Economy

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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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The Dangers of Exaggerating RMB Internationalisation

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RMB ‘internationalization’ is one of the most discussed issues in China’s economic policy. But many claims regarding the extent of RMB internationalization are greatly exaggerated and the practical proposal to attempt to achieve it, capital account convertibility of the RMB, is extremely dangerous for China’s economic and social stability. To eliminate false estimates and policies, it is, therefore, necessary first to accurately establish the facts regarding the real international role of the RMB and then analyze what consequences flow from these.

Those wishing to present a highly exaggerated picture of the degree of RMB internationalization frequently do this by presenting percentage growth figures. This gives a misleading impression because it fails to mention that such growth rates look impressive merely because they are calculated starting from extraordinarily low levels. To take a typical example, the proportion of RMB payments carried out in the US in April 2014 had risen by 100% compared to a year earlier. This sounds spectacular – until it is noted that the rise was only to 0.04% of all worldwide currency transactions!

A sense of reality is immediately injected if its noted that in April 2014 the RMB accounted for only 1.4% of international payments – globally, RMB payments are entirely marginal. Furthermore even this very low figure exaggerates the RMB’s internationalization because a large percentage of the payments are merely between mainland China and Hong Kong.

To illustrate the real situation, start with China’s strongest area internationally – trade. By the end of 2013, 8.7% of world trade was denominated in RMB – but the dollar’s share was almost 10 times as high at 81%. Furthermore, the RMB figure was artificially flattering as around 80% of RMB payments were for Hong Kong. Excluding Hong Kong RMB payments were marginal. For example, by April 2014 only 2.4% of China and Hong Kong’s trade with the US, China’s largest single country export market, was in RMB.

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Stag-covery

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Stag-covery (n): a situation where statistical recovery occurs within a persistent economic stagnation  

The CSO’s new release shows a statistical recovery and a stagnant economy – a state of affairs that can be described as stag-covery.

The headline rates show a GDP quarterly increase of 2.7 percent.  This might seem solid enough but all this is driven by net exports.  The domestic economy remains mired in stagnation.

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The worst of the economic crash ended in 2010.  Since then it’s just a matter of bouncing along the bottom.  In 2013 consumer spending fell, spending on public services bumped up marginally while investment fell marginally.  We can debate the swings and roundabouts (impact of the pharma cliff, aircraft leasing, etc.).  But the narrative remains the same – the ship sunk to the bottom and is struggling to get back to the surface.

The first quarter of 2014 didn’t get off to a hectic start.  On a quarterly basis:

  • Consumer spending fell, though this shouldn’t be too surprising given that it was coming off a quarter that contained Christmas spending.
  • Spending on public service resumed its long-term fall – by over 2 percent.
  • Investment fell by a substantial 8 percent.

It is this inability of the latter to generate any momentum upwards that is particularly worrying.

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This represents is a potential problem for the Government.  In the last quarter investment fell by 8 percent.  Yet the Government has pencilled in investment growth of over 15 percent this year.  Of course, the game isn’t even half over but this is an especially poor start.

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Pablo Iglesias: “put a stop to the grand coalition that is imposing austerity and financial totalitarianism.”

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This is a rush translation of the address by Podemos MEP Pablo Iglesias to the European Parliament this morning, on the occasion of presenting his candidