Michael Roberts's Blog, page 42
October 12, 2020
Debt disaster with no escape
The IMF-World Bank semi-annual meeting starts this week. Earlier the IMF kicked off the show with a warning that the poor countries of the world are heading for a catastrophe from the pandemic slump, leading to defaults on the debts that their governments and companies owe to investors and banks in the ‘global north’.
According to the IMF, about half of Low Income Economies (LIEs) are now in danger of debt default. ‘Emerging market’ debt to GDP has increased from 40% to 60% in this crisis.
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And there is little room to boost government spending to alleviate the hit. The ‘developing’ countries are in a much weaker position compared with the global financial crisis of 2008-09. In 2007, 40 emerging market and middle-income countries had a combined central government fiscal surplus equal to 0.3 per cent of gross domestic product, according to the IMF. Last year, they posted a fiscal deficit of 4.9 per cent of GDP. The government deficit of ‘EMs’ in Asia went from 0.7 per cent of GDP in 2007 to 5.8 per cent in 2019; in Latin America, it rose from 1.2 per cent of GDP to 4.9 per cent; and European EMs went from a surplus of 1.9 per cent of GDP to a deficit of 1 per cent.
For example, Brazil is now running a consolidated government deficit of 15% of GDP. India’s is 13%. Both countries will see their sovereign debt levels rise towards 90% of GDP by the end of next year and approach 100% of GDP in 2022.
New World Bank chief economist Carmen Reinhart warned that the global south faces “an unprecedented wave of debt crises and restructurings”. Reinhart said: “in terms of the coverage, of which countries will be engulfed, we are at levels not seen even in the 1930s.” Debts owed by non-financial companies in the 30 largest emerging markets rose to 96 per cent of gross domestic product in the first quarter of this year, more than the amount of corporate debt in advanced economies, at 94 per cent of GDP, according to the IIF.
Over the next two years the top 30 emerging economies face the highest level ever of maturing debt, both private and public.
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And so these poor countries will be forced to raise even more debt to deal with the pandemic slump and meet repayments on existing debt. Nevertheless, Reinhart argued that “while the disease is raging, what else are you going to do? First you worry about fighting the war, then you figure out how to pay for it.”
This was ironic coming from somebody who is best known for her work with fellow Harvard economist Kenneth Rogoff on the economic damage inflicted by high debt levels throughout history. In their famous (infamous?) book, This time is different, they argued that high public debt levels were unsustainable and governments would have to apply ‘fiscal austerity’ to reduce them or face a banking and debt collapse.
Worse, much of the debt is denominated in US dollars and as that hegemonic currency increased in value as a ‘safe haven’, the burden of repayment will mount for the dominated economies of the ‘south’. The level of EM corporate ‘hard currency’ debt is significantly higher now than in 2008. According to the IMF’s October 2019 Financial Stability Report, the median external debt of emerging market and middle-income countries increased from 100 per cent of GDP in 2008 to 160 per cent of GDP in 2019.
Capitalist investors and banks are now no longer investing in the stocks and bonds of the ‘global south’ – apart from China. So the flow of private capital has dried up to fund existing debt.
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As a result, the currencies of the major emerging markets have dived relative to the dollar and other ‘hard’ currencies, making it even more difficult to repay debts.
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This impending debt crisis only compounds the impact of the pandemic slump on the global south. In its report for the semi-annual meeting, the World Bank reckons that the pandemic will push between 88m and 115m people into extreme poverty this year, which the bank defines as living on less than $1.90 a day (a pathetically low threshold anyway).
More than 80 per cent of those who will fall into extreme poverty this year are in ‘middle-income’ countries, with south Asia the worst-hit region, followed by sub-Saharan Africa. “We are likely to see people who previously escaped poverty falling back into it, as well as people who have never been poor falling into poverty for the first time,” said Carolina Sánchez-Páramo, director of the bank’s poverty and equity division. “Even under the optimistic assumption that, after 2021, growth returns to its historical rates . . . the pandemic’s impoverishing effects will be vast,” the World Bank said.
The global economy is expected to contract by between 5 and 8 per cent this year on a per-capita basis, and that would set poverty levels back to their 2017 levels, undoing three years of progress in improving living standards, the World Bank estimated.
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Progress in reducing poverty had been slowing before the pandemic, according to the report. About 52m people worldwide rose out of poverty between 2015 and 2017 but the rate of poverty reduction had slowed to less than half a percentage point a year during that period, after reductions of about 1 per cent a year between 1990 and 2015.
What is also clear from the report is that all the reduction in poverty rates since 1990 have been in Asia, in particular East Asia, and in particular China. Strip China out and there has been little or no improvement in absolute poverty in 30 years.
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Nearly 7 per cent of the world’s population will live on less than $1.90 a day by 2030, the report said, compared with a target of less than 3 per cent under the UN’s Sustainable Development Goals.
In an attempt to head off the impending debt defaults, a debt service moratorium was approved by the G20 and runs until the end of this year. The IMF has also provided about $31bn of emergency financing to 76 countries, including 47 of the poorest countries under the Catastrophe Containment and Relief Trust. Most of these countries had high economic dependence on single commodity exports or tourism and suffered a classic external financing seizure and economic collapse when Covid-19 struck.
But mostly it’s all talk; with speeches like those of IMF chief Georgieva and Reinhart at the World bank. As Oxfam says in a devastating new report on inequality and the lack of public services and workers’ rights, “emergency programmes have focused on closing the huge budget and balance of payments financing gaps produced by coronavirus-related revenue collapses, and on allowing more space for health and limited social protection spending to confront the crisis.” And the “IMF’s global, regional and national reports are already warning of the need for ‘fiscal consolidation’ i.e. austerity, to reduce debt burdens once the pandemic has been contained.”
Virtually all the national emergency loan documents emphasize the need for governments to make anti-corona virus spending temporary and to take fiscal adjustment measures to reduce deficits after the pandemic. For example, in June 2020, the IMF agreed a 12-month, $5.2bn loan programme with Egypt, which detailed a FY2020/21 primary budget surplus target of 0.5% to allow for spending related to the coronavirus pandemic, but demanded that it be restored to the pre-crisis primary surplus of 2% in FY 2021/22. The IMF has also been linked to large cuts in health spending, which have left countries ill-prepared for the crisis.
The World Bank has pledged $160bn in emergency funding over the next 15 months, and has advocated debt relief by other creditors, but has so far refused to cancel any debt owed to it, despite low-income countries repaying $3.5bn to the World Bank in 2020. Oxfam’s analysis shows that only 8 of 71 World Bank COVID-19 health projects included any measures to reduce financial barriers to accessing health services, even though a number of these projects acknowledge high out-of-pocket health expenditure as a major issue. Such expenditures bankrupt millions of people each year and exclude them from treatment.
The only effective way to avoid debt defaults is to cancel the debts of the poor countries owed to the banks and multinationals. But that is the one policy that is no going to happen.
The Jubilee Debt Campaign (JDC) called for the IMF to sell some of its stockpile of gold to cover the debt payments owed by the world’s poorest countries for the next 15 months. The JDC said selling less than 7% of the IMF’s gold would generate a $12bn profit, which is enough to cancel the debts owed by the 73 poorest countries until the end of 2021 and still leave the Washington-based organisation with $26bn more gold than it held at the start of the year. The JDC and others have also called for a new issuance of Special Drawing Rights (SDR), in effect international money, to fund the poor countries. Both these suggestions have been rejected.
Reinhart wails that “At the country level, at the multilateral level, at the G7 level, who has the financing to fill in all the big fiscal gaps that have been created or exacerbated by the pandemic?” Answer there is none.
October 4, 2020
Work or toil in the pandemic
The pandemic has opened up a Pandora’s box about the future of work. The slump has caused a huge loss of jobs, hours and earnings, particularly for those who are in all sorts of service sectors, like retail, entertainment, leisure, events, food preparation etc and it is driving thousands of small businesses surviving on small margins and with large debt burdens to the wall.
But it is more than that. The slump will and is providing an opportunity for companies, particularly large ones, to do away with substantial parts of their labour force and replace them with machines, robots, home working connectivity and algorithms. The result is that there will be further concentration of companies in sectors, as larger companies devour the markets of the smaller. Of course, this is no new phenomenon but is part and parcel of slumps under capitalism. Friedrich Engels detected this process as long ago as in the 1840s in industrial England: “The former lower strata of the middleclass – the small tradespeople, shopkeepers, the retired, the handicraftsmen and peasants – all these sink gradually into the proletariat, partly because their diminutive capital does not suffice for the scale on which modern industry is carried on, and is swamped in the competition with the large capitalists, partly because their specialized skill is rendered worthless by new methods of production”.
