Michael Roberts Blog

US economy in shutdown?

October 2, 2013

So the US Congress has forced a shutdown in a portion of federal government services. From yesterday, 800,000 federal employees will be laid off without pay. This affects about one-third of federal government spending, the rest is actually exempt and, of course, Congress has agreed to ensure that American soldiers on ‘active service’ will continue to be paid, but not civilians. So far, after two days of shutdown, according some estimates, US real GDP growth will be reduced by about by 0.1 percentage points at an annualised rate in this quarter, while a week-long shutdown would cost 0.3 percentage points. And remember that, in the third quarter, the US economy was growing at just 1.7% (see my post, http://thenextrecession.wordpress.com/2013/07/31/the-us-economy-bigger-but-not-healthier/). So a continued shutdown would begin to have a significant effect on real GDP growth.

The argument of some mainstream economists, no doubt easily seized upon by the tea party activists in the Republican party who are behind forcing this shutdown, is that smaller government and lower government spending is good news. After all, the loss in GDP will be really in unproductive government spending. Capitalist sector growth is unaffected. This is nonsense. Sure, overall government spending, whether financed by borrowing or taxes, is a negative to overall capitalist sector profits, but significant sections of the capitalist sector depend on government procurement of goods and services. This will now be suspended – they may be recovered later, but some losses for capitalist producers of government demand will endure. This leaves out, of course, the impact of the loss of government services on the poor and needy, namely the closure of federal health services and food stamps provision etc. But then that is just a ‘use value’ for people and not a reduction in ‘exchange value’ for capitalist production, which is all that matters.

But that is not the end of the risk of a new downturn in US economic growth. There is the looming issue of the federal government debt ceiling. This is the annual limit placed by Congress on the amount that the US government can borrow. Ironically, the debt ceiling was introduced during the First World War to help the federal government pay for the war. Up to then, every new piece of borrowing had to approved by Congress laboriously. To speed things up, Congress dispensed with considering every government bond issuance and just set a limit on how much outstanding debt there could be each year. But now, with total US government debt over $22trn in gross amounts (including state-guaranteed mortgage or so-called agency debt) and federal debt at over $16trn, the ceiling limit has become just that – a limit not a help.

As the government does not yet balance its books (although the deficit between revenues and spending is narrowing fast as spending has been held down and tax collection is rising, it is still about 4% of GDP), it must borrow the difference by issuing treasury securities (debt). Also the government must issue new debt to cover debt that is maturing and which must be repaid to those who bought its bonds. Well, the debt ceiling will be breached by 17 October at the latest and available cash for the federal government after that is estimated at $30bn, which would run out before the end of this month. And at the end of October, the government must repay about $70bn in maturing bonds or default on its debt.

A debt default would be a disaster for the government’s standing in global bond markets and lead to a sharp downgrading of its credit rating and so force up interest rates. it would also spill over into the rest of world as holders of US government debt, which includes most of the world’s central banks, governments and banks, would find themselves short of cash receipts that they were expecting and some may be unable to meet their own obligations. In addition, the US government would be forced to balance its budget for 2014, which started in October, and thus would have to impose a 20% cut in spending immediately. That would push the US economy back into recession very quickly.

Of course, this is not going to happen – I think. The Republican-controlled House of Representatives will have to agree with the Democrat-controlled Senate to raise the debt ceiling before Armageddon arrives. But the Republicans, controlled as they are by the tea-party crazies, may drag this right out to the edge of the cliff. What is behind this Republican intransigence to the point of closing down government services is partly a claim that the government is borrowing ‘too much’, partly a hatred of President Obama, but mostly a belief that Obama’s new healthcare reform is a move towards European-style ‘socialism’ and a welfare state. The tea party loonies thrive on the view of the petty bourgeois, small town suburban myth that the American dream is really about families working and doing things on their own without the ‘interference’ of big government. Even state-funded police forces and intelligence services against ‘terrorism’ are viewed with suspicion by some of the more extreme elements. A man and his gun (often illegal) is all that is needed.

I am reminded of the new film, Prisoners, now out in the US, where our hero is a small self-employed craftsman who believes in protecting his family himself, trains his son at an early age to use guns and ‘be strong’. His daughter is kidnapped by some crazies. He has no faith in the ability of the police to solve the case and get his daughter back. He decides to take the law into his own hands. This is a typical plot in many US movies, where the hero solves the issue without the support and often the hindrance of the authorities. But in Prisoners, the opposite is the outcome. His ‘going it alone’ leads to disaster.

The American dream of the individual overcoming all odds is, of course, an illusion. It is not ‘big government’ that is the problem of US capitalism, but ‘big business’. The banking crash, the Great Recession and the lack of jobs and investment is not the result of government but of the failure of the capitalist sector. Indeed, it is government and the ‘small’ people who have taken the burden of the crisis caused by banks and capital.

And yet when the Democrats take a very small step in trying to alleviate one of those burdens on people, the lack of affordable ‘on demand’ healthcare, it is the Republicans, backed by big business, medical insurance and the big pharma companies, and driven on by the tea party crazies, who decide to block an agreement on the 2014 budget unless Obama backs down on implementing his healthcare reform.

But Americans badly need a proper healthcare service. The US spends 18 per cent of its gross domestic product on health against 12 per cent by the next highest spender, France. The US public sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada. US spending per head is almost 100 per cent more than in Canada and 150 per cent more than in the UK. But America’s mainly privately owned and funded healthcare sector is a miserable failure in terms of meeting people’s needs (although very profitable). US life expectancy at birth is the lowest of these countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher.

Under tremendous pressure from below, the Democrats finally got the nerve to push through Congress some limited reform of US healthcare. The Patient Protection and Affordable Care Act (dubbed ‘Obamacare’ by the Republicans) was signed into law back in March 2010, but is only now being implemented. It is not a universal healthcare service free at the point of demand and paid for out of taxation, as in the UK or in Europe. Instead, it is relies on providing government subsidies to existing private medical insurance schemes of employers alongside the government-provided Medicaid scheme for very poor.

Obamacare will help about 20 percent of Americans who are either uninsured or get insurance on the individual (or “non-group”) market. The idea is that anybody who makes more than the federal poverty line, but less than four times the poverty line ($94,200 for a family of four), can buy subsidised insurance. Those making less than 133 percent of the poverty line and living in a state that has accepted the Medicaid expansion can get Medicaid. The Congressional Budget Office expects that the Affordable Care Act will cover about 14 million of the uninsured in 2014 and 25 million by the end of the decade.

One of the really big changes that the health law makes is to eliminate the relevance of preexisting conditions altogether. This means that insurers won’t be allowed to ask about the existing health problems of applicants or charge more because of it.

The problem with Obamacare is manifold, however. The first is that it won’t even be applied in all states. The Medicaid expansion was made optional by the Supreme Court and only 26 states are likely to participate. And there are no subsidies for private insurance for people making less than the poverty line. Moreover, Obamacare still leaves about 30 million people uninsured, according to a new analysis in the journal Health Affairs. So still the most vulnerable will not have universal healthcare. Also Obamacare is to be paid for by cutting other health services. The first are cuts to Medicare reimbursements. These are cuts largely to the rates that we pay doctors who see Medicare patients, and also what we pay private insurers that cover these subscribers. The other big funding source are taxes on different health care industries like hospitals, insurance companies and, more relevant in recent days, medical device makers. And every American who does not take out Obamacare insurance will still have to pay a $95 tax penalty.

Obamacare is a botched measure that only helps a proportion of uninsured Americans. It is only a subsidy to buy private health insurance which means the money goes to the greedy hands of ‘big insurance’ and private hospitals and doctors. Millions will not be able to afford even the subsidised health premiums and will not qualify for the laborious medicaid schemes either. And the whole thing is to be paid for by reductions in other government spending and more taxes on lower income sectors. It is yet another example of the failure of capitalist schemes to provide basic needs.

The Affordable Care Act will raise taxes on investment income for people who earn more than $200,000. And here we get yet again the screams of the rich against taxation. This is the height of hypocrisy when the latest data reveal that US income inequality has reached new heights. University of California Professor Emmanuel Saez (http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf) analyzed recent IRS data and discovered that the incomes of the top 1% of Americans rose by 19.6% in 2012 while the income of the bottom 99% grew by only 1%. The result is that the top 1% accounted for 19.3% of total household income in 2012, their highest share since 1928. If capital gains are included, the top one percent’s income share has risen f rom 18.1% in 2009 to 22.5% in 2012. Indeed, the top 1% captured slightly more than half of the overall economic growth of real incomes per family over the period 1993-2010. And in the first year of economic recovery after 2009, the rich took 93% of the rise in household income!

This increase in inequality of income has taken place in all the major capitalist economies (see my post, http://thenextrecession.wordpress.com/2013/07/14/the-story-of-inequality/). And it is not just income inequality that has grown in the US and in other capitalist economies. In a recent paper (http://www.voxeu.org/article/capital-back), Picketty and Zucman found that the wealth-to-income ratios of rich countries have been increasing since the 1970s . In the top eight developed economies, according to official national balance sheets, aggregate private wealth has risen from about two to three times national income in 1970 to a range of four to seven times today. And the authors show that, looking at the very long run, the postwar decades – marked by relatively low wealth – appear to be a historical anomaly. High wealth-to-income ratios were the norm in Europe throughout the 18th and 19th centuries (see graph below). Then the world wars, low saving rates, and a number of anti-capital policies provoked a large drop in private wealth, from six to seven times national income to about two times in the aftermath of World War II. The wealth-to-income ratios have been rising ever since, to the extent that they appear to be returning to their 19th-century levels. Capitalism has not changed to reduce inequality anywhere – confirming Marx’s view that (relative) amiseration of the people would increase under capitalism (see my post, http://thenextrecession.wordpress.com/2010/01/10/20/).

