Michael Roberts Blog

Koreans have decided to impeach their President Park Geun-hye over corruption charges.  Last Friday the country’s top court upheld an earlier impeachment vote, officially ousting Park Geun-hye, South Korea’s first female leader, from office. This follows months of protests by South Koreans alarmed at claims of bribery, influence-peddling and even shamanistic cult rituals in the presidential Blue House. The demonstrations were more than 1m strong. An impeachment motion easily passed the legislature.

Park is the most unpopular South Korean leader since the country became a democracy in the late 1980s. The scandal ensnared senior government officials and business figures, including Lee Jae-yong, the acting head of Samsung, who denied bribery, corruption and other charges at the first hearing in his trial last week.  Samsung apparently  donated 43bn won ($40m) – more than any other firm – to the foundations run by the president’s confidant, Choi Soon-sil.

Choi is the Rasputin to Korea’s Park. She is the daughter of a South Korean Shamanistic–Evangelical cult leader, Choi Tae-min. Her ex-husband is Park’s former chief of staff Chung Yoon-hoi and dressage athlete Chung Yoo-ra is their daughter.  Samsung allegedly gave millions of euros to fund Choi’s daughter’s equestrian training in Germany. Choi is in detention, accused of using her close ties with Park to force local firms to “donate” nearly $70m (£60m) to her non-profit foundations, which Choi allegedly used for personal gain.

It looks likely Moon Jae-in, a former human rights lawyer and political veteran from the opposition Democratic party, will win snap presidential polls in May. Mr Moon has won admirers among the country’s younger generation for his “progressive values” and pledges to tackle youth unemployment, which stands at a record high since the Asian crisis of 1997-8.  Despite what his opponents say, he is no communist.

Korea’s political turmoil is yet another example of how incumbent governments around the world have suffered the price of failure and exposure since the Long Depression began in 2009 after the global financial crash of 2007 and the Great Recession of 2008-9.

The mainstream view is that Korea is a capitalist success story.  Unlike other so-called ‘emerging economies’ in the post 1950 period, which have struggle to close the gap in output and living standards with the leading imperialist countries like the US, the UK or Japan, Korea has made substantial progress.  Between 1960s and the 1980s, Korea’s economy expanded by an average of 8% a year in real national output.  Per capital GDP rose from $104 in 1962 to $5,438 in 1989, and reached the $20,000 level just before the global financial crash. So per capita income rose from 5% of the US in 1960 to around 55%.

This progress was made possible because Korea embarked on, and adhered to, a state-directed industrialisation and export strategy for nearly 50 years. The manufacturing sector grew from 14.3% of GDP in 1962 to 30.3% in 1987.  Within two generations, Korea vaulted into the OECD, its goods and services became known around the globe, and its national corporate champions entered the ranks of the world’s most recognized companies.  In 2012, Korea became the seventh global member of the ’20-50′ club (population surpassing 50m with per capita income of $20,000), the supposed definition of a major capitalist economy.

Marx’s law of profitability can provide an underlying explanation of the success of Korean capitalism in the period from the 1960s after the Korean war to the end of the 1970s.  While the major capitalist economies experienced a fall in profitability from about the mid-1960s to the early 1980s, Korean capital had high and rising rates of profit.  The Korean rate of profit has been measured by several different authors including myself, but probably the best and most thorough measurements have been by Esteban Maito and Seongjin Jeong, the editor of Marxism21.

Maito finds that the Korean rate of profit rose from the 1960s to the late 1970s. (Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century ). And that was the peak.

Jeong presents the most comprehensive analysis of trends in the rate of profit on Korean capital.  Jeong finds that the rate of profit fell from a peak in 1978 to a low in 2002.  And the decline in the rate over the 1980s and 1990s was the underlying cause of the crisis and slump of 1997, part of the so-called Asian crisis. “The 1997 crisis was intimately related to a broader problem of declining capitalist profitability.  While the rate of profit has recovered since that crisis”, Jeong says, “its 2002 level still remains at only one-third of the level of 1978.  This suggests that the Korean economy remains in the middle of its long downturn.”

Jeong also shows that Marx’s law of profitability, based on a rising organic composition of capital, provides the underlying cause for this fall in profitability.  The era of Park Jung Hee, which saw a limited stabilisation of profitability, was only possible because of intensified exploitation of the Korean working class in the so-called neoliberal period of the 1980s, delivering a rise in the rate of surplus value or exploitation, the main counteracting factor to the tendency of the rate of profit to fall.  But even that factor could not overcome the eventual fall in profitability in the 1990s that finally culminated in the slump of 1997, ironically just as profitability in the major economies peaked.  In the 1997 Asian financial crisis, the South Korean economy suffered a liquidity crunch and had to rely on a bailout by the IMF.

The Asian crisis that hit Korea so hard led to a sharp devaluation of capital values (through the writing off of bankrupt companies and rising unemployment), followed by more neoliberal measures that boosted profitability.  But as Maito and my own measures of profitability show, after the 2001 mild global recession, Korean profitability resumed its decline, leading up to the global financial collapse of 2008.  Economic growth was stopped in its tracks in 2009.

Since then, Korean capitalism has become part of the Long Depression.  Underlying trend growth has weakened from 7% a year in the 1990s to just 3% now.

Moreover, Korean capitalism now faces serious structural challenges, many of which imply a further decline in potential growth.  Korea has one of the lowest birth rates in the world and one of the world’s most rapidly aging societies. The working age population is projected to peak this year and decline rapidly thereafter, depressing potential employment and growth. The overall population is expected to start declining after 2025.