The much talked about automation revolution is likely to take off, at least in some important growth sectors. Under capitalism, the production for profit system, this will not mean fewer working hours for employees; more interesting work rather than basic toil; or rising incomes. On the contrary, the automation revolution under capitalism will aim to reduce the workforce, increase hours for those still employed and keep wages from rising – all in order to raise the profitability of the most efficient at the expense of the least efficient.
There are many forecasts of the loss of jobs as robots replace workers. Management consultants, McKinsey, forecast that automation could displace 53 million positions on the European continent alone by 2030, the equivalent of about 20% of the current workforce. The biggest reductions in jobs will be retailing, manufacturing and food and accommodation services. And those hit the most will be those who have the least ‘skills’ and are paid the least.
Again, there is nothing new in the story of labour being replaced by machines. It is the essence of industrial capitalism. The so-called ‘industrial revolution’ of the early 19th century saw millions of craftsmen and skilled artisans replaced by machines. Real wages were stagnant or even fell as craftsmen’s incomes vanished and the gains of the new industries went to their owners. Engels noted this result in his brilliant book, The condition of the working class in England (1844). The machine-owning industrialists grew “rich on the misery of the mass of wage earners”. Now the pandemic slump is creating the conditions for the wiping out of jobs across the board as happened in that period after the slump of the third decade of the 1800s. The third decade of this century could see the same.
In his book Engels noted that mechanisation led to a fall in the labour share of national income to fall, even if some workers gained employment in new industries as old ones died. This process will be repeated in this post-pandemic decade. Already, in the US, the wages for prime-aged men with no more than a high-school diploma have declined since 1980 and labour force participation rates among men aged 25 to 55 have fallen in tandem. Part of the reason was a switch to cheaper female labour and shifting of manufacturing industry out of the advanced capitalist economies to the ‘global south’ to use even cheaper labour with modern plants. Again, Engels noted that trend in 1840s industrialising England: “the more modern industry becomes developed, the more is the labour of men superseded by that of women and children… Differences of age and sex have no longer any distinctive social validity for the working class. All are instruments of labour, more or less expensive to use, according to their age and sex.”
But labour-replacing technological change was also major reason. Estimates show that each multipurpose robot has replaced about 3.3 jobs in the US economy and reduced real wages. And forecasts for robot expansion in the 2020s predict exponential growth. The number of industrial robots has already increased by factor of three over the course of the last decade, rising from a little over one million operative units in 2010 to a projected 3.15 million units in 2020. Over the same time, robots reportedly became capable of substituting for, or even outperforming, humans for many tasks, such as producing customised parts and medical implants using 3D printing technologies, diagnosing diseases, and assisting decision making, for example, by ‘robot judges’.
The rise of the robots: robots million units
Routine and low-skill tasks continue to be easier for robots to perform than non-routine, high-skill tasks. This implies that increases in the number of robots or improvements in their productivity tend to affect low-skilled workers much more adversely than high-skilled workers. Moreover, high-skilled workers tend to specialise in tasks to which automation is complementary, such as robot design and maintenance, supervision, and management. The differential impact of automation implies that the wages of low-skilled workers might stagnate and even decline in the presence of automation; just as Engels found in the 1840s.
When robots constitute a perfect substitute for labour, workers and robots compete directly on the labour market, holding wages down. As a consequence, automation leads to a declining labour income share. In the US, the labour income share within the productive sectors fell during the 1970s as companies tried to compensate for falling profitability by reducing their workforces, enabled by two huge slumps in 1974-5 and 1908-2. The labour share stabilised during 1980s and 1990s at a lower level as corporate profitability improved somewhat in the neoliberal period. Clearly, there were other factors than mechanisation that led to a fall in labour’s share (the destruction of the trade unions, wage freezes etc), but it is estimated that of the 3% fall in the labour share from the 1990s to 2010, about 1% point can be laid at the door of automation.
Labour share of US GDP (%)
But as Engels also noted, mechanisation works both ways. On the one hand, the introduction of new machinery or technology will lead to the loss of jobs for those workers using outdated technology. On the other hand, the new industries and techniques could create new jobs. But it is only in sectors of industry that require high skill and/or are subject to union protection that increasing wages and jobs are sustained: “The so-called fine spinners…do receive high wages, thirty to forty shillings a week, because they have a powerful association for keeping wages up, and their craft requires long training; but the coarse spinners who have to compete against self-actors (which are not as yet adapted for fine spinning), and whose association was broken down by the introduction of these machines, receive very low wages” (Engels). Generally, however, “that wages in general have been reduced by the improvement of machinery is the unanimous testimony of the operatives. The bourgeois assertion that the condition of the working-class has been improved by machinery is most vigorously proclaimed a falsehood in every meeting of working-men in the factory districts.”
Mechanisation, robots and automation will reduce labour time. That should mean fewer working hours as more use values are created by labour in less time. But under capitalism, the extra use-values only deliver more value through the sale of those use-values and that value is only paid out to workers either in fewer hours, higher wages or both through a class struggle between the owners of capital and the labour force. So, under capitalism, mechanisation does not ‘automatically’ lead to fewer hours and less toil.
In a new book, Work: a history of how we spend our time, James Suzman explains that, contrary to hopes and predictions of such as Adam Smith or John Maynard Keynes, technology does not deliver a “happy life” (Smith) or “abundant leisure” (Keynes). As the recently deceased (and missed) David Graeber showed, mechanisation under capitalism has actually led to more ’bullshit jobs’ that destroy creativity and meaningful work, while increasing toil.
As the pollster Gallup showed in a recent survey of working life in 155 countries published in 2017, only one in 10 western Europeans described themselves as ‘engaged’ by their jobs. In another survey conducted by YouGov in 2015, 37 per cent of working British adults said their jobs were not making any meaningful contribution to the world.
It’s true that average working hours in most advanced capitalist economies have fallen since Engels’ time, but that has not been because of mechanisation, so much as from trade union struggle and political battles over factory legislation and on the reducing working day etc. Indeed, since the trade unions were decimated in the late 20th century in most countries, there has been little reduction in the average working week (still hovering at about 40 hours) despite the acceleration of robots and automation.
When trade unions in Finland recently proposed a 6 hour day, verbally backed by the Finnish prime minister, the idea was shunted off to a committee because of “resistance from employers, who have an interest in paying (as little as possible) for hours worked, not according to productivity. A six-hour day for eight hours’ pay means a higher hourly wage. It also means a loss of control over workers — not only in terms of a smaller chunk of each day where employers control the activities of employees, but also through the implicit acknowledgment that workers should have more of a say in organizing working life.” Keynes’ dream nearly 100 years ago of a 15-hour week is still just that – a dream.
The pandemic slump looks like being a new catalyst for a change in working conditions. ‘Working from home’ is the new cry. But that will only apply to a minority, mostly those in better paid office-based work.
And there is no surety that ‘working from home’ will improve job satisfaction or make people ‘happier’ as Adam Smith hoped. Already employers are developing new methods of monitoring staff in their homes and indeed ensuring that they work even longer hours as they no longer commute. And for the vast majority, going out to work in jobs that offer no creativity, pay badly and are increasingly insecure will remain the norm. More toil not less work.
September 28, 2020
Ending the pandemic slump – a return to Keynes?
The latest Trade and Development report by the United Nations Conference on Trade and Development (UNCTAD), the economic research agency to help ‘developing countries’, is a must read. Not only is it packed with data and statistics about trends and developments in global production, trade and investment, but this 2020 issue takes a very radical position on how to get the world economy out of what the IMF calls the ‘lockdown’ slump. As UNCTAD eloquently says: “The world economy is experiencing a deep recession amid a still-unchecked pandemic. Now is the time to hammer out a plan for global recovery, one that can credibly return even the most vulnerable countries to a stronger position than they were before. The status quo ante, is a goal not worth the name. And the task is urgent, for right now, history is repeating itself, this time with a disturbing mix of both tragedy and farce.”
First, UNCTAD’s economists spell out the depth and extent of the pandemic recession. UNCTAD reckons the global economy’s real GDP will contract by about 4.3 per cent this year, leaving global output by year’s end over $6 trillion short (in current US dollars) of what economists had expected it to be before the Covid-19 pathogen began to spread. “In short, the world is grappling with the equivalent of a complete wipe out of the Brazilian, Indian and Mexican economies. And as domestic activity contracts, so goes the international economy; trade will shrink by around one fifth this year, foreign direct investment flows by up to 40 per cent and remittances will drop by over $100 billion.”
The Great Lockdown has tipped the global economy into recession in 2020 on a scale not witnessed since the 1930s. As a result, over 500 million jobs worldwide are under threat and at least 100 million jobs will have gone entirely by year-end. Furthermore, between 90 million and 120 million people will be pushed into extreme poverty in the developing world, with hunger and malnutrition certain to follow, while income gaps will widen everywhere. These developments point toward a massive uptick in sickness and death.
