsidise food and fuel for the millions of poorer Indians. Those deficits are funded by borrowing and the cost of that borrowing has steadily eaten into the available revenue from taxes, leaving little for education, health or transport.

Government tax revenues are low because Indian companies pay little tax and rich individuals even less. Inequality of income in India is not as high as in China, Brazil or South Africa, but it is probably higher than the official gini index because of huge hidden income among the rich and it has been rising.  According to the OECD, income inequality has doubled in India since the early 1990s. The richest 10% of Indians earn more than 12 times as much money as the poorest 10%, compared to roughly six times in 1990.

This inequality is not down to the Modi government alone.  Previous Congress-led governments perpetuated this inequality too – indeed, under the corrupt Gandhi dynasty, made it worse.  That’s why the BJP is probably going to stay in power if with a reduced number of seats.

The real problem for Indian capitalism is the falling profitability of its business sector.  The rate of profit is high by international standards, like many ‘emerging economies that have masses of cheap labour brought in from rural areas.  But, over the decades, rising investment in capital equipment relative to labour has started to create a reserve army of labour alongside falling profitability.

Indian capital’s profitability had been falling steadily (if from a high ‘emerging market’ level) even before the global economic slump started. It has fallen further since and is now some 20% below levels in the 1980s. The boom double-digit growth years of the early 2000s, when all the talk was about India’s software outsourcing industry and new auto companies, seem unlikely to return without drastic reductions in the share of value going to labour.

Source: Extended Penn World tables and Penn World Tables 9.0, author’s calculations.

The answer for Indian capital and endorsed by Modi is privatisation, cuts in food and fuel subsidies and a new sales tax, a tax that is the most regressive way to get revenue as it hits the poor the most.  The aim here, as it always is with neoliberal economic policy, is to raise the rate of exploitation of labour so that the profitability of capital is boosted and thus provide an incentive to invest, something Indian capital is refusing to do right now.

Just as in 2014, India’s electorate are faced with a choice between a corrupt, family-run party backed by big business and landholder interests and an extreme nationalist party (with increasing backing from big business and foreign investors).  For the moment, Modi wins their vote (just).

Australia: luck running out?

May 17, 2019

Australia has a general election on Saturday.  The opposition Labor Party has been leading in the polls and given a redistribution of the seats in parliament that favours Labour, it is expected to gain office and defeat the incumbent coalition of the National and Liberal parties.

The usual thing said about Australia’s economy is that it is the ‘lucky country’.  It was the only OECD economy to avoid a slump during the Great Recession and has enjoyed 28 consecutive years of real GDP growth.

But there have been quarters of downturn and when the sharp increase in population (mainly through immigration) is taken into account (up from 15m in 1980 to 25m now), per capital growth is not so stellar – about 1.7% a year compared to average annual real GDP growth of 3.1%.

Even so, Australians have experienced a much faster improvement in national output and real incomes than just about any other advanced capitalist economy in the last 30-40 years.

However, growth has been slowing significantly in the last few years, down to 2.3% yoy on the latest data.  Indeed stripping out population growth, real GDP per capita has been no more than 1% a year since the start of the global Long Depression ten years ago.

Apart from immigration, Australia has been ‘lucky’ because of its close proximity to the fastest growing giant economy of China over the last 25 years. “Australia was uniquely placed to benefit from China and Asia’s long-term growth by exporting resources, agricultural produce and services to the region”.  Also the economy benefited from an influx of skilled labour through immigration from all parts but also immigrants who came with wealth of their own to invest.” (Hockey)

The relative success of Australian capitalism has been expressed in the profitability of its capital.  I collated three measures of Australia’s profitability as a capitalist economy since the early 1980s and profitability has risen by 40-60% – with only some signs of flattening out since the Great Recession.

But Australia is heavily dependent on its exports to China and world growth in general.

China is now the largest source of foreign investment in Australia, leapfrogging the US. Total investment in real estate was $74.6bn, up from $51.9bn a year earlier.  And it’s mainly in real estate.  This has led to a massive house price boom.  Household debt has rocketed to 165% of personal disposable income.

