Globalisation and Milanovic’s elephant

Branco Milanovic is the former chief economist at the World Bank, where he became recognised as the expert on global inequality of incomes.  After leaving the bank, Milanovic wrote a definitive study on global inequality which was updated in a later paper in 2013 and finally came out as a book last year, Global Inequality.  In his earlier papers and in the new book, Milanovic presented his now famous ‘Elephant chart’ (shaped like an elephant) of the changes in household incomes since 1988 from the poorest to the richest globally.  Milanovic shows that the middle half of the global income distribution has gained 60-70% in real income since 1988 while those nearer the top group have gained nothing.


Milanovic found that the 60m or so people who constitute the world’s top 1% of income ‘earners’ have seen their incomes rise by 60% since 1988. About half of these are the richest 12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese, French and German, and the top 1% of several other countries, including Russia, Brazil and South Africa. These people include the world capitalist class – the owners and controllers of the capitalist system and the strategists and policy makers of imperialism.

But Milanovic found that those who have gained income even more in the last 20 years are the ones in the ‘global middle’.  These people are not capitalists.  These are mainly people in India and China, formerly peasants or rural workers have migrated to the cities to work in the sweat shops and factories of globalisation: their real incomes have jumped from a very low base, even if their conditions and rights have not.

The biggest losers are the very poorest (mainly in African rural farmers) who have gained nothing in 20 years. The other losers appear to be some of the ‘better off’ globally.  But this is in a global context, remember. These ‘better off’ are in fact mainly working class people in the former ‘Communist’ countries of Eastern Europe whose living standards were slashed with the return of capitalism in the 1990s and the broad working class in the advanced capitalist economies whose real wages have stagnated in the past 20 years.

There are many controversial points in Milanovic’s work that I have outlined in previous posts, but a new controversy has arisen now.  The British think-tank Resolution Foundation has analysed the Elephant chart.  The Resolution Foundation found that faster population growth in countries like China and India distort the conclusion that it was the lower classes of the advanced capitalist economies that had no income gains since 1988.  Indeed, if we assume for the moment that incomes were unchanged in every country, then the population effect alone would lead to apparent drops of 25 per cent in parts of the global income scale associated with poorer people in rich countries.

A revised graph that removes the effect of different population growth would show that the lower income groups in the advanced capitalist economies did see real incomes rise since the late 1980s – although nowhere near as much as the top 5-10% of income earners.


This result has led the likes of the Financial Times and other supporters of global capitalism to argue that rising inequality has not been due to ‘globalisation’ (the shifting of capital and investment in manufacturing and industry into ‘emerging economies’ at the expense of the industrial proletariat of the ‘North’).

This is a comforting conclusion for the apologists of capital at a time when populist anti-capitalist sentiment is rising and is attacking the idea of ‘free trade’ and ‘free movement of capital’, thus threatening the profitability of capital globally.

But the Resolution Foundation’s analysis does not do away with the incontrovertible fact that inequality of incomes and wealth has increased since the early 1980s in virtually every country.  Milanovic’s own work shows that inequality of income (and wealth) within the imperialist countries has risen in the last 30 years and is now as high, if not higher, than in 1870.

As Toby N points out, what the Resolution Foundation finds is that a large section of Western lower middle and working classes experienced a cumulative real income growth of c25% (with Japanese lower income deciles experiencing contraction, US lower income deciles experiencing low but positive growth, and Western European lower deciles experiencing c45% cumulative income growth).  But these levels of cumulative income growth have been lower than the income growth at the top of each of the income distributions for the respective developed market blocs (leading in many developed countries to higher levels of income inequality), and lower than the income growth of the global median or global poor (leading to lower levels of income inequality across the globe, principally due to the rise of China).

And so, while real incomes have risen for lower middle and working classes in absolute terms, the bottom 80% labour share of GDP in the UK and US has declined as a proportion of GDP (defined as the labour share of GDP multiplied by the proportion of labour income received by the bottom 80% of the income distribution, see chart below), while the relative cost of labour in the West vs the rest of the world has reduced. (It is also notable that the big decline in the UK occurred in the 1980s, with an evening out thereafter.)


And, as I have pointed out before in previous posts, the management consultants, McKinsey found that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005 (Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.  In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing.  In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.  For example, 81 percent of the US population were in groups with flat or falling market income.

However, according to the latest report by the US Census Bureau, Americans last year (2015) reaped the largest annual gain in nearly a generation as poverty fell, health insurance coverage spread and incomes rose sharply for households on every rung of the economic ladder, ending years of stagnation. The median household’s income in 2015 was $56,500, up 5.2 percent from the previous year — the largest single-year increase since record-keeping began in 1967. The share of Americans living in poverty also posted the sharpest decline in decades.  The average incomes of the poorest fifth of the population increased 6.6 percent after three consecutive years of decline. And the official poverty rate declined to 13.5 percent from 14.8 percent in 2014, the sharpest decline since the late 1960s.

But beneath these headline figures, the story is not so sanguine. The numbers still offer a lopsided picture, with a gargantuan share of income rising to the top. While the bottom fifth of households increased their share of the nation’s income, by the census’s definition, to 3.4 percent from 3.3 percent, the richest 5 percent kept 21.8 percent of the pie, the same as in 2014.

And incomes in the middle, measured in 2015 dollars, were still 1.6 percent below the previous peak of $57,423 a household, which was attained in 2007, just before the economy sank into what has come to be known as the Great Recession. Today, US median household incomes are still 2.4 percent below the absolute peak they hit in 1999 just before the bust and global financial crash.


Indeed, according to Elise Gould of the Economic Policy Institute, the income of American households in the middle of the distribution last year was still 4.6 percent below its level in 2007 and 5.4 percent below where it was in 1999. Men’s earnings from work increased 1.5 percent. But they are still lower than in the 1970s!

Households at the 10th percentile — those poorer than 90 percent of the population — are still a bit poorer than they were in 1989. Across the entire bottom 60 percent of the distribution, households are taking home a smaller slice of the pie than they did in the 1960s and 1970s. The 3.4 percent of income that households in the bottom fifth took home last year was less than the 5.8 percent they had in 1974.  By contrast, households in the top 5 percent have profited nicely from America’s expansions. In 2015, they took in $350,870, on average. That is 4.9 percent more than in 1999 and 37.5 percent more than in 1989!

Sure in 2015, the US poverty rate dropped by 1.2%. However, there are still 43.1 million people living in poverty in the US, up from 38 million in 2007.  The poverty rate has hardly budged since the 1980s.


So let’s sum up; what does all the analysis of global and national inequality tell us?

First, that global inequality has increased since the early 1980s, when ‘globalisation’ got moving.  Second, that global growth of incomes has been concentrated in China, and to a lesser extent and more recently, India.  Otherwise average global household income growth would have been much lower.  Third, there has been a rise in average household incomes in the major advanced capitalist economies since the 1980s, but the growth has been much less than in China or India (starting from way further down the income levels) and much less than the top 1-5% have gained.  Fourth, since the beginning of the millennium, most households in the top capitalist economies have seen their incomes from work or interest on savings stagnate and must rely on transfers and benefits to improve their lot.

These outcomes are down partly to globalisation by multinational capital taking factories and jobs into what used to be called the Third World; and partly due to neo-liberal policies in the advanced economies (i.e. reducing trade union power and labour rights; casualization of labour and holding down wages; privatisation and a reduction in public services, pensions and social benefits).  And it is also down to regular and recurrent collapses or slumps in capitalist production, which lead to a loss of household incomes for the majority that can never be restored in any ‘recovery’, particularly since 2009.

In other words, rising inequality is the result the drive of capital to reduce labour’s share and raise profits and to the recurrent and periodic failures of capitalist production.  That is something that the likes of FT and mainstream economics wishes to ignore.

For more on inequality: see my booklet:…/…/ref=sr_1_5…

The end of globalisation and the future of capitalism

Keynesian economist Brad DeLong recently reprised the argument made by John Maynard Keynes back in 1931 that capitalism might be in a depression now, but if we take the long view, we can see that capitalism has been the most successful mode of production for people’s needs in human history; so don’t worry, it will be again.

Keynes made this argument in a lecture to his economics students at Cambridge, called The economic possibilities of our grandchildren.  He argued that within a hundred years, average incomes would have increased eight-fold and everybody would be working a 15-hour week.  So, he said, keep faith in capitalism and don’t go off adopting stupid Marxist ideas – as many were doing at the time.

Now Brad DeLong has become the Keynes of 2016, in the midst of the latest Long Depression.  In his blog, he recognises that “economic growth since 2008 has been profoundly disappointing. There is no reasoned case for optimistically expecting a turn for the better in the next five years or so. And the failure of global institutions to deliver ever-increasing prosperity has undermined the trust and confidence which in better times would serve to suppress the murderous demons of our age.”  But fear not: if we look at global economic growth not just five years out, but over the next 30-60 years, the picture looks much brighter…..The reason is simple: the large-scale trends that have fueled global growth since World War II have not stopped. More people are gaining access to new, productivity enhancing technologies, more people are engaging in mutually beneficial trade, and fewer people are being born, thus allaying any continued fears of a so-called population bomb….. Moreover, innovation, especially in the global north, has not ceased, even if it has possibly slowed since the 1880s. And while war and terror continue to horrify us, we are not witnessing anything on the scale of the genocides that were a hallmark of the twentieth century.”

DeLong claims that these major trends are likely to continue, according to data from thePenn World Table research project, the best source for summary information on global economic growth. The PWT data on average real (inflation-adjusted)per capitaGDP show that the world in 1980 was 80% better off than it was in 1950, and another 80% better off in 2010 than it was in 1980. In other words, our average material well-being is three times what it was in 1950.

Actually that evidence shows that Keynes was way too optimistic back in 1931.  I did estimates like DeLong a few years ago and found that if we look at the world economy as a whole (something JMK does not), then world per capita GDP rose only about 2.5 times from 1930 to 1990.  JMK was far too optimistic. And the average working week in the US in 1930 – if you had a job – was about 50 hours.  It is still above 40 hours (including overtime) now for full-time permanent employment.  Indeed, in 1980, the average hours worked in a year was about 1800 for advanced economies.  Currently, it is about 1800 hours – so again, no change there.

DeLong echoes Keynes in 1931 by concluding that “short of a nightmare scenario like terror-driven nuclear war, you can expect my successors in 2075 to look back and relish that, once again, their world is three times better off than ours is today.” 

This pro-capitalist optimism was also recently promoted by Nobel prize winner Angus Deaton.   Deaton is an expert on world poverty, the consumption patterns of households and how to measure them.  He emphasises that life expectancy globally has risen 50% since 1900 and is still rising. The share of people living on less than $1 a day (in inflation-adjusted terms) has dropped to 14 percent from 42 percent as recently as 1981. The greatest progress against cancer and heart disease has come in the last 20 to 30 years.  “Things are getting better,” he writes, “and hugely so.” 

But Deaton makes it clear that progress in living conditions and quality of life is a relatively recent development. And much of this improvement in the quality and length of life comes from the application of science and knowledge through state spending on education, on sewage, clean water, disease prevention and protection, hospitals and better child development.  These are things that do not come from capitalism but from the common weal.

Moreover, things are not that rosy.  Back in 2013, the World Bank reported that there were roughly 1.2 billion people completely destitute (living on less than $1.25 a day), one-third of which are 400 million children.  One of every three extremely poor people is a child under the age of 13.   So there are over one billion people, one-third of them children, who are virtually starving in the 21st century.  While extreme poverty rates have declined in all regions, the world’s 35 low-income countries (LICs) – 26 of which are in Africa — registered 103 million more extremely poor people today than three decades ago.  Aside from China and India,“ individuals living in extreme poverty [in the developing world] today appear to be as poor as those living in extreme poverty 30 years ago,” the World Bank said.

