Posts By Michael Burke

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Hoarding Cash While Refusing to Invest

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This article originally appeared on Socialist Economic Bulletin on the 8th of July.

The world’s largest companies are hoarding cash and cutting productive investment at the same time. The Financial Times reportsa survey from one leading ratings’ agency, Standard & Poor’s, which shows that the 2,000 largest private firms globally are sitting on a cash mountain of $4.5 trillion, which is approximately double the size of Britain’s annual GDP.

Yet capital expenditure, or ‘capex’ by those firms fell by 1% in 2013 and is projected to fall by 0.5% this year. But this does not presage an upturn. Steeper declines in productive investment are projected by those firms in both 2015 and 2016. Taken together, if these projections materialise the actual and projected falls in capex over the 4 years from 2013 to 2016 will approach the calamitous fall in productive investment seen at the depth of the recession in 2009. This is shown in the FT’s chart below.

Chart 1. Real Capital Expenditure by 2000 leading firms

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SEB has previously argued that companies are not prevented from investing by lack of access to capital or similar factors. They are sitting on a cash mountain. The same is true of British firms. There is plenty of money left, but firms refuse to invest it.

This is because private firms are not concerned with growth, either GDP growth or the growth of their own productive capacity. They are primarily driven by the growth of their own profits, or preserving them. Where that is not possible, where new capex will not meet an expected level of return, no new investments will be made.

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Economics and the Debate on Immigration II

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This article was originally posted on Socialist Economic Bulletin on the 6th of June.

The now notorious UKIP poster which suggested the entire population of the EU might come to Britain for work is designed to whip up racism. But it contains two fallacies that are unfortunately shared by many people who are not racists, and are therefore worth rebutting.

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The first myth is that Britain is a uniquely attractive place within Europe in terms of pay or workers’ rights, or social security entitlements. The graphic below was produced by the UNITE union in Ireland in their argument for higher pay. But it is such a good graphic it is worth reproducing as it stands.

Graphic 1. Private Sector Hourly Compensation in Western Europe, € PPPs

Graphic 1. Private Sector Hourly Compensation in Western Europe, € PPPs

Compensation includes both pay and social wages such as pensions and other benefits. The data is in Purchasing Power Parity terms, so that they account for price differentials between European countries. The data is drawn from Eurostat database here.

The compensation for British workers is among the lowest in Western Europe. Britain is not a uniquely attractive destination for economic migration within the EU. Therefore it should come as no surprise that Britain has one of the lower levels of immigration of the Western European economies.

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What is the Current Phase of Imperialism?

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A new situation requires a new analysis, and each new factor in the situation requires a specific and concrete analysis, placing it and its weight correctly in the overall situation.

In world politics, the new situation is that the US was unable to bomb Syria, it finds itself negotiating with, rather than bombing Iran, and its coup in the Ukraine may not be entirely successful in drawing Russia’s neighbour into NATO’s sphere of influence.

This overturns recent history. The overthrow of the Soviet Union in 1991 was accompanied by the US-led Gulf War. Since that time, the US and its various allies have bombed, invaded or intervened in Somalia (twice), Yugoslavia, Haiti, Afghanistan, the Philippines, Liberia, Iraq, the Maghreb, Yemen, Libya, Pakistan, Libya and South Sudan. The US has also led, organised or outsourced countless other interventions, overthrown governments and destabilised economies in pursuit of its interests. There has also been a series of coups and attempted coups in Latin America with varied success, and the so-called ‘colour revolutions’ in Eastern Europe to install pro-US, pro-NATO governments, as well as the US hijacking of the Arab Spring.

However, the economic rise of China has warranted a strategic ‘pivot’ towards Asia in an attempt to curb the rise of the only economy that could rival US supremacy in the foreseeable future. Given this absolute priority and the reduced circumstances of the US economy, it has been necessary to suspend new large-scale direct military interventions elsewhere.

This curb on US power has had immediate and beneficial consequences for humanity. Syria could not be bombed and neither could Iran. In these, Russian opposition to US plans was a key political obstacle, especially as the US wanted to deploy multilateral and multinational forces to do its bidding and needed the imprimatur of the UN Security Council. The US response to this blockage has been to increase pressure on Russia, most dramatically with its ouster of the elected Ukrainian government in a coup and its attempt to breach the country’s agreed neutrality by bringing it into NATO.

This curb on US power, however limited or temporary, should be welcomed by all socialists, by all democrats and simply by all those who desire peace. Instead, we have the strange spectacle that some on the left have raised the charge that Russia is imperialist, or that China is, or countries such as Brazil, or India or South Africa are ‘sub-imperialist’!

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Trying to Learn from What Works

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This article was originally posted on Socialist Economic Bulletin on Sunday May the 4th.

Facts can be a very severe judge. Either economic structures, the models used to explain them and economic policies work, or they don’t. The factual verdict alone can determine who was right, what was successful, what economic system works best.

The chart below is reproduced from The Economist. It shows the change in the IMF’s own estimates and forecasts of the level of US and Chinese GDP. Previously the IMF’s projections were that China would surpass the US as the world’s largest economy in 2019. Its revised estimates are that this will now occur at the end of this year. From 2015 onwards, when anyone refers to the world’s largest economy this will be China, not the US.

Chart 1. IMF Estimates & Projections of US & China GDP, PPP $ trillions

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By any standards, this is a momentous economic event. The leading position in the world economy does not change with great frequency. The US surpassed China’s GDP at some time around 1890, having already overtaken Britain in in 1872. (The Financial Times is incorrect to place this earlier data as the key turning-point – it seems to have ignored China altogether).

In this sense the current reversal is a return to the norm. China’s economy, with a population of 1.3 billion people should be larger than the US. At the same, this higher population level means that per capita GDP is still much below countries like Britain or the US, although this gap too is narrowing rapidly.

As a result, it would be foolish to argue Britain should ‘copy’ China. Different geographies, different relationships with the world economy, different histories and different levels of current economic development would make that an impossibility.

But the Chinese economy has delivered exceptionally strong growth, and grown much more rapidly than the Western economies over a very prolonged period. In 30 years of the process of reform and opening up from 1978 to 2008 it has raised average living standards from the British level of the 15th century to the same as Britain in 1948. No doubt the advance since 2008 has been equally impressive (probably to something like the early 1960s in Britain).

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Pressing On Both Sides of the See-Saw

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The slump in the Irish economy continues to be driven by the collapse in investment. The fall in investment more than accounts for the entire contraction in the economy during the recession.

The chart below shows the annual totals for both GDP and investment (Gross Fixed Capital Formation, GFCF) versus the peak in 2008. The worst GDP outcome was in 2010 when it was €12.7 billion below the 2008 peak. But by 2013 it was still €9.5 billion lower. Not much sign of genuine recovery.

Investment has fared even worse. It carried on falling even after GDP had stabilised. The low-point was in 2012, when investment was €16.6 billion below the previous high-point. But in 2013 it was still €15.9 billion lower.

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Over the 6 years of the slump GDP has fallen by 9.6%. Investment has fallen by 47%. As a result, investment as a proportion of GDP has fallen from 20.8% to 12.1%. Since the level of investment is decisive for the long-term productivity of any economy, a falling rate of investment will hurt growth over a prolonged period.

The relative weakness of investment by firms in Ireland is shown in the OECD chart below. Over a prolonged period leading up to the crisis private firms (Private Non-Financial Corporations, or PNFCs) operating in Ireland invested much less than firms in the other industrialised countries.

This weakness has been further exacerbated by the crisis. Since 2008 firms’ profits have actually risen in cash terms, by €6.7 billion. But on the same basis, investment in transport equipment and other equipment have both fallen by €1 billion, road building and other construction apart from homes have slumped by €5.4 billion.

Private Non-Financial Corporations Investment:  Decade Averages

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One of the key factors which has worsened the crisis is that successive governments have cut the state’s own level of investment. On the same cash basis, government has cut its investment by €7.6 billion. This was not always the case. Previously, when the economy was growing rapidly government had a higher level of investment than in the other industrialised economies, as shown in the chart below.

This is the see-saw of the Irish economy: very low levels of private firms’ investment and relatively high levels of government investment. The policy of austerity is pushing down on both ends of the see-saw at once. As a result the economy is cracking.

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That Tory Recovery in Perspective

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This post was originally published on Socialist Economic Bulletin on Tuesday the 18th of March.

This week George Osborne will announce his latest Budget. The specific measures in this Budget were not published at the time of writing. But it is a fairly safe assumption that he will boast that the economy is on track, and that there is a recovery. This is simply an exercise in redefinition.

The economy grew by just 1.9% in 2013. This is following a period of historically slow growth, the deepest recession in living memory and the weakest recovery on record. Yet many commentators and not just explicit supporters of austerity seem to believe this means we are automatically on track for a genuine recovery with all that means for growing jobs, rising real pay and improving living standards.

Unfortunately both the celebrations and the optimism are misplaced. Of course this does not mean that the economy will never grow again. It is even possible that growth will be a little better in 2014 than it was in 2013. But after most recessions the economic rebound is usually fairly strong. After a very steep recession the recovery should be very strong. That is not the case currently.

Annual growth in GDP of just 1.9% in 2013 is the best since 2007. But that is really a measure of the crisis of the economy and how badly policy has failed.

Prior to the current crisis, in the 20 years to 2008 the average annual growth rate of GDP was a little under 3%. In the same 20 year period from 1988 to 2008 only 3 years have seen worse growth for the British economy than last year’s 1.9% and all of those were associated with the recession under the Tories in the early 1990s (the ERM crisis).

So, a growth rate associated in the past with crisis is now redefined as recovery and heralded as success. Crisis is redefined as success; stagnation is now growth.

Current growth rates also remain well below the previous trend. That means the gap between where we are and where could or should have been is actually getting wider. It would take many years of sustained growth above that 3% rate in order to close the gap between the actual level of GDP and its previous trend. No major forecasting body suggests anything like that is going to happen over the next few years. The chart below shows the trend growth of Britain’s GDP in from 1988 to 2008.

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Marx was right all along, says investment bank

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This article appeared as a post on Socialist Economic Bulletin on Tuesday the 4th of March.

Well, not quite. But a recent study by leading investment bank Credit Suisse shows that long-term growth rates of GDP in selected industrialised economies are negatively correlated with financial returns to shareholders. That is, the best returns for shareholders are from countries where GDP growth has been slowest, and vice versa. Where growth has been strongest, shareholder returns are weakest.

This is shown in the chart from Credit Suisse below.

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Business Insider magazine carries a report of the research. It makes a series of bizarre arguments in an attempt to explain the correlation. The first is that stock markets anticipate future economic growth. But given that these data are based on the last 113 years, the stock markets must be very far-sighted indeed. The subsequent arguments do not get any stronger.

The negative correlation does not prove negative causality. But it does support the theory which suggests that the interests of shareholders are contrary to the interests of economic growth and the well-being of the population.

The clearest theory which this data supports, that the interests of shareholders are counterposed to that of economic growth, was formulated by Marx. In Capital he argues that the ‘development of the productive forces’ (the investment in the means of production and in education that are required to increase the productivity of labour and hence economic growth) runs up against the barrier of the private ownership of the means of production*.

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Who’s Fooling Who at the BBC?

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This post originally appeared on the Socialist Economic Bulletin blog today.

Robert Peston is the BBC’s new economics editor. He has opened his new role with a programme called ‘How China Fooled the World’. For a time it is available on BBC iPlayer and Peston’s own summary is here.

In the blog and the programme Peston argues that China dodged the global economic crisis by increasing investment, specifically state-led investment. But the prevailing level of investment was already excessively high, the argument runs, and merely postponing the crisis by increasing it further will only exaggerate the inevitable crash.

The strangest thing about this argument is not the misapprehensions about the Chinese economy or even the evident lack of understanding about the forces that created what is described as the Chinese ‘economic miracle’. The main fault is that Peston does not seem to grasp the mutual relations between economies, or what is the motor force of economic growth. The BBC’s economics editor is making economic howlers.

This is the most important feature of the programme. Neither what Peston nor what SEB says is likely to affect the outcome for Chinese growth. But understanding its dynamics is crucial to a wider understanding of the economy and how to address crises where they actually exist. One of the countries where there is currently an economic crisis is Britain, not China.

Growth Forecasts

The argument rests on Peston’s own forecast of an imminent economic and financial crash in China. This puts him at odds with all the main leading global economic institutions, the IMF, World Bank, OECD and so on.

To take one example the IMF estimates that China’s real GDP growth will be 7.3% in 2014 after increasing by 7.6% in 2013. It also forecasts an increase of 7% in each of the three years from 2015 to 2018. By contrast, the IMF forecasts that British growth is stuck around the 2% rate every year until 2018, when it accelerates to 2.3%. The IMF data and projections for GDP real growth for Britain and China are shown in the chart below (Fig.1).

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Fig.1 IMF data & forecasts for China and Britain real GDP Growth

It is entirely possible that the official bodies are all wrong on Chinese growth. But without making the argument on why growth is destined to collapse, Peston is simply joining the very long list of those who have wrongly forecast China’s imminent demise, some of whom have continued to do so over a very prolonged period.

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Paper Tigers and Real Ones

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This is a guest post by Michael Burke.  Michael works as an economic consultant. He was previously senior international economist with Citibank in London. He blogs regularly at Socialist Economic Bulletin.  You can follow Michael at @menburke . It was originally posted on Notes on the Front.

Most people don’t care much about GDP (Gross Domestic Product) or most other acronyms that get bandied about on the economy. For good reason.

The purpose of economic policy is, or ought to be, about achieving the optimal sustainable improvement in living standards for the population. If businesses produce goods that no-one buys and they accumulate as unsold inventories, or if the buying power of businesses or households declines so that imports fall, both of these count as increases in GDP.

What really matters is if the economy and society as a whole is moving forwards, if people see an increase in their living standards and reasonably expect that the next generation or two will see the same.

In that light, the latest forecasts from the Central Bank of Ireland are not very encouraging. Sure, there is a forecast of 2.1% real GDP growth for the economy in 2014. But in terms of real wages, on average they will be zero as a projected 0.5% increase in wages is effectively wiped out by the anticipated level of inflation. Government current spending is also expected to fall in 2014 more than it did in 2013, so living standards for most people will actually decline again.

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Trends In Economic Output in Ireland

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There is very little combined economic analysis of both parts of the island of Ireland. With the exception of some very useful and innovative work done by the NERI Institute, it is not clear there is any other body which attempts to look at the island economy by simultaneously integrating an economic perspective North and South.

This is regrettable. To take just one example, about one-third of what the Office of National Statistics (ONS) designates NI exports goes southwards, although the proportion of exports from the RoI to the North is far smaller. In fact, despite all the obstacles in terms separate jurisdictions, regulations, monetary and fiscal policies, etc., it is very likely that the two economies are more integrated now than at the time of Partition. But that is a question for another time.

A recent development from the Office of National Statistics (ONS) does allow at least some useful comparisons to be made. Gross Value Added (GVA) is a measure of total output in an economy which excludes the effects of taxes and subsidies on production, to remove the distortions caused by them. It can be used when comparing the levels and composition of output in differing regions.

The Central Statistical Office (CSO) has for some time provided a real measure of GVA, which excludes the effects of inflation. The ONS has only recently done the same for what it describes as the regions of the UK.

The results are in the chart below show real GVA in both parts of Ireland. The indices of activity are adjusted so that the year 2010 equals 100.

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World Bank Sees a ‘Turning-Point’ in World Economy

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The World Bank has recently released its updated forecasts for the world economy. Two key features of the forecasts have received the greatest attention. The first is that the World Bank describes the overall trend in the world economy as at a ‘turning-point’ and secondly that this is led by a recovery in the advanced industrialised countries, or High Income Countries in the World Bank’s categorisation.

In terms of the forecasts, global GDP growth is expected to advance from 2.4% in 2013 to 3.2% this year rising to 3.4% in 2015 and 3.5% in 2016. Within that the Developing Economies are expected to grow by 5.3% in 2014, accelerating to 5.5% and 5.7% in 2015 and 2016 having grown an estimated 4.8% in 2013. But the bigger contribution to global growth is expected to come from the High Income Countries (HICs) which grew by just 1.3% in 2013 (estimated) rising to 2.2% in 2014 and 2.4% in both the following years.

So global growth is only ‘led by’ the HICs in the sense that the modest acceleration in projected growth is from the low base of 2013, a rise from 1.3% to 2.4%. By contrast the Developing Economies as a whole are expected to accelerate from 4.8% in 2013 to 5.7% in 2016, a rise of 0.9%. As a result the growth gap between these two key categories of the global economy narrows from 3.5% to 3.3%, on World Bank forecasts.

Over the medium-term the compound effect of growth differentials of this magnitude is very large. If a 3.3% differential in growth were maintained over 25 years, the Developing Economies would double in size relative to the HICs.

Turning to the performance of the HICs alone, the chart below shows World Bank data for their gross savings and investment (Gross Fixed Capital Formation) as a proportion of GDP (left-hand side). The growth of GDP is the grey line shown on the right-hand side.

What is clear is that all three variables are in a downtrend. That is, both the cyclical high-points and low-points become progressively lower over time. The slump in activity in 2008 and 2009 is the exception not the rule. The rule is a steady downtrend in activity.

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How Bad Will It Get?

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Chancellor George Osborne has recently been promoting two ideas. One is that a recovery is under way and the other is that further cuts in government spending are needed, up to £25bn.

The contradictory nature of those two statements tells us something important about the nature of the current recovery and the actual content of economic policy. It is clear that however weak the current recovery is, the overwhelming bulk of the population will not benefit from it. Austerity policies have always been aimed at transferring incomes from labour and the poor to capital and the rich. So for example, a VAT increase was said to be necessary to cut the deficit yet was simultaneously implemented with a cut in the corporation tax rate which reduced government revenues by almost exactly the same amount.

The popular shorthand for this is a recovery solely for the 1%. The class content is clear. The policy is designed to boost capital at the expense of labour and its allies.

Austerity is not at all designed to boost total economic output, in which capital might be one of the beneficiaries. The reason is simple. In the ordinary course of events an economic downturn or slump leads to a fall in profits far greater than the fall in output. A simple recovery in output could entrench that for a prolonged period.

So, the owners of a car firm sell cars worth £1,000 million in a year. Their main costs are all the inputs of labour, capital and raw materials amounting to £800 million. But these largely to tend to stay the same or even continue to rise a little when the downturn occurs. Suppose sales fall by 10% to £900 million. Input costs are unaltered in aggregate. Now profits are only £100 million and previously they were £200 million. On a 10% decline in sales, profits have fallen by 50%. Profits fall faster than output.

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Britain’s Economic ‘Boom’

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This post originally appeared in Socialist Economic Bulletin on the 19th of November. 

As the British economic crisis becomes more prolonged the outbreak of stupidity that greets every new piece of important economic data becomes more generalised. Previously there has been a campaign to suggest that austerity has led to recovery when the opposite is the case. The recovery is based unsustainably on rising consumption, led by government consumption. The publication of the latest GDP data for most major economies has now led to wild suggestions that Britain is booming and is the strongest major economy in the world.

The level of real GDP in Britain since the recession began at the beginning of 2008 is shown in the chart below. It is compared to the US and the Euro Area. British growth has been almost exactly the same as that of the Euro Area as a whole and significantly worse than US GDP growth.

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Why Public Investment is Falling

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The level of public investment is falling in most of the advanced industrialised economies including Britain. The chart below appeared in the Financial Times and has attracted some publicity because it shows this decline in the US in stark terms.

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The difference between gross government investment and net government investment is accounted for by depreciation. All investment is subject to depreciation over time. This deducts from the level of gross investment. In the US net government investment (after depreciation) has fallen from 4% of GDP close to 1% of GDP.

It is set to fall further. The chart below also appeared in the FT piece but was less remarked. It shows the various Budget proposals from the Republican and Democrat parties in Congress as well as the Obama proposals. In all cases the Budget plans are to maintain a trend decline in public investment (excluding defence spending) with just one minority proposal for a temporary increase in investment.

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Both the British government and the US government have talked a great deal about the need for greater investment in infrastructure and greater public investment.

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