The recent increase in inequality since the Great Recession as recorded by Saez is a product of the massive increase in the share of profit in capitalist production since the trough of the recession in 2009, mainly by holding down wages and employment, as the now familiar graph of the ratio of US corporate profits to GDP shows.

But it is not just the squeeze on labour that has driven up profits and increased inequality. It is also the policies of pro-capitalist governments and central banks. Governments have generally followed policies of forcing down government spending, raising taxes on employees and cutting services in pursing fiscal ‘austerity’ to reduce costs for the capitalist sector and keep interest rates low. So central banks have taken up the task of trying to stimulate the capitalist economy with a flood of cheap money and liquidity. But most of this liquidity has not led to an expansion of productive investment or in the productive sectors of the capitalist economies. Investment levels remain well below pre-crisis peaks and real GDP growth remains well below trend growth before the Great Recession.

Take the UK. The proportion of total expenditure accounted for by spending on investment has fallen from an average of 13.5 per cent in 2007 to an average of 10.9 per cent during 2012 and to 10.4 per cent in the second half of 2013.

he proportion of total expenditure accounted for by spending on investment has fallen from an average of 13.5 per cent in 2007, to an average of 10.9 per cent during 2012 and to 10.4 per cent in the second half of 2013. Investment accounts for an average of 14.6 per cent of Gross Financial Expenditure in the G7, with the UK’s 10.4 per cent compares with 14.1 per cent in France, 16.7 per cent in the United States and 17.9 per cent in Canada. – See more at: http://www.cityam.com/blog/1380705247/uk-investment-expenditure-hits-1950s-low#sthash.3UIpDkGy.dpuf

This liquidity, as we have explained in numerous posts, has been ‘invested’ by the banks and other credit intermediaries into unproductive sectors like real estate and into ‘fictitious capital’ like stocks and bonds. As a result, the stock market has rocketed and house prices are rising at near double-digit rates in the US and other countries. The main reason that the Fed did not go ahead with its plan to’ taper’ its purchases of government bonds and ‘agency’ debt last month as it had promised was the rise in mortgage rates that had taken place since it announced the tapering plan last April (see my post, http://thenextrecession.wordpress.com/2013/09/19/tapering-maybe-not/). The Fed’s policy has meant that the banking sector is not lending on this cheap credit to the real or productive sectors of the economy. As I have argued before, the big corporations already have cash but won’t invest and the small corporation are loaded with debt and cannot borrow. So bank lending in the US is slowing up.

And in Europe, it is contracting at a faster pace!

In this fictitious world, the rich are gaining most as it they that own the stock and are buying up the property – street by street in Detroit or New Orleans). As Saez’s data show, if you include capital gains in income (see figure above), the inequality of income is even greater.

We get the same approach to recovery in the UK where the Conservative coalition has launched a plan to help home buyers by providing government money and guarantees for mortgages with as little as 5% deposit down for residential property worth up to £600k. Speculative investors are piling in to take advantage of this government scheme. In London, house prices are rising at near 10% a year and buy-to-let purchases are booming.

There is confusion about why capitalists are not investing much compared to the huge profits they seem to be stacking up Profits are at a record high in the US and companies are piling up cash mountains. But as I have explained in previous posts, profits are not the same as profitability and cash mountains are not profits but accumulated reserves that must be set against accumulated debt held by companies (see my post, thenextrecession.wordpress.com/2013/09/17/nobodys-investing/).

There is no real drop in overall debt in most capitalist economies. The latest flow of funds data from the US Fed show a fall in the debt of households and, given the sharp rise in property and stock values, a significant rise in the net wealth of households, although as we have seen these gains are sharply concentrated in rich households. But there has been no fall in non-financial corporate debt and of course in government debt. They are both rising, if at a slower pace. Debt deleveraging has not been sufficient to allow companies to start significant investment in new capacity.

Now it is true that sentiment in the capitalist sector about future growth seems to be picking up all round. The purchasing managers indexes (PMIs) that I follow as high frequency indicators of activity in capitalist economies would suggest better times might be ahead.

But real data on economic growth, manufacturing output and investment don’t confirm that. And above all, profitability remains below the peak level before the crisis began in 2007. I have measured the fall in UK profitability in previous posts (http://thenextrecession.wordpress.com/2012/05/01/the-uks-weak-recovery-and-profitability/). I made a stab at updating the position for US profitability from the latest Federal Reserve data. This is what I found.

The graphs shows that the rate of profit for non-financial corporations (a crude proxy of the productive sector of US capitalism) up to the end of 2012, with profits measured against the cost of tangible fixed assets and employee costs and then measured against the additional inclusion of net corporate debt (net worth). It shows that the rate of profit has nearly recovered to its pre-crisis peak in 2006 against tangible assets but when net debt is included, the rate of profit is starting to fall away. US corporations are not going to get back to pre-crisis levels of profitability. There is more work to be done on analysing the data and I shall return to this in future posts, but initial evidence does not suggest that US corporate profitability is on the march upwards.

So the prospects for faster economic growth and a sustained recovery in the major advanced capitalist states remains questionable, at best. And it is a world phenomenon. Take world trade. As former Goldman Sachs chief economist and now FT blogger, Gavyn Davies recently pointed out (http://blogs.ft.com/gavyndavies/2013/09/29/why-world-trade-growth-has-lost-its-mojo/), world trade is in serious doldrums. Normally, world trade growth is about twice the rate of global real GDP. Between 1990-2008, global real GDP rose 3.2% a year, while world trade volume rose at 6% a year. However since 2008, world trade has grown more slowly that real GDP and the share of exports in world GDP has fallen for the first time in 25 years – since the deep recession of the early 1980s. Protectionism – the imposition of tariffs and other restrictions on imports is rising (stalling further globalisation) – and the decline in world trade relative to GDP since 2008 has probably knocked down GDP growth by 1% point. It’s another indicator of the Long Depression that the major economies have entered.

So the risk (however small) that the US Congress could push the US government into a default in its debt only adds to the probability of another global slump down the road.

Posted in capitalism, economics, marxism, Profitability | 7 Comments »

Climate change and capitalism

September 28, 2013

The 5th report by the International Panel for Climate Change (IPCC) was released this weekend (http://www.climatechange2013.org/images/uploads/WGIAR5-SPM_Approved27Sep2013.pdf). The IPCC brings together hundreds of scientists in the field of climate change to cooperate in drawing up a comprehensive analysis of the state of the earth’s climate and forecasts about its future. The IPCC report raised its estimate of the probability that human activities, led by the burning of fossil fuels, are the main cause of global warming since the mid-20th century to “extremely likely”, or at least 95 percent, from “very likely” (90 percent) in its previous report in 2007 and “likely” (66 percent) in 2001.

The IPCC said that short periods are influenced by natural variability and do not, in general, reflect long-term climate trends. So the argument of those whom deny global warming is man-made or is not getting worse cannot rely on the recent slowing of the rise in average atmospheric temperatures in the last 15 years. The IPCC went on to say that temperatures were likely to rise by between 0.3 and 4.8 degrees Celsius (0.5 to 8.6 Fahrenheit) by the late 21st century. Sea levels are likely to rise by between 26 and 82 cm (10 to 32 inches) by the late 21st century, after a 19 cm rise in the 19th century. In the worst case, seas could be 98 cm higher in the year 2100.

The IPCC estimates that a doubling of carbon dioxide concentrations in the atmosphere would lead to a warming of between 1.5 and 4.5 degrees Celsius (2.7 and 8.1F), lowering the bottom of the range from 2.0 degrees (3.6F) estimated in 2007 report. The new range, however, is the same as in other IPCC reports before 2007. It said the earth was set for more heatwaves, floods, droughts and rising sea levels from melting ice sheets that could swamp coasts and low-lying islands as greenhouse gases built up in the atmosphere.

The IPCC admitted that it was still unclear about the causes for the slowdown in climate change in the past 15 years, but insisted that the long-term trends were beyond doubt and that a decade and a half was far too short a period in which to draw any firm conclusions. The temperature rise has slowed from 0.12C per decade since 1951 to 0.05C per decade in the past 15 years – a point seized upon by climate sceptics to discredit climate science. Professor Stocker said: “People always pick 1998 but that was a very special year, because a strong El Niño made it unusually hot, and since then there have been a series of medium-sized volcanic eruptions that have cooled the climate.” Explaining a recent slower pace of warming, the report said the past 15-year period was skewed by the fact that 1998 was an extremely warm year with an El Nino event – a warming of the ocean surface – in the Pacific. It said warming had slowed “in roughly equal measure” because of random variations in the climate and the impact of factors such as volcanic eruptions when ash dims sunshine, and a cyclical decline in the sun’s output.

But the deniers of climate change and manmade global warming remain unconvinced. Professor Judith Curry of the Georgia Institute of Technology in Atlanta responded by saying that “Well, IPCC has thrown down the gauntlet – if the pause continues beyond 15 years (well it already has), they are toast.” But Rajendra Pachauri, chair of the IPCC, retorted that the reduction in warming would have to last far longer - “three or four decades” – to be a sign of a new trend. And the IPCC report predicted that the reduction in warming would not last, saying temperatures from 2016-35 were likely to be 0.3-0.7 degree Celsius (0.5 to 1.3 Fahrenheit) warmer than in 1986-2005.

The sceptics or deniers are a tiny percentage of scientists in the field of climate change. An analysis of abstracts of 11,944 peer-reviewed scientific papers, published between 1991 and 2011 and written by 29,083 authors, concludes that 98.4 per cent of authors who took a position endorsed man-made (anthropogenic) global warming, 1.2 per cent rejected it and 0.4 per cent were uncertain. And more recent studies made after the laborious IPCC compilations (http://www.climatechange2013.org/images/uploads/WGIAR5-SPM_Approved27Sep2013.pdf) confirm that the earth is warming up at a rate that can only be explained by human activity. Indeed, the concentration of carbon dioxide in the atmosphere was reported to have passed 400 parts per million for the first time in 4.5m years.

A study of global temperatures over the past 2,000 years has lent fresh weight to the so-called hockey stick graph which suggests that humans caused global warming. The graph, first published in the late 1990s by US palaeoclimatologist Professor Michael Mann and colleagues, shows temperatures stayed roughly flat for about 900 years, like the handle of the hockey stick laid down, before rising sharply upwards in the 20th century, like the blade, after the industrial revolution prompted a rise in fossil fuel emissions.

Now a paper by 78 researchers from 24 countries, the most comprehensive reconstruction of past temperature changes at the continental scale shows an overall cooling trend across nearly all continents over the past 1,000-2,000 years that was reversed by what the authors described as “distinct warming” at the end of the 19th century. “This pre-industrial cooling trend was likely caused by natural factors that continued to operate through the 20th century, making the 20th century warming more difficult to explain without the likely impact of increased greenhouse gases,” the authors said.“The temperature averaged across the seven continental-scale regions indicates that 1971-2000 was warmer than any time in nearly 1,400 years.”

Now it is possible that all these scientists have it got it wrong and the small minority of deniers are right. Scientists have been wrong in the past. But each new study seems to confirm the majority view. The sceptics says that this is because these ‘global warmers’ are biased and they have turned into an academic ‘industry’ that now has a vested interest delivering these predictions. But if there are vested interests involved, it is easier to look at who is funding the work and publicising of sceptic views. It is the big fossil fuel companies in coal, oil and gas, just as past deniers about the cancerous effects of smoking were financed by big tobacco.

But the vested interests of the fossil fuel companies are winning the battle of opinions, if not the science. Thirty-seven per cent of American voters still believe global warming is a hoax. With growing demand for energy throughout the world, people are inclined to prefer the argument that there is no impending crisis and accept the view that there is no need for action – at least not yet. So the chances are close to zero that the reduction in emissions will be made to keep CO2 concentrations below 450 parts per million and so greatly reduce the risks of a rise in global temperature of more than 2°C. The 25-40 per cent cut in emissions of high-income countries by 2020 needed to put the world on that path is not going to happen.

In my view, the evidence of global warming and its man-made nature is increasingly overwhelming. And the potentially disastrous effects from higher temperatures, rising sea levels and extreme weather formations will be hugely damaging especially to the poorest and most vulnerable people on the planet. But industrialisation and human activity need not produce these effects if human beings organised their activities in a planned way with due regard for the protection of natural resources and the wider impact on the environment and public health. That seems impossible under capitalism, however.

The environmental and ecological impact of the capitalist mode of production was highlighted by Marx and Engels way back in the early part of industrialisation in Europe. As Engels put it, capitalism is production for profit and not human need and so takes no account of the impact on wider society of accumulation for profit: “As individual capitalists are engaged in production and exchange for the sake of the immediate profit, only the nearest, most immediate results must first be taken into account. As long as the individual manufacturer or merchant sells a manufactured or purchased commodity with the usual coveted profit, he is satisfied and does not concern himself with what afterwards becomes of the commodity and its purchasers.” This drive for profit leads to ecological catastrophe: “What cared the Spanish planters in Cuba, who burned down forests on the slopes of the mountains and obtained from the ashes sufficient fertilizer for one generation of very highly profitable coffee trees–what cared they that the heavy tropical rainfall afterwards washed away the unprotected upper stratum of the soil, leaving behind only bare rock!”

Marx summed up the impact of capitalist production on nature: “[A]ll progress in capitalistic agriculture is a progress in the art, not only of robbing the laborer, but of robbing the soil; all progress in increasing the fertility of the soil for a given time, is a progress towards ruining the lasting sources of that fertility…Capitalist production, therefore, develops technology, and the combining together of various processes into a social whole, only by sapping the original sources of all wealth–the soil and the laborer.”

And there is modern evidence that climate change and global warming is the result of capitalist accumulation. Jose Tapia Granados and Oscar Carpintero (http://deepblue.lib.umich.edu/bitstream/handle/2027.42/93589/Tapia&Carpintero_Dynamics_of_climate_change.pdf?sequence=1) have shown that there is a pro-cyclical correlation between the rate of increase of atmospheric CO2 and the rate of growth of the global economy, providing strong evidence that the world economy is linked with the build-up of the greenhouse effect and, therefore, with the process of global warming.

In another paper, Tapia Granados uses multivariate analysis of the influence of the world economy, volcanic activity and ENSO activity on CO2 levels to show that the annual increase in atmospheric CO2 is significantly linked to the growth of the global economy. Years of above-trend GDP growth are years of greater rise in CO2 concentrations, and similarly, years of below-trend growth are years of smaller rise in CO2 concentrations. So global emissions of CO2 have increased at rates strongly correlated with the absolute growth of the global economy.

This might well provide part of the explanation of the slowdown in global warming from 1998, as world economic growth slowed since then. A major drop in the growth of estimated emissions occurred in 2009 as a consequence of the Great Recession. When capitalist production stops, so does global warming. Of course, that does not end the story. As Tapia Granados goes onto to say: “However, even in 2009 when the global economy contracted 2.25%, global emissions did not decrease, they just ceased growing to start growing again next year when the world economy somewhat recovered. This shows how dependent on fossil fuels the world economy has become in recent years. In earlier recessions of the global economy—in the mid-1970, early-1980s, early-1990s and late-1990s—emissions not only decreased in many countries, as we have shown, but also worldwide. The notion that economic growth will reduce the carbon intensity of the world economy (the ratio of global emissions to WGDP) is inconsistent with the fact that the carbon intensity of the global economy has increased in recent years. In 2010, after the Great Recession, WGDP grew 5.0%, but emissions grew faster, 5.9%. Furthermore, the average growth of global CO2 emissions was 3.1% per year in 2000-2011, while it had been 1.0% per year in 1990–2000, and 2.0% per year in 1980-1990″.

Most of the rise in emissions comes from emerging economies where economic growth has been fastest. China was responsible for 24 per cent of the global total emissions in 2009, against 17 per cent for the US and 8 per cent for the eurozone. But each Chinese person emits only a third as much as an American and less than four-fifths of a resident of the eurozone. China is a relatively wasteful emerging economy, in terms of its emissions per unit of output. But it still emits less per head than the high-income countries because its people remain relatively poor. As emerging countries develop, emissions per person will tend to rise towards levels in high-income countries, raising the global average. This is why global emissions per person rose by 16 per cent between 2000 and 2009, which was a period of fast growth in emerging economies.

European Climate Commissioner Connie Hedegaard said: “If your doctor was 95 percent sure you had a serious disease, you would immediately start looking for the cure,”. But what are the solutions? The sceptics say nothing should be done to weaken the drive to get more energy ‘for the poor’ – but they really mean is not to restrict the profits of the fossil fuel companies. So the leaders of this capitalist world will not adopt energy policies that keep emissions below the “safe” level of 450 parts per million. There is an urgent search for new sources of energy supply that are not only cleaner but also cheaper. But capitalism has failed to deliver. Investment in renewables and other low-carbon sources has just not been enough and the technical advantages of such sources disappointing. Offshore wind is a technology that is just not profitable. Nuclear, as shown by the new stations being built in Finland and at Flamanville in France, is getting more rather than less expensive.

So what about changing behaviour? The chairman of the IPCC reckoned that the only way to reduce large-scale fossil-fuel use is to ‘price’ carbon emissions: “Unless a price could be put on carbon emissions that was high enough to force power companies and manufacturers to reduce their fossil-fuel use, there seemed to be little chance of avoiding hugely damaging temperature increases.” But is the neoclassical economics solution of pricing going to work to change the behaviour of energy and manufacturing companies? And what governments will ‘interfere’ with the market for energy to do so? The EU carbon emissions permits scheme designed to drive up carbon pricing has failed miserably.

An alternative solution from some mainstream economists are carbon taxes. Taxing bad things is like cigarettes may have some effect, but high taxes on tobacco also hit the incomes of the poorest. What is really needed is proper planning of available resources globally, plus a drive, through public investment, to develop new technologies that could work (like carbon capture, transport not based on fossil fuels, produced locally with low carbon footprints etc) – and, of course, a shift out of fossil fuels into renewables. Also, it is not just a problem of carbon and other gas emissions, but of cleaning up the environment that is already damaged. All these tasks require public control and ownership of the energy and transport industries and public investment in the environment for the public good.

There is no sign of that. Next year, we get a report from the IPCC on the likely future damage from global warming in the 21st century. Expect it to tell us that disasters are not only more imminent and but with us already in the form of floods, tsunamis, droughts and other ‘natural’ nightmares.

Posted in capitalism, economics, marxism | 5 Comments »

German capitalism – a success story?

September 22, 2013

The German election has produced a victory for right-wing German Chancellor Mrs Angela Merkel, the best result for her party since 1990. However, the existing coalition of Merkel’s Christian Democrat Union (CDU), the Bavarian Christian Social Union (CSU) and the small Free Democrats (FDP) cannot continue because the FDP failed to make the 5% voting share threshold to enter the German parliament (Bundestag). The FDP vote is hugely down from 14.6% in 2009. Most of those lost votes went to the CDU. So even though Merkel’s CDU-CSU bloc has polled the most at about 42.5%, up from 34% in 2009, it will have to try to form a grand coalition with the opposition Social Democrats (SPD), which polled 26%, up a bit from the all-time post-war low of 23% that the SPD got in 2009. The Greens polled badly at 8% (down from 10.7% in 2009) and were passed by the Left Bloc (die Linke) which polled 8.5%. So, although old coalition polled 47% (compared to 48% in 2009) over the ‘left’ (SPD, Greens and die Linke) with 43% (down from 46% in 2009), Mrs Merkel must find new coalition partners.

Germany is the largest and most important capitalist economy in Europe, if not yet the most important European imperialist power (there it vies with the UK and France). It is the main creditor and funder of the Eurozone member states. So what does this election campaign and result tell us about the future of German capitalism and the strategy being adopted by its political leaders?

On the surface, all looks good for the economic health of Germany as there appears to be very little difference on policy between the CDU and the SPD. You would find it hard to push a sheet of paper between them on major policy issues for Germany. So it seems likely that a Grand Coalition between the CDU-CSU and SPD will be formed with two-thirds of the seats in parliament and German capitalism looks set fair for the status quo for another four years.

However that is too simple a calculation. There are new economic and political pressures for German capitalism that will make it more unstable than before. The first thing is that there has been a long-term trend in German (and other Euro) politics: namely, the fragmentation of electoral votes from two or three parties into several. That’s a recipe for instability and paralysis, as we have seen in Greece, Italy, Belgium, the Netherlands etc. This election has slightly reversed that trend with the two main parties polling about 56% compared to 50% last time, but that is no better than in 2005. Some 16% of votes will not be represented in parliament due to the 5% hurdle — more than ever before. The turnout may be slightly better than in the recession year 2009 at 73%, but it’s well down from the 1990s.

And then there is the joker in the pack: the eurosceptic Alternative fur Deutschland party (AfD), a party made up of academics and other petty-bourgeois elements, strongly opposed to ‘handouts’ to the ‘free-spending’ peripheral Euro states and demanding a return to the D-mark. The AfD polled 4.9%, just not quite enough to gain representation. But by polling close to the 5% threshold, that will stir up new currents beneath the surface of serenity in German politics, especially leading up to the Euro elections next May.

Despite the Euro debt crisis and the ‘contingent’ costs to the pockets of the German taxpayers from the bailout payments to the distressed Eurozone states, the German ruling class is still convinced that the euro is worth having over the D-mark. That is because German capitalism has gained most from the trade and capital integration of the single currency. The best indicator of that is to look at what has happened to German capital’s rate of profit. The European Commission AMECO database provides a measure of the net return on capital invested for many countries including Germany. There are several technical issues with this measure, but I think it gives a relatively good guide to trends (partly because it is supported by alternative data from the Extended Penn World Tables that I have used before to measure country rates of profit).

The AMECO measure shows that Germany’s rate of profit fell consistently from the early 1960s to the early 1980s slump (down 30%) – much like the rest of the major capitalist economies in that period. Then there was a recovery (some 33% up – using Penn measures) with a short fall during the recession of the early 1990s and then stagnation during the 1990s as West Germany digested the integration of East Germany into its capitalist economy. The real take-off in German profitability began with the formation of the Eurozone in 1999, generating two-thirds of all the rise from the early 1980s to 2007.

German capitalism benefited hugely from expanding into the Eurozone with goods exports and capital investment until the Great Recession hit in 2008, while other Euro partners lost ground.

Once the east was integrated, Germany’s manufacturing export base grew just as much as the new force in world manufacturing, China, did.

But the fall in profitability during the Great Recession was considerable and AMECO forecasts do not suggest a significant recovery in profitability since. Indeed profitability will be below the level of 2005 from now on. So things may be more difficult from hereon.

It is interesting to consider the reason for the rise in the German rate of profit using Marxist categories. The rise in the rate of profit from the early 1980s to 2007 can be broken down into a rise in the rate of surplus value of 38%, but only a small rise of 5% in the organic composition of capital. This is consistent with Marx’s law of profitability in that the rate of profit rises when the increase in the rate of surplus value outstrips the increase in the organic composition of capital. It seems that the ability to extract more surplus value out of the German working class while keeping the cost of constant capital from rising much was the story of German capitalism. In other words, constant capital did not rise due to innovations and investment in new technology while surplus value did, due to the expansion of the workforce using imported labour from Turkey and elsewhere at first – and then expansion directly into Europe later.

The real jump in the rate of profit began with the start of the Eurozone. In this period, the organic composition of capital was flat while the rate of surplus value rose 17%. German capital was able to exploit cheap labour within EMU but also in Eastern Europe to keep costs down. The export of plant and capital to Spain, Poland, Italy, Greece, Hungary etc (without obstacle and in one currency) allowed German industry to dominate Europe and even parts of the rest of the world.

Most important, the fear of the export of jobs to other parts of Europe enabled German capitalists to impose significant curbs on the ability of German labour to raise their wages and conditions. The large rise in the German rate of profit was accompanied by a sharp increase in the rate of surplus value or exploitation, particularly from 2003 onwards.

What happened from 2003 to enable German capitalism to exploit its workers so much more? In 2003-2005 the SPD-led government implemented a number of wide-ranging labour market ‘reforms’, the so-called Hartz reforms. The first three parts of the reform package, Hartz I-III, were mainly concerned with creating new types of employment opportunities (Hartz I), introducing additional wage subsidies (Hartz II), and restructuring the Federal Employment Agency (Hartz III). The final part, Hartz IV, was implemented in 2005 and resulted in a significant cut in the unemployment benefits for the long-term unemployed. Between 2005 and 2008 the unemployment rate fell from almost 11% to 7.5%, barely increased during the Great Recession and then continued its downward trend reaching 5.5% at the end of 2012, although it is still higher than in the golden age of expansion in the 1960s.

German unemployment rate (%)

A wonderful success then? Not for labour. About one quarter of the German workforce now receive a “low income” wage, using a common definition of one that is less than two-thirds of the median, which is a higher proportion than all 17 European countries, except Lithuania. A recent Institute for Employment Research (IAB) study found wage inequality in Germany has increased since the 1990s, particularly at the bottom end of the income spectrum. The number of temporary workers in Germany has almost trebled over the past 10 years to about 822,000, according to the Federal Employment Agency. This is something we have seen across Europe – the dual labour system in Spain being the prime example.

So the reduced share of unemployed in the German workforce was achieved at the expense of the real incomes of those in work. Fear of low benefits if you became unemployed, along with the threat of moving businesses abroad into the rest of the Eurozone or Eastern Europe, combined to force German workers to accept very low wage increases while German capitalists reaped big profit expansion. German real wages fell during the Eurozone era and are now below the level of 1999, while German real GDP per capita has risen nearly 30%.

No wonder German capitalism has been so ‘competitive’ in European and world markets. The Hartz reforms may be regarded as a success by German capital and mainstream economists. But they have always been very unpopular among the German public. In this election, no major party has dared to run on a platform that openly endorses the Hartz reforms. Indeed, several parties tried to win votes by promising to roll back the Hartz reforms, including the SPD which initiated the reforms in 2003-2005 under Chancellor Gerhard Schroeder.

Of course, this is not to deny that the German working class is better off than its peers in the rest of the Eurozone and this explains why German voters who have voted, did so, by and large, for parties that wish to preserve the status quo.

The German ruling class and the leadership of the two main parties are generally agreed that the Eurozone must be kept intact as it is, despite the cost of the debt crises in the peripheral EMU states. After all, German capitalism has gained hugely from the Eurozone, as I have shown. Greece should not probably have been allowed in, as Merkel and others have said on several occasions, but now it is in, it is too risky to kick Greece out as it sets a dangerous precedent. And the cost of yet another Greek bailout in the next year is small.

But there are are some differences between the CDU and the SPD over the Eurozone. The CDU does not want any integration of debt and debt payments within the Eurozone through things like a euro redemption fund or Eurozone bonds, while the SPD does. The CDU does not want German capital taking on any contingent liability of the future or existing debt of the likes of Italy or Spain, even if it never happens that they cannot service it. Even so, a Grand Coalition will agree eventually to ease the terms of repayment of the bailout recipients – indeed it will probably put repayment back for likes of Greece to the indefinite future. Remember that the US allowed the UK to repay what they owed the US after the second world war for ages – it was only fully paid off in 2005!

However, the Grand Coalition will be set with difficulties from its beginning. It will be under the pressure from the right, the eurosceptics and the small business FDP to refuse any further bailouts and apply severe austerity to the peripheral EMU states and France. The SPD will be under pressure from the left to break with the coalition to reverse the Hartz reforms, spend more and avoid nuclear energy or leave the coalition.

German capitalism may have been a ‘success story’ over the last 25 years since the integration of East Germany. But its long-term prospects do not look so good from here. It has a declining and ageing workforce (this will be the last election in which the majority of voters were under the age of 55) and less areas for exploitation of new labour outside Germany, while competition from the likes of China and Asia will mount. And the costs of maintaining the Eurozone will grow. All these are issues for the strategists of German capital now that there will be a new coalition in power.

The German electorate may have voted for the status quo again in this election, but the relatively low turnout and the low share of the vote for the main parties show that there is growing disillusionment with the ‘success’ of German capitalism that has given just a few crumbs for the working class off the table of bounty for German capital income. And the burden on the working class in paying for the further ambitions of German capitalism is set to rise.

Posted in capitalism, economics, Profitability | 10 Comments »

Tapering? – maybe not

September 19, 2013

Stock markets rocketed up and the dollar fell on the news that the US Federal Reserve had decided not to reduce its planned monthly purchases of US government and mortgage bonds after all. The prices of shares and commodities shot up because investors concluded that the US central bank was going to continue a while longer with its huge injections of ‘liquidity’ (dollars) into financial markets. They had been told by the Fed in June that it was getting ready to cut back on its purchases of bonds starting this month. But the Fed decided to wait.

Part of the reason for the Fed’s delay on beginning the process of ‘exiting’ from printing money was that the bank was still not convinced that the US economy was growing at a sufficiently fast and sustainable pace to get unemployment down and to expand without the help of liquidity injections. Indeed, the Fed reduced its forecasts for US real GDP growth from its predictions in June from a minimum of 2.3% for 2013 to 2% and for next year from 3% to 2.9%.

Since it began its ‘quantitative easing’ programmes back 2010, the Fed has purchased nearly $3trn in government and mortgage bonds, or some 20% of US GDP – a huge injection of cash into financial markets. The Fed was not proposing to stop all further purchases of bonds but merely slow the rate of purchase by a little bit. Yet its decision just to hold off for the moment produced a huge boost to financial asset prices.

This shows that what is pushing stock prices to new highs and fuelling optimism about the world economy is mainly fictitious, based on central banks (the Fed, the Bank of England, the Bank of Japan and others) printing money. This cash flows into the banks and financial institutions, but goes no further. It does not get into the ‘real economy’, the productive sectors. The economics of ‘quantitative easing’, ‘unconventional’ monetary stimulus, has been a failure in kick-starting the world economy

(see my posts, Down the Jackson Hole, http://thenextrecession.wordpress.com/2013/08/28/down-in-the-jackson-hole/

and The failure of QE, http://thenextrecession.wordpress.com/2013/06/26/the-failure-of-qe-2/ .

QE has just fuelled a new property and financial market boom that last time eventually burst into collapse. The productive sectors of the capitalist economies remain in the doldrums. It suggests that when the Fed and other central banks do pull the plug, the world economy could slip back into a new slump.

Posted in capitalism, economics | 52 Comments »

Nobody’s investing

September 17, 2013

ven worse for our long-run health, the UK is still failing to invest. A devastating calculation from The Economist showed that the UK was ranked 159th globally in 2012 when comparing investment as a share of GDP – truly appalling. We were beaten by Paraguay but just managed to do better than Trinidad and Tobago, Sierra Leone, Cote d’Ivoire and Greece. Not all capital expenditure is good: companies can spend money on projects that turn out to be duds, misled by artificially low interest rates. Governments can allocate cash to white elephants, such as HS2 that cost more in foregone resources than generate in extra GDP. But sensible investment projects are the only way to generate sustainable growth. A country’s GDP depends on how many hours are worked, and the productivity of the workforce – and that, in turn, is directly linked to human and physical capital.

There are several reasons for this dearth of investment. Large British firms are flush with cash but feel that they cannot make suitable, tax, inflation and risk adjusted returns from spending more on factories and computers. This is bad news for our future productivity performance.

- See more at: http://www.cityam.com/article/we-must-produce-invest-and-export-more-and-consume-less#sthash.72b8CYqe.dpuf

In previous posts (http://thenextrecession.wordpress.com/2013/02/10/why-is-there-a-long-depression/) I have pointed out the supposed conundrum between profits and investment present in many countries – namely profits are up, but investment is not matching the rise in profits. According to GMO, the financial asset manager, profits and overall net investment in the US tracked each other closely until the late 1980s, with both about 9% of GDP. But after the recession, from 2009, it went haywire. US pretax corporate profits are now at record highs – more than 12% of GDP – while net investment (that’s investment after replacing worn out old capital) is barely 4%.

US corporate profits recovered dramatically from the trough at the end of 2008. They surpassed their previous peak in 2006 by early 2010. But most of the recovery in profits since the end of 2008 has been hoarded and not spent on new investment. Undistributed profits have accumulated to $744bn from just $19bn at the end of 2008! Profits are up around $1trn since then, so only 30% of the increase in profits has been spent on new investment. This explains why the economic recovery has been so weak, with the US economy growing only barely at 2% a year. It is exactly the same story in the UK. According to Treasury Strategies, a body that looks at these things, corporate cash in the US was 10% of GDP in 2000 and is now 15%, while in the Eurozone the corporate cash pile has risen from 15% to 21% and in the UK from 26% in 2000 to 50% of GDP in 2012 (http://treasurystrategies.com/news)!

Companies are stockpiling cash rather that investing. Take the latest data from the UK. The amount of cash held on the balance sheets of the UK’s largest companies by market value has reached an all-time high to stand at £166bn, according to Capita Asset Services. Gross cash balances for FTSE 100 companies have risen by one-third from £123.8bn since 2008. Yet British capitalist companies are still failing to invest that cash. The Economist showed that the UK was ranked 159th globally in 2012 when comparing investment as a share of GDP, behind by Paraguay.

But, as Marxist economist Mick Brooks explains (in an email to me – see http://thenextrecession.wordpress.com/2012/08/20/capitalist-crisis-theory-and-practice/), cash reserves are a sum, a stock, accumulated over years. They are not an indication of current profitability. The rate of profit is a flow measured over time. So we need to look at the net asset position of companies – not just their pile of cash and other assets but also their underlying debts and balance the two off against each other. Companies can pay for investment in two ways; by directly investing their own profits or by borrowing and going into debt. In recent years, there has been a tendency for corporations to become more reliant on debt finance. The reason why the ‘credit crunch’ (when bank lending suddenly stopped) had such wide and rapid repercussions on the ‘real economy’ was because firms were head over heels in debt.

US companies are reputed to have a cash mountain of $2trn with another $2trn offshore, according to Edward Luce (Stuck in the mud, Financial Times 13.05.13). This is for both financial and nonfinancial corporations. But, to put this in perspective, America’s GDP is around $15trn. And the corporate debt for nonfinancial corporations alone in the US is 72% of GDP. So cash assets are small compared to corporate debt. Perhaps what is more relevant to our enquiry is not the total indebtedness of a country, or of its nonfinancial firms, but how the total debts of nonfinancial firms stack up against their assets.

However, most mainstream explanations of the conundrum do not draw upon the relationship between profitability, debt and investment. Paul Krugman suggests that investment is lagging profits because a general increase in monopoly power. “The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment but instead reflect the value of market dominance,” he wrote. But while more monopolies might explain higher profits with less investment,there is little evidence that monopoly power has risen in the last few years. After all, capital expenditures are low in competitive industries as well.

Another explanation is the post-Keynesian one: namely that high profits are mirrored in reverse by a fall in real incomes and in labour’s share of total national income. Stewart Lansley argues that the sustained squeeze on wages in recent years “sucked out demand”, encouraged debt-fuelled consumption and raised economic risk. (http://www.newleftproject.org/index.php/site/article_comments/wage_led_growth_is_an_economic_imperative).

Austrian school economist Benjamin Higgins reckons that businesses won’t invest because they may be more or less “uncertain about the regime,” by which he means, they are worried that investors’ private property rights in their capital and the income it yields will be attenuated further by government action: regulation, taxation and other controls. In a way, this explanation is similar to that of Michal Kalecki, at the other end of the spectrum of political economy. Kalecki reckoned that full employment and economic recovery under capitalism could not be achieved because capitalists feared government stimulus policies to boost demand through spending and investment would encroach on capitalist power (see his famous essay, The political aspects of full employment (http://courses.umass.edu/econ797a-rpollin/Kalecki–Political%20Aspects%20of%20Full%20Employment.pdf). Capitalists would (irrationally) prefer no recovery to one led by government.

But there is no need for the ‘fear of government’ argument, rational or irrational. It’s not fear of government that stops investment picking up, but the objective reality of low profitability. Cash flow and profits may be up for larger companies, but the rate of profit has not recovered in many capitalist economies, like the UK and Europe.

This argument is backed up by several studies. JP Morgan economists recently made a study of global corporate profitability. They concluded that what they call “profit margins” have fallen in Europe and in emerging economies over the past two years. They also concluded that US profitability has stagnated over the last six quarters, on their measure. JP Morgan’s measure of profitability is not a Marxist one and it is not even a measure of corporate profits against corporate capital. But even so, it does produce a global measure of corporate profitability that shows a fall from near 9% before the Great Recession down to under 4% in the trough of 2009 before recovering to 8% in 2011. But in 2012, it declined again to 7%, 13% below its peak in February 2008 when the Great Recession began. This decline in global profitability was mainly driven by Europe and by a fall in emerging economies. Similarly, my own analysis of profitability as measured by the EU AMECO net rate of return on capital and US data, indexed from 2005 shows the same thing (see my post, http://thenextrecession.wordpress.com/2013/02/25/deleveraging-and-profitability-again/).

The EU Commission has also commented on corporate profitability and investment in Europe. In its Winter Economic Forecast report (2012), it noted that non-residential investment (that excludes households buying houses) as a share of GDP “stands at its lowest level since the mid-1990s”. And the main reason: “a reduced level of profitability”. The report makes the key point that “measures of corporate profits tend to be closely correlated with investment growth” and only companies that don’t need to borrow and are cash-rich can invest – and even they are reluctant. The Commission found that Europe’s profitability “has stayed below pre-crisis levels”.

The EU report also found a “strong negative correlation between changes in investment since the onset of the crisis and pre-crisis debt accumulation, suggesting that the build-up of deleveraging pressures has been an important factor behind investment weakness”. The Commission reckoned that Eurozone corporations must deleverage further by an amount equivalent to 12% of GDP and that such an adjustment spread over five years would reduce corporate investment by a cumulative 1.6% of GDP. Given that gross non-residential investment to GDP is at a low of 12% right now, that’s a sizeable hit to investment growth.

According the Bank for International Settlements (BIS), in its latest annual report of June 2013, the level of debt in the world economy has not fallen much despite the Great Recession. Indeed, the average non-financial debt to GDP ratio for the major developed markets is currently 312% (June 2013) compared to 280% in March 2007. While the household debt ratio has declined from 97% of GDP to 88% now, non-financial corporate debt has risen from 101% to 105% now and government debt has rocketed from 83% to 120%.

The BIS also found that of 33 advanced and emerging economies, 27 have non-financial debt to GDP levels above 130%. Two of those have ratios above 400%, four between 300-400%. Only six have ratios below 130% and only three below 100% of GDP – namely Turkey, Mexico and Indonesia. Of the 33 economies, 18 have rising debt ratios, 11 are flat and only four have falling debt ratios. Of those four, three are in IMF or Troika bailout programmes (Greece, Ireland and Hungary). Only Norway has reduced its overall non-financial debt ratio ‘voluntarily’. Only Mexico and Thailand have reduced their overall debt levels in the last 15 years. Household debt ratios have fallen in some developed markets, including the UK and the US, as well as some peripheral EMU countries. But 27 economies have experienced a rise in private debt-to-GDP ratios since the global financial crisis.

Large multinationals have preferred to invest in emerging economies rather than in the domestic economy. And cash-rich companies have taken advantage of credit-fuelled (QE) stock markets to buy back their own shares rather than invest and boost dividends. In contrast, small businesses cannot invest because they cannot borrow on current terms and many are zombie companies just able to pay the interest on their debt. They have been hoarding labour rather than invest in new equipment and labour saving systems. Overall corporate debt levels just remain too high to allow new investment – paying down debt or holding cash is safer.

The conundrum of rising profits and stagnant investment in productive assets shows that the “recovery” is weak and partly ‘artificial’. It depends much on central bank liquidity injections, which find their way into the financial sector, not the real economy. Until there is a sufficient rise in profitability in the productive sectors and fall in net debt for corporations, private sector investment will continue to fall behind profits and cash piles will rise further and companies hoard rather than invest.

Posted in capitalism, economics, Profitability | 39 Comments »

UK underemployment and economic recovery

September 13, 2013

In my last post,
(http://thenextrecession.wordpress.com/2013/09/07/autumn-pick-up/), I pointed out that US employment growth was still pretty weak and was concentrated in low-paid sectors and part-time work or casual (so-called zero hours) contracts., while long-term unemployment remained at record highs. This week, the UK unemployment figures for August were released and were heralded by the Conservative-led coalition government as yet another sign that the UK economy was now starting to establish a significant and sustained recovery. UK unemployment is now below 2.5 million and the headline unemployment rate fell to 7.7%, for the first time below the level at which the coalition took office in 2010. Employment is at record levels, although this is mainly due to an increasing workforce (immigration being a big factor here).

But beneath these headline figures, the story is not so rosy (see Russell Lynch, Evening Standard, 12 September). If you add part-time workers who want full-time jobs plus those in temporary positions who want permanent work to the officially unemployed, the UK, as well as the number of economically inactive people who say they want work but are not seeking it (if they were, they would be classed as unemployed), then the UK has an under-employment rate of 21%, slightly higher than the 20.8% seen when the coalition government took office and well above the 15.8% seen at the start of the recession in 2008. The number of part-time workers unable to find full-time work is up nearly 400,000 in the past three years. The number of temporary workers looking for permanent roles is up 100,000. And, as in the US, there are huge numbers of long-term unemployed. There are 891,000 out of work for 12 months or more between May and July, 36.1% of total unemployed, close to its highest level since 1997. And youth unemployment has risen by more than 30,000 to 960,000 while long-term youth employment is up by a third to 277,000.

As a result of this underemployment, average real wages (after inflation) in the UK have taken the biggest plunge since the 1920s, according to the Bank of England.

So the statements of Osborne that the economy has moved “out of intensive care” and is “turning the corner” are really so much poppycock. Take the latest data on UK industrial output. It was completely flat in July, while as exports to non-EU countries (the key area for export growth) fell by over 16%, the largest monthly decline since January 2009. Nevertheless, Osborne now claims that the government’s apparent sticking to fiscal austerity and government spending cuts despite opposition from Keynesians and others has proved to be right. “In my view the last few months have decisively ended this controversy. Those in favour of a Plan B have lost the argument,” he said.“The pace of fiscal consolidation has not changed, government spending cuts have continued as planned and yet growth has accelerated and many of the leading economic indicators show activity rising faster than at any time since the 1990s.”

Osborne refers to ‘economic indicators’ of business opinion, like PMIs (see my last post), but not to actual activity, He can hardly crow that a pick-up in real GDP of just 0.6% last quarter constitutes a boom and a vindication of austerity. Indeed, as Michael Burke points out in an excellent post (http://socialisteconomicbulletin.blogspot.co.uk/2013/09/did-austerity-lead-to-recovery-no-it.html), the UK economy has expanded by just 1.8% in the three years of the government’s austerity programme, less than one-quarter of previous trend growth. I would add, that even if we take out the fall in North Sea oil and gas production, the average annual growth rate in the UK over the past four years has been just 1.3%. That compares with the credit and property-fuelled annual growth of 3.3% in the decade before the financial crash and a longer-term trend growth rate of around 2.5%. The overall UK economy is still 3.3% below its 2008 peak, some five years on.

Ironically, as Burke exposes, real GDP growth to date is entirely a function of increased government spending! Total government current spending barely changed from the time the coalition took office to the end of 2011. However, from the 4^th quarter of 2011 to the 2^nd quarter of 2013, government current spending rose by an annualised £15.1bn. while the rise in aggregate GDP over the same period was just £14.8bn. So the rise in government spending accounted for the entire expansion over the same period (as investment and net exports contracted).

As I (and Michael Burke) have argued before
(http://thenextrecession.wordpress.com/2013/07/27/uk-returns-to-growth-but-what-about-investment/), the slump of 2008-9 was driven by a collapse in capitalist investment and until there are signs that this is rising sufficiently to contribute to GDP growth, capitalism in the US and the UK cannot really be considered to moving back to growth rates seen before the Great Recession. And that is not happening. Even worse, as Burke points out, what the UK government (like the Obama administration) has slashed is public sector investment, which just compounds the collapse in capitalist sector.

In my view, investment is driven by profits, and in particular, the profitability of new investment in UK industry and services, as opposed to buying up financial assets or investing abroad. And here lies a conundrum: if profits are up so much (at least in the US), why is investment not rising as well? It is a question that I have dealt with before in this blog. I shall return to it in the next post.

Posted in capitalism, economics, Profitability | 10 Comments »

Autumn pick-up?

September 7, 2013

The US employment figures for August that came out on Friday put a bit of a dampener on the growing euphoria in the business media that economic recovery is now sustained, not only in the US, but also in Europe and Japan – after over four years since the trough of the Great Recession in mid-2009. Unfortunately, for that view, the US employment rose just 169k in August, with July being revised down to 104k and June down to 174k – three weak numbers in a row. Against the hopes of 200k+ each month, the last three months are averaging just 148k. That’s nowhere near enough to ensure a steady fall in the unemployment rate back to so-called full employment (which now means about a 5% unemployment rate in the US), let alone to the target that the Federal Reserve has set to start ‘normalising’ monetary policy (i.e ending QE and beginning to raise interest rates). At this rate, the Hamilton Project at the Brookings Institution’s jobs gap calculator reports that the US jobs gap won’t close until after 2025. That’s over 12 years from now!

Sure, the official unemployment rate fell to 7.3% from 7.4% in the previous month, the lowest since December 2008. But this was only because fewer Americans are seeking work as they have given up looking. The labour force participation rate fell to a 35-year low (graph). And the employment rate — the share of working-age population with any job — also fell. If it were still at January 2009 levels, the unemployment rate would be 10.8%. As RDQ Economics cautions, “This continued fall in participation should give pause to those who argue that the decline is cyclical and will be reversed.” The Economic Policy Institute points out that there are “3.8 million missing workers … workers who have dropped out of, or never entered, the labor force due to weak job opportunities in the Great Recession and its aftermath.” If they were in the labour force looking for work, the US unemployment rate would be 9.5% instead of 7.3%.

Moreover, the median unemployment duration actually increased to 16.4 weeks from 15.7 weeks in July, while the share of the unemployed without work for 27 weeks and longer jumped to 37.9% from 37.0%. So there are 3 million more long-term unemployed Americans today — four years after the end of the recession — than before the recession. And here is the most amazing statistic: so far this year there have been 848,000 new jobs. But of those, 813,000 are part time jobs – an incredible 96% of the jobs added this year were part-time jobs. There is an increasing lost generation of Americans who may never have a proper job that brings in a living wage (I’ll return to this theme in a future post).

It’s true, however, that employment is a lagging indicator – it looks backward to what has happened and not forward to what will happen. And the consensus is that faster growth is on its way, and along with it, a rise in real incomes and employment. This optimism is based on the significant rises in the Purchasing Managers Indexes (PMIs) around the globe in the last few months. The PMIs, as I have pointed out before in this blog, are the best high-frequency measures of the level of activity in capitalist economies that we have. They are really measures of what company managers think about the state of their industries and markets. They are not measures of actual sales or production. Thus they show what might happen in the future. I have developed a composite indicator for the US PMI (manufacturing and services combined). For the first time, in August, that indicator (data from the ISM) went close to what I consider is boom territory (graph below). So perhaps the US economy is finally on its way up?

Similarly, across the globe, PMIs rose in August. But let’s be careful. This does not mean every region of capitalism is expanding. It means that each region is now doing better (or less worse than before), according to the PMI indicators.

Also, the OECD announced its latest update for forecast real GDP growth in the advanced economies of the OECD, revising up their measures slightly.

The OECD reckoned that growth was “proceeding at encouraging rates in North America, Japan and the UK” and the Eurozone was “out of recession, although output remains weak in a number of economies”. But, although some advanced economies looked like growing faster in the rest of this year than previously thought, some larger emerging economies were slowing down: “the numbers for advanced economies are a tad higher, and for France and the UK more than a tad higher”, but the average rate of growth in emerging economies would be about 1% point a year lower than in the recent past. And remember what the OECD is talking about is growth of about 2% a year or less for the major economies (see graph above), hardly a ringing endorsement of economic strength. For 2013, the OECD now thinks US growth will be 1.7% with growth rates of 1.6% in Japan, 0.7% in Germany, 0.3% in France, -1.8% in Italy and 1.5% in the UK. Wow!

The IMF has also begun to raise its forecasts a little for the advanced capitalist economies. But the IMF has dropped its rosy view of the emerging economies which it had considered were the ‘dynamic engine of the world economy’, instead noting that “momentum is projected to come mainly from advanced economies, where output is expected to accelerate”. It is now admitting that the faster growth in economies like Brazil, India, China etc was partly a product of a flow of cheap credit (fictitious capital as Marx called it) into the emerging economies. The huge expansion of credit generated by central banks printing money had not gone into new investment in the productive sectors of the advanced economies, but instead into buying financial assets (bonds and equities) or into the coffers of the financial sectors of the emerging economies, where it has fuelled a property and stock market boom.

But now the PMI indexes for key emerging economies don’t look so rosy – with slowdowns reported in India, Indonesia and Korea, while greater China is steady.

So the IMF is now worried that some of these emerging economies like India or Brazil could have a credit crunch just as the advanced economies did in 2007 and is urging the upcoming Group of 20 summit in St Petersburg this week “to take action to mitigate risks from weakness in poorer countries.” Ironically, the IMF, having swung towards ‘Keynesianism’ last April, urging governments to go easy on austerity so that economies could recover, is now swinging back. The IMF now recommends that countries follow the British policy of “achieving structural fiscal targets and allowing automatic stabilisers to play freely”. The IMF, under its semi-Keynesian chief economist Olivier Blanchard, is all over the place.Behind the IMF’s new backing for the success of the UK government’s austerity measures is the supposed excitement that the UK, far from slipping into a ‘triple-dip’ recession (that’s recession in 2009, 2011 and 2013), is now likely to grow faster than many other advanced economies – before austerity was a bad idea, now it is a success!

This optimism about the UK comes from a batch of recent data that suggests an improving economy (from a disastrously low base). The services PMI has rocketed up.

According to the NIESR economic think-tank, the UK economy is now growing at its fastest pace in three years. That sounds good, but what it means is real annual GDP growth of just 0.9% in the last three months to August, up from 0.7% a year to July. Wow! The UK economy is still 2.7% smaller than it was at its last peak in January 2008, in the slowest and weakest recovery from a recession in the last 100 years – even weaker than in the 1930s. It is now 66 months since the start of the Great Recession and the UK economy has still not got back to its peak (black line in graph below), while that was achieved in 48 months in the 1930s (blue line).

The fact that optimism about UK recovery is based on its services sector is no accident. What has been recovering is the property market. Residential property prices are rising at over 10% a year in London and around 3-5% a year elsewhere. It is the same phenomenon in the US, where home prices are rising at over 12% a year. The boom in these economies is concentrated in the unproductive sectors of finance, property and the stock market, not in investment and employment in manufacturing, industry and exports. Indeed, UK industrial output was completely flat in July And exports to non-EU countries fell by over 16% in July, the largest monthly decline since January 2009. As much of the UK’s ‘better’ real GDP growth in the last quarter came from exports this does not suggest that this current quarter will deliver much faster growth.

Much of the recent optimism about sustained recovery is the view that finally the Eurozone, with all its distressed and depressed peripheral economies like Spain, Portugal, Italy, Greece etc is starting to grow again. That view starts again with the pick-up in the Eurozone PMI.

Surveys of industrial activity are consistent with a renewed recovery in time – the manufacturing PMI suggests that the annual growth rate could pick up from July’s -2.2% towards +5%. But for now, with production in Q3 very unlikely to come near Q2’s 1.3% rise, GDP growth looks set to slow quite sharply after the 0.7% quarterly gain seen last quarter.German trade data released earlier today revealed a fall in exports in July that supports this picture. In all, the data will dent hopes of a rapid recovery in Germany and hence in the euro-zone as a whole, justifying the cautious tone struck by the ECB yesterday.- See more at: http://www.cityam.com/blog/1378462536/german-industrial-production-sinks-july#sthash.etjbnyAw.dpuf

UK industrial output has been completely flat in July, despite expectations of a rise of 0.1 per cent. That comes after 1.3 per cent growth last month (revised up from 1.1 per cent).Manufacturing production also came in lower than expected, at 0.2 per cent versus estimates of 0.3 growth. Last month the manufacturing sector saw production increase by 2.0 per cent (revised up from 1.9 per cent).- See more at: http://www.cityam.com/blog/1378456108/end-uks-winning-streak-industrial-output-growth-goes-flat#sthash.7SMWtiQd.dpuf

Think tank NIESR has estimated that UK GDP grew by 0.9 per cent in the three months to August, up from an estimate of 0.7 per cent growth in the three months to July.The latest time NIESR estimated growth this fast was in July 2010, when it was also at 0.9 per cent.- See more at: http://www.cityam.com/blog/1378475746/think-tank-sees-uk-growing-fastest-pace-three-years#sthash.D1mzJvTx.DWVhoYka.dpuf

The PMIs are recovering even in the peripheral Eurozone economies, although most are still contracting, if at a slower pace.

And it would seem that the Eurozone composite PMI is a reasonable guide to where the real GDP growth rate will go – both are picking up (see graph below).

But the actual data continue to show how weak Europe’s economies are. Most forecasts are that Eurozone GDP will still contract this year, before growing next year. Indeed, the European Central Bank (ECB) adjusted its predictions from June, revising up its 2013 GDP forecast from -0.6 per cent to -0.4 per cent, but it cut next year’s estimate from 1.1 per cent to 1.0 per cent. Wow!

And it was not encouraging to note that in Germany, the engine of Europe’s growth, manufacturing output in Q3 is very unlikely to come near Q2’s 1.3% rise and real GDP growth looks set to slow quite sharply after the 0.7% quarterly gain seen last quarter. July’s German trade data revealed a fall in exports.

I have never claimed in this blog that the world was in a permanent slump or that it had dropped back into a recession, when many others made such forecasts. But I also remain unconvinced that recent optimistic noises mean that world capitalism is now on a sustained upward trend in economic activity. In my view, it is still in a slow crawl, as it was in the years 1932-37 during the Great Depression or in the Long Depression of the 1880s. For me, the key indicators of sustained recovery in capitalism would be rising rates of profit, a sharp pick-up in business investment and substantial falls in unemployment. There are little signs of any of this.

I’ll return to the question of the role of investment and profits in another post shortly.

POSTSCRIPT

John Lott (http://johnrlott.blogspot.co.uk) provided the figure that said 96% of all jobs created in the last eight months in the US were part-time. Well, it appears that Lott got it wrong. Only 59.4 percent of the jobs added from January to August were part-time jobs (497,000 of 837,000 total jobs). And if you exclude March, then the percentage drops to 19%. And over the last year, the figure is just 14%.

Even so, that does suggest part-time jobs are becoming a larger proportion. Statistics!

Posted in capitalism, economics | 5 Comments »

From the North Star

September 1, 2013

Something I forgot to mention to readers is that I did an email interview with The North Star back in June, which you may find interesting.

http://www.thenorthstar.info/?p=9006

The North Star calls itself “a forum for socialist renewal. Emphasizing discussion and debate, this project is partly inspired by the North Star Network, a Marxist group founded by Peter Camejo in the 1980s that integrated former members of the Socialist Workers Party, a Trotskyist group, and the Line of March, a Maoist one. Camejo believed that the future of radical politics in this country lay not with the existing three-letter left groups but elsewhere. Taking its name from Frederick Douglass’s first newspaper, the network sought to throw off the baggage of dogmatism and sectarianism plaguing Marxism, emphasizing the importance of open debate.”

There are quite a few interesting interviews, reviews and articles on the site.

http://www.thenorthstar.info/

Posted in capitalism, economics, marxism, Profitability | 1 Comment »

Tom O’Brien from Alpha to Omega with profits, cycles and breakdowns

August 31, 2013

Tom O’Brien runs an excellent series of interviews with all sorts through the Podomatic website, where he publishes these interviews as podcasts at:

http://fromalpha2omega.podomatic.com/

He recently interviewed me on the ideas of Marxist economics, Keynes, profit cycles and the breakdown of capitalism. He published this interview today.

have a look at:

http://fromalpha2omega.podomatic.com/entry/2013-08-31T00_02_37-07_00

Posted in capitalism, economics, marxism, Profitability | 10 Comments »

Down in the Jackson Hole

August 28, 2013

Central bankers from all over the world gather each August underneath the Grand Teton mountains in Jackson Hole, Wyoming for their summer symposium to discuss the global economy and what central bankers can do about it. This year, Ben Bernanke, head of the most important central bank, the US Federal Reserve, is not present. He is about to end his term of office at year-end, so perhaps he saw no need to attend. But lots of other key bankers and mainstream economists are there.

The main issue to discuss, as it was last year, was how effective has been the policy of ‘quantitative easing’ (QE) in getting the global capitalist economy into recovery mode. QE is where central banks buy up government, corporate and mortgage bonds through the expansion of central bank power money (‘printing money’), in order to inject ‘liquidity’ into the economy. The idea is that this extra credit will filter through from the banks and pension funds that the central bank has bought the bonds from into loans to households and businesses. Those loans will lead to more spending in the shops and more investment by businesses.

Well, has it worked? That’s easy to answer. No. The global economy remains stuck in a low-growth mode, and most important, at such a low growth in economic activity that unemployment rates remain nearly double the rate before the Great Recession in the major economies and three or four times as high in the depressed economies of southern Europe.

At last summer’s symposium, central banks were worried that QE was not working and a leading mainstream economist, Michael Woodford presented a paper (http://www.kansascityfed.org/publicat/sympos/2012/mw.pdf?sm=jh083112-4) in which he argued that if central banks could change the perception of businesses and households that interest rates were going to stay very low for a long time, then that would inspire ‘confidence’ and thus lead to increased spending and investment. This led to the recent policy of central banks, called ‘forward guidance’ (see my post, http://thenextrecession.wordpress.com/2013/08/13/a-blind-guide-dog/). Forward guidance is an attempt by central bankers to persuade businesses and consumers that they do not have to worry about rising interest rates for years ahead and so they can start spending now.

But forward guidance has done no such thing. Indeed, after both the ECB and the Bank of England followed the Fed and announced such ‘guidance’, stock markets fell and interest rates rose! That was partly because businesses still do not believe that central banks won’t hike interest rates at the first sign of economic recovery. But it was also because the Federal Reserve had already announced that it intends to begin to end its QE policy by gradually reducing its planned asset purchases that it will make from September onwards. That is seen as a sign that central bank support for ‘easy money’ is coming to an end. Stock markets, particularly in emerging economeis, which have been the main beneficiaries of this largesse, have sold off big time.

And that’s the point. QE has not boosted the ‘real economy’ but merely fuelled a new credit bubble in stock market and property prices – US home prices are now up over 12% since this time last year and in the UK, prices are up 5%, with over 10% in ‘hot’ London. Indeed, as I pointed out in that previous post, the latest evidence shows that QE measures have had little or no effect on boosting the real economy. A recent paper by Vasco Curdia and Andrea Ferrero at the Federal Reserve Bank of San Francisco (Efficacy of QE) found that the Fed’s QE measures from 2010 had helped to boost real GDP growth by just 0.13 percentage points and the bulk of this ‘boost’ was thanks to forward guidance, namely convincing investors that interest rates were not going to rise. If that factor had been left out, the US real GDP would have risen only 0.04 per cent as a result of QE.

This is worrying for central banks. They would like to think that providing easy credit has done the trick and there is now sustained economic growth so that they can end their QE measures. Instead, they cannot – indeed in the case of Japan, they have been extending them. At the Jackson Hole symposuum, Christien Lagarde, head of the IMF, urged caution on ditching QE too early: “now is not the time to pull back on these policies.. are still needed in all the places” these policies are being employed… I do not suggest a rush to exit,” Lagarde said, adding in Europe, “there is a good deal more mileage to be gained” from unconventional policy. As for Japan, she said an “exit is very likely some way off.”

And Lagarde added an important sting in the tail of her address. She reckoned that QE should be maintained because it would help allow governments to push through yet more measures of wage cutting, privatisation, reductions in government spending and ‘liberalising’ markets in order to raise the profitability of capital and thus sustain economic revival down the road. As she put it: “I do worry that all the hard work of central banks will be wasted if not enough is done on other fronts—to adopt the admittedly more difficult policies needed for balanced, durable, and inclusive growth. . . . [unconventional monetary policy] is providing the space for more reforms. We should use that space wisely.”

But despite the policies of austerity to reduce costs and despite the policy of easy money through QE, the global capitalist economy does not respond. This has been the longest slump since the second world war. A recent CEPR discussion paper by Antonia Fatas and Olian Mihov (http://www.cepr.org/pubs/dps/DP9551# and http://www.voxeu.org/article/recoveries-missing-third-phase-business-cycle) found that the US economy has still not returned to ‘normal’, ie trend growth in real GDP after more than 16 quarters since the trough of the Great Recession – and still counting. That compares with just six quarters to return to normal in previous post-war recessions. Moreover, the accumulated loss in US GDP from its peak caused by the Great Recession and the subsequent weak recovery so far totals 22% of US peak GDP and still counting. That compares with a maximum of 16% in the 1980-2 slump and only 4-5% in other post-war recessions. The depth and duration of the Great Recession has been hugely damaging – ant the gap remains (see graph below).

The driver of economic recovery under capitalism is investment. That leads to jobs and then to income and then to spending. But sufficient investment depends on profitability recovering to previous levels or higher and on debt not being too high that it strangles corporate investment. That has not happened so far. While cash flow and profits may be up for larger companies, the rate of profit has not recovered in many capitalist economies, like the UK and Europe. Also, large multinationals have preferred to invest in emerging economies rather than in the domestic economy. And cash-rich companies have taken advantage of credit-fuelled (QE) stock markets to buy back their own shares rather than invest and boost dividends. This helps executive bonuses!

Small businesses cannot invest because they cannot borrow on current terms and many are zombie companies just able to pay the interest on their debt. They have been hoarding labour rather than invest in new equipment and labour saving systems. And overall corporate debt levels remain too high to allow new investment – paying down debt or holding cash is safer.

The conundrum of rising profits and stagnant investment in productive assets shows that the ‘recovery’ is artificial. It depends on central bank liquidity, which finds its way into the financial sector not the real economy. The really cash-rich companies are banks, financial institutions and large multinationals and not the bulk of non-financial companies that invest and employ labour. One analyst reckons that as interest rates start to rise over the next year, when central banks try to wean the capitalist sector off its milk of ‘easy money’ that has slowed “down the process of creative destruction… then these zombie companies are going to present symptoms of a disease which will begin to affect other companies. That is when the recession will come.”

Meanwhile, small businesses in the US and elsewhere are struggling – and they are the main sources of new employment. In 1982, new companies made up roughly half of all US businesses, according to census data. By 2011, they accounted for just over a third. From 1982 through 2011, the share of the labour force working at new companies fell to 11% from more than 20%. Total venture capital invested in the US fell nearly 10% last year and is still below its pre-recession peak, according to PricewaterhouseCoopers. New startups, as opposed to startup jobs, accelerated during the recession and remain higher than average, according to the Kaufman Foundation (http://www.kauffman.org/newsroom/entrepreneurial-activity-declines-as-jobs-rise-in-2012-according-to-kauffman-report.aspx). But what this shows is that older and blue collar workers, forced out of their jobs, are trying to set up self-employed businesses to to make ends meet. Most of these businesses soon die a death.

The unemployment rate in the US has dropped a little from its peak during the depth of the Great Recession. But this hides the continuing depression in the labour market. The labour participation rate, the ratio of people in the workforce against those adults of working age, has been dropping fast.

In other words, as Marx would put it, the reserve army of labour has been rising sharply since the late 1990s and accelerated during the Great Recession. This reflects the efforts of the capitalist sector to counteract the fall in the US rate of profit since the late 1990s by raising the rate of surplus value – a major countertendency to the rise in the organic composition of capital – in effect the cost of new technology. Capital aimed to exploit labour harder to compensate for increased costs of capital investment relative to profitability.

This succeeded for a while in checking a very sharp fall in profitability. But eventually, a slump could not be resisted when profits began to slip from 2005 onwards. Now the risk is that any growth in new value will be capped by the inability to employ more unused labour. So economic growth will remain stunted. Plenty for central bankers to ponder.

Posted in capitalism, economics, Profitability | 12 Comments »

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