The urgent need for increased health spending along with declining tax revenues, combined with a collapse in export earnings and pending debt payments has exposed a $2-3 trillion financing gap in the developing world which the ‘international community’ has, so far, failed to address. “There is a very serious danger that the shortfall will drag developing countries into another lost decade ending any hope of realizing the ambition of the 2030 Agenda for Sustainable Development.”
UNCTAD economists note something I argued last March, that the world economy was already heading for a slump before the pandemic hit. In the advanced capitalist economies, the average growth rate between 2010–2019 fluctuated around an annual average of 2 per cent, compared with 2.4 per cent from 2001–2007. Growth also declined for developing countries from 7.9 per cent in 2010 to 3.5 per cent in 2019, with an annual average of just 5.0 per cent compared with 6.9 per cent from 2001–2007 (or 3.4 and 4.9 respectively, excluding China). The global economy had entered dangerous waters by late 2019. Growth was slowing across all regions with a number of economies contracting in the final quarter.
Moreover, UNCTAD reckons that a V-shaped recovery from the 2020 slump is not likely. Even a full V-shaped recovery with annual growth next year above 5 per cent and the world economy returning to its 2019 level by end of 2021 would still leave a $12 trillion income shortfall in its wake and an engorged debt burden, particularly in the public sector. But even that is not going to happen, says UNCTAD: “Our own assessment also sees the bounce continuing into next year albeit with stronger headwinds weakening the pace of global recovery which will, under the best scenario, struggle to climb above 4 per cent.”
What economic policies should be adopted to end this ‘lockdown slump’ and avoid or reduce the hit to the livelihoods of billions? That depends on the analysis of the causes of the slump itself.
And here I take issue with UNCTAD’s economists. They reckon the cause of the global slowdown before the pandemic and the lost decade since the Great Recession ended in 2009 is primarily due a ‘lack of global demand’. This lack of demand is caused by wages being too low because of neoliberal policies; and by capitalist investment being too low because of a switch into financial speculation rather than into productive investment; and by fiscal austerity reducing government spending.
UNCTAD economists openly follow the Keynesian ‘explanation’ for the lost decade (or what I have called the Long Depression) since 2009. And their solution is a re-adoption of Keynesian policies to manage capitalism better. For UNCTAD, slumps start with a collapse in demand ie in investment spending and above all in household consumption. That leads to a fall in sales, trade and then production and investment. “Since its founding in the aftermath of the Great Depression, the key principle of macroeconomics has been that effective demand – expected sales of final goods and services – determines income and employment.” That may be the key principle of macroeconomics, but as I have argued before in many posts, this sequence is not correct and is actually back to front. In a capitalist, profit-making, economy, it is profits and profitability that drive investment and when profitability drops, investment in the means of production and in labour will contract, leading to unemployment and loss of consumer incomes and demand.
Indeed, on occasion even Keynes recognised that profitability (which he called the ‘marginal efficiency of capital’) was an important factor in causing slumps. As he said: “Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.” If the marginal efficiency of capital fell below the interest cost of borrowing capital, then capitalists would have a loss of ‘animal spirits’ and stop investing and instead hoard money. But this aspect of Keynesian theory is ignored by modern Keynesians (as it was by Keynes himself). There is no mention of profit or profitability in the whole of the long UNCTAD report. Instead we are asked to accept that slumps are caused by low wages and consumption and by low investment caused by a switch to financial speculation leading to ‘instability’.
You see, in the last 40 years, the share of profits in the national incomes of the major economies has risen at the expense of wages and so the crisis of capitalist production is ‘wage-led’ not ‘profit-led’. “In the last decade, the profit share has increased in all but three G20 countries. If these pre-Covid-19 forces of wage repression remain in place, the labour share will likely continue its decline in many economies in the next years exacerbating inequalities. In the United States, after a 50-year descent, the labor share is now back to its 1950s level; if current trends continue, in ten years’ time it will be back to the brink-of-the-abyss level of 1930.”
UNCTAD says the problem is that “The world largely abandoned the imperative of demand management with the turn to neoliberal policies in the 1980s and an exclusive focus on measures to boost growth from the supply-side.” But UNCTAD offers no real explanation of why the government policies changed in the 1970s towards what are now called neo-liberal measures like wage suppression. If everything was going swimmingly in the ‘golden age’ of the 1960s for capitalism and with workers’ wages, why change? UNCTAD’s offered explanation is that “a more active role of the government in economic reconstruction fell out of fashion in recent decades under the influence of the neoliberal economic mindset.” So Keynesian policies of managing capitalism “fell out of fashion” because of a change of ideology to a “neoliberal mindset”. This is the explanation also recently made by Thomas Piketty is his new tome, Capital and Ideology, where he argues that it was a change of ideology that changed economic policies.
This idealist explanation ignores the main objective economic condition for capitalism in the 1970s: the well-documented profitability crisis. In the 1970s, rates of profit on capital in the all the major economies plummeted, leading to a severe slump in 1980-2. This forced governments to abandon Keynesian ‘demand management’. It had failed to save capitalism and governments turned to ‘neoliberal’ policies based on crushing trade union power, decimating manufacturing industry in the advanced capitalist economies and taking capital and productive capacity into the cheap labour areas of the global south (and eastern Europe after the fall of the Soviet Union).
Yes, the ‘rules of the game’ were changed from ‘demand management’ to ‘free markets, corporate tax cuts and globalisation’. But this was based on the objective situation, not on some ideological nastiness. UNCTAD may think that returning to Keynesian demand management will solve rising inequality, global warming and low wages and investment. But if the profitability of capital stays low, such policies (even in the unlikely event of being implemented) won’t work.
UNCTAD’s economists note that productivity growth has slowed significantly in the last 20 or more years. In the US, productivity grew 17 percent in the 1999–2009 decade but only 12.5 percent in the last decade; China’s impressive productivity growth of 162 percent in the earlier decade came down to 99 percent in the last decade. But they seem to think this is due to lower slowing aggregate demand. But the evidence is clear: those countries with low levels of productive investment growth had low levels of productivity growth, and low levels of investment growth were driven by low levels of profitability, not ‘demand’.
It’s true that productive investment growth has slowed while investment in financial assets has risen, driven by cheap credit (leading to rising debt). But again the question is why capitalists invested productively with credit back in the 1960s and early 1970s but now prefer to purchase financial assets? Why have “policies drifted towards a different paradigm of finance-led globalization”? Should we not consider the motor force for this is the low profitability in productive investment?
UNCTAD says “as long as growth needs to rely on credit and the State is removed from actions to control finance and ensure full employment, financial instability and crises become features of capitalist economies”. The implication here is that if the state controlled finance it could achieve full employment and end crises. But surely, as UNCTAD goes onto to say “with profit preservation being the linchpin of the model, wage earners or the public sector bear the cost of crises, and downward pressure on wages suppresses aggregate demand in the subsequent cycle.”
Indeed, ‘profit preservation’ is the problem because it is the driving force for capitalist production. So when UNCTAD says it wants to focus “on functional income distribution” ie the wage-profit share distribution, and reduce the profit share, it ignores the reality that it is the capitalist mode of production for profit that generates that unequal distribution. UNCTAD wants us to end “rent-seeking behaviour and market concentration (ie monopolies), and unequal terms of trade (imperialism) and the international division of labour (imperialism)”, but how can that be done without taking control and ownership of the multinational companies and financial institutions that breed these inequalities and imperialist flows of value?
UNCTAD says that “markets, left alone, cannot efficiently provide society with the necessary collective goods and with the conditions for sustainable, equitable growth and development, regardless of the starting point. A mixture of active fiscal policies and more structural policies are then needed to fill the gap, policies that look beyond temporary stabilization and contribute to economic reconstruction.” This implies that things would work efficiently if markets were interfered with and ‘managed’.
UNCTAD’s ‘structural policies’ boil down to more regulation of monopolies and banks, not taking them over. “To curtail market monopolization and corporate rent-seeking, much of the regulatory structure dismantled over the past four decades needs to be restored. In addition, antitrust and anti-monopoly laws have to be updated.” And “we need a re-regulation of finance. This includes tackling the giant private banks through international oversight and regulation; addressing the highly concentrated and critical market for credit rating; and the cosy relationship between rating agencies and shadow banking institutions.” Anybody who has read my analysis of the effectiveness of regulation over monopolies and banks will conclude that this policy of regulation will not work.
Take climate change. UNCTAD presents a whole range of ’green’ measures to curb and control global warming. But there is no call for the public ownership of the fossil fuel industries and their phasing out.