And although unemployment rates are relatively low, much of the new employment has been in temporary contracts and part-time.  As a result, while the employment participation rate has been rising and the official unemployment rate has been falling during the housing boom, the ‘underemployment’ rate is near all-time highs.

Wage growth is also slowing.

You can get a job in Australia, but don’t expect it to be on a permanent contract or full-time.  As a result, productivity growth has fallen from near 2.5% a year in the 1990s to under 1% a year now as capital investment is stagnating.

Australia may be a ‘lucky country’ but luck can change.  The economy relies on raw material exports and so is vulnerable to any plunge in commodity prices and if China were to slow down or the trade war with the US really spike, then Australia is vulnerable.  The OECD put it this way “a negative external shock cold prompt a sharp cut to incomes, a rise in unemployment and downturn in consumption.  This would increase mortgage stress and further escalate a fall in house prices.  A currency depreciation would also be likely.”

Ratings agency Moody’s has just forecast that Sydney house prices will drop by 9.3% this year, revised from its January prediction of 3.3%. It’s a similar story in Melbourne, with Moody’s original January forecast of a 6% decline updated most recently to an 11.4% fall this year. The Reserve Bank of Australia warned that more than 3% of Australian homes are in negative equity.

There is little to choose between the current government and the opposition on economic policy.  Both are pledged to cut back on government spending, cut taxes and yet run tight fiscal budgets.  It seems that government services and employees are the fall guys here.

And then there is climate change.  Of all the major advanced capitalist economies, global warming is likely to damage Australia more than any other.  Climate change in Australia has been a critical issue since the beginning of the 21st century.  Australia is becoming hotter and will experience more extreme heat and longer fire seasons. In 2014, the Bureau of Meteorology released a report on the state of Australia’s climate that highlighted several key points, including the significant increase in Australia’s temperatures (particularly night-time temperatures) and the increasing frequency of bush fires, droughts and floods, which have all been linked to climate change.

Yet the economy depends very much on its fossil fuel exports and developing the mining industry.  Non-renewable fossil fuels still account for about 85 percent of Australia‘s electricity generation. Australia is one of the world’s largest per capita emitters – producing some 1.3 percent of global carbon emissions in 2017 with only 0.3 of the world’s population.

While the centre-right government insists it is on track to meet Australia’s commitments under the 2020 Kyoto targets, it also seeks to placate the country’s powerful extractive industries and energy sector. A week prior to the election, incumbent prime minister Morrison announced $20.7m for a new school of mines and manufacturing at Central Queensland University.

Problems for Australian capital are hotting up in many ways.

Inequality and risk – both rising

May 14, 2019

The US Federal Reserve governor Lael Brainard, in a speech in Washington, revealed the extent of rising inequality in the US.  Using the latest income and wealth data, she outlined that the incomes and wealth of working-class (the American establishments like to use ‘middle-class’) households in the US have been squeezed in the last 50 years and particularly in the last 20 years.

Average American households have still not fully recovered the wealth they lost in the Great Recession. At the end of 2018, the average middle income household had wealth of $340,000 (mainly a home), while those in the top 10% had $4.5 million, up 19% from before the recession. The latter’s rise was mainly due to the surge in the stock market.

According to the Fed’s consumer survey, one third of middle income adults say they would borrow money, sell something or not be able to pay an unexpected $400 expense. One fourth said they skipped some kind of medical care in 2018 because of its cost.  Nearly three in 10 middle-income adults carry a balance on their credit card most or all of the time. Meanwhile the share of income spent on rent by middle class renters rose to 25% in 2018 from 18% in 2007, a rise of 40%.

The gini coefficient (the basic measure of inequality) for incomes is now at its highest ever in the US, at a record breaking 0.48 up from 0.38 in the late 1960s – a rise of 30% (see graph above).