Deaton himself recognises this: “the number of those who live on less than $2 a day is rising according to the most recent estimates.”  In 2010, 33 percent of the extreme poor lived in low-income countries (LICs), compared to 13 percent in 1981.  In India, the average income of the poor rose to 96 cents in 2010, compared to 84 cents in 1981, and China’s average poor’s income rose to 95 cents, compared to 67 cents.  China’s state-run still mainly planned economy saw its poorest people make the greatest progress.   But the “average” poor person in a low-income country lived on 78 cents a day in 2010, compared to 74 cents a day in 1981, hardly any change.

But here is the crucial underlying story behind the improvement that has been registered under capitalism since 1950.  It is mostly due to the rapid rise of the economic colossus of China, and in the last decade, to a lesser extent, India (where the figures have been cooked a little).  As DeLong shows, China’s real  per capita  GDP in 1980 was 60% lower than the world average, but today it is 25% above it. India’s real per capita  GDP in 1980 was more than 70% below the world average, but India has since closed that gap by half.

DeLong thinks that China’s progress is down to having “strong leaders” like Deng Xiaoping, and in India like Rajiv Gandhi (!).  Apparently China’s economic model had nothing to do with it.  But when we look at the evidence, as David Rosnick has done with Branco Milanovic’s data from his new book Global Inequality, Rosnick finds that global growth was much lower without China in the equation.  As “China implemented different policies, often in opposition to reforms that much of the rest of the world was adopting (e.g. state ownership of most the banking system, government control over most investment including foreign direct investment, industrial policy, and lax enforcement of intellectual property rights.) If this period’s successes in development are mostly driven by China, then we may reach different conclusions regarding the success of widespread global reforms.”

The problem with the optimism of the likes of DeLong and Deaton with the continued ‘success’ of capitalism is that capitalism appears to heading past its use-by date.  Deutsche Bank economists, in a recent study, make the point that ‘globalisation’ (the spread of capitalism’s tentacles across the world) has ground to a halt.  And growth in the productivity of labour, the measure of future ‘progress’, has also more or less ceased in the major economies.

Deutsche strategists Jim Reid, Nick Burns, and Sukanto Chanda comment that “It feels like we’re coming towards the end of an economic era. Such eras often come and go in long waves.  In the past 30 years a perfect storm of factors — China re-entering the global economy in the 70s, the fall of the Soviet Union, and to some extent, the economic liberalisation of India — added more than a billion workers into the global labour market.”  This, Deutsche notes “has coincided with a general surge in the global workforce population in absolute terms and also relative to the overall population, thus creating a perfect storm and an abundance of workers.”

But the era of the ‘baby-boomers’ in the advanced economies is over and the expansion of the workforce in the emerging economies is beginning to slow – the graph below shows how the ratio of productive workers to total population in the major economies is set to fall from hereon.


At the same time, the world economy is in a downwave of profitability and investment.  “With demographics deteriorating it seems highly unlikely that the next couple of decades (possibly longer) will see real growth rates returning close to their pre-crisis, pre-leverage era levels. Obviously if there is a sustainable exogenous boost to productivity then a more optimistic scenario (relative to the one below) can be painted. At this stage it is hard to see where such a boost comes from – and even if it does, time is running out for it to prevent economic and political regime change given the existing stresses in the system.”

Indeed, the Deutsche study hints at my own view of long waves in economic development under capitalism.  In this blog, and in my books, I have argued that world capitalism is in a major downwave in prices, productivity and profitability which won’t come to an end without further major convulsions in capitalist production similar to that in 2008-9.  If that is right, the optimistic predictions of DeLong and Deaton will be confounded.

American economist Robert J Gordon has emphasised that productivity growth everywhere has slowed to a trickle despite the new technological advances of the internet, big data, social media, 3d printing etc.  And the debate continues on whether the current era of ‘disruptive’ new technologies will drive capitalism forward and with the majority of people.

Mainstream economics remains divided on the issue.  On the one hand, economists at the Bank of England reckon that the new technologies will deliver renewed economic growth and employment, as they have done in the past.  The BoE reckons that technological progress won’t create mass unemployment and while it probably won’t make your working week much shorter and it’ll probably push up average wages.  So “robots are (probably) our friends”.

On the other side, the IMF’s economists are less sanguine.  They argue thatrobot capital tends to replace workers and drive down wages, and at first the diversion of investment into robots dries up the supplies of traditional capital that help raise wages. The difference, though, is that humans’ special talents become increasingly valuable and productive as they combine with this gradually accumulating traditional and robot capital. Eventually, this increase in labor productivity outweighs the fact that the robots are replacing humans, and wages (as well as output) rise.  But there are two problems…it takes 20 years for the productivity effect to outweigh the substitution effect and drive up wages. Second, capital will still likely greatly increase its role in the economy. It will take a higher share of income, even in the long run when wages are above the pre-robot-era level. Thus, inequality will be worse, possibly dramatically so.”  So, not so great.

Keynes’ 1930s optimism gained credence with the boom during a major world war and the subsequent post-war Golden Age that restored the profitability of capital for a generation.  Let’s hope it does not take another world war to confirm the optimism of the modern Keynesians like DeLong.

From China to Mars

The weekend meeting of the heads of state of the top 20 economies in the world (G20) in the Chinese resort of Hangzou concluded that the global economy was still in trouble.  The IMF reckoned 2016 would be the fifth consecutive year in which global growth was below the 3.7% average recorded in the period from 1990 to 2007.

And just before the G20 summit, the IMF issued a report forecasting even slower growth than that rate. “High frequency data points to softer growth this year, especially in G-20 advanced economies, while the performance of emerging markets is more mixed”.  It went on: “The global outlook remains subdued, with unfavorable longer-term growth dynamics and domestic income disparities adding to the challenges faced by policymakers. Recent developments—including very low inflation, along with slowing investment growth and trade—broadly confirm the modest pace of global activity. The decline in investment, exacerbated by private sector debt overhangs and financial sector balance sheet issues in many countries, low productivity growth trends, and demographic factors weigh on long-term growth prospects, further reducing incentives for investment despite record-low interest rates. A period of low growth that has bypassed many low-income earners has raised anxiety about globalization and worsened the political climate for reform. Downside risks still dominate.”


IMF chief, Christine Lagarde, also blogged that “Weak global growth that interacts with rising inequality is feeding a political climate in which reforms stall and countries resort to inward-looking policies. In a broad cross-section of advanced economies, incomes for the top 10 percent increased by about 40 percent in the past 20 years, while growing only very modestly at the bottom. Inequality has also increased in many emerging economies, although the impact on the poor has sometimes been offset by strong general income growth”.


Low growth, high debt, weak productivity and rising inequality: that’s the story of the world economy since the end of the Great Recession in 2009.

What did the IMF suggest to the G20 leaders as way out of this depressed activity?  First, more “demand” support. But monetary policy (zero or negative interest rates and printing money) was not working.  So it was time to boost public investment and upgrade infrastructure”.   But the world needs more neo-liberal type ‘structural reforms’, like deregulation of labour and product markets, reducing pension schemes etc, in order to boost profitability.  But there should also be less inequality through higher basic benefits and increased education for low-wage earners.  So we need more globalisation, world trade, neoliberal reforms and less inequality.  Reconcile those!

One idea that dominated the G20 meeting was the need to boost world trade and support ‘globalisation’.  As this blog has reported often, world trade growth has been dismal and is a big feature of the Long Depression since 2009.

World trade

But worse for global capitalism, and American imperialism in particular, there has been a growing trend away from ‘globalisation’ (free trade of goods, services and capital flows for big business).  The World Trade Organisation trade agreements have stopped and the regional mega-deals like TTP and TTIP are in serious jeopardy.  Everywhere, governments are under pressure to block further deals and even reverse them (eg Trump on NAFTA).  So Lagarde called for renewed support for globalisation and the neo-liberal era now under attack.

The Chinese were particularly worried because global trade growth is vital to its export, investment-led economic model.  Chinese President Xi Jinping was vocal in a call for wider trade and investment.  “We should turn the G20 group into an action team, instead of a talk shop,” he said.

Meanwhile, optimism that a proper world economic recovery remains.  Gavyn Davies in the FT has recently been claiming that his Fulcrum forecasting agency was finding a world economic pick-upHowever, this weekend, he was slightly less sanguine“In August, we have received no confirmation that a cyclical upswing is gaining momentum. But nor has there been a significant decline in activity: the jury is still out”.  

At the beginning of the year, many mainstream economists reckoned that China and other ‘emerging’ economies were going south and would drag the rest of the world down with them.  I disagreed at the time.  The optimism for recovery then switched to the US and even Europe.

However, as we move into the last part of 2016, it has become clear that the US economy has slowed down even more and Europe has achieved hardly any pick-up at all.  So now the optimism has swung back to the major emerging economies.  As the UK’s accountancy firm Deloitte economists put it today: “The downward trend for emerging market activity seems to have run its course. Growth is widely expected to accelerate in 2017. India is forecast to grow by 7.6% next year, the fastest rate of growth among any major economy. Brazil and Russia are likely to emerge from recession. Chinese growth is expected to ease, but, at a forecast 6.2% in 2017, would still be far higher than global averages. Crucially, the risk of a Chinese ‘hard landing’ has eased.”

So it’s back to the future with the so-called BRICs leading the way out of the depression.  We’ll see.

Talking of back to the future, one of the biggest policy calls from mainstream economists has been for governments to launch more infrastructure spending (building roads, rail, bridges, power stations, telecoms etc) to get economies going.  So far, this has been largely ignored by governments trying to cut budget deficits with reductions in government investment spending or facing high public debt levels.

The latest call on this front has come from the economists of the Australian investment outfit, Macquarie.  Why not colonise Mars?   “It is not as crazy as it sounds,” wrote Viktor Shvets and Chetan Seth from the Macquarie global equities team.  “A giant Mars colonisation program would create a vast, capital-intensive industry which would span the globe, create jobs, and address the global economy’s productivity problem.” 

You see, the world economy is not growing at a sufficient rate because there are “declining returns on investment”.  So what we need to do is to start a huge government programme to colonise Mars, similar to the space program of the 1960s under Kennedy that led to landing on the Moon.


Interestingly, the Macquarie economists are not interested in a global investment programme to help the poorest in the world to develop; to help solve the global environmental disaster or to boost education, health and basic infrastructure in the poorest countries on Earth.  No, that is not as useful (profitable) as investing in another planet to get returns on investment up.

The Macquarie solution is the ultimate in Keynesian economic policy (short of ‘war Keynesianism’).  It is the idea that there is plenty of capital available but just no ‘investment opportunities’ due to lack of demand.  So war or space can offer a way out.

The Macquarie economists think that the huge injection of money and credit into financial assets, that has driven interest rates to zero or below is what has created low returns.  But low returns on capital, generated by too much capital, is a neoclassical marginalist theory (that Keynes held to).  It is confusing ‘fictitious’ capital with productive capital.

The Marxist view is different.  Productive investment is not taking place because of ‘too much capital and low demand’ but because of too little surplus value or profitability from productive capital.  And low profitability will not be improved by government spending on a space program.  On the contrary.  In the 1960s, the space program was affordable because of high (not low) profitability in the capitalist sector.  So unproductive expenditure, which no doubt did develop new technology and employment for many, was affordable.  That is the opposite now. There is no way out through Mars.

Still stuck in the Jackson Hole

Every August, the central bankers of the world meet at Jackson Hole, Wyoming, amid the Grand Teton mountains in mid-west America, to discuss the state of the world economy and the role of monetary policy and central banks.  The central bank chiefs hear papers presented by leading mainstream economists in a restful weekend symposium hosted by the Kansas City Fed.  Usually, it is an opportunity for the head of the US Federal Reserve, the hegemonic central bank, to make a speech outlining what’s happening in the US economy and future monetary policy (and its efficacy).

This August it was the turn of Janet Yellen, the current Fed chief.   Global investors and financial market participants always await expectantly to see what the Fed is thinking.  The immediate issue for markets is whether the Federal Reserve will resume its plan to raise its ‘policy’ interest rate towards a ‘normal’ level.  The Fed policy rate is the floor for all other rates, like bank loan rates for households and companies and also for international rates, given the predominant position of Wall Street in global finance.

The Fed under Janet Yellen hiked its policy rate back in December 2015 for the first time in nine years, supposedly as the start of the move back to ‘normal’ – on the grounds that the US economy was fast recovering back to trend economic growth and full employment.  Yellen explained that the US economy “is on a path of sustainable improvement.” and “we are confident in the US economy”.   But since December, the Fed has sat on its hands.

Why?  Well, the return to trend growth has not materialised and inflation has not risen. In the first half of 2016, the US economy has expanded in real terms (after inflation) at less than 1%, more one-third the ‘normal’ rate.  The economy has been slowing down, not accelerating.

US GDP growth

At the same time, inflation fell back too.

US inflation

So the Fed paused on its ‘normalisation’ policy.  Indeed, there was talk of opting for cutting the policy rate and even introducing ‘negative’ interest rates. However, the Fed’s chiefs remained optimistic.  Just before the Jackson Hole symposium, Fed vice-chair Stanley Fischer made a speech in which he reckoned that “the economy has returned to near-full employment in a relatively short time after the Great Recession, given the historical experience following a financial crisis.”

Now in Yellen’s Jackson Hole speech, she reiterated her confidence in the sustainability of the US economic ‘recovery’ and hinted that the Fed would soon resume its hiking of the policy rate.  Yellen said: “In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”  Yellen added that the US economy was “now nearing the Federal Reserve’s statutory goals of maximum employment and price stability”.

Central bank ‘conventional’ measures before the global financial crash boiled down to manipulating the basic interest rate for borrowing or providing cash or credit for limited periods to tide banks over in a slump.  But such was the depth and width of the impact of the global financial crash and Great Recession on the banks and the wider economy, central banks had gradually adopted more ‘unconventional’ measures, such as printing money to buy government and corporate bonds from banks at high prices to provide liquidity for the banks to lend on to ‘real economy’; and to offer ‘forward guidance’ to the markets and industry i.e. a commitment to keep interest rates as low as possible for as long as possible so that ‘confidence’ in investing was restored.  The ECB’s version of this ‘forward guidance’’ was for ECB chief Mario Draghi to announce that the ECB would “do what it takes” to get the Eurozone economy moving.

However, as the world economy continued to crawl along, with GDP growth stuck, unemployment falling back very slowly and many economies slipping into outright deflation (bad news for those with big debts), it was clear that monetary policy, conventional or unconventional, had failed.  In the last year, many have called for more radical measures and some central banks have adopted them; namely, ‘negative interest rates’ (Sweden, Switzerland, Japan) and even consideration of ‘helicopter money’ (straight cash handouts to households); or the abolition of paper money so that all money is kept in banks electronically to be spent (and not stuffed under mattresses).  This last proposal is the ultimate in bank dictatorship over people’s rights to their cash savings.

Just before Yellen’s speech, San Francisco Fed chief, John Williams had suggested setting higher inflation or ‘nominal’ GDP growth targets (so that central banks print even more money).  And it is interesting that all the papers presented to the Jackson Hole symposium by various mainstream academic economists had one basic theme: existing monetary policy is not working and we need to consider more unconventional and extreme measures.

The economic strategists of capital are worried that monetary policy is not working to get the world economy (and the US economy) out of its ‘secular stagnation’.  The failure of current monetary policy pushes the monetarists like former Fed chief Ben Bernanke into proposing yet more of the same (cutting rates) and more of the not same (helicopter money).

Yellen was vaguely sympathetic to Williams’ idea, but on balance, argued that nothing else was needed.  And anyway, relying too heavily on these non-traditional tools could have “unintended consequences” as it might encourage “excessive risk-taking” and undermine financial stability. She argued that the Fed would not need to adopt any new measures of ‘unconventional’ monetary policy beyond those adopted since the onset of the Great Recession in 2008.  Indeed, these measures could actually make the economic and financial situation worse.  “Monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth,” said Fed vice chair Stanley Fischer.

The alternative policy answer of the Keynesians like Paul Krugman, Larry Summers and Yellen herself is to call for government infrastructure spending and other efforts to counter weak growth, sagging productivity improvements, and lagging business investment.  You see the problem is that the capitalist sector is not investing sufficiently to get productivity of labour growing faster and thus real GDP growth.

As a share of GDP, US annual business investment since 2008 has averaged nearly a full percentage point below the previous decade’s average, government data shows. This has generated an investment shortfall equivalent to $1trn with what it would have been if the previous trend continued.  Little suggests a rebound any time soon.  Fixed business investment has fallen in three successive quarters as a share of GDP and for the last three quarters up to Q2 2016.

And it is not as if the evidence is not there that the US (and UK) economies need to invest in new infrastructure and technology to lower costs and improve efficiency.  The American Society of Civil Engineers has all we need to know. 

But would government investment compensate?  In most major capitalist economies, business investment to GDP is about 13-15% while government investment is about 1-3%, or about seven times smaller.  If business investment slips by 1-2% of GDP, then government investment would have to nearly double in GDP terms to just stand still.  And that assumes that governments controlled by big business and big finance would contemplate a doubling of government investment that involves large increases in taxation or rising interest rates for borrowing (in other words, enchroaching on profitability) (Kalecki).

As I have argued in this blog, what matters in a capitalist economy is the profitability of capital and the mass of profits generated by the workers employed.  If the profitability is capital is too low and the capitalist sector remains dominant, investment and economic growth will not recover whatever central banks do or government spending does.

Indeed, there is yet more evidence from the Federal Reserve own economists that this is right.  In a recent study, two Fed economists asked chief financial officers of major corporations and found the corporate internal rate of return needed to justify capital projects has “hovered near 15% for decades,” and barely budged even as global interest rates have fallen.  So even if interest rates stay near zero or go negative or if helicopter money is handed out, it won’t make any difference if companies don’t think they can get their 15%.Fed on investment.

It is no accident that Marxist studies of the US corporate rate of profit in the productive sectors (i.e. non-financial) since the 1980s confirm an average rate of about 15%.  US companies now expect 15% but can’t get it.  So they buy back their own shares or increase dividends instead on investing in new technology, plant or equipment.

So yet again, it is profitability of capital that matters and from there to investment and growth.  Yellen and Fischer cite higher employment and consumption as reasons for hiking interest rates now.  But these are ‘lagging’ indicators; their movement ultimately depends on what is happening with business investment and behind that, profitability.

And the latest figures on US corporate profits that came out just this week for the first half of 2016 make dismal news.  US corporate profits fell 4.9% in Q2 2016, compared to this time last year. And after tax was deducted, profits were down 6.3% compared to last year.

Corporate profits are the main driver of business.  Where profits go, business investment is soon to follow, like the usual ‘night follows day’ proverb.  And there is yet new evidence that this is right.  Emre Ergungor is a senior economic advisor in the Research Department of the Federal Reserve Bank of Cleveland.   He has been working on a model that can predict economic recessions.  Most existing models try to predict recessions based on the movement of short-term and long-term interest rates.  But they are not very good.  Currently such models are reckoning the likelihood of a recession at no more than 20%.  ec 201609 recession probablilities

But the Ergungor came across a startling fact (already known to the readers of this blog) that there is a very high correlation between the movement of business profits, investment and industrial production!  He found that A simple correlation analysis shows that the correlation between the change in corporate profits and the contemporaneous change in industrial production is 54 percent, but the correlation goes up to 66 percent if I use the one-quarter-ahead change in industrial production. Similarly, the correlation between the change in corporate profits and the contemporaneous change in gross domestic private investment is 57 percent, but the correlation goes up to 68 percent if I use the one-quarter-ahead change in investment. More formally, a Granger causality test indicates that the quarterly change in profits leads the quarterly change in production by one quarter, but the change in profits is independent of the change in production. A similar relationship applies to the quarterly change in profits and investment.6 Thus, firms seem to adjust their production and investment after seeing a drop in their profits.”

This is very similar to the correlations and Granger causality tests that I found and others have too.  The time gap between profits and investment is about three quarters of a year.  So Cleveland developed a new recession model to include corporate profits and found that “In early 2016, model 3 assigned an 81 percent probability to a recession in the next 12 months, and model 4 assigned a 73 percent probability to the same event. Thus, the consideration of the decline in corporate profits in this period worsened the recession probability by 8 percentage points. As credit spreads declined later in the period, the recession probabilities from both models declined to around 30 percent.”  Cleveland cautions that their model does not always predict a recession.  But the model is way better than one based on interest rates only.

I have spelt all this out in detail because it adds yet more evidence to the Marxist economic case that it is profits that matter and investment that decides, not the price or quantity of money (monetarism) or consumption and employment (Keynesianism). So expect business investment to fall further over the next few quarters.  If the Fed decides to hike interest rates in the middle of that, it could well trigger a new economic recession if stock markets fall and the fictitious financial value of companies is exposed to the reality of their profits.

Returning to Gordon

This time last year I did a post on why productivity growth in all the major economies has slowed down.

As I explained in that post, the productivity of labour, as measured by output per worker or output per hour of worker, is a very good measure of the productive potential of capitalism.  Economies can increase their national outputs by employing more people to work (from a rising population of working age) or they can do so by increasing the productivity of each worker.  With population growth slowing in most major economies and globally, productivity growth is the main method of raising global output and – given the huge caveats of inequality or income and wealth and the lack of production for the majority’s needs) – the living standards of the world’s population.

Capitalism is a mode of production that aimed specifically at raising the productivity of labour to new heights, compared to previous modes of production like slavery, feudalism or absolutism.  That’s because capitalists, in competing to obtain and control more profit (or surplus value) from the labour power of workers, were driven to mechanise and introduce labour-saving technologies. So if capitalism is no longer delivering increasing productivity through investment in technology then its raison d’etre for human social organisation comes under serious question.  Capitalism would be past its ‘use-by date’.

Growth per capita

And as last year’s post said, global productivity growth has fallen back, particularly since the Great Recession began in 2008 and shows no signs yet of recovering to previous levels.  This is vexing and worrying the ruling economic strategists, particularly as mainstream economics has no clear explanation of why this is happening.

Global labour productivity remains below its pre-crisis average of 2.6% (1999-2006)

productivity growth

Only this week, the vice-chair of the US Federal Reserve, Stanley Fischer, looked at the state of US economy.  He started by claiming the success of Fed monetary policies in achieving virtually full employment again in the US: “I believe it is a remarkable, and perhaps underappreciated, achievement that the economy has returned to near-full employment in a relatively short time after the Great Recession, given the historical experience following a financial crisis.”

However, Fischer noted that growth in output had not been so impressive.  And this is clearly due to the slowdown in productivity growth.  Most recently, business-sector productivity is reported to have declined for the past three quarters, its worst performance since 1979. Granted, productivity growth is often quite volatile from quarter to quarter, both because of difficulties in measuring output and hours and because other transitory factors may affect productivity. But looking at the past decade, productivity growth has been lackluster by post-World War II standards. Output per hour increased only 1-1/4 percent per year on average from 2006 to 2015, compared with its long-run average of 2-1/2 percent from 1949 to 2005. A 1-1/4 percentage point slowdown in productivity growth is a massive change, one that, if it were to persist, would have wide-ranging consequences for employment, wage growth, and economic policy more broadly. For example, the frustratingly slow pace of real wage gains seen during the recent expansion likely partly reflects the slow growth in productivity.”

Why is this?  Fischer presents various explanations: the mismeasurement of GDP growth; low business investment; a slowdown in new technology that could boost productivity; and/or the failure any new technology to spread to wider sections of the economy.

The first explanation has a lot of support.  The argument is that the traditional measure of output, the Gross Domestic Product, is a very poor measure of ‘welfare’ or the production of people’s needs.  This argument has been most well presented in a book by Diane Coyle. ( called GDP: A Brief But Affectionate History .  Coyle argues that GDP is an ‘abstract’ idea (as it clearly is) that leaves out important services and benefits and puts in unnecessary additions.  Here is one example offered by John Mauldin: “If I purchase a solar energy system for my home, that purchase immediately adds its cost to GDP. But if I then remove myself from the power grid I am no longer sending the electric company $1000 a month and that reduces GDP by that amount. Yet I am consuming the exact same amount of electricity! My lifestyle hasn’t changed and yet my disposable income has risen.”

Yes, but what Coyle’s critique fails to recognise is that GDP is not designed to measure ‘benefits’ to people but productive gains for the capitalist mode of production.  Electricity on the grid is part of the market, electricity made at home is not; cleaning houses and office for money is part of the market and is included in GDP; cleaning your home yourself is not marketable and so is not in GDP.  That makes perfect sense from the point of capitalism, if not from people’s welfare.  As Mauldin says “GDP is a financial construct at its heart, a political and philosophical abstraction. It is a necessary part of the management of the country, because, as with any enterprise, if you can’t measure it you can’t determine if what you are doing is productive”.

Many have argued recently that many new technological developments are not measured in the GDP figures: “because the official statistics have failed to capture new and better products or properly account for changes in prices over time” (Fischer).  But as Fischer comments, most recent research suggests that mismeasurement of output cannot account for much of the productivity slowdown.”

That brings me to the main argument offered by mainstream economist, Robert J Gordon, in his magnum opus, The Rise and Fall of American Growth: The US Standard of Living Since the Civil WarI have discussed Gordon’s thesis before in this blog ever since he first presented it back in 2012. Gordon reckons that the evidence shows productivity growth is currently low because that it is where it is usually.  There have been periods of fast-growing productivity when technical advances spread widely across economies, as in the early 1930s and in the immediate post-war period.  Productivity growth rose from the late nineteenth century and peaked in the 1950s, but has slowed to a crawl since 1970. In designating 1870–1970 as the ‘special century’, Gordon emphasizes that the period since 1970 has been less special. He argues that the pace of innovation has slowed since 1970 and furthermore that the gains from technological improvement have been shared less broadly.

In Marxist terms, this suggests that capitalism is now exhibiting exhaustion as a mode of production that can expand to lower labour time and meet people’s needs.  The current technical innovations of the internet, computers smart phones and algorithms etc are nowhere near as pervasive in their impact as electricity, autos, medical advances and public health etc were in previous periods.  So globally, capitalism cannot be expected to raise productivity growth from here.  Indeed, there are many ‘headwinds’ likely to keep it lower, says Gordon.

So why has productivity growth slowed and will it continue?  Mainstream economics offers all sorts of explanations. The first, as we have seen, is to argue that productivity growth has not really slowed because it is not being measured properly in the modern age of services and the internet.

The second is to argue that the slowdown is temporary and caused by the global financial crash and the subsequent Great Recession.  The legacy of crash is still very high levels of debt, both private and public, and this is weighing down on the capacity and willingness of the capitalist sector to invest and expand new technologies. Noah Smith, the Keynesian blogger struggled with debt as the main cause of recessions and slowdowns.   Robert Shiller, the Nobel prize winning ‘behavioural’ economist, on the other hand, reckons that the slowdown is due to “hesitation.” “Economic slowdowns can often be characterised as periods of hesitation. Consumers hesitate to buy a new house or car, thinking that the old house or car will do just fine for a while longer. Managers hesitate to expand their workforce, buy a new office building, or build a new factory, waiting for news that will make them stop worrying about committing to new ideas.”

There is no doubt that the global financial crash has driven growth rates in the major economies down – indeed that is part of the definition of what I call The Long Depression that capitalism is now suffering (and all of us, of course, as a result).

Growth slows

And one key factor in that slowdown has certainly been the huge rise in debt, particularly corporate debt, since the end of the Great Recession.  As a recent analysis by JP Morgan economists pointed out: Corporate business, in particular, has borrowed aggressively in recent years, often using the proceeds to buy back shares. Ratios of corporate debt to GDP or income are starting to look rather high'”  Indeed US corporate debt is now at a post-war high.

And there is no doubt that capitalist companies are ‘hesitating’ about investing in new technology in a big way.  But why?  Shiller reckons that “loss of economic confidence is one possible cause.”  But that is merely stating the question again.  Why has there been a loss of economic confidence?  Shiller’s response is to suggest that nobody is willing to invest because of fears about “growing nationalism; immigration and terrorism”  So it’s all due to political and cultural fears – hardly a convincing economic thesis.

Yes, high debt and low ‘confidence’ are factors that will lead to low and even falling investment in technology and therefore in generating low productivity growth.  But they are only factors triggered, Marxist economics would argue, because the profitability of capital remains low, particularly in the productive sectors. Yes, profit rates in most economies rose from the early 1980s up to the end of the 20th century while investment growth and real GDP growth slowed.  But most of that profitability gain was in unproductive sectors like real estate and finance.  Manufacturing and industrial profitability stayed low, as several Marxist analyses have shown. 

Even mainstream economics, using marginal productivity categories, reveal something similar.  Using marginalist mainstream categories, Dietz Vollrath found that the ‘marginal productivity of capital’ fell consistently from the late 1960s.  Capitalism has become less productive ‘at the margin’.  Marxist economics can explain this as due to a rising organic composition of capital (more technology replacing labour) leading to a fall in the rate of profit (return on capital).  Post the Great Recession, the marginal productivity of capital rose because the share going to profit rose.  In Marxist terms, the rate of surplus value rose to compensate for the rise in the organic composition of capital.  Here’s Vollrath’s chart showing the time path in capital productivity from 1960 to 2013.  If you remove the effect of rising profit share, the falling productivity of capital continued (dotted line).


So the conclusion of last year’s post still holds; “Productivity growth still depends on capital investment being large enough.  And that depends on the profitability of investment.  There is still relatively low profitability and a continued overhang of debt, particularly corporate debt, in not just the major economies, but also in the emerging capitalist economies.  Under capitalism, until profitability is restored sufficiently and debt reduced (and both work together), the productivity benefits of the new ‘disruptive technologies’ (as the jargon goes) of robots, AI, ‘big data’ 3D printing etc will not deliver a sustained revival in productivity growth and thus real GDP.”

Don’t expect any help from Japan or Europe

US economic data gave somewhat conflicting outcomes in August.  First, we found that the US economy grew far less than expected in the second quarter of 2016. Real GDP (that’s after inflation is removed) increased at only a 1.2% yoy rate. And business investment fell at a 9.7% annual rate, the third straight quarterly fall. On the other hand, in July, the US economy added 255,000 more jobs, while wages (before inflation and taxes) climbed 2.6% compared to July 2015.

US earning

It is this strongish labour market plus rising nominal wages that made the Goldman Sachs economists conclude that things are looking up for the US economy.  “As a result, the US economy is now much more “normal” than widely perceived, in our view. By this we mean that the usual features of a mid-to-late expansion economy—full employment and even a somewhat hot labor market, inflation near or perhaps even above the target—are likely to eventually emerge in the years ahead.”  However, the GS economists, unlike those at JP Morgan, ignore the sharp fall in corporate profits and business investment that suggests the US economy is not about to turn ‘hot’ – on the contrary.

US corporate profits


Also, US retail sales figures for July do not show a pick-up in consumer demand that GS expects.  Retail sales growth has been slowing throughout 2016.  Sales in the shops and online are only 40% of American household’s expenditure – the rest is on housing, health, education, utilities etc.  So the jury is out on whether American consumers are not accelerating their spending or not.

US retail sales

Anyway, what is clear is that, even if the US economy is pretty much okay and has made a reasonable recovery from the 2008 Great Recession, according to the GS economists, that cannot be said for the other major capitalist economic areas, Japan and Europe.

I have pointed out before that Japan continues to struggle with little or no economic growth despite four years of Abenomics (monetary injections, fiscal stimulus and neo-liberal labour reforms); and despite the advice of monetarist guru, Ben Bernanke, ex-chief of the US Federal Reserve and Keynesian fiscal guru, Paul Krugman, both of whom have called on Japan’s conservative prime minister Shinzo Abe to continue with yet more monetary stimulus (helicopter money) and fiscal spending (budget deficit).

But nothing seems to be working.  Japan failed to grow at all in Q2 2016, a sharp slowdown from 2% growth in Q1.  And it was business investment that collapsed as corporate profits have fallen since the beginning of the year.  The purchasing managers’ index came in at 49.3 in July from 48.1 in June.  Any figure below 50 is meant to indicate a contraction.

Japan PMI

Again, like the US, the Japanese labour market has been reasonably strong with the unemployment rate at its lowest in 21 years.  Abe makes much of this but the decline in unemployment is much more to do with Japan’s ageing and declining population.  The number of people of working age looking for work is just falling.  Moreover, most of those who got work got temporary contracts not regular work.

Japan jobs

The attempt to hike sales taxes in 2014 in order to bring the government spending deficit and debt under control only caused a collapse in spending by Japanese households which has not recovered (see graph below).  So the Abe government postponed any further tax hikes and reversed policy by announcing a large fiscal spending package.  Thus the government swings from neo-liberal measures to Keynesian ones with little success.

Japan growth

Indeed, the main target for the Japanese government is to get inflation rising at around 2% a year. This supposedly would engender more consumer spending and get the economy going. Such is the view of Keynesians advising Abe.  But monetary and fiscal policy have signally failed to achieve that.  Now that the effect of the sales tax hike has fallen out of the figures, Japan has returned to deflation.

Japan inflation

Average wages are growing at less than 1% a year, so it is just as well prices in the shops are falling or Japanese households would be suffering a major fall in living standards.  The reason monetarism and Keynesianism have failed in Japan is because the capitalist sector will only grow if more investment takes place and investment only takes place if corporate profits are rising, not falling as now.  This leading economic index shows which way the Japanese capitalist sector is going.

Japan leading index

The situation is no better in Europe.  The UK economy had been the best performer in economic growth last year, matching that of the US at just over 2% a year.  Now all the signs are that UK businesses have stopped investment plans and foreigners are also holding on back on investing in UK Inc until the issue of the new terms for the UK-EU trade and investment is clear and that could take years.