Maybe that’s too much to expect from an international agency like UNCTAD, funded as it is by the great powers in the UN. UNCTAD wants to promote a radical alternative to neoliberalism that it reckons has brought capitalism to its knees in the pandemic, but if it only advocates a return to Keynesian-style demand management of capitalism, it is not offering a “plan for global recovery, one that can credibly return even the most vulnerable countries to a stronger position than they were before”.
September 20, 2020
More on a world rate of profit
Back in July, I wrote a post on a new approach to a world rate of profit and how to measure it. I won’t go over the arguments again as you can read that post and previous ones on the subject. But in that July post, I said I would follow up on the decomposition of the world rate of profit and the factors driving it. And I would try to relate the change in the rate of profit to the regularity and intensity of crises in the capitalist mode of production. And I would consider the question of whether, if there is a tendency for the rate of profit to fall as Marx argued, it could reach zero eventually; and what does that tell us about capitalism itself? I am not sure I can answer all those points in this post, but here goes.
First, let me repeat the results of the measurement of a world rate of profit offered in the July post. Based on data now available in Penn World Tables 9.1 (IRR series), I calculated that the average (weighted) rate of profit on fixed assets for the top G20 economies from 1950 to 2017 (latest data) looked like this in the graph below.
Source: Penn World Tables, author’s calculations
I have divided the series into four periods that I think define different situations in the world capitalist economy. There is the ‘golden age’ immediately after WW2 where profitability is high and even rising. Then there is the now well documented (and not disputed) collapse in the rate of profit from the mid-1960s to the global slump of the early 1980s. Then there is the so-called neoliberal recovery where profitability recovers, but peaks in the late 1990s at a level still well below the golden age. And finally, there is the period that I call the Long Depression where profitability heads back down, with a jerk up from the mild recession of 2001 to 2007, just before the Great Recession. Recovery in profitability since the end of the GR has been miniscule.
So Marx’s law of profitability is justified empirically. But is it justified theoretically? Could there be other reasons for the secular fall in profitability than those proposed by Marx. Marx’s theory was that capitalists competing with each other to increase profits and gain market share would try to undercut their rivals by reducing costs, particularly labour costs. So investment in machinery and technology would be aimed at shedding labour – machines to replace workers. But as new value depends on labour power (machines do not create value without labour power), there would be a tendency for new value (and particularly surplus value) to fall relatively to the increase in investment in machinery and plant (constant capital in Marx’s terms).
So over time, there would be a rise in constant capital relative to investment in labour (variable capital) ie a rise in the organic composition of capital (OCC). This was the key tendency in Marx’s law of profitability. This tendency could be counteracted if capitalists could force up the rate of exploitation (or surplus value) from the employed workforce. Thus if the organic composition of capital rises more than the rate of surplus value, the rate of profit will fall – and vice versa. If this applies to the rate of profit as measured, it lends support to Marx’s explanation of the falling rate of profit since 1950.
Well, here is a graph of the decomposition of the rate of profit for the G20 economies. The graph shows that the long-term decline in profitability is matched by a long-term rise in the OCC. So Marx’s main explanation for a falling rate of profit, namely a rise in the organic composition of capital is supported.
Source: Penn World Tables, author’s calculations
What about the rate of surplus value? If that rises faster than the OCC, the rate of profit should rise and vice versa. Well, here are the variables broken down into the four periods I described above. They show the percentage change in each period.
Source: Penn World Tables, author’s calculations
For the whole period 1950-2017, the G20 rate of profit fell over 18%, the organic composition of capital rose 12.6% and the rate of surplus value actually fell over 8%. In the golden age, the rate of profit rose 11%, because the rate of surplus value rose more (16%) than the OCC (4%). In the profitability crisis of 1966-82, the rate of profit plummeted 35% because, although the OCC also fell 6%, the rate of surplus value dropped 38%. In the neoliberal recovery period, the rate of profit rose 24% because although the OCC rose 11%, the rate of surplus value rose 37% (a real squeeze on workers wages and conditions). In the final period since 1997 when the rate of profit fell 10% to 2017, the OCC rose a little (4%) but the rate of surplus value dropped a little (7%).
These results confirm Marx’s law as an appropriate explanation of the movement in the world rate of profit since 1950 – I know of no other alternative explanation that explains this better.
So will the rate of profit eventually fall to zero and what does that mean? Well, if the current rate of secular fall in the G20 economies continues, it is going to take a very long time to reach zero – well into the next century! Among the G7 economies, however, if the average annual fall in profitability experienced in the last 20 years or so is continued, then the G7 rate will reach zero by 2050. But of course, there could be a new period of revival in the rate of profit, probably driven by the destruction of capital values in a deep slump and by a severe restriction on labour’s share of value by reactionary governments.
Nevertheless, what the secular fall in the profitability of capital does tell you is that capitalism’s ability to develop the productive forces and take billions out of poverty and towards a world of abundance and harmony with nature is hopelessly impossible. Capitalism as a system is already past its sell-by date.
Finally, can we relate falling profitability with regular and recurring crises of production and investment in capitalism? In my book, Marx 200, I explain that connection and in the July post I showed a close correlation between falling profitability of capital and a fall in the total mass of profits. Marx argued that, as average profitability of capital in an economy falls, capitalists compensate for this by increasing investment and production to boost the mass of profit. He called this a double edge law: falling profitability and rising profits. However, at a certain point, such is the fall in profitability that the mass of profits stops rising and starts to fall – this is the crux point for the beginning of an ‘investment strike’ leading to a slump in production, employment and eventually incomes and workers’ spending. Only when there is a sufficient reduction in costs for capitalists, bringing about a rise in profitability and profits, will the ‘business cycle’ resume.
What is happening right now? Well, as we have seen above, global profitability was already at a low point in 2017 and still below the pre-Great Recession peak. By any measured guess, it was even lower in 2019. And I have updated my measure of the mass of profits in the corporate sector of the major economies (US, UK, Germany, Japan, China). Even before the pandemic broke and the lockdowns began, global corporate profits had turned negative, suggesting a slump was on its way in 2020 anyway.
We read about the huge profits that the large US tech and online distribution companies (FAANGS) are making. But they are the exception. Vast swathes of corporations (large and small) globally are struggling to sustain profit levels as profitability stays low and/or falls. Now the pandemic slump has driven global corporate profits down by around 25% in the first half of 2020 – a bigger fall than in the Great Recession.
Source: National accounts, author’s calculations
Profits recovered fast after the Great Recession. It may not be so quick this time.
September 13, 2020
The US rate of profit before the COVID
Every year, I look at measuring the US rate of profit. Official US data are now available to update the measurement of the rate for 2019.
There are many ways to measure the rate of profit (for the various ways, see http://pinguet.free.fr/basu2012.pdf). I have one way and you can check and replicate my results by referring to the excellent manual explaining my method, kindly compiled by Anders Axelsson from Sweden.
Readers of my blog and other papers know that I prefer to measure the rate of profit by looking at total surplus value in an economy against total private capital employed in production; to be as close as possible to Marx’s original formula of s/C+v. So I have what I call a ‘whole economy’ measure, based on total national income (less depreciation) for surplus value; net non-residential private fixed assets for constant capital; and adding in employee compensation for variable capital. This is what might be called a general or gross rate of profit. The rate of profit will be lower if we look only at the corporate sector, or the non-financial corporate sector, before or after tax etc.
Most Marxist measures exclude any measure of variable capital on the grounds that ‘employee compensation’ (wages plus benefits) is not a stock of invested capital but a flow of circulating capital. And this cannot be measured easily from available data. I don’t agree that this is a restriction and G Carchedi and I have an unpublished work on this point. Even so, given that the value of constant fixed capital compared to variable capital is five to eight times larger (depending on whether you use a historic or current cost measure), the addition of a measure of variable capital to the denominator does not change the trend or turning points in the rate of profit significantly (although it does change the absolute level). This also applies to the rest of circulating capital ie. inventories (the stock of unfinished and intermediate goods), or ‘working capital’. They should and could be added as circulating capital to the denominator for the rate of profit, but I have not done so as the results would be little different.
In contrast, Brian Green has done some powerful work in measuring circulating capital and its rate of turnover for the US economy in order to incorporate it into the measure of the rate of profit. He considers this vital to establishing the proper rate of profit and also as an indicator of likely recessions. You can consider the usefulness of Green’s work at his website here: https://theplanningmotive.com/. All I would say is that adding circulating capital to fixed assets in the denominator of the rate of profit does not make much difference to the outcome for measuring the US rate of profit.
Anyway, on my ‘whole economy’ measure, the US rate of profit since 1946 to 2019 looks like this.
In this graph, I have included measures based on historic (HC) and current costs (CC) for comparison. For an explanation of why I include both, see my previous posts and my book, The Long Depression (appendix). The two measures differ in the 1960s particularly and from the 1990s. The difference is caused by inflation. If inflation is high, as it was between the 1960s and late 1980s, then the divergence between the changes in the HC measure and the CC measure will be greater. When inflation drops off, the difference in the changes between the two HC and CC measures will narrow. From 1965 to 1982, the US rate of profit fell 20% on the HC measure, but 35% on the CC measure. From 1982 to 1997, the US rate of profit rose just 9% on the HC measure, but rose 29% on the CC measure. But over the whole post-war period up to 2019, there was a secular fall in the US rate of profit on the HC measure of 31% and on the CC measure 31%!
Either way, the data confirm Marx’s explanation of the trends in profitability. According to Marx, changes in profitability depend on the relative movement of two Marxian categories in the accumulation process: the organic composition of capital (C/v) and the rate of surplus value (exploitation) (s/v). Since 1946, there has been the secular rise in the organic composition of capital (HC measure) of 60%, while the main ‘counteracting factor’ in Marx’s law of the tendency of the rate of profit to fall, the rate of surplus value, has actually fallen over 10%. So the rate of profit fell 31%. Conversely, in the so-called ‘neo-liberal’ period from 1982 to 1997, the rate of surplus value rose 16%, more than the organic composition of capital (11%), so the rate of profit rose 9%. Since 1997, the US rate of profit has fallen around 6%, because the organic composition of capital has risen nearly 17%, outstripping the rise in the rate of surplus value (3%).
One of the compelling results of the data is that each economic recession in the US has been preceded by a fall in the rate of profit and then by a fall in the mass of profits. This is what you would expect cyclically from Marx’s law of profitability.
I have argued that the profitability of capital is key to gauging whether the capitalist economy is in a healthy state or not. If profitability persistently falls, then eventually the mass of profits will start to fall and that is the trigger for a collapse in investment and a slump.
In 2019, on my measure, US overall profitability fell slightly compared to 2018. Profitability in 2019 is now 5-9% below the post Great Recession peak of 2014 and 10% below the 2006 pre-Great Recession peak. Also, the mass of profits fell 3% in 2019. Indeed, the period from 2014 to 2019 is now the longest period of contraction in US profitability since 1946. That suggests the US economy was already heading into a slump in 2020 before the COVID pandemic hit.
In September 2020, we now know that all the major economies of the world (with the exception of China) will suffer the biggest post-war contraction in real GDP in 2020. But how will that affect the rate of profit in 2020? Assuming a 7% fall in US real GDP, I calculate that we can expect a 25% fall in the rate of profit. In my first graph above I feed that into my 2020 forecast. If correct, the US rate of profit will hit a new post-war low in 2020.
That is on the whole economy measure. If we consider the non-financial corporate sector, a proxy for the productive sector of the economy, then the rate of profit could drop to as low as 3%, based on data from the Federal Reserve – the lowest level since Fed records were available.
September 6, 2020
Pandemics: prevention before cure
There is now firm evidence of a strong link between environmental destruction and the increased emergence of deadly new diseases such as Covid-19. Indeed, increasing numbers of deadly new pandemics will afflict the planet if levels of deforestation and biodiversity loss continue at their current catastrophic rates. That is the conclusion of scientists who will present reports at the end of this month to the United Nations Summit on Biodiversity under the theme of “Urgent action on biodiversity for sustainable development.”
There delegates will hear that rampant deforestation, uncontrolled expansion of farming and the building of mines in remote regions – as well as the exploitation of wild animals as sources of food, traditional medicines and exotic pets – are creating a “perfect storm” for the spillover of diseases from wildlife to people.
Almost a third of all emerging diseases have originated through the process of land use change. As a result, five or six new epidemics a year could soon affect Earth’s population. “There are now a whole raft of activities – illegal logging, clearing and mining – with associated international trades in bushmeat and exotic pets that have created this crisis,” says Stuart Pimm, professor of conservation at Duke University. “In the case of Covid-19, it has cost the world trillions of dollars and already killed almost a million people, so clearly urgent action is needed.”
It is estimated that tens of millions of hectares of rainforest and other wild environments are being bulldozed every year to cultivate palm trees, farm cattle, extract oil and provide access to mines and mineral deposits.
This leads to the widespread destruction of vegetation and wildlife that are hosts to countless species of viruses and bacteria, most unknown to science. Those microbes can then accidentally infect new hosts, such as humans and domestic livestock. Such events are known as spillovers. Crucially, if viruses thrive in their new human hosts they can infect other individuals. This is known as transmission and the result can be a new, emerging disease.
Zoologist David Redding, of University College London explains what happens in places where trees are being cleared, mosaics of fields, created around farms, appear in the landscape interspersed with parcels of old forest. “This increases the interface between the wild and the cultivated. Bats, rodents and other pests carrying strange new viruses come from surviving clumps of forests and infect farm animals – who then pass on these infections to humans.”
In the past many outbreaks of new diseases remained in contained areas. However, the development of cheap air travel has changed that picture and diseases can appear across the globe before scientists have fully realised what is happening. “The onward transmission of a new disease is also another really important element in the pandemic story,” said Professor James Wood, head of veterinary medicine at Cambridge University. “Consider the swine flu pandemic. We flew that around the world several times before we realised what was going on. Global connectivity has allowed – and is still allowing – Covid-19 to be transmitted to just about every country on Earth.”
In a paper published in Science last month, Pimm, Dobson and other scientists and economists propose setting up a programme to monitor wildlife, reduce spillovers, end the wildlife meat trade and reduce deforestation.
They estimate that such a scheme could cost more than $20bn a year, a price tag that is dwarfed by the cost of the Covid-19 pandemic, which has wiped trillions of dollars from national economies round the world. Spending of about $260bn over 10 years would substantially reduce the risks of another pandemic on the scale of the coronavirus outbreak, the researchers estimate, which is just 2% of the estimated $11.5tn costs of Covid-19 to the world economy. Furthermore, the spending on wildlife and forest protection would be almost cancelled out by another benefit of the action: cutting the carbon dioxide emissions driving the climate crisis.
In the report, several estimates of the effectiveness and cost of strategies to reduce tropical deforestation are made. At an annual cost of $9.6 billion, direct forest-protection payments to outcompete deforestation economically could achieve a 40% reduction in areas at highest risk for virus spillover.
A recent report, from the New Nature Economy project, published by the WEF, says: “We are reaching irreversible tipping points for nature and climate. If recovery efforts do not address the looming planetary crises, a critical window of opportunity to avoid their worst impact will be irreversibly lost.”
And yet the cost of action to deal with these impending disasters would be not much more than the recent fiscal spending by governments to save jobs and businesses from the current COVId-19 pandemic.
What is not mentioned in any of these reports is that is the drive for profit under the capitalist mode of production which breaks the necessary connection between human activity and nature. It is not ‘illegal logging, clearing and mining’ or wildlife markets that are the problems. They are the symptoms of the expansion of productive forces under capitalism. Logging and forest burning and clearing are done not only by large corporations, but also by many poor farmers unable to make a living as the land and technology is mainly owned and exploited by big business. It is the very uneven development of capitalist accumulation that is the fundamental cause.
Over 140 years ago, Friedrich Engels noted how the private ownership of the land, the drive for profit and the degradation of nature go hand in hand. “To make earth an object of huckstering — the earth which is our one and all, the first condition of our existence — was the last step towards making oneself an object of huckstering. It was and is to this very day an immorality surpassed only by the immorality of self-alienation. And the original appropriation — the monopolization of the earth by a few, the exclusion of the rest from that which is the condition of their life — yields nothing in immorality to the subsequent huckstering of the earth.” Once the earth becomes commodified by capital, it is subject to just as much exploitation as labour.
Yes, science helps us to understand what is happening. As Engels said, “ with every day that passes we are learning to understand these laws more correctly and getting to know both the more immediate and the more remote consequences of our interference with the traditional course of nature. … But the more this happens, the more will men not only feel, but also know, their unity with nature, and thus the more impossible will become the senseless and antinatural idea of a contradiction between mind and matter, man and nature, soul and body.”
We need the work of climate change and environments scientists because “by collecting and analyzing the historical material, we are gradually learning to get a clear view of the indirect, more remote, social effects of our productive activity, and so the possibility is afforded us of mastering and controlling these effects as well.” (Engels).
But the reports of the scientists at the UN meeting and others and making people aware are not enough. The Extinction Rebellion recently issued a statement saying that “we are not a socialist movement. We do not trust any single ideology, we trust the people to find the best future for us all. A banner saying socialism or extinction does not represent us.” Well, maybe Extinction Rebellion does not recognise that the battle to save the planet is connected to replacing the capitalist mode of production. But ER’s view contrasts, it seems, from that of climate activist Greta Thubergh, who recently said that “The climate and ecological crisis cannot be solved within today’s political and economic systems. That isn’t an opinion. That’s a fact.”
As Engels said: “To carry out this control requires something more than mere knowledge.” Science is not enough. “It requires a complete revolution in our hitherto existing mode of production, and with it of our whole contemporary social order.”
August 31, 2020
Abenomics: a review
Over the weekend, Abe Shinzo announced that he was resigning as Japan’s prime minister. Last November, he became the country’s longest serving premier. He resigns amid the worst economic slump in Japan’s post-war history, caused by the coronavirus pandemic and the lockdowns. His popularity had plummeted due to a series of bribery and corruption scandals in his government and because of his handling of the pandemic.
In the second quarter of 2020, Japan’s national output fell 7.8% compared to the first quarter level, or an annualised drop of 27.8%, a quarterly drop more than 60% greater than in the depths of Great Recession of 2009.
But Japan was already in a classic economic recession before COVID-19 hit the world economy. Real GDP had already fallen in the last quarter of 2019.
Indeed, it is a sorry end to the great hopes expressed when Abe came into office in early 2013. Abe announced then that he had an economic policy, soon to be called Abenomics, which had three ‘arrows’, to get the Japanese economy out of its long stagnation. The arrows were monetary injections, fiscal stimulus and structural reform. Abe spelt out the mission: “I will break down any and all walls looming ahead of the Japanese economy and map out a new trajectory for growth. This is precisely the mission of Abenomics.”(2017).
Now that Abe is gone, can we say, what I then called the Keynesian/neoliberal mix that was Abenomics, has worked to boost Japanese capitalism? It is an interesting question, because Abenomics combined all the policy proposals of mainstream economics into one and the three arrows were praised by neoclassical and Keynesian economists alike. So Japan has been the perfect laboratory model for the efficacy of mainstream economic policy to achieve sustained growth in output, incomes and jobs.
So let’s consider the Abe government’s own benchmark outcomes for success, as outlined in the Abenomics document of economic progress: namely, nominal GDP, unemployment; inflation; and profits.
Nominal GDP was Y495trn back at the end of 2012 when Abe took over. He set a target for his government of getting Japan’s economy up to Y600trn. What did it reach before COVID-19 broke? Nominal GDP reached Y560trn at the end of 2019, a rise of about 2% a year. The performance of real GDP was even worse, a yearly average of just 1.2%, just about the worst of the G7 economies, although Italy was even worse.
The reasons that Abenomics failed to meet its growth target and instead Japan continued on its low growth-stagnation trajectory are manifold. First, Japan’s population has been declining. For the last 15 years, Japan’s birth rate has been below its death rate.
So the ‘natural’ population (ie excluding immigration) has fallen.
Thus increased national output could only come from more employment and from productivity growth. Under Abe, there was an increase in employment (4m), mainly from an increase in female employment (3m), where Japan has lagged the rest of the world in expansion. Ironically, this explains why the unemployment rate fell under Abe from 4% to under 2.5% in 2019 before the pandemic. Japan’s working age population fell from 80.6m people to 75.1, while employment rose. So the unemployment rate fell.
But most of the new employees are women and older people who are taking up jobs in health and social care, temporary and part-time, the lower end of wage market. More than a third of the Japanese workforce is working in non-regular positions, including an increasing number of older people who have become contract or temporary workers after retirement. Employment may have risen under Abe and unemployment fallen, but real wages and household consumption have not improved at all. Real wages have fallen under Abe.
Source: Cabinet Office, author’s calculations
While household consumption (what you get for your wages) has virtually stagnated (up just 0.3% a year).
Overall, Japanese workers are spending an average of 11 percent more time to earn the same salary they were bringing home about 20 years ago, and some are working unpaid overtime on top of that. Many workers are having to do two or more jobs to make ends meet. Some people are working 70-hour weeks out of multiple jobs. According to Lancers research, some 4.5 million full-time workers in Japan have second jobs, where they work, on average, between six and 14 additional hours each week, on top of any overtime hours they clock at their primary job; a small number of them work up to 30 or 40 hours per week at their second jobs. Under Abe, average annual working hours per employee fell, but only because many of the new workers were part-time or temporary – and Japan’s annual working hours remain one of the highest in the world.
Unlike the UK or even Germany, net immigration has not boosted employment in Japan. So the other reason that Abe never achieved his aim of rebooting Japanese economic growth was the low growth in the productivity of labour. Japan ranks twenty-first for labour productivity among the 36 nations of the OECD. Japan’s per-hour labour productivity in 2018 was $46.8 (equivalent in purchasing power to ¥4,744); this is less than half the $102.3 level in Ireland and roughly 60% the $74.7 level in the United States.
Japan’s per-hour and per-capita labor productivity are both just over 60% the level in the United States. And the gap separating the two countries has been steadily widening, as compared to the roughly 70% in 2000 and 65% in 2010.
And remember, US productivity growth has also been very poor since the end of the Great Recession, as it has been in all the advanced economies. So Japan’s performance is particularly bad.
And the reason for that is clear. Domestic business investment rose only just over 1% a year under Abe. Japan’s corporations did not invest much to boost productivity and so productivity languished. Capital investment as a % of GDP rose from 23.2% in 2013 to 24.2% in 2018, but that ratio was still below the pre-Great Recession period.
That was despite Abe aiming from the start to raise the profitability of Japanese capital. And that was the one area where Abenomics has worked: in raising corporate profits. As I said in 2012, the real purpose of Abenomics was to raise the profitability of Japanese capitalism, at the expense of labour. That was the third arrow of Abenomics: the so-called ‘structural reforms’ ie reducing the cost of production by deregulating the labour market, privatising and cutting taxes on profits etc. These measures aimed to help boost the rate of exploitation and the profitability of capital in Japan. Abe cut corporate profit taxes sharply – Trump-style
and he hiked employee social security contributions to reduce the burden for employers.
The outcome was a shift in the share of labour in national income towards profits. Corporate profits doubled under Abe from 2013 to 2018, but then fell back in 2019 as the economy headed into recession.
Even so, Abenomics did not succeed in restoring the profitability of capital to even pre-GR levels. And herein lies the underlying cause of the failure of Abenomics, despite the hopes and expectations of mainstream/Keynesian economics.
*This rate of return measure is compiled from IRR series in the Penn World Tables 9.1 with an estimated update for 2018 and 2019 using the AMECO database on NRR.
And what about the key policy target is restoring a level of inflation in the economy of about 2% a year? The annual inflation rate has averaged just 0.8%. So the first arrow of Abenomics, monetary injections, quantitative easing etc has miserably failed even on its own terms.
And what about the aim to reduce the budget deficits and public sector debt levels and rely more on taxation than on bond issuance? Well, under Abe, the government continued to run budget deficits (although narrowing) and public debt ratio continued to rise, if mor slowly under Abe. So the dependency on borrowing (bonds as a share of spending) fell back – until COVID-19 hit. But all this fiscal stimulus did not avoid Japan slipping back into recession in 2019 – so much for the second arrow of Abenomics.
Before Abe resigned, his government introduced a supplementary fiscal 2020 budget to include provision of ¥100,000 cash handouts to all residents. This has raised the bond dependency ratio to 45.4%. This will bring Japanese government bond issuance to a record ¥58.2 trillion in fiscal 2020. The ratio is heading back to the 50%-plus level of the Great Recession.
Plus ca change…
August 28, 2020
The Fed in a hole
At the Kansas City Fed Jackson Hole symposium, the annual jamboree ‘think-tank’ for international central bankers, US Federal Reserve Chair Jay Powell announced the end of monetary policy as a tool to control inflation. His speech of just a few minutes completely dropped the monetarist theory of inflation as proposed by Chicago free market economist Milton Friedman and pursued by his disciple and former Fed chief, Ben Bernanke. Powell also made it obvious that the Keynesian argument for inflation, namely as trade-off for full employment and rising wages, as graphically presented in the so-called Phillips curve, was also dead.
Powell noted that “over the years, forecasts from FOMC participants and private-sector analysts routinely showed a return to 2 percent inflation, but these forecasts were never realized on a sustained basis.”
And more recently, despite falling and record low unemployment (before the pandemic), the inflation rate continued to fall. “The muted responsiveness of inflation to labor market tightness, which we refer to as the flattening of the Phillips curve, also contributed to low inflation outcomes….. the historically strong labor market did not trigger a significant rise in inflation.”
Why does it matter if inflation is falling and is below the Fed’s 2% a year target? Powell explained: “Many find it counterintuitive that the Fed would want to push up inflation. After all, low and stable inflation is essential for a well-functioning economy. However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.”
What’s wrong with that? After all, working people would be very happy if there was no inflation to cut into the purchasing power of their wages. But the objective of the Fed is not to stop inflation hitting wages. The objective is to have some inflation, because without it “we would have less scope to cut interest rates to boost employment during an economic downturn, further diminishing our capacity to stabilize the economy through cutting interest rates.” So low inflation means low interest rates and no room for monetary policy to cut rates further to “boost employment” or “stabilise the economy”. In other words, monetary policy (changing the Fed policy rate and/or injecting quantities of money into banks) would no longer work.
Indeed, the reality of the last ten years since the Great Recession is that cutting interest rates to zero and applying quantitative easing (which has taken the Fed balance sheet to record highs) has done little or nothing to boost economic growth or the productivity of labour. As Powell said in his Jackson Hole speech: “assessments of the potential, or longer-run, growth rate of the economy have declined. For example, since January 2012, the median estimate of potential growth from FOMC participants has fallen from 2.5 percent to 1.8 percent”. So monetary policy has failed the productive part of the economy. The prices of financial assets and property have rocketed, on the other hand.
So what has Powell decided to do to justify his job? “Our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” The target of 2% a year has been abandoned in favour of some vague ‘average rate over time’. In other words, the Fed will sit on its hands and do nothing.
The stock market loved this because the rich-investing public (hedge funds, banks, insurance companies and pension funds) can now expect the cost of borrowing to speculate to be near zero for the foreseeable future. But the Fed and mainstream economics provide no explanation of why inflation has slowed and so there is no guarantee that it won’t return in the future.
What are the mainstream explanations of low inflation in the last 30-40 years? Powell commented that “some slowing in growth relative to earlier decades was to be expected, reflecting slowing population growth and the aging of the population. More troubling has been the decline in productivity growth, which is the primary driver of improving living standards over time.” It seems that inflation is not “purely a monetary phenomenon” (Friedman), but instead is “driven by fundamental factors in the economy, including demographics and productivity growth— the same factors that drive potential economic growth.”
At the symposium, some mainstream economists attempted to offer an explanation for why US productivity growth has been so weak, thus keeping real GDP growth low and, with it, inflation. One Chicago University economist (the home of Friedman and free market economics) argued that productivity growth was low because of “slowing business dynamism”. Businesses were not innovating but had become lazy and just taking the money. Why? Because of the decline in ‘free competition” and the rise of monopolies. Market concentration had risen and average profit markups increased. The productivity gap between frontier and laggard firms had widened and the share of young ‘innovative’ firms had declined.
This is the argument of ‘market power’, popular among left economists as well, it seems, as among right-wing free market economists. It is ironic that usually the argument is that inflation is caused by monopolies using ‘pricing power’. Now the argument is reversed: monopolies slow productivity growth and so inflation slows. So low productivity and stagnation is the fault of monopoly power. The free market policy is to break up monopolies and return to (the myth) of ‘free competition’. The leftist policy is pretty much the same, or sometimes more radically, to call for the public ownership of these monopolies.
But is the problem of low growth in productivity down to ‘market power’? I have presented several arguments against this explanation in previous posts.
The other explanation offered for low growth in real GDP, productivity and inflation is falling population. Jay Powell referred to an ageing population that spends less, thus keeping prices low. And one economist at the Jackson Hole symposium argued that old people are less likely to want to use innovation, so businesses will invent less.
Source: Pugsley, Karahan and Sahin (2018): Demographic Origins of the Start-Up Deficit
Does not sound very convincing does it?
A much better explanation can be found using Marx’s value theory. In a previous post, I have spelt out a theory based on value creation. If new value created by labour power (divided into profits and wages) accelerates, purchasing power will accelerate and so will inflation of goods and services over time – and if new value growth slows, so will inflation.
Source: Federal Reserve, author’s calculations
The growth in the productivity of labour will slow if the growth in investment in productive assets slows. And investment growth ultimately depends on the profitability of capital. The movement in productive investment is driven by underlying profitability, not by the extraction of rents by a few market leaders.
The very latest corporate profit figures for the US economy provide strong support for the view that slowing productivity and inflation is driven by slowing profits and thus falling profitability of capital. The US rate of profit peaked in the late 1990s and has not recovered from a 30-year low in the Great Recession. And now the rate of profit in 2020 could end up at levels not seen since the deep slump of the early 1980s (and perhaps even lower).
Source: Penn World Tables, AMECO
US non-financial sector corporate profits have been falling since 2014, and now in the pandemic lockdown, have dropped another 20%-plus, to reach levels not seen since the depths of the Great Recession.
Source: BEA NIPA
No wonder monetary policy has failed to restore economic growth, even to rates achieved before the Great Recession, let alone back to the years of the Golden Age of the 1960s. Low inflation may be a product of ‘slowing business dynamism’, but that in turn is a product of slowing investment in productive assets because of low and falling profitability.
August 21, 2020
A Marxist theory of inflation
In my previous post on inflation, I spelt out why mainstream theories of inflation have been proved wrong empirically; leaving mainstream economics in a confusion about what just does drive inflation in the prices of goods and services. In this post, I want to argue that mainstream theories of inflation falter because they are not based on the law of value that operates in the capitalist mode of production. Both the monetarist and Keynesian theories fail because of this.
Marx opposed both these mainstream theories. The quantity theory of money was opposed by Marx for two reasons: 1) money is endogenous, created by banks etc, not by state fiat; 2) overall, money represents value in commodity production and is not independent of it.
So returning to the quantity theory of money equation, MV=PT (see the previous post); for Marx, the basic causal direction is from PT to MV, not the other way (ie from prices to money, not money to prices). Money is endogenous to capitalist production and prices of production are formed from value creation not from money creation. Money supply generally will follow price changes, so deliberate attempts to alter the money supply will fail to determine price inflation.
Cost-push theories were also rejected by Marx because wage rises do not cause price rises. As Marx put it in Value, Price and Profit, when he debated with trade unionist Weston who argued that wage rises would cause inflation: “a struggle for a rise of wages follows only in the track of previous changes, and is the necessary offspring of previous changes in the amount of production, the productive powers of labour, the value of labour, the value of money, the extent or the intensity of labour extracted, the fluctuations of market prices, dependent upon the fluctuations of demand and supply, and consistent with the different phases of the industrial cycle; in one word, as reactions of labour against the previous action of capital (my emphasis).”
“By treating the struggle for a rise of wages independently of all these circumstances, by looking only upon the change of wages, and overlooking all other changes from which they emanate, you proceed from a false premise in order to arrive at false conclusions.” Broadly speaking, argued Marx, “A general rise in the rate of wages would result in a fall of the general rate of profit, but not affect the prices of commodities.”
Marx never developed a comprehensive theory of inflation, but can we develop one based on Marx’s value theory? Italian Marxist economist, Guglielmo Carchedi has come up with one. His work will be fully published later this year. But let summarise his main arguments.
Capitalist production continually strives to increase the productivity of labour ie produce more units per worker. But this means that the labour time per unit will fall. As only labour creates value, while there is a general tendency for the supply of units of goods and services to rise, there is also a general tendency for the value of commodities to fall, over the long term. This is because capitalist accumulation is a labour-saving process, so the value of commodities will fall alongside a rise in the productivity of labour. Use values are produced at greater amounts than the value contained in them. So, if prices of production depend on value, there is an inherent tendency for prices of commodities to fall not rise. as total value will fall relatively to total production over time.
The demand for commodities depends on the new value created in production. New value commands the demand or purchasing power over the supply of commodities. New value is divided by the class struggle into wages and profits. Wages buy consumer goods and profits buy capital or investment goods.
But new value will tend to decline: first, because total value declines relatively to the supply of commodities…
Source: author’s calculations from NIPA GDP data
… and second because of the rising organic composition of capital (c/v). Capitalist accumulation is labour-saving, so the value of machinery, plant, and raw materials etc (c) will tend to rise relative to the value of labour power (v). As the price of production in value terms is made up of constant capital (c) and new value (v s), a rising c/v will tend to reduce the share of new value in the price of production.
Source: author’s calculations
Total value will decline relatively to use value production and new value will decline relatively to total value. So there is an underlying deflationary or disinflationary pressure on the prices of commodities over the long term.
But there are counteracting factors that can exert an upward pressure on prices over the long term; in particular, the intervention of the monetary authorities with their attempts to control the supply of money.
Carchedi’s theory of inflation is that there is a value rate of inflation (VRI), which combines the impact of changes in the purchasing power of wages and profits (new value) and the money supply, measured as cash deposits in banks (M2). The former factor is the determining one and will tend to drive price inflation down, while the latter is the counteracting factor that will tend to push inflation up, but with no permanent success.
The value rate of inflation (VRI) = % change in wages and profits (CPP) % change in money supply (M2). Using data from the US since 1960, we find that the VRI falls over the long term. This is because the combined purchasing power (CPP) of wages and profits grows more slowly and any changes in money supply (M2) have been insufficient to stop the VRI slowing.
Source: author’s calculations
But is there a close correlation between the VRI and consumer price inflation? Yes. Between 1960 and 1979, the VRI rose and so did US CPI inflation; between 1980 and 2019, the VRI slowed and so did CPI inflation.
Indeed, if we model the VRI forecasts for each year against actual CPI inflation, there is a close correlation over the long term. In the graph below, the VRI inflation model forecast for US consumer price inflation (orange lines) is a pretty good fit for actual CPI inflation (blue lines). It offers a much better result than monetarist forecasts or the Phillips curve, especially since the early 1990s, the period of so-called disinflation that has puzzled monetarists and Keynesians.
The value theory of inflation thus explains the slowdown in annual consumer price inflation since the 1980s, unlike mainstream theories which are nonplussed. Even though central banks pumped more money into the economy and M2 money supply growth accelerated, especially from the 1990s and after the Great Recession, because new value growth kept slowing, the slowing combined purchasing power of wage and profit growth continued to drive down inflation.
Can we forecast where inflation is going in the COVID and after? If Carchedi’s theory is right, then whether inflation returns after the COVID depends your forecasts for new value and M2 money growth and thus on the forecast for the value rate of inflation. When he reads this, Carchedi will complain that the value theory of inflation is long term and cannot be used to forecast inflation over a few years or less. But nevertheless, let’s have a go.
This year, 2020, has seen a huge rise in M2 money supply, up 25% yoy so far. But we can expect a fall in profits of about 25% and in wages of about 20% – so a big drop in the combined purchasing power of new value. The VRI model translates into US consumer price inflation this year of about 0.5-1.0%, an annual rate not seen since the depth of the Great Recession. Currently US CPI annual inflation is at 1.0% in July after falling to 0.7% in June.
If we assume that in each of the two next years, 2021 and 2022,the nominal wage bill rises by 5% and profits rise by 10% and 15% respectively, while M2 money growth slows to 10% a year, then the VRI model forecasts 3.0-3.5% US CPI annual inflation over the next two years, not deflation as some expect.
Of course, that result depends on the assumptions. More important, what the value theory of inflation shows is that mainstream theories of inflation fail because of their ignorance of value theory. Once changes in value, not money or employment, are analysed, we can understand the trajectory of inflation under capitalist production.
This post in no way covers all the points and arguments in the Value Theory of Inflation. They will be developed in detail in an upcoming academic paper and as part of the jointly authored book, Through the Prism of Value that Carchedi and I will publish next year.
August 17, 2020
COVID and inflation
Is inflation going to rise once the lockdowns from the pandemic have been relaxed? Mainstream economics has no idea. For a start, the rate of inflation in the prices of goods and services in the major capitalist economies has been falling as a trend since the 1980s. And this is despite the attempts of central banks to boost the money supply in order to stimulate demand and reach a certain inflation target.
Indeed, just before the COVID pandemic broke, inflation rates were falling well short of the target rate (usually around 2% a year) aimed at by central banks. Monetary policy was not working in terms of sustaining a moderate rate of inflation; instead money/credit was flowing into financial assets and property, driving up prices in those assets to new record highs.
But why do we care what the rate of inflation is? Well, workers and their families do not want prices in the shops or for utilities and other services to be rising faster than their wages and benefits. On the other hand, businesses do not want collapsing prices, so that profits are squeezed and employers are forced to stop production or go bankrupt. So it has become a conventional wisdom that moderate inflation is good for capitalist production; as against hyper-inflation nor deflation.
During the pandemic lockdowns, inflation of prices in most goods and services (not all) slowed or even fell, as people were locked down, furloughed or lost their jobs. So spending, particularly on travel, entertainment and other ‘discretionary’ items was curtailed. Supply may have slumped at an unprecedented amount, but so did demand.
But what will happen, if and when business revives? Will deflation take over as firms go bust or will hyperinflation emerge because of the huge amount of credit-backed ‘pent-up’ demand inspired by central banks that cannot be met by supply?
As I say, the mainstream has no idea. As Wolfgang Munchau in the FT put it: “central bankers do not really understand how inflation works. There are lots of theories and approaches, theoretical and statistical, but none that has been able to explain persistently what is going on in the real world. In the case of the ECB, that lack of understanding is best symbolised by the almost comical failure of its inflation forecasts. The forecast went wrong because of a false belief that inflation would eventually return to the 2 per cent target. A random number generator, a monkey with a dartboard, or even a horoscope would have outperformed the ECB here.”
Munchau went on: “The problem is not that somebody got a forecast wrong. We all do, all the time. The troubling bit is that these forecasts reveal a basic lack of understanding of the underlying inflation process. There is some recent evidence that globalisation may have changed the inflation process. Even if true, this is not necessarily a helpful observation either. We do not know exactly what kind of period we are entering.”
The reason that mainstream economics is floundering is because its two main theories for accounting for inflation in capitalist economies have been found wanting. The first of these starts from the demand side of the price equation. Demand is provided by the money in our pockets or in our bank accounts (whether households or businesses). Thus, we have the monetarist theory of inflation based on the quantity theory of money.
The theory has a simple formula: MV=PT, where M = the quantity of money in the economy; V = the rate of circulation of that money through the economy, its velocity, P = prices of goods and services and T = the number of transactions in the market.
The argument goes, as from its most famous modern exponent, Milton Friedman, that “inflation is always and everywhere a monetary phenomenon” (Milton Friedman, Inflation Causes and Consequences, Asian Publishing House, 1963.) Leaving out V and T for a moment, then if money quantity rises, prices will rise and vice versa. Or, if you like, if the quantity of money rises faster than the production of goods and services (nominal GDP), then there will be inflation.
The first thing to say against this simple theory is that the formula also includes V and T and if the velocity of money should fall sharply and transactions drop off dramatically, that could counteract any increase in money supply. And that is indeed what happens when economies slow down sharply, particularly in slumps. So the pace of economic transactions can act to slow or reverse any rise in money supply. And that is happening now. In 2020, money supply growth has rocketed to over 25% yoy, but inflation in most countries stays well below 2% a year.
The velocity of money has slowed sharply since the end of the Great Recession and has now dived during the pandemic.
Also, the historical evidence is against that the theory that inflation is driven by the quantity of money. For a start, Friedman and Schwarz’s empirical analysis of money supply and real GDP growth in the 1930s Great Depression was fraught with errors and ‘heroic’ assumptions.
And if we look at consumer price inflation over the last 30 years (I am using US data here, but it applies to the other major economies too), the rate has trended downwards and yet money supply growth has been stable or rising. Between 1993 and 2019, M2 money supply rose at an average rate of 6.7% a year, but CPI inflation rose at only 2.3%. And from the Great Recession in 2008, money supply growth accelerated to 9.6% a year as central banks applied ‘quantitative easing’, but CPI inflation slowed to 1.8% a year.
The other mainstream theory is that of the Keynesians. They come from the supply side of the price equation. Price inflation comes from rising raw material prices and from rising wages. As long as there is ‘slack’ in the economy (lack of demand), then more unemployed can be put to work and unused capacity in factories and stocks can be utilised and inflation will not rise. But if there is full employment, then supply cannot be increased and workers can drive up wages, forcing companies to raise prices in a wage-price spiral. So there is trade-off between the level of unemployment and prices. This trade-off can be characterised in a graphic curve, named after AW Phillips.
Unfortunately, the evidence of history runs against the Phillips curve as an explanation of the degree of inflation. In the 1970s, price inflation reached post-war highs, but economic growth slowed and unemployment rose. Most major economies experienced ‘stagflation’. And since the end of the Great Recession, unemployment rates in the major economies have dropped to post-war lows, but inflation has also slowed to lows. The Phillips curve has flattened to non-existence (see the brown dots ‘curve’ in the graph of unemployment against inflation in the advanced economies below).
So the mainstream is ‘puzzled’. Indeed, ECB board member Benoit Coeure recently commented “Economics is indeed struggling with inflation theory. Monetary aggregates and monetarism have been correctly abandoned. Domestic slack explanations (the Phillips curve) have been under attack but are still a bit alive” And while “there are tons of econometric papers trying to bury or defend a significant slope coefficient in complex reduced-form regressions that forecast inflation (also called Phillips curves to add to the confusion) or in PC embedded in models. Econometric results always insufficient.” Coeure concludes: “Anyone can feel lost in this ambiguity of econometrics” And Janet Yellen, former chair of the US Federal commented: “Our framework for understanding inflation dynamics could be ‘misspecified’ in some fundamental way.”
The mainstream answer to whether inflation will return as economies end lockdowns and stage some sort of economic recovery is: ‘we don’t know, but maybe at some point’. Can Marxist political economy offer an alternative and more effective theory of inflation? I shall discuss this in the next post.
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