Brainard suggested that so bad is this development that reasonable living standards for most Americans will never return.  “In recent years, households at the middle of the income distribution have faced a number of challenges,’’ Brainard said. “That raises the question of whether middle-class living standards are within reach for middle-income Americans in today’s economy.’

Such a situation also threatened to weaken the economy with lower consumption per person.  “Research shows that households with lower levels of wealth spend a larger fraction of any income gains than their wealthier counterparts. That has long-term implications for consumption, the single biggest engine of growth in the economy” she said.  And it even risked ‘democracy’ itself.  “A strong middle class is often seen as a cornerstone of a vibrant economy and, beyond that, a resilient democracy,’’ she said. Such are the fears of one of the members of the pillars of American capital, the Federal Reserve.

While the ‘middle-class’ in the US and many other advanced capitalist countries is being squeezed, the top 1% and even more, the top 0.1%, have never had it so good.  It’s as though the Great Recession never happened.

The wealth of the world’s richest people did decline by 7% to $8.56 trillion in 2018, Wealth-X said, citing global trade tensions, stock-market volatility a slowdown in economic growth. And the number of billionaires fell 5.4% to 2,604, the second annual fall since the financial crash a decade ago.  But the America’s richest fared the best of the three main regions, recording a slight rise in the number of billionaires of 0.9% to 892, even if their wealth fell by 5.8% to $3.54 trillion.

San Francisco has more billionaires per inhabitant in the world — with one billionaire for approximately every 11,600 residents — followed by New York, Dubai and Hong Kong.

There has not been a fall in billionaires in Brexit Britain, however.  According to the Sunday Times rich list just published, there are a record 151 billionaires in the UK.  And to be a billionaire is like a god in the sky compared to the average wealth of households.  If we measure the difference in time, say days, it is staggering. An NHS nurse’s annual salary is like half a day, while a billionaire’s is like 11,500.  The billionaire’s income has a 32 year gap!

Like climate change and global warming, inequality around the world has now reached an irreversible tipping point.  The UK-based House of Commons Library reckons that, if current trends continue, the richest 1% will control nearly 66% of world’s money by 2030. Based on 6% annual growth in wealth, they would hold assets worth approximately $305 trillion, up from $140 trillion today.  This follows a report released earlier this year by Oxfam, which said that just eight billionaires have as much wealth as 3.6 billion people — the poorest half of the world.

Chief Economist at the Bank of England Andy Haldane also delivered an insightful study of how in Britain the rich and poor are spread across the country.  From his home town, Sheffield in northern England, Haldane showed that wealth and income are heavily concentrated in the south-east of England.  Indeed, the UK has the worst regional dispersion of income and wealth in Europe – even worse than Italy.

Income and wealth are concentrated in London and the south-east, although long hours and travel time seem to make Londoners more miserable than their poorer fellow citizens in the north, according to surveys.

Rising inequality is creating conditions for rising risk and uncertainty in capitalist economies. That’s because the main way that the inequality of wealth has increased is through rising prices of financial assets.  Marx called these assets fictitious capital, as they represented a claim on the value of companies and government that may not be reflected in the value realised in the earnings and assets of companies or government revenues.  Financial crashes are regular occurrences, often of increased severity, and they can wipe out the ‘value’ of these assets at a stroke.  Such crashes can be triggers for a collapse in any underlying weakness in the productive sectors of the capitalist economy.

The latest report of the US Federal Reserve on the financial stability in the US makes sober reading.

According to the report, “Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid signs of deteriorating credit standards.”  Interest rates for loans are near historic lows, so the borrowing binge among companies continues.  According the Fed, “Debt owed by the business sector, however, has expanded more rapidly than output for the past several years, pushing the business-sector credit-to-GDP ratio to historically high levels.”

Moreover, “The sizable growth in business debt over the past seven years has been characterized by large increases in risky forms of debt extended to firms with poorer credit profiles or that already had elevated levels of debt.”

And this borrowed money is not used to invest in productive assets but to speculate in the stock market.  Indeed, the main buyers of US stocks are companies themselves, thus driving up the price of their own shares (buybacks).

As long as interest rates stay low and there is no major collapse in corporate earnings, this scenario of corporate borrowing and stock market buybacks can continue.  But if interest rates should turn up and/or profits fall, then this corporate house of cards could tumble badly.  As the Fed puts it: “Even without a sharp decrease in credit availability, any weakening of economic activity could boost default rates and lead to credit-related contractions to employment and investment among these businesses. Moreover, existing research suggests that elevated vulnerabilities, such as excessive borrowing in the business sector, increase the downside risk to broader economic activity.”

Naturally, the Fed’s report concluded that things were going to be all right and the banks and corporations were resilient and healthy.  But overall uncertainty about the future for the major capitalist economies is rising, according to the latest reading of the World Uncertainty Index, a device that supposedly measures the confidence of capitalist investors globally.

The latest measure of the WUI has risen sharply to a level higher than before the global financial crash.  And the recent drop in share prices driven by the ongoing trade war between the US and China is an indication of what could happen in the next year.

Productivity, investment and profitability

May 11, 2019

Radical economic historian Adam Tooze recently tweeted that Whenever I see figures for the decline in the (advanced economies) AE productivity growth rate I am left puzzling: do we really have an explanation? Do we really have an explanation?”

Well, I think we do.  As I outlined in a previous post, over the last 40 years and especially in the last 15, there’s been a broad-based slowdown in output per hour worked across the major economies. For the top G11 economies (which excludes China), it’s currently running at a trend rate of just 0.7% p.a.

Russia’s productivity level is falling, while that of Italy and the UK is hardly moving.

But why is productivity growth in the major economies falling? The productivity puzzle has been debated by mainstream economists for some time now. The ‘demand pull’ Keynesian explanation is that capitalism is in ‘secular stagnation’ due to a lack of ‘effective demand’,which is necessary to encourage capitalists to invest in productivity-enhancing technology. This is the view of such Keynesians as Larry Summers or Martin Wolf. It is also promoted in semi-Marxist form by John Bellamy Foster at the Monthly Review.

Then there is a ‘supply-side’ argument from other conventional economists that there are not enough effective productivity-enhancing technologies to invest in – the day of the computer, the internet etc, is over and there is nothing new that will have the same impact.  This thesis is strongly propounded by Robert J Gordon.

But there is also another very simple explanation. There are three factors behind productivity growth: the amount of labour employed, the amount invested in machinery and technology and the X-factor of the quality and innovatory skill of the workforce.  Mainstream growth accounting calls this last factor, total factor productivity (TFP), measured as the unaccounted-for (residual) contribution to productivity growth after capital invested and labour employed.

Evidence shows that productivity growth is mainly driven by capital investment, which replaces labour with machines – as machines boost the output of each worker using the latest technology, they also reduce the number of workers needed.  In the graph below, the US Conference Board shows, in the 20 years up to the global financial crash, the main contribution to productivity growth came from capital investment (32%+18%); labour contributed 23% and TFP 26%.

And TFP growth slowed after the Great Recession in most economies, except for China and India.  In the US, all three factors driving productivity growth were at their strongest in the ‘hi-tech’ decade of the 1990s, but in the 2000s, all factors slowed sharply.

Indeed, the slowdown in productivity growth in the AEs began in the 1970s.  And this is no accident.

Decomposing the factors driving productivity growth clarifies things.  Slowing investment in productive assets, particularly hi-technology led to a slowing in the productivity of labour.  Here is a figure generated by JPMorgan economists recently.  There has been a secular fall in the fixed asset investment to GDP in the advanced economies in the last 50 years ie starting from the 1970s.

Part of the decline in US capital and labour investment can be laid at the door of increased globalisation as American companies went overseas for their factories and activities. But investment to GDP has declined in all the major economies (with the exception of China).

In 1980, both advanced capitalist economies and ‘emerging’ capitalist ones (ex-China) had investment rates around 25% of GDP. Now the rate averages around 22%, or a more than 10% decline.  The rate fell to 20% for advanced economies during the Great Recession.

JPMorgan’s economists note that situation is becoming serious.  Growth in global business investment in new equipment is grinding to a halt for the third time since the Great Recession ended in 2009.

And the JPM economists comment: “Even more concerning is that the latest survey data suggest the capex growth slowdown has yet to find a bottom.”  Their proxy model forecast is for zero growth in 2019.

So secular slowing of productivity growth comes from the secular slowing of more investment in productive value creating assets.  The next question follows: why did new investment in technology begin to drop off from the 1970s? Is it really a ‘lack of effective demand’ or a lack of productivity-generating technologies?  More likely it is the Marxist explanation: businesses in the major economies experienced a secular fall in the profitability of capital and so began to think that it was not profitable enough to invest in heaps of new technology to replace labour.

The figure offered by JPMorgan on the long-term decline in fixed asset investment is perfectly matched by the long-term decline in the profitability of capital in the major economies (see graph below).

A world rate of profit – average of 14 major economies (profits as % of fixed assets)

This has been strikingly clear in the post Great Recession period.  In many major economies like the US, the UK, Japan and in Europe, companies have preferred to keep their labour force and then employ new workers on more ‘precarious’ contracts with fewer non-wage benefits and part-term or temporary contracts. That is revealed in very low official unemployment rates alongside low investment rates. Thus productivity growth is poor and overall real GDP growth is below-par.

And the share of investment in the productive value creating sector of the major economies has also declined because of the increase in investment in unproductive labour and sectors ie. marketing, commerce, finance, insurance, real estate, government (particularly arms spending etc).  These sectors sucked up an increased share of surplus value, thus lowering the profitability of the productive sectors.

Here is a chart produced by Australian Marxist economist, Peter Jones, from his new book, The Falling Rate of Profit and the Great Recession, which decomposes the factors affecting the rate of profit in the productive sectors of the US economy: (s-u)/C.  The factors lowering profitability are: 1) a rising organic composition of capital a la classical Marxist analysis (green bars); and 2) the rise in the share of unproductive labour (blue bars).

Over the long term, these factors have overwhelmed any counteracting factors that raise profitability like a rising rate of exploitation of labour or the cheapening effects of new technology.  No wonder, fixed investment rates have been falling and thus productivity growth.

JP Morgan economists also note that the slowdown in productive investment is driven by slowing profitability (which leads to a lack of business confidence to invest): “the projected slowing in capex growth owes entirely to weaker confidence and profit growth relative to past years.”

But there is one other key factor that has led to a decline in investment in productive labour: the switch by capitalists to speculating in fictitious capital in the expectation that gains from buying and selling stock market shares and government and corporate bonds will deliver better returns than investment in technology to make things or deliver services.  As profitability in productive investment fell, investment in financial assets became increasingly attractive.

The growth of fictitious capital has been a long-term feature since the trough in the profitability of capital by the early 1980s.  The share of financial sector profits in total profits in the US and other capitalist economies rose at an increasing rate up to the global financial crash – note that this share only really rocketed from the 1980s.

And much of this investment is fictitious (as Marx called it) as the prices of stocks or bonds may bear no relation to the underlying earnings of assets of companies, and these prices  can dissolve in any financial crash.

Peter Jones in his book provides one measure of the amount of financial profits that are fictitious and there are other new studies on their way.  But one crude but simple measure of the size of fictitious capital can be based on Tobin’s Q.  Named after the leftist economist James Tobin of the 1970s, it measures the ratio between the market price of equities against the book value (or price) of the fixed assets of companies in an economy.  The ratio thus expresses the fictitious portion of financial assets.

We can see that in the bull market in stocks from the early 1980s up to dot.com bust in 2000, the market value of US companies was some 70% above money value of company assets.

Given that the long-term average ratio of Q is about 70 not 110 as now, you can thus gauge the extent of the fictitious part of buying financial assets.

So while the stock market booms, with the help of near zero interest rates and quantitative easing, the profitability of productive capital stays low – and along with it, low investment growth and poor productivity growth.