In the Eurozone, things are much worse.  Joseph Stiglitz, the American Nobel prize winner in economics, has a new book out in which he argues that the crisis and slump in the Eurozone is due to the euro itself.  He reckons  that “the eurozone was flawed at birth” and that “the euro created the euro crisis”.  That’s not my view. I have argued that the euro debt crisis is part of the crisis of capitalism in 2008-9, the Great Recession. The euro did not “create” the euro crisis, even though the EU project and the euro has fundamental flaws.

Even if the euro had collapsed and EMU states had returned to running their own monetary and currency policies, the crisis would not have gone away and may even have been worse. That’s because the euro crisis was the product of the failure of the capitalist mode of production globally. The crisis was only partly a result of the policies of austerity being pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK. Alternative Keynesian policies of fiscal stimulus and/or devaluation would have done little to end the slump.

But what the single currency area has done is to increase divergence between the weaker capitalist states within the Eurozone like Greece, Portugal, Ireland and Spain and the stronger ‘core’ states, in particular, Germany.  The global capitalist crisis has hit the weaker periphery really hard while Germany has recovered better.

Europe growth

Indeed, it is only German capitalism that has made any sort of recovery since the end of the Great Recession.  Only German investment is above pre-crisis levels in Europe (including the UK).

German investment

In contrast the condition of Greek capitalism has never been worse in its short history. The collapse of the Greek economy is almost without precedent. Real household consumption has dropped by 27 per cent since the peak.

Greek living standards

Greece’s capital stock has been shrinking by about 6 to 7 per cent of output since 2012.  The nonfinancial corporate sector, which shifted the bulk of its liquid assets outside Greece in 2009-2011, has nevertheless experienced a decline in its deposits by more than 35 per cent since the peak in 2012:

Now despite three ‘bailouts’ by the IMF and the Euro leaders (in reality bailouts for foreign banks and then funds in order to reduce debt through austerity measures), the Greek economy remains in a dire despond.

Close to half a million Greeks are believed to have migrated since the crisis begun, thanks to the searing effect of persistent unemployment (at just under 24%, the highest in Europe) and an economy that has shed more than a third of its total output over the past six years.  And still consumption and exports fell by 6.4% and 7.2%, in the second quarter of this year.  The duration and depth of the recession is such that the World Bank now compares it to the slumps seen in eastern European countries in the early 1990s. The poorest 20% of Greece’s 11 million people have suffered a 42% drop in disposable income since 2009.

Italy’s economy may not be in a deep depression like Greece but it is not growing at all.  And as a result, its banks have built up a huge potential loss on the loans they have made to Italian companies – it is estimated that there are €360bn ‘non-performing loans’ on their books.

One bank Monte Dei Pasche is so weak and has so much ‘bad debt’ that is basically bankrupt. The Italian government wanted to bail it out with state funds but the new EU banking rules do not allow that unless all the bank bond holders first take a hit.  Unfortunately, most of these bond holders are ordinary Italians who were persuaded to put their savings into these bank bonds by the banks in the biggest piece of misselling in Italian history.  Hundreds of thousands would lose their life savings if their bonds were written off.

So now the government is desperately trying to get more secure Italian banks and foreign hedge funds and investment banks to invest in to save the day – on very sweet terms, of course. The Italian bank crisis is yet another indicator of the failure of Italy’s economy to recover and of what could happen across Europe in banking if growth continues to stutter.

And Eurozone growth is stuttering still.  The Eurozone as a whole started to recover after its huge debt crisis in 2012-14, but annual growth just does not rise above 1.5% or so – and nearly all the growth is in Germany and the Netherlands.

It is my view that the US economy remains the most important in levering global growth.  I did not agree that China, for example, would pull the world down.  If US economic growth starts accelerating as Goldman Sachs economists suggest, then that will spill over into Europe and Japan – and even help China.  On the other hand, the US will get no help from Europe and Japan in restoring a healthy global capitalist economy.,

The Great Financial Meltdown

The Great Financial Meltdown: systemic, conjunctural or policy created? edited by Turan Subasat.

This book started from a seminar on the causes of crises hosted by the University of Izmir, Turkey back in October 2014.  Many of the top radical and Marxist economists were present.

At that seminar, distinguished Marxist, David Harvey delivered a paper criticising those Marxist economists who support the view that Marx’s law of the tendency of the rate of profit to fall (LTRPF) is the underlying or main cause of crises in the capitalist mode of production.  In particular, Harvey singled out my work to attack.  I replied to his critique on my blog and he kindly posted that reply on his popular website.  After that, there was a further exchange of views, including a strong intervention by Andrew Kliman in support of Marx’s law.

Turan Subasat has superbly brought together all the papers submitted by leading Marxist and radical scholars at that seminar nearly two years ago in this book.  He kindly invited me to present my reply to Harvey which now also appears in the book.  But there are many other interesting and relevant papers in the book by leading Marxist economists (contributors: E. Bakir, R. Bellofiore, A. Campbell, R. Desai, B. Fine, D. Fouskas, A. Freeman, D. Harvey, A. Kaltenbrunner, E. Karacimen, D. Kotz, S. Mavroudeas, S. Mohun, O. Orhangazi, M. Roberts, T. Subasat, J. Toporowski, J. Weeks.)

Unfortunately, the book is very expensive, as is the wont of academic publishers, so that only the rich and those able to get a good library will be able to read it, so I thought I would give a flavour of the ideas presented in the book by various authors, of course, through my own particular taste buds.

Turan provides an excellent introduction and summary of the combined views of these top Marxist scholars.  He argues that the causes of crises under capitalism and, in particular, the recent global financial crash and subsequent Great Recession, can be considered from three angles: is there a systemic underlying cause of crises (the falling rate of profit or underconsumption); or is it conjunctural (each crisis has a different cause); or is it the result of policy decisions (eg the neoliberal agenda, financial deregulation etc)?

On the first theme, apart from my own paper, Alan Freeman, a longstanding supporter of the LTRPF, offers a “vigorous defence” (Subasat) of Marx’s law.  Like me, Freeman reckons that we must separate the underlying cause of crises (falling profitability) from the immediate causes (financial crash).  Some conjunctural phenomena like ‘financialisation’ in the last 30 years or neoliberal policy regimes may seem to be the cause of crises but they are not alternative causes but are “themselves explained by the LTRPF.”

In contrast, John Weeks, in his paper, reckons that the LTRPF “fails to get out to the starting gate as a candidate for generating cross-country crises”.  Weeks reckons that the organic composition of capital (OCC), argued by Marx as the main driver of the tendency of the rate of profit to fall, has not risen to critical levels to justify the LTRPF as the main cause and, anyway, falling profitability does not lead to crises but just to a slowdown in the rate of accumulation (investment).

Now I have looked at Week’s arguments before.  But actually Marx himself dealt with that argument.  For him, the fall in the rate of profit eventually leads to a fall in the mass of profit.  At that point, capitalist investment will not just slow, it will start to contract sharply, leading to job losses and income falls and the start of a slump.  The causal connection between the falling rate of profit, the mass of profit and investment has been outlined and investigated empirically by several authors, including G Carchedi, Jose Tapia and Peter Jones.

In his paper, Weeks argues that there is no precise separation by Marxist economists between mild downturns in economic growth and full-blown crises under capitalism.  For him, there have been only three crises under capitalism: in the late 19th century, the 1930s and now.  Now I agree that there is an important difference between regular and recurrent recessions every 8-10 years under capitalism and what I have called ‘depressions’ that last longer and go deeper.  Indeed, that has been the main theme of my new book, The Long Depression, now belatedly available to readers.

It’s true that many financial crises are not accompanied by a slump or economic recession, as in the stock market crash of 1987, cited by Weeks as an example. But in that case, profitability in the major economies including the US was on the rise. So the crash was short-lived and quickly reversed. But that was not the case in 1974-5, the first worldwide simultaneous slump, triggered by the oil price jump, but after a decade or more of a profitability slide; or in 1980-2, again triggered by energy prices, but again after another decline in profitability.

In another paper, Simon Mohun argues that when profits are measured properly according to ‘class’ i.e. profits from ownership of capital, and not by official measures, then profitability, at least in the US, did not fall until just before the Great Recession, and so the LTRPF cannot be the cause.  Again I have looked Mohun’s thesis of several occasions and I found that, even on Mohun’s own measures, corporate profitability peaked in the late 1990s and then fell.  .

Both Weeks and Mohun look for other explanations than the LTRPF.  Weeks argues that it was the breakdown in the circuit of capital and the realisation of money that was the problem and had nothing to do with the accumulation of value in the production process, as advocated by the ‘falling rate of profit’ theorists.  Similarly, Mohun in his paper concentrates on the financial aspects of the crisis, arguing that crises are the result of breakdowns in the money circuit.

Other authors in the book also downplay the role of the LTRPF because they see a rise in profitability and little or no rise in the organic composition of capital due to the devaluation effects of technical innovation in the 1990s during the neoliberal period and, in the case of Ricardo Bellofiore, argue that we should instead look for crises in the private sector explosion of debt (‘privatised Keynesianism’), similar to the position of post-Keynesian economist, Steve Keen.

Radhika Desai, in her paper, goes even further and argues that the current crisis (and all crises) is really the result of chronic underconsumption, Keynesian style.  See John Weeks for a formidable refutation of that view (

Both Subasat and Desai seem to move towards the post-Keynesian view that cause of crises is to be found in the distribution of wages and profits, Ricardo-style, and not in the production for profit, Marxist style.  Similarly, Mohun concludes that reducing the inequality of incomes and the grotesque levels of top incomes would begin to solve recurrent crises: “unless the issue of soaring top incomes is addressed, the neoliberal financial system remains crisis prone”.

As for financialisation, however defined, that was a response to the falling rate of profit in the major economies in the 1970s; a counteracting factor, as Al Campbell and Erdogan Bakir show in their paper, and also expanded on by Freeman in his. Campbell and Bakir argue that the Great Recession was not caused by Marx’s law of profitability but was caused by the collapse of the neoliberal response to the profitability crisis of the 1970s. The policies of the ruling class in the major economies to hold down wages, allow deregulation, promote privatisation and introduce financialisation, eventually turned profitability round, but only at the expense of opening up a new underconsumption or financial crisis with a falling wage share in income and reckless credit-fuelled bubbles in housing that eventually burst.  This approach is similar to the paper by David Kotz. 

In another paper, Turan Subasat himself is keen to emphasise that the actual policies adopted under the neoliberal era were an important factor in creating the financial crash of 2008 – in effect the third strand of possible causes beyond the systemic and conjunctural.  So we have alternative explanations of the Great Recession offered in the book:  from financial deregulation (Toporowski), financialisation (Orhangazi) and overaccumulation of financial assets, to neoliberal policies (Subasat, Ben Fine).

Yet, also in the book, we have the case study of Greece, the biggest victim of the current capitalist crisis.  And here Stavros Mavroudeas, convincingly in my view, shows how the LTRPF is the best explanation of the Greek tragedy. Mavroudeas: “First, it is argued that 2007-8 economic crisis is a crisis a-laM arx (i.e. stemming from the tendency of the profit rate to fall – TRPF) and not a primarily financial crisis and this represents the ‘internal’ cause of the Greek crisis. Second, it is shown that there is also an ‘external’ cause. This comes from the relations of imperialist exploitation (i.e. unequal exchange) that exist within the EU and which divide it between North (euro-core) and South (euro-periphery) economies.”