Korea’s economic success came on the back of exports, but that heavy reliance may now be a liability in a world of slowing trade and with the prospect of the end of globalisation and the rise of protectionism after the election of President Donald Trump in the US.  With exports exceeding 50% of GDP—one of the highest shares among advanced economies—Korea is heavily exposed to any shocks or change in China and the US, particularly from China, its largest trading partner.  Some of the heavy industrial sectors that underpinned Korea’s past growth—for instance, shipbuilding, shipping, steel, and petrochemicals—are now facing bleak prospects globally given the trade slowdown and competition from China.  Korean capital is under severe pressure.

Moreover, South Korea’s economy is still dominated by oligopolistic chaebol that are now being squeezed at the low end by expanding Chinese manufacturers and at the high end by Japanese players who have benefited from a deliberately-weakened yen. Exporters are creating fewer jobs in South Korea as the chaebol move production offshore to look for cheaper labour.  That has left the domestic economy hurting: small and medium-sized businesses are still failing and the high-value services sector is lagging well behind other countries. “This has raised concerns about Korea’s traditional catch-up strategy led by exports produced by large chaebol companies”, the OECD said in a report last year.

In the 1990s, Korean capitalists adopted neoliberal employment policies by keeping much of its workers on casual temporary contracts.  The share of temporary workers was nearly 22% in 2014, double the OECD average.  But this led to slowing productivity and under-investment in skills.  Labor productivity rose at an average annual rate of 5.5% in 1990-2011, but it has stagnated since then and remains only 40% of the three most productive OECD countries.  Labor productivity is particularly low in the service sector—much lower than in peer economies and only half that of manufacturing and much lower in smaller companies.

Korean capital prospered on the backs of overworked staff, working long hours and by avoiding any social security.  The Basic Livelihood Security Program (BLSP), introduced in 2000, provides cash and in-kind benefits to the most vulnerable, but is substantially less generous than the OECD average. The National Pension System (NPS) currently covers about one-third of the elderly and the OECD reports that pension benefits were only around one-quarter of the average wage in 2015.

This has led to increasing household debt: many retirees borrow to open (risky) small businesses, in an attempt to supplement their incomes. Total social spending amounts to just 10% of GDP, less than half the OECD average, while household debt rose steadily from 40% of GDP in the early 1990s to nearly 90% today.  At the same time, corporate debt has been consistently high at about 100% over the last decade.   This high and rising debt indicates that Korean capital is no capable of getting a healthy and rising rate of profit and is forced to borrow to grow – increasing the impact of any future slump.

Back in 2012, the now disgraced Park Geun-hye pledged to rebuild the ‘middle class’ and increase its size to 70% of society.  This has turned out to be a sham.  Instead, there has been increasing economic polarisation in the Long Depression.  Economic inequality increased noticeably during and after the 1997 crisis and the Great Recession of 2008-9. South Korea’s average gini coefficient — a measure of inequality — for 1990–1995 was 0.258, but with rising inequality its coefficient increased to 0.298 in 1999. It continued to increase, reaching 0.315 in 2010.  The same trend can be seen in income distribution: the share held by the top 10% of income holders divided by that of the bottom 10% has increased from 3.30 in 1990 to 4.90 in 2010. The income share of the top 1% was 16.6% of national income in 2012, not far short of the extremes in the US and much worse than in Japan.  The most recent statistics released by a government source indicate that as much as 73% of Seoul residents identified themselves as belonging to the ‘lower class’.

The Great Recession has increased the precarious position of Korean workers and produced an even sharper cleavage between regularly employed workers on standard contracts and irregularly employed workers (those who are limited-term, part-time, temporary or dispatched), increasing the latter from 27% of the working population in 2002 to 34% in 2011. This means that approximately one-third of South Korean workers suffer from insecure job conditions, receiving only around 60% of regular workers’ wages with no medical insurance, severance pay or company welfare subsidies.

Since the late 1990s, a general trend among South Korean firms has been to discard the old seniority-based salary system and adopt the American style ability-based salary system. With this change, the wage gap between professional and managerial workers and the rest of the workforce has widened greatly. As the South Korean economy has moved towards being knowledge-based, the value of scarce skills and knowledge has increased and globalised business sectors have begun to offer extremely high salaries to attract talent.

So significant income disparities that have long existed between South Korea’s conglomerate firms and medium to small-sized firms have become even greater in recent years. South Korea’s top 1% of income earners are most likely to be employed in the leading conglomerates, like Samsung, Hyundai and LG, which have grown into truly world-class companies and become very profitable.

Finally, in South Korea, as in most societies, wealth inequality is much larger than earned income inequality. In 2012, the top 10% of the population possessed 46% of the country’s total wealth. The bottom 50% possessed only 9.5%. This wealth inequality emerged primarily from the booming real estate market. But in recent years, the stock market and other financial investments have replaced the real estate market as the major means of wealth accumulation.

According to Statistics Korea, the average monthly household income of the top 10% was 10,627,099 won.  This is 5.1 times higher than that in 1990, which was 2,097,826 won. For the bottom of 10%, the figure increased only 3.6 times from 248,027 won to 896,393 won. So the gap between these two groups increased from 8.5 times to 11.9 times. The data is based on 8,700 households, not including the extremely poor or the top chaebol families, so the actual gap appears to be much larger.

One out of six people live with less than 10 million won per year and one out of four households are more often in the red than in the black. The poverty rate of people over 65 years old is 48.5%, which is 3.4 times higher than that of the OECD average. Moreover, the suicide rate is among the highest in the world. Korean capitalism may appear to have been a relative success by world standards over the last 50 years, but it has been at the expense of its people.

The future of Korean capitalism is tied up with the future of global capital.  No national economy can escape that.  But there are specific challenges for Korean capital too.  The biggest and possibly the most immediate is what happens with North Korea.  If and when the Stalinist-type regime falls there, Korean capital is no position to integrate the people of the north into the capitalist system of the south.  The cost that West German capital and economy suffered when the Berlin Wall fell and Germany was united again was significant and held back one of the most successful capitalist economies for a decade.  The disruption to Korean capital would be very much greater, especially if this should happen in this period of economic stagnation and political turmoil.

Then there is Korean capital’s longer term future.  The slowing of world trade everywhere is damaging to Korean capitalism, but this slowdown appears to morphing into the end of the period of so-called globalisation that world capitalism has benefited from since the early 1980s.  Regional trade agreements like TPP and TTIP are in the rubbish bin, thanks to Donald Trump, while he talks of tariffs on imports into the US and forcing American capital back to the US.  The next global recession could be an even bigger hit to Korean capital than the last.

The overwhelming victory of the governing BJP in key Indian states last weekend seems to have cemented the rule of India’s prime minister Narendra Modi.  In the world’s largest capitalist democracy, Modi’s Hindu nationalist BJP swept the board in Uttar Pradesh state, the most populated in India with 220m voters.  The BJP won 312 seats out of 403 and took just under 40% of the vote, slightly less than Modi achieved when winning the 2014 general election with the biggest parliamentary majority in 30 years.

Similarly, the Uttar Pradesh result gave the BJP the biggest majority in any state for one party since 1977. Modi’s BJP now heads the government in states where more than half of Indians live, while the Congress party, which has ruled India for most of the 70 years since independence, leads in regions covering less than 8 percent of the population.

The result came five months after the shock move last November by the Modi government to abolish high-denomination banknotes. The government claimed the aim was to flush out ill-gotten gains by rich Indians hiding their earnings in cash to avoid tax.  Some Western economists like Harvard’s Larry Summers, Nobel Prize winner Amartya Sen and the opposition Congress party claimed that it would squeeze credit and destroy consumer spending and lower growth.

Well, Modi appears to have been vindicated, at least by the electorate.  His barbed attack on ‘Harvard University economists’ during the election campaign scored.  “On one hand, there are these intellectuals who talk about Harvard, and on the other, there is this son of a poor mother, who is trying to change the economy of the country through hard work. In fact, hard work is much more powerful than Harvard.” The Hindu poor, in the rural areas particularly, where the ‘demonetisation’ was supposed to hurt the most, voted BJP.  The reality is that, while many transactions are conducted ‘informally’ ie not through the banking system, most rural poor never see the sight of large bank notes.  They are held by richer merchants, farmers and the urban elite to avoid paying tax.  So Modi’s move was popular.

But it was not only that which gave the BJP victory.  The party, formerly based on the fascist RSS, continued with its communally divisive propaganda to get people to vote on caste and religious lines. Its state leader Amit Sha promised to construct a Hindu temple on a razed mosque site and ban the slaughter of cows, worshipped by millions of Hindus.

Modi may have won the vote but the ‘demonetisation’ of 86% of circulated banknotes may still have economic repercussions.  In the short term, it caused lengthy queues at ATMs, when the government failed to provide sufficient amounts of new banknotes, stalling credit and transactions, with limits placed on cash withdrawals.  Those limits are only being removed next week, some five months later.  The demonetisation was supposed to attack corruption and tax evasion, but it seems to have had little effect on that.  Indeed, lots of rich Indians made ‘private arrangements’ to obtain new bank notes and avoid having to declare monies into bank accounts.

India has the largest ‘informal’ sector among the main so-called emerging economies.   Government tax revenues are low because Indian companies pay little tax and rich individuals even less.  It may be that demonetisation was invoked to reduce corruption and tax scams, but it was also a move that would strengthen the banking system’s control over people’s money in an undemocratic way.  A completely bank accounting transaction system would put big business and the banks in the driving seat for credit and liquidity, however, more efficient.  But for the rural poor, so far, that argument means little when you don’t have cash to withdraw anyway. Two-thirds of Indian workers are employed in small businesses with less than ten workers – most are paid on a casual basis and in cash rupees.

Modi may claim that the government’s November move has proved to have no long-term effect on the economy, but that is not true.  There has been a significant fall in consumer spending and business investment that has meant India can no longer be the fastest growing major economy over the likes of China.  The IMF reckons that India grew 6.6% in 2016 compared with China’s 6.7% and has lowered its forecasts for this year.

Moreover, India’s figures for real GDP are to be no more trusted that those in the past provided for China, or for that matter for Ireland in the last year.  Back in 2015, India’s statistical office suddenly announced revised figures for GDP.  That boosted GDP growth by over 2% pts a year overnight.  It seems nominal growth in national output was now being ‘deflated’ into real terms by a price deflator based on wholesale production prices and not on consumer prices in the shops, so that the real GDP figure rose by some way.  Moreover, this revision was not applied to the whole economic series, so nobody knows how the current growth figure compares with before 2015.  Also the GDP figures are not ‘seasonally adjusted’ to take into account any changes in the number of days in a month or quarter or weather etc.  Seasonal adjustment would have shown India’s real GDP growth as slowing towards the end of last year to about 5.7%, well below the official figure of 7.5%.

Real GDP growth may look strong on official data, but industrial output does not.  India’s industrial sector is hardly growing.

Business investment is stagnating, as Indian companies are overwhelmed by large debt burdens; and these debts put a lot of pressure on the banking system.  The Modi government, in contradiction with its neoliberal agenda, is trying to overcome the stagnation in business investment with government spending, but this is limited to defence and transport.  Ironically, the BJP government plans to strengthen the state energy sector through mergers of its 13 state-controlled relatively small oil companies.

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

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

The Modi government remains optimistic that the Indian economy is going to pick up even faster this year and onwards, based on ‘Modinomics’, which boil down to privatisation, cuts in food and fuel subsidies and a new sales tax, a tax that is the most regressive way to get revenue as it hits the poor the most.  The aim here, as it always is with neoliberal economic policy, is to raise the rate of exploitation of labour so that the profitability of capital is boosted and thus provide an incentive to invest, something Indian capital is refusing to do right now.  Now that Modi has triumphed and looks set to win the next general election in 2019, India’s big business and foreign investors will expect Modinomics to be accelerated.

This can only increase inequality.  Already, India is one of the most unequal societies in the world.  The richest 1% of Indians now own 58.4% of the country’s wealth, according to the latest data on global wealth from Credit Suisse Group.  The share of the top 1% is up from 53% last year. In the last two years, the share of the top 1% has increased at a cracking pace, from 49% in 2014 to 58.4% in 2016. The richest 10% of Indians have increased their share of the pie from 68.8% in 2010 to 80.7% by 2016.  In sharp contrast, the bottom half of the Indian people own a mere 2.1% of the country’s wealth.

This inequality is not down to the Modi government alone.  Previous Congress-led governments perpetuated this inequality too – indeed, under the corrupt Gandhi dynasty, made it worse.  No wonder India’s poor won’t vote for the Gandhis any more.  Just as in 2014, India’s electorate in the state elections were faced with a choice between a corrupt, family-run party backed by big business and landholder interests and an extreme nationalist party (with increasing backing from big business and foreign investors).  For the moment, Modi wins their vote.

Recently, the economics editor of the Guardian newspaper in the UK, Larry Elliott, presented us with a comparison of the Great Depression of the 1930s and now.  In effect, Elliott argued that the world economy was now in a similar depression as then.  The 1930s depression started with a stock market crash in 1929, followed by a global banking crash and then a huge slump in output, employment and investment.  In that order. The number of bank failures rose from an annual average of about 600 during the 1920s, to 1,350 in 1930 and then peaked in 1933 when 4,000 banks were suspended. Over the entire period 1930-33, one-third of all US banks failed.  But it was the stock market crash that was first.

The Long Depression, as I like to call the current one, started with a housing crash in the US, only then followed by a banking crash that was global and then a huge slump in output, investment and employment.  The aftermath in both depressions was a long, slow and weak economic recovery with many national economies still not returning to pre-crash levels of output, investment or profitability.

By the way, if anybody doubts that the major economies (G20) are not in what I call a Long Depression, defined as below-trend growth in output, investment, productivity and employment, then consider this nice summary by Wells Fargo bank economists of the key indicators since the end of the Great Recession in 2009 for the US, the economy that has recovered the most.

They conclude that during the 2008-2015 period, the average annual reduction in the level of real GDP from trend was 9.9 percent, 9.8 percent in personal consumption and 10.7 percent in real disposable personal income. During the same time period, the average annual loss in business fixed investment was 20.1 percent, 7.8 percent in employment and 6.9 percent in total factor productivity. The average reduction in the labor force was 2.2 percent, 7.9 percent in labor productivity and 6.4 percent in capital services during the 2008-2015 period.

“And there has been long lasting damages from the Great Recession as the level (trend) of potential series (for all variables) has shifted downward.  These results are consistent with the overall economic environment since the Great Recession. That is, a painfully slow economic recovery along with a slower growth in the personal income, employment, wages and business fixed investment.”

Elliott points out that very few economists or pundits predicted the crash of 1929 at the height of huge credit-fuelled boom in stock markets and economic expansion.  Similarly, very few forecast the US housing crash and subsequent global financial meltdown.  But some did.

The more interesting part of Elliott’s account are the reasons given for the Great Depression of the 1930s and whether they are the same reasons for the current Long Depression.  Elliott quotes the biographer of Keynes, Lord Skidelsky, that the main cause was excessive debt.  “We got into the Great Depression for the same reason as in 2008: there was a great pile of debt, there was gambling on margin on the stock market, there was over-inflation of assets, and interest rates were too high to support a full employment level of investment.”

This explanation is almost the conventional one among leftist and heterodox economists.  Skidelsky combines the views of post-Keynesians (Steve Keen, Ann Pettifor) and some mainstream economists (Mian and Sufi) who highlight the levels of private sector debt (particularly household debt) – “great pile of debt” – with the view of Keynes that “interest rates were too high to support full employment”.

Indeed, next month, Steve Keen, leading post-Keynesian and Minskyite, publishes a new book in which he argues that “ever-rising levels of private debt make another financial crisis almost inevitable unless politicians tackle the real dynamics causing financial instability.” Ironically, And Anne Pettifor has just published a new book that seeks to argue that printing money (more debt?) could help take the capitalist economy out of its depression.

Now there is a lot of truth in the argument that excessive debt (or credit, which is just the other side of the balance sheet) is a prime indicator of impending financial crashes.  Debt was high in the 1920s before the crash. This has been documented by many studies, including the seminal work of Rogoff and Reinhart. And Claudio Borio at the Bank of International Settlements has also built up a weight of evidence to show that it is the level and rate of increase or decrease in credit (in effect, a cycle of debt) that is much better indicator of likely financial crashes than the neo-Keynesian idea of some secular stagnation in growth and a collapse in ‘aggregate demand’ (a la Paul Krugman or Larry Summers).

And it is no accident that Steve Keen was one of the few economists to predict the impending crash of 2008.  In my book, The Long Depression, I devote a whole chapter to this issue of debt – what Marx called fictitious capital.  Credit allows capital accumulation to be extended beyond the creation of real value, for a time.  But it also means that when the eventual contraction in investment comes because profitability in productive sectors falls, then the crash is that much greater as debt must be written off with the devaluation of capital values.  Credit acts like a yo-yo, going out and then snapping back. So ‘excessive debt’ is undoubtedly a ‘cause’ of crashes, in that sense.  The question is what makes it ‘excessive’ – excessive to what?  Borio says excessive to GDP growth, but then what determines that?

The other argument that is linked to the ‘excessive debt’ cause is rising inequality as the cause of the crashes of the 1929 and 2008.  As Elliott puts it: “while employees saw their slice of the economic cake get smaller, for the rich and powerful, the Roaring Twenties were the best of times. In the US, the halving of the top rate of income tax to 32% meant more money for speculation in the stock and property markets. Share prices rose six-fold on Wall Street in the decade leading up to the Wall Street Crash. Inequality was high and rising, and demand only maintained through a credit bubble.”  Yes, similar to the period up to 2008.

Now I don’t think that rising inequality was the cause of the crisis of the 1930s or in 2008 and I have detailed my arguments against the view in several places. The empirical evidence does not support a causal connection from inequality to crash.  Indeed, a new study by JW Mason presented at Assa 2017 in Chicago adds further weight to the argument that rising inequality and the consequent (?) rise in household debt was not the cause of the financial crash of 1929 or 2008.  “The idea is that rising debt is the result of rising inequality as lower-income households borrowed to maintain rising consumption standards in the face of stagnant incomes; this debt-financed consumption was critical to supporting aggregate demand in the period before 2008. This story is often associated with Ragnuram Rajan and Mian and Sufi but is also widely embraced on the left; it’s become almost conventional wisdom among Post Keynesian and Marxist economists. In my paper, I suggest some reasons for skepticism.”

The gist of my view is that inequality is always part of capitalism (and for that matter class societies, by definition) and rising inequality from the 1980s in the neo-liberal period went on for decades before there was the crash.  It is more convincing that rising profitability and a rising share going to capital from labour in accumulation was the cause of rising inequality, not vice versa.  So the underlying cause of the eventual slump must be found in the capitalist accumulation process itself and some change in the profit-making machine.

The third cause or reason offered by Elliott for the Great Depression of the 1930s and the Long Depression now is that there is no hegemonic power in a position to act as a ‘lender of last resort’ to bail out banks and national economies with credit and also set the rules for global economic recovery. Between the two world wars, the UK was no longer hegemonic as it had been in mid-19^th century and the US was unable or unwilling to take its place.  So there was, in effect, no global banker and thus anarchy and protectionism in the world economy.

This was the main argument of the great economic historian, Charles Kindleberger, with his “hegemonic stability theory” in his book, The World in Depression, 1929-39.  This theory of international crises has been followed on by such economic historians as Barry Eichengreen and HSBC economist, Stephen King, cited by Elliott as saying, “There are similarities between now and the 1930s, in the sense that you have a declining superpower”. So the argument goes that the US is now no longer hegemonic and cannot impose international rules of commerce as it did after 1945 with the IMF, the World Bank and GATT.  Now, there are rival economic powers like  China and even the European Union that no longer bend to US will.  And the IMF is no position to act as lender of last resort to bail out economies like Greece etc.

This view also comes from Marxist economists like Leo Panitch and Sam Gindin, who (conversely) argue that the US is still a hegemonic power and thus still decides all in an “informal American empire” and this explains the huge economic recovery after the 1980s in the neo-liberal period.  Yanis Varoufakis argues something similar in his book, The Global Minotaur.  Skidelsky too likes the argument that the neoliberal ‘recovery’ was achieved by globalisation under US imperial control.  “Globalisation enables capital to escape national and union control.”  He considers this the Marxist explanation: “I am much more sympathetic since the start of the crisis to the Marxist way of analysing things.”  

But is the crisis of the 2008 the result of weak US imperial power or too much US power?  Either way, I doubt that the hegemonic stability theory is a sufficient explanation of the Great Depression or the Long Depression.  Clearly, the US has been in (relative) decline as the leading imperialist power economically, although it remains the leading financial power and overwhelmingly dominant as a military power – similar to the Roman empire in its declining period.

No doubt that this has had some effect on the ability of all the major capitalist economies to get out of this depression and increased the move towards nationalism, protectionism and isolationism that we now see in many countries and in Trump’s America itself now. But the end of ‘globalisation’ was not the result of weakening American power but the result of the slowdown in global investment, trade and, above all, in the profitability of capital that empirical evidence has revealed since the late 1990s. The ‘death’ of globalisation was accelerated by the global financial crash and the collapse in world trade and debt flows since 2008.

The long depression has continued not because of high inequality or the weakening of US hegemony or because of the move to protectionism (that has hardly started).  It has continued, I contend, because of the failure of profitability to rise sufficiently to revive productive investment and productivity growth; and the continued hangover of fictitious capital and debt.  Indeed, I have shown that these are the same reasons that extended the Great Depression of the 1930s: low profitability, high debt levels and weak trade.

In Elliott’s article we are also offered some differences between the 1930s and now.  The first is that, unlike the 1930s, now central banks acted to boost money supply and bail out the banks with interest-rate cuts to zero and quantitative easing.  Back in the 1930s, according to Adam Tooze in his book The Deluge, deflationary policies were pursued everywhere. “The question that critics have asked ever since is why the world was so eager to commit to this collective austerity. If Keynesian and monetarist economists can agree on one thing, it is the disastrous consequences of this deflationary consensus.” (Tooze).

And they did agree on this in the current depression.  As I have shown in several posts, former US Fed chief Ben Bernanke was a mainstream expert on the causes of the Great Depression and once told a meeting of the mainstream to commemorate his mentor, the great monetarist, Milton Friedman, that the mistake of the 1930s not to expand the money supply would not be repeated.  But QE and easy money may have bailed out the banks and restored ‘business as usual’ fro them, but it did not end the current Long Depression.  Actually, that easy money and unconventional monetary policy would end the Great Depression was thought possible by Keynes in 1931.  But by 1936, when he wrote his famous General Theory, he realised it was inadequate.  And indeed, the idea that things would be different this time compared to the 1930s because of easy monetary policy has turned out to be bogus.

The Keynesians, having in many cases advocated easy money as the way out of the current depression, now push fiscal stimulus as the solution, just as Keynes finally resorted to in 1936.  Keynesians like Skidelsky claim that the UK had fiscal ‘automatic stabilisers’ that were kicking in to ameliorate the slump of the 1930s but the governments of the day smashed those and imposed austerity and that caused the extension of the slump into depression.

Most governments now have not adopted massive government spending or run large budget deficits to boost investment and growth – mainly because they fear a massive increase in public debt and the burden that will put on funding it from the capitalist sector. So we hear from the battery of leftist and Keynesian economists that the application of ‘austerity’ is the cause of the continued Long Depression now.  It is difficult to prove one way or another, but in a series of posts and papers, I have put considerable doubt on the Keynesian explanation of the Long Depression.

The New Deal did not end the Great Depression.  Indeed, the Roosevelt regime ran consistent budget deficits of around 5% of GDP from 1931 onwards, spending twice as much as tax revenue.  And the government took on lots more workers on programmes – but all to little effect.

Coming off the gold standard and devaluing currencies did not stop the Great Depression.  Indeed, resorting to competitive devaluations and protectionist tariffs and restrictions on international trade probably made things worse.

And monetary easing has not worked this time and nor has fiscal stimulus (as Abenomics in Japan has shown), which we shall see again if Trump ever does manage to run budgets deficits to lower corporate taxes and increase infrastructure spending.

Now it seems protectionism and devaluations are becoming more likely in this post-Trump, post-Brexit period of the Long Depression.  Indeed, the latest policy document for the upcoming G20 summit in Germany next week has actually dropped its condemnation of protectionist policies.  As Elliott sums it up: “So far, financial markets have taken a positive view of Trump. They have concentrated on the growth potential of his plans for tax cuts and higher infrastructure spending, rather than his threat to build a wall along the Rio Grande and to slap tariffs on Mexican and Chinese imports.  There is, though, a darker vision of the future, where every country tries to do what Trump is doing. In this scenario, a shrinking global economy leads to shrinking global trade, and deflation means personal debts become more onerous.”

The Great Depression only ended when the US prepared to enter the world war in 1941.  Then government took over from the private sector in directing investment and employment and using the savings and consumption of the people for the war effort. Profitability of capital rocketed and continued after the end of the war. Looking back, the depression of the  1880s and 1890s in the major economies only ended after a series of slumps finally managed to raise the profitability of capital in the most efficient sectors and national economies and so delivered more sustained investment – although eventually that led to imperialist rivalry over the exploitation of the globe and the first world war.

How will this Long Depression end?

After Donald Trump delivered his first presidential address to the US Congress, the American stock market hit yet again a record high.  Since he was elected, the stock market is up over 11%.

The buoyant mood in the market for financial assets is also being mirrored in the views of the top financial analysts.  “There’s no question that animal spirits have been unleashed a bit post the election,” remarked New York Federal Reserve President William Dudley, echoing the terms of Keynesian economic thinking that economies take off when entrepreneurs feel optimistic about future sales.

And the main economic indicators in the US and global economy have been picking up.  The purchasing managers’ indexes (PMI) are surveys of companies in various countries on their likely spending, sales and investments.  And the PMIs everywhere are well above 50, meaning that more than 50% of the respondents are seeing improvement.  The global PMI now stands at its highest level (54) for three years and, according to JP Morgan economists, it suggests that global manufacturing output is now rising at a 4% pace compared to just 1% this time last year.

US manufacturing PMI hit its highest level for two years.

European economies manufacturing sectors also have seemed to turned the corner.

Things are also looking better in the so-called emerging economies.  China has not crashed as many expected this time last year.  On the contrary, the Chinese economy has picked up and, as a result, there has been increased demand for raw materials.

Iron ore prices have rocketed back up, enabling the Australian economy to avoid a recession.  In the last quarter of 2016, the Aussie real GDP grew by 1.1 per cent, the strongest rate of quarterly growth over the past five years (although annual growth in 2016 was 2.4%, better than most other advanced economies, but lower than average).  India too recorded a pick-up in GDP growth to over 7%.

So good are things looking that Gavyn Davies in the FT sarcastically attacked those economists who have been talking about ‘secular stagnation’ in the major economies.  “Whatever happened to that?”, says Davies, pointing out that “Global activity growth has rebounded sharply, and recession risks have plummeted. Growth in real output is now running at higher levels than anything seen since the temporary rebound from the financial crash in 2009/10. Importantly, recent data suggest that the growth rate of fixed investment is beginning to recover, which is a body blow to one of the central tenets of the secular stagnation school.”

According to the Institute of International Finance, an industry association, growth in GDP across emerging markets surged to an average of 6.4 per cent in January, its fastest monthly rate since June 2011. If confirmed, this will show emerging economies reversing a downward trend in growth that has been in place since the global financial crisis.

Behind this apparent recovery is a small recovery in corporate profits, which up to the middle of 2016 had been slowing fast.  Since then, corporate profits have recovered somewhat around the world and,.according to JP Morgan, business investment has reversed its decline of the last year.

Investors have responded.  Flows to emerging market equity and bond funds have begun the year positively for the first time since 2013. Foreign investors withdrew more than $38bn from EM stocks and bonds in the last three months of 2016 but sent more than $12bn back to those markets in January, the IIF estimates.

Even world trade growth, which has been abysmal and stopping rising altogether at the beginning of 2016, rose 2% at the end of last year (but still way below 3-4% rate in 2015).

So it would seem that the ‘Trump rally’ in stock markets is being accompanied by stronger economic growth and an end to the risk of deflation and stagnation.  Indeed, it is now expected that the US Federal Reserve Bank may well be confident enough to decide to raise its policy interest rate again this month, having stalled on its planned hikes after December.

But as I have argued before in previous posts, financial markets and mainstream economists may be getting ahead of themselves.

Is the US economy really going to leap forward from its sluggish pace of 2% or less that it has achieved since 2009?  Indeed, revised data for US real GDP growth in the last quarter was just 1.9% year over year, actually below the average growth rate since the end of the Great Recession.

It is no accident that the wild claims by Trump that his policies would lead to the US economy soon growing at a 4% rate have already been watered down.  Barely a month into Trump’s presidency, his advisers have already downgraded that rather elevated forecast. Steve Mnuchin, Trump’s recently confirmed Treasury secretary who is a former banker at Goldman Sachs, substantially downgraded the Trump’s goal for economic growth to just 3%.  And the Federal Reserve has proved to be wrong repeatedly in its forecast of faster economic growth.

Moreover, business investment growth slowed to a trickle. Investment badly needs a boost if the US economy is to sustain any significant growth rate, let alone the claimed 3-4% target of the Trump administration.  With business investment so weak, US economic growth is not going to accelerate unless corporate profits leap forward and government investment steps up to the plate.

Business investment contributed just 0.17 percentage point to GDP growth in the last quarter of 2016, while government investment has collapsed.

That, of course, is the Trump plan (such as he can explain it), namely to cut corporate taxes to raise after-tax profits and to introduce an infrastructure investment programme.  We shall see.  But corporate profit margins (profit per unit of sales) are not rising but narrowing and the fiscal multiplier effect of any Trump government investment stimulus is likely to be small.

There has been little sign of a recovery in real GDP per person in the US since the Great Recession – on the contrary – and that is the real indicator of (average) economic success.

And what happens in the US has a profound influence on the rest of the capitalist world.  There is a close synchronisation of growth rates between the US and the rest of the world economy. Recent research indicates that the US appears to influence the timing and duration of recessions in many major economies.  Estimates indicate that a percentage-point increase in US growth could boost growth in advanced economies by 0.8 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point after one year.

Sources: Haver Analytics; World Bank; Kose and Terrones (2015); IMF.
Notes: Contemporaneous correlations between cyclical component of US real GDP and cyclical component of real GDP of advanced economies and emerging economies.

But it also works the other way.  A fall in US economic growth will weaken growth rates elsewhere and any crash in the US stock market will quickly spread abroad.  Estimates suggest that a sustained 10% increase in US stock market volatility could, after one year, reduce investment growth in the US by about 0.6 of a percentage point, in other advanced economies by around 0.5 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point.

As I have pointed out before, the US stock market is looking ‘overvalued’ and liable to a crash.

The stock market price compared to sales by the companies in the stock market is back at levels not seen since the last crash in 2000.

As I have argued before, the key indicators to tell you if the US and world economy is starting to grow faster or is slipping back are the movement of profits and investment.  In the last half of 2016, corporate profits moved back into positive territory.  To finish off the batch of graphs in this post, here is my measure of global corporate profit growth up to end-2016.

Where this graph goes in 2017 is crucial to an analysis of the future.

The tech giant Apple has accumulated an enormous cash hoard of $246bn, larger than Sri Lanka’s estimated 2016 GDP. If Apple’s cash pile was its own public company, it would be the 13th largest in the world.  Much of this cash pile ($215bn) is held abroad to avoid paying the higher rate of corporation tax that the US applies.  For example Apple paid only 0.005 per cent tax in Ireland in 2014.  The EU Commission is trying to force Apple pay a proper tax amount to Ireland on the grounds that its profits in Europe have not been taxed properly because it accounts for its sales through Ireland.  The Irish government has sided with Apple in this dispute!

But Apple’s cash pile is not actually “cash” nor “on hand”. Apple has only about $16.7 billion in cash and equivalents on its balance sheet. The rest is stashed in long-term marketable securities, meaning Apple plans to let those funds — roughly $177 billion — accrue interest for more than a year.

Everybody notices the high cash hoards that some of the largest US companies are accumulating but do not notice that their debt has rocketed too.  Apple’s debt has exploded. It has $80bn in debt, which since 2012 is essentially an increase of $80bn. That’s right, a few years ago, Apple had near-zero debt levels and now has a solid $80bn worth.

And while cash and securities pile up overseas, Apple is piling up debt in the US. Apple – even before this latest borrowing – had more debt than the telecom and cable companies which typically carry the most debt since they have stable cash flow and slow growth. The company currently sits on about $53.2 billion in long-term debt obligations as well as $32.2 billion in “non-current liabilities,” after executing a series of bond sales including the largest in history for a nonfinancial U.S. business, making it the fourth most-indebted company in the Standard & Poor’s 500.

By borrowing instead, Apple gets cash to pay dividends and buy back shares of stock without hauling its billions stored overseas back to the US, which could trigger a ‘tax event’.  Apple is a little more than three-quarters of the way through a $200 billion capital-return program that it believes will set a corporate record for stock buybacks. There is another $47 billion promised to shareholders. There is no doubt that Apple is raking in cash with its massive hardware sales and has plenty of ammunition for potential acquisitions. But Apple is actually borrowing to finance the promises it has already made.

And it’s the same story behind the so-called cash hoards that have built up in other very large US multi-national corporations.

A recent study of multinational cash holdings found that “since corporate assets tend to grow over time, the dollar amount of cash holdings would grow even if the ratio of cash to assets stays constant.” And that is what has been happening.  Cash reserves have risen but cash to asset ratios have not.  “Using all non-financial and non-regulated public firms with assets and market capitalization greater than $5 million per year in the US, the average cash/assets ratio is 20.18% in 2009-2010 compared to 20.50% in the 2004-2006 pre-crisis period.” That’s down.

The median ratio is higher by 0.87% in 2009-2010 than in 2004-2006 and the asset-weighted ratio is higher by 0.74% in the recent period. That tells you large firms have increased their cash holdings more.  This confirms the recent OECD study that found that the huge profits gained since the end of the Great Recession have been mostly confined to the large companies: “just a few mega companies hold most of the cash while thousands of small and medium enterprises (SMEs) hold little cash and much more debt

The big rise in cash holdings took place in the global credit boom of the early 2000s. From 1998-2000 to 2004-2006, the average cash/assets ratio in US corporations increased by 3.77%, the median by 6.39%, and the asset-weighted average by 3.62%.  And this appears to be a US phenomenon.

The study found that cash/assets ratios increased across the world in the 2000s compared to the late 1990s. But the increase in average cash holdings across the world was smaller than the increase in the US. Indeed median cash holdings in the US in the late 1990s were lower than median cash holdings in foreign countries, but the opposite was true by 2010.  And after 2010, there is little evidence of an increase in average cash holdings for foreign firms.

Why have cash to asset ratios risen since 1998?  The study finds that cash holdings may have changed simply because firm characteristics have changed. If this were the case, there might be nothing abnormal about the large cash holdings of American firms in recent years. Bates, Kahle, and Stulz (2009) show that changes in firm characteristics explain much of the increase in cash holdings in the 1980s and 1990s.  US multinationals held comparable amounts of cash than purely domestic firms in the late 1990s, but now hold significantly more cash than similar purely domestic firms.

The tax treatment of remittances made it advantageous for multinationals to keep their earnings abroad. But the increase in cash holdings of multinationals is strongly related to their R&D intensity, so that multinationals with no R&D expenditures do not have an increase in abnormal cash holdings compared to domestic firms with no R&D expenditures. In sum, what this study shows is that cash hoarding is really confined to large hi-tech multinationals which keep cash for high risk R&D spending that burns cash, while borrowing and issuing debt to pay shareholders their dividends and buy back shares, as this is cheap and tax efficient.

This confirms previous studies such as that in the Journal of Finance (2009), Why firms have so much cash, which found that in order to compete, companies increasingly must invest in new and untried technology rather than just increase investment in existing equipment.  That’s riskier: “the greater importance of R&D relative to capital expenditures also has a permanent effect on the cash ratio. Because of lower asset tangibility, R&D investment opportunities are costlier to finance than capital using external capital expenditures. Consequently, greater R&D intensity relative to capital expenditures requires firms to hold a greater cash buffer against future shocks to internally generated cash flow.”  

So companies have to build up cash reserves as a sinking fund to cover likely losses on research and development.  This partly explains why there was a growing gap between cash held by corporations and investment in means in production between 1998 and 2008

As I showed in a recent post, profitability across the spectrum of the corporate sector in the major advanced capitalist economies remains weak and there is a sizeable section of that sector that are ‘zombie’ firms, unable to make any more profit than necessary to cover the servicing of their debts, let along invest in new productive technology to raise productivity and expand.

And behind that situation is the level of corporate debt, something ignored by the likes of Gavyn Davies.  As Austrian economist, William White puts it in a damning piece, “the question that all market observers ultimately have to answer today is whether the epic accumulation of global debt is sustainable. If it is not, as I believe, the next question is how to identify the signs indicating that excesses are becoming unsustainable and leading to breakage.”

Michael Lewitt points out that stock markets “are chasing the highest valuations in history.”  As the graph below shows, they still have some way to go to match the hi-tech bubble excess of 2000. But the US stock market is now at the same level of valuation as just before the 1929 crash.

And yet financial markets are not supported by strong corporate earnings and real GDP growth.  According to Factset, estimated non- GAAP earnings growth for S&P companies in 2016 was a paltry +0.1% (and GAAP earnings growth was negative). Revenues were up roughly 2.0%.  “Wall Street strategists trying to tempt investors into buying more stocks at these levels are playing with fire.” (Casey).