John Weeks sums up the papers in the book.  He makes the point that, while there are substantial differences about the causes and the nature of the current crisis among the authors (the LTRPF versus poor demand or low wages; neoliberal policies; instability of finance), the most common factor among the papers was an attempt to analyse theory with empirical evidence and not just quote Marx etc.

It is interesting to compare the collection of radical economic explanations of the current crisis in this book with the explanations on the causes of the Great Recession offered by leading mainstream economists at an IMF conference more or less at the same time.

Back in 2013, at the IMF conference on the crisis, Christine Romer, head of Obama’s economic council, concluded that I think the right conclusion to draw is that financial shocks are likely to be both frequent and hard to predict – not just in their timing but in their form.”  Very little empirical evidence at the IMF conference was presented to explain the global financial crash and the subsequent slump.  It apparently remained a mystery.

Later this year, G Carchedi and I will publish a book (The World in Crisis) similar to Subasat’s, a collection of papers by young Marxist economists internationally, that will provide more comprehensive evidence to back the view that Marx’s LTRPF remains, as Alan Freeman says, “the only credible competitor left in the contest to explain what is going wrong with capitalism”.

Stalling or escaping?

As I reported in a recent post, global economic growth has been slowing from its already below-average level.  US economic growth has dropped away in the first half of 2016, along with weak growth in Japan and Europe, slowing growth in China, impending recession in post-Brexit vote Britain and continued recessions in Brazil and Russia, with South Africa and Turkey about to join them.  Indeed, the US is growing at its weakest rate since 2010.  Worse, everything unrelated to consumer spending is suffering an outright contraction for the first time since the recession ended in 2009, according to Deutsche Bank.

US consumer

US business investment is dying.  Expenditures on new equipment fell 3.5% in the second quarter and is down nearly 2% over the last year. Spending on structures was down 7.9% in the quarter and 7% over the past year.  Labour productivity is stalling.  Even home purchases are falling, with residential investment down 6.1% in Q2 2016.

As I have pointed out on numerous occasions, US business investment is responding to a fall in corporate profits, down for five consecutive quarters.  The latest estimates from FactSet suggest that earnings for the top 500 US companies will decline on a year-over-year basis in the third quarter as well, which would mark the six straight quarter of declining profits. With sales falling, executives are doing what they can to protect margins by slashing spending and cutting inventories.

According to the economists of investment bank JP Morgan, global growth was just 2.2% annualised in Q2 2016, well below the forecasts for this year made by the IMF.  The IMF expects 3.1% growth this year and 3.4% growth next year.  JPM and the World Bank are closer in their estimates, with the latter now expecting just 2.4% global real GDP growth this year.  Most economists reckon that when global growth is at 2.5%, the world economy is at ‘stall speed’, meaning that it would drop into recession from that level because investment and consumption growth would collapse.

But all is not lost, it seems.  In the month of July, there seems to have been some slightly better data.  Business activity surveys called purchasing managers indexes (PMIs) for July rose.  JPM estimates that the global PMI rose to 51.4 in July from a low of 51.2 in May.  That is supposed to mean that global growth has stopped slowing because actual real GDP growth closely follows the global PMI.  And the closely followed Atlanta Fed growth forecasting model currently reckons US economic growth will rebound in the current quarter ending at end-September.

Atlanta fed

Former chief economist for Goldman Sachs, Gavyn Davies now runs an economic forecasting firm, called Fulcrum.  Fulcrum also claims that things are looking up with global activity expanding at an annualised rate of 4.1 per cent, a marked improvement compared to the low point of 2.2 per cent recorded in March.  So far from ‘stall speed’, the world economy could be “achieving escape velocity, in which the recovery becomes self-propelled, without needing repeated doses of monetary and fiscal policy support to prevent a renewed slowdown”.

Fulcrum forecast

Davies admits that “the global economy has been growing at below its trend rate of 3.8 per cent per annum on an almost continuous basis since 2012, with only a few brief periods of slightly better performance”, but things could be about to change.

And JP Morgan, having shown that global economic growth has slowed in Q2, also reckons things are about to improve.  Their economists commented that “The long-awaited rebound in global manufacturing appears to be in the offing. Global consumer goods demand accelerated sharply last quarter while the latest data suggest that a contraction in capital spending is about to end.”  JPM reckons the great investment downturn could be ending, “after slipping in the four quarters through 1Q16, business capex will just stabilize in the year through 4Q16 before strengthening by 3%-4% in 2017.”

Why should this happen? Well, JP Morgan economists reckon that business investment and profits are closely correlated “both business confidence and profit growth are highly statistically significant in explaining capital spending.”  JP Morgan reckons that business spending “is less a function of borrowing costs than of an assessment of the outlook and profitability. On balance, this model explains 70-85% of the variation in business equipment spending growth”.

So once again, mainstream economics confirms what Marxist economics has always argued: business investment is driven by profitability. For example, mainstream economists Kothari, Lewellen and Warner from three American business schools, recently published a paper called The behavior of corporate investment and found a close causal correlation between the movement in US business investment and business profitability. Like JP Morgan, they found that “at least three-quarters of the investment decline can be thought of as a historically typical drop given the behaviour of profits and GDP at the end of 2008. Problems in the credit markets may have played a role, but the impact on corporate investment is arguably small.”  

JP Morgan admits that business investment and profits growth are “currently quite depressed” but if GDP growth picks up and commodity prices do also, then there could be a “turn-up in the profits cycle”.  And that would lead to an investment recovery, and with it, faster economic growth. But wait a minute.  Economic growth is going to speed up because investment is going to speed up, because profits are going to rise, because economic growth is going to speed up. There appears to be a circular argument here.

While JP Morgan’s economists have recognised the high correlation between business investment and profits, they have failed to identify the causal direction. As I have argued before, the Keynesian-Kalecki view is from spending (consumer and investment) to profits and wages, while Marxist view is that it is from profits (and exploitation) to investment and then income, employment and spending.  Getting that direction right is essential to understanding the trajectory of the capitalist economy.  Corporate profits are falling in the US, Japan and Europe – and so follows business investment.  Unless that changes, the major economies are more likely to contract, not speed up. Optimism could be dashed again.

The Long Depression – an interview

Mark Kilian from de Socialist, a Dutch socialist journal, talked to me about my new book, the current economic stagnation, the prospects for another recession and the way out for capitalism.  Here is the English translation of the interview kindly provided by Mark and edited by me.

MK: Our government says the economy recovers. At the same time, we see that Greece continuously needs ‘rescue packages’ and there are now problems in Italy. What is the state of the world economy?

MR: The development of the world economy since 1945 has not been harmonious, not gone in a straight line upwards. There has been a series of booms and recessions. By that, I mean a decline in national income or the national output of a country for at least six months or longer, before recovery and growth resumes.

But what is different about the recent period, is that we had a very big slump in 2008-9 after the international banking crash. The Great Recession, which lasted for 18 months, was the biggest since the 1930s.  As a result, all the major economies in the world, including the Netherlands, saw a sharp decline in their national income and national output.  Every time that happens millions of people have their lives ruined, they lose their jobs and possibly their homes because they cannot pay the rent or mortgage. On top of that, governments introduced whole ranges of measures, of cuts in welfare and public services, which damaged population as well.  Also, all that period of decline is a permanent loss. If there had been no slump, output and income would have been higher, jobs would have been better. That can never be recovered.

And the difference this time compared to other crises is that the recovery from the Great Recession has been incredibly weak. It is the weakest economic recovery in these since the 1930s. From the end of the Great Recession, after seven years, most economies have hardly recovered to the level they were in 2007. That shows how slow it’s been.

Take Italy: the IMF has presented a report that is truly shocking. Not only does Italy have a major banking crisis which could come crashing around the banks’ ears fairly soon unless the government bails them out, but the IMF reckoned that Italy’s GDP and output would not get back to the level of 2007 until 2025! That’s two lost decades of output, income, jobs and better conditions for the Italian people. That’s how bad the recovery has been in Italy.

Output, employment, and people’s incomes in most economies and for most people have not recovered to the 2007 level.  According to a new report by McKinsey, the management consultants, two-thirds of households in the 26 OECD economies have lower living standards in 2015 compared to 2005!

So this is a really weak recovery and, in my view, there is every danger before we get back to the levels we have seen before, if we ever do, that the world economy will slip into yet another slump in the next year or two.

MK: In your new book you describe three depressions: that of the years 1873-1897, 1929-39 and the present one.  Is there anything we can learn from this?

MR:  In my view, this is not a normal recession, but a depression. That’s different from the normal slumps. That does not happen very often. In the history of modern capitalism, of the 19th century until now, there have only been three major depressions. In a depression, recovery is so weak that economies do not return to the same growth rates or even the level of output that previously existed, except for a very long time.

There was a big slump in 1873 in Britain, Germany and the US, the major capitalist economies then. There was no real strong recovery after that. There were a series of slumps which went on for the next 20 years.  That was a depression: a low level of growth and a series of slumps. It took a really long time before sustained recovery was possible.

The second depression is called the Great Depression. This began with the collapse of the stock markets in the US in 1929, similar to the collapse of the housing market in the US in 2007. After the crash in 1929 the US, the largest capitalist economy in the world, went into the most severe depression. There was prolonged mass unemployment, and there was no real recovery during the 1930s.  The only thing that turned it around was that the US entered the Second World War, alongside Britain, against the so-called Axis powers. Government production was increased, which led to the economic growth and recovery. So only war brought recovery in the 1930s. In my view, we are in a similar period. It’s going to take some drastic changes in order for capitalism to recover at all.

MK: Your choice of words suggests that state-led production can be different from  capitalist production?

I think there’s a distinction to be made here. Keynesian economists reckon the solution to these slumps is that the government should spend more money on welfare, or give money to business to invest, or carry out its own programs of production itself and thus get people into work. This will boost the capitalist economy and get it going again. That’s the Keynesian solution to these crises.

It was tried briefly and half-heartedly in the 1930s by Roosevelt in the US under the so-called New Deal. It wasn’t really tried in this current recovery. Most governments have operated on cutting government spending.  I am not advocating the Keynesian solution. It might help for a while, but it would also eventually cut into the profitability of the business sector and actually could, under certain circumstances, make things worse.

When I’m talking about government production, I mean government taking over control of the major part of the investment program of the economy. So the big companies would become part of a state-led, ideally state owned, operation. In World War II, in effect, that’s what happened. The big companies were told: ‘You cannot produce cars any more, you’ve now got to build tanks.’  That was direct government control for the war effort. In a way, it ended capitalist production for profit and replaced it with government-led production. The capitalists still made money and profits, but they were completely controlled and directed by the military state in order to carry out a war.  The analogy here is that capitalism no longer operates on the basis of the interests of the capitalist sector, but what was regarded as in the interests of society at that time.

Now a socialist answer, rather than a Keynesian one, is that we need governments to take over the major sectors of the economy to produce for social needs rather that for profit. That means controlling the investment and ownership of all the major banks and other big companies. That is drastically different from what the Keynesians propose now and goes even further than in wartime.

MK: Many people see the long boom after 1945 as a ‘normal’ situation. But how do we explain the boom?

That is an important part of my book; why there are booms and slumps. The period from 1945 to the mid-60s was an exceptional period; it is called the ‘golden age’ of capitalism. There was quite good growth, more or less full employment, many countries developed a better welfare state, free education even to university level, free health services, state housing programs; better pensions etc.

But that was an exceptional period. Why? What drives growth under capitalism is the ability to make profits. The health of the capitalist economy depends on what happens to the profitability of capital, the rate of profit on every investment made by capitalists.  At the end of World War II, as the result of the physical destruction in Europe, of most of the machinery, factories, etc., and a massive amount of labour available at cheap rates, profitability rocketed in Europe for the capitalist combines as they restarted. And they got cheap (even free) credit from the US.  In the US there had been a devaluation of old capital, so new capital came up with new technology that was extremely profitable, and there was a huge expansion of labour force. The same applied to Japan. Across the board world capitalism had a high level of profitability for investment.

But in the mid-60s profitability began to fall quite sharply up to the early 1980s. This period is called the profitability crisis. Marx’s theory of crises under capitalism is that, if profitability is the driving force behind growth, it can’t keep on rising. As capitalism expands and accumulates capital, there is a tendency for profitability to fall. This is a key law in the political economy that Marx discerned. And in that process of the falling rate of profit capitalism gets into in trouble and crises develop more frequently.

The ‘golden age’ of the 1950s and 1960s gave way to crises. I was young then and I remember that this time was a period of big struggles by the labour movement as profitability fell and capitalism tried to drive the workers down. Workers fought because they had a lot of gains that they did not want to give up and trade unions were relatively strong.  Eventually the unions were crushed in the recessions of the early 1980s and the labour movement was shackled and defeated in many battles. Capitalism then tried to raise profitability through cuts in public spending, privatizations, the exploitation of the labour force, removing all the protections of the labour force, globalisation etc. This neoliberal period was the last 20 years of the 20th century.

So the ‘golden age’, was a special period when profitability was very high because of a world war, then followed by a large decline in profitability, and then up to the end of the century big efforts of capitalism – with some success – to increase profit rates again.

MK: So what you’re actually saying is that the crisis of the mid-60s validated Marx’s theory of the falling rate of profit and then neoliberalism mobilized some of the counteracting tendencies that Marx also described, in order to restore profit rates?

That’s a good way to put it. Marx’s law of profitability says that as capitalism expands, there is a tendency of the rate of profit to fall. But there are ways to counteract that, for a time. Under a capitalist society value comes only from the exploitation of labour, people who work under the control of capitalist owners so that they can sell the commodities on the market, and they can make a profit. They will use more machinery and plant, and new technology to keep the down the cost of labour, but in so doing they reduce the amount of profit per investment. Profit, and value in general, according to Marx comes only from people working, it does not come from machines. Machines produce no value unless you put them to work. That requires human labour unless you have a society with only robots – but that’s another story.

So there is a contradiction between raising productivity of labour through more investment in technology and sustaining profitability. This can be overcome for a while by exploiting workers harder, for longer hours, making them work more intensely, introducing new technology, expanding trade, trying to occupy poorer countries, and use their resources – there are various ways in which the counteraction can take place. These counteracting factors operated strongly during the 1980s and 1990s, to reverse the very low rate of profit that capitalism had reached.

Profitability did recover, but not anywhere near to the level of the ‘golden age’. From the late 1990s the Marxist law of profitability began to operate again, and despite all attempts of the capitalists, it began to slip back in the major economies. That created the conditions for further crises and slumps of the 21st century. The capitalists tried to avoid that by a huge credit boom, by pumping loads of credit, inventing new ways to speculate in the financial markets and keeping profits up for a section of the capitalists. But underlying profitability did not recover. You can speculate on stock markets but you don’t create anything. You just try to pinch money off others, so to speak, and create an apparent improvement.

Take today. The US stock market has reached an all-time high (in nominal terms). At yet we look at the state of growth and production in the major economies and that’s really slowing down. Profits are stagnating and yet the stock market is booming. That shows the division between what Marx called ‘fictitious capital’ and what is really going on in the capitalist process.  That division reached an extreme in 2007, a gap between stock market prices, house prices, speculation in financial markets and what was actually happening with the profitability of capital.  Then came the crash.

This is the process that I try to describe in the book. The book tries to provide some indicators for readers to look at.  Some economists focus on the financialisation: the increase in that sector relative to the productive sectors. A popular argument is that the financial sector and the banks should be regulated or curtailed.  But that’s not enough, that’s a bit like trying to control a tiger in a cage with only a piece of paper. There is no surety that the banks will behave with regulation. Only recently, the US financial regulators investigated the activities of HSBC, the big UK bank, which laundered money for Mexican drug cartels for years. They made billions of pounds out of this. It was discovered, but the authorities were told not to intervene and not to fine HSBC because it might bring the banking system down. That shows that regulating the banks is totally useless. It changes nothing, so they will continue in the same way.

The only way to deal with that is to take over the banks, to bring them into public ownership through control by the bank workers and by wider democratic control of society as a whole, so that banks become a service: providing people loans for what they need, for small businesses, and to lend to improve the productive potential of the economy, not to speculate in financial markets and assets, or to engage in tax haven scandals and money laundering, as they have been doing in recent decades – and will continue to do, even with regulators around.

The other point about this is that the financial crash wasn’t just a banking crisis. A financial crisis is not isolated from what is happening in the productive sector of the economy: manufacturing, technology, places actually making things that circulate, on which banks then speculate. Banks do not make money except between themselves, value must come from somewhere else. The banking crash was really a symptom of the fact that the productive sectors of the capitalist economy were no longer profitable enough to support this house of cards. Those who argue that it was only a financial crisis and that the solution lies in controlling the financial sector, ignore the true nature of the crisis and so can’t actually solve it.

MK: Can you say that the financial sector adds to the instability of the system?

Clearly, for it has become larger and more important. As profitability fell in the 1960s and 1970s and remained relatively low in the productive sectors in the neoliberal period, one of the counteracting factors was to shift investment into the financial sector, banks and other institutions, to make profits at the expense of investment in the productive sector. Productive investment as a percentage of output declined in most economies in the 1980s and 1990s. That is an indication of the weakness of the capitalist economy towards the end of the 20th century, the need to divert to finance and elsewhere. So yes, it is an important part of the process of the crisis. But at the same time, it’s a symptom of the inability to get profitability up.

MK: The Great Recession of 2007-2009 was not foreseen by economists?

The book has a section that would be funny if it were not so tragic. The economics profession, the economic institutions and other ‘experts’ did not see the Great Recession coming, quite the reverse. Central banks and governments were convinced that everything was fine, and if there was a problem that could be solved easily.

When the crash came, they were unable to explain why it had happened. They remained in denial and thought it would end quickly, which it did not. They were unable to explain why that was, and even now they cannot really know what to do to get things going again. The institutions, central banks and governments are still struggling to get this recovery up above the weak level where it is, because they do not understand what happened and what to do about it.

There were one or two people who did recognise the dangers in the early 2000s. They saw the huge housing bubble in the US and that that could not possibly last; some who saw a huge increase in private credits, a financial sector which they also saw as dangerous. So one or two radical economists outside the consensus, recognised the real dangers.  And a one or two Marxists, raised the idea that, despite the huge boom in house prices and credit, beneath it the profitability situation was worsening and there were contradictions that would produce a crash.

One of those was Anwar Shaikh. He predicted a big crash and a depression as a result. I made a similar forecast in 2005-6. I argued that there was a conjunction of cycles coming together: declining profits, a peak of the housing market, and a general depressionary cycle which was named after the Russian economist Kondratieff.  All those cycles were coming together in a depressive downturn. That suggested to me that there could be a quite serious slump, I thought in 2009-10. I was a little late because it came earlier. So a handful of people saw this crisis coming, 99 percent of the economists did not.

MK: You compare the position of the US today to that of Great Britain during the last crisis of the 1930s: holding on to hegemony while simultaneously being undermined economically. How does that work out for the coming period, for example could China take over that role?

The US, the biggest economy, has had a slightly better recovery than Europe or Japan, which have been struggling, and many of the emerging economies like Brazil, Russia, South Africa. They are in recession and have not recovered at all. The US is doing slightly better, but still growing only at about 2 percent per year since 2009. It used to be 3.5 percent on average in the period since 1945, and sometimes faster in the golden age.

This is a very weak recovery and it seems to be petering out. While the depression continues, rivals which do better get into in a position to challenge the hegemony that the US has had economically. The US economy has declined relatively economically anyway over the last 30 years.  It no longer has the same share of manufacturing output in the world, compared to Germany or Japan, and of course China, which has been the fastest growing economy for the last 20 years, and what has become a great economic power now.

Even in other parts of the economic spectrum – services, technology – the US has got rivals as well. The US is still superior because it has a massive financial sector, which controls and supplies capital around the world. That gives it, along with Britain – another big finance capital centre – control, despite its weaker productive position, through the expansion of the credit realm.  And it is by far the biggest military power, bigger than all the other military powers put together, which gives it, again, a strong position. You can use the analogy of the Roman Empire, which also began a relative decline compared to its rivals outside the empire, but continued to have hegemony for hundreds of years because it had a Roman army and huge financial resources. America is in a similar position, but it is getting rivals.

Capitalism faces some key challenges over the next 20 years. The first is climate change and global warming, which is a serious problem which capitalism is not doing anything about. This really threatens the future of the human race and the planet, unless something is done.

Also there are huge inequalities in wealth and income in the world which create enormous social tensions. Over the past 25 years, the inequality in income and wealth globally has reached a level that we have not seen for probably 150 years.

And there is also the slowdown in productivity: the failure of capitalism to expand the productive forces to provide what people need. Technology has not expanded to the level of what is possible, and productivity growth is very weak.

All these factors threaten the future of capitalism to meet the needs of people and the ability of the US to maintain its hegemonic position. So the rivalries between the big capitalist powers will increase and also between the US and China, because China is a major threat in trade and production, and probably in finance and technology in the future. These are the increasing contradictions that exist in capitalism, even threatening the existence of the planet.

MK: You devote a separate chapter to the eurozone. That is particularly relevant since the Brexit. Over the past 15 years we saw a sharpening of the contradiction between North and South, in particular Germany on the one hand and Greece, Spain and Ireland on the other. How would you extrapolate that?

The project of the European Union was a plan of the leading strategists of the European capital after 1945. They did not want another war, no more division of Europe. They wanted to develop the capitalist base within Europe, as one united force that could rival on a world scale with the US and Asia, particularly Japan at that time.  They wanted to end petty wars between nations that became world wars, and to unite, to use the resources of labour and capital across Europe and develop a European-wide capital to rival the rest of the world. That was the plan.

They first introduced the customs union, breaking down the tariffs between the three or four biggest economies, including the Netherlands, later developed the Common Market (EEC),, so that trade was expanded in all other areas, not only tariffs but common regulations, rates and conditions for trade within Europe. And then the European Union itself, which meant political institutions were set up to integrate Europe into one force.

The biggest step forward was to introduce a single currency for at least those core parts of the EU prepared and able to join. The Germans agreed that the powerful D-Mark would be integrated into a euro currency, with France, Italy and other economies, including the Netherlands. It was seen as a necessary step to integrate Europe further as a force in the world.

But it is very difficult to develop one currency under capitalism, one union, when capitalism, while it expands its productive forces, also drives things apart. So the weaker economies in a capitalist union actually get weaker relative to the stronger ones. That’s how capitalism works. It doesn’t actually help the weak to come towards the strong. So the weaker economies within that bloc, especially in the euro bloc, were even worse off relatively after the formation of the euro than before. They went backwards relatively while the main gainer of the euro was the core, Germany in particular.

The Great Recession exposed these fissures in the eurozone.  The euro project was like a train that is shoved off the track by the economic crisis.  It’s very difficult to put the train back on the track again because so many of the weaker countries fell off and the stronger countries were not prepared to bail them out.

The euro project would only work if you had a full fiscal union, a full federal union, as in the US. But remember, the US achieved that only after a terrible civil war that crushed opposition in the slave-owning South. The idea of a full fiscal union where everyone pays the same taxes, where there is one government, one currency applied across the board: that is not possible in Europe at the moment, particularly after the Great Recession. In fact, the opposite is the case: the risk is that the euro project and the EU project could break up, particularly if there is another slump in the future.

Brexit is an example of that tension. British capitalist strategists had never been fully keen on the idea of European integration. It still had illusions that Britain was powerful enough to go on its own, or it could be a junior partner of American capitalism and so didn’t need to be integrated in Europe to progress. The British ruling class was divided between those who thought that Europe was the answer and those who thought it was better to be on their own or with the US.

That division came to a head with the Great Recession, when Europe had a huge euro debt crisis, Greece, Spain and Italy fell into deep depression and the Franco-German leadership failed to provide support for these countries as part of the EU project. So some British capitalists said: ‘Well, Europe’s not really where we can make a profit; we’re better off on our own.’ This political split came to a head with the referendum.  In many ways, this will be a complete disaster for British capitalism; with its strategists not knowing which way it’s going to go.

MK: In the book you suggest that no depression is permanent. So is there a way out for capitalism?

Some Marxists say that we are in a permanent stagnation or depression. I don’t agree. In the past, capitalism has shown it can find a way out, if it can restore the conditions for a higher rate of profit, as it did after World War II and at the end of the 19th century depression.

How do you do that?  The only way is to restore profitability.  That means destroying the value of old capital which is no longer productive. It means getting ‘lean and mean’, cutting off the old bad plants in your garden and allowing new ones to grow. Of course, this will be at the expense of everybody’s jobs and livelihoods, because we’re talking about human beings losing their jobs as a result of closing down factories and businesses, mergers, selling off the assets, displacing workers and reducing the overall level of production to reach higher profitability. A slump, maybe a series of slumps, can do that.  Until then we’ll continue with this depression. The system needs to get rid of a lot of debt, smash a lot of banks, close a lot of old industries and companies. That’s horrible, but that’s what capitalism does to revive itself.

Then capitalism could get a new lease of life and use all the new technologies that everyone is talking about – robots, automation, the Internet of things; all these kinds of technology that can be expanded – and also exploit new areas of the world which still have large amounts of cheap labour which can be used in conjunction with this technology.

Maybe the political and economic conditions for such a new lease of life for capitalism could happen in, say, the next decade as a result of further slumps, but only if working people in the countries which will suffer from this, are unable to change the situation in any way, and the capitalists and their strategists and political representatives remain in power.

But even if that happens, capitalism is not going to solve its problems indefinitely. In fact, it is getting more and more difficult for them to have a new lease of life and expand, with global warming, low productivity, rising inequality, and with less and less areas in the world to exploit that aren’t already proletarianised, urbanized and part of the global capitalist system. There’s less room for capitalism to expand. It is getting close to its use-by date in historical terms.  But it could have another period of expansion in the next 20 years even so.

Michael Roberts’ new book, The Long Depression, is available

on Amazon US at:

And on Amazon UK at:

And if you don’t want to buy it from Amazon, then you can get it from Haymarket Books, the publisher, direct at:

Shopping for growth

This week, at its July meeting, the US Federal Reserve Bank decided not to alter its current policy rate of interest – a rate that sets the floor for all interest rates for borrowing in the US and across the major economies.  Last December, the Fed hiked its policy rate from all-time lows because Fed chair Janet Yellen reckoned the US economy was “on a path of sustainable improvement”and she was “confident in the US economy”.

It was expected that the Fed would continue to raise its interest rate towards ‘normal’ levels this year.  However, contrary to Yellen’s prediction, US economic growth slumped in the first quarter, while the Chinese manufacturing powerhouse seemed to be in trouble (with growth slowing, debt rising and the yuan falling).  The world looked in a bad place; so the Fed baulked at further hikes.

After signs of slightly better economic data in the last month; and relief that China had not had a meltdown, the Fed’s July meeting talked of an improving situation that might merit a hike in its policy rate by the year-end.  But if the preliminary figures out today for US real GDP growth are anything to go by, then even that may not materialise.

The US economy grew far less than expected in the second quarter. GDP increased at only a 1.2% yoy rate.  Growth is being driven by consumer spending, which increased at a 4.2% rate – the fastest since the fourth quarter of 2014. That in turn is driven by cheap borrowing and rising house prices.  But business investment continued to plunge, down at a 9.7% annual rate, the third straight quarterly fall.

US investment

Indeed, outside the US, things may have not reached meltdown, but the major economies continue to stagnate.  One the fastest growing economies in Europe in the last year is Spain, but second quarter figures showed a slowdown in real GDP growth to 3.2% from 3.4%.  And Sweden also slipped back from 4.2% yoy in Q1 to 3.1% in Q2, with the slowest quarterly growth rate in three years.  Austria’s growth rate also slowed to 1.2% yoy.  Only the UK has seen a pick-up to 2.2% in Q2 to 2.0% in Q1 (but expect that to be revised down after the investment data comes in) – and the impact of Brexit has yet to be calculated.  France stagnated in Q2.

Three EZ growth

Overall, growth in the Eurozone cooled in Q2.  And the European Commission recently trimmed its growth forecasts for the next two years following the UK referendum. The well-regarded purchasing managers’ index for the eurozone fell to an 18-month low in July.  It’s worse in Japan where industrial production and corporate profits are contracting.  And of course, China’s growth rate has steadily slowed.  Brazil, Russia and South Africa are in recession.

Japan profits

So what is to be done?  Once again desperate measures are being considered – in particular ‘helicopter money’.  I have explained the origins and nature of this flying money before.  The theory behind the concept is to fuse monetary and fiscal policies: cash-strapped governments sell short-term debt straight to their central bank for newly printed money that is then injected straight into the economy via tax cuts or spending programs. The usual intermediaries, like banks, are bypassed.

Helicopter frenzy has reached a new level with the efforts of the Japanese government to get its economy going.  The government has announced a new package of government spending programmes and it wants to finance these from money printed by the Bank of Japan.  This is one step further from Japan’s longstanding aim of restoring economic growth and ending deflation through quantitative easing, then backed up by negative interest rates and now ‘helicopter money’.

This is part of so-called Abenomics, the three-arrowed policy of the Abe government (monetary easing, fiscal expansion and ‘reform’ of the labour market by increasing participation by women and reducing labour rights).  Abenomics has totally failed.  But that has not stopped the likes of Keynesian Paul Krugman dropping in on Abe and calling for more easing.  Krugman spoke to a special meeting including and introduced by Abe to advise the Japanese government on what to do to get the economy going.

After saying that monetary policy of quantitative easing and negative interest rates was not working, Krugman basically said: do not worry about the size of Japan’s public sector debt (currently 230% of GDP) because the short-term aim must be to get demand going. So more government spending.  He did not mention that the Japanese government has been running budget deficits of over 5% of GDP a year for a decade or more with little to show for it in economic recovery. Keynesian policies have already failed in Japan but Krugman was there to advise Abe to do more. Abe responded: “Professor Krugman, the international community must coordinate in the fiscal space and the countries which are able would spend fiscally. This message is very important. I presume that this is going to be essentially your message and I agree with your message. “

More recently, Ben Bernanke, the original promoter of helicopter money and former Fed chair during the global financial crash, was flown into Japan to advise on yet more printing of money.  Bernanke in April published on his Brookings blog that, while there were many challenges behind such a strategy, a “monetary financed fiscal program” shouldn’t be ruled out in the case of an emergency.  “Under certain extreme circumstances — sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies — such programs may be the best available alternative. It would be premature to rule them out,” Bernanke wrote.

But helicopter money will fail to kick-start the Japanese economy.  As Richard Koo, the Japanese Keynesian economist, puts it:  “direct financing may increase reserves in the banking system, but those reserves will stay trapped in the banking system since there are unlikely to be any additional private-sector borrowers.   In short, there’s no need for fancy helicopter-money theatricals. What’s needed is a greater allocation of long-term patient capital to government so that it can spend its way out of the private sector’s surplus savings problem productively and responsibly (ideally by committing capital to multi-generationally wealth-inducing projects that the private sector is unlikely to want to fund).”

As I have noted before, back in the depth of the Great Depression, Keynes came to a similar conclusion that quantitative easing would not work in getting economies out of depression.  Low interest rates and extra liquidity cannot get things going again, if the profitability of investment (what Keynes calls the ‘marginal efficiency of capital’) remained too low. Keynes concluded: “I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”.  General Theory.  And so Keynes moved on to advocating fiscal spending and state intervention to complement or pump-prime failing business investment.

Nevertheless, the advocates of ‘helicopter money’ are speaking louder.  Now the chief economist at the OECD has lent her support to the sound of rotors in the economic sky.  Catherine Mann commented on Bloomberg TV that “We can’t just stick with this low nominal GDP growth”.  So we need action.  “Helicopter money by itself isn’t going to be any more effective at gaining economic growth than what the central banks have been doing already”.  Why? Because “you’re just going to take the helicopter money and put it in your mattress — where you’ve been keeping the rest of it.”  So, instead, the authorities could opt for helicopter shopping coupons “where you actually have to go spend the money.”  Now shopping coupons are going to get capitalism out of depression.

It seems that all these mainstream economists do not take into account their own research on the efficacy of quantitative easing.  The IMF held a special conference on just that subject last year.  And what did they conclude?  One economist from the LSE commenting on QE found that: “Yet, there is little evidence that the program led to an increase in credit.”  Some Fed economists considered the macroeconomic effect of QE.  They concluded that“ our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case.”  Then some European economists looked at the impact of the ECB’s QE.  They found that QE“significantly reduced bank risk and allowed banks to access market based financing again. The increase in bank health translated into an increased loan supply to the corporate sector, especially to low-quality borrowers. These firms use the cash inflow from new bank loans to build up cash reserves, but show no significant increase in real activity, that is, no increase in employment or investment”.

money multiplier

So the modern mainstream economists found the same result that Keynes found in the 1930s.  Pumping money and expanding credit does not work in restoring growth because it does not boost investment or employment.  It just fuels a stock market and bond boom. Indeed, while the Japanese government wants to start the rotor blades, the governor of the Bank of Japan, Haruhiko Kuroda, announced at today’s BoJ meeting that helicopter money was ‘illegal’ (as it ‘monetised’ government debt) and things in Japan were fine anyway.  So two fingers to Bernanke.  I’ll return to how fine things are in Japan in a future post.

To add to the evidence against the efficacy on monetary measures to end the depressed level of growth, some economists at the Bank of England looked at the impact of finance on growth“The real question of interest here is if investment is low, is the blockage that is stopping investment taking place due to real economy factors – such as globalisation and secular stagnation – or financial factors – such as a lack of access to finance.”  The BoE economists found what others have also found: that small businesses are starved of credit to invest but large businesses have sufficient internal funds and don’t need to borrow, but still won’t invest.  The reason businesses are not investing at previous levels is because the profitability of invested capital is relatively low at least compared with the late 1990s.

Quantitative easing, negative interest rates and shopping coupons are not going to turn things around if profitability of investment in productive assets is not sufficient.  Public investment is the alternative.  The level of public investment in every major economy has been slashed in the years of austerity since the global financial crash.  The question then becomes; if more public investment is needed, how is it to be paid for and should it complement private investment or replace it altogether?  You know my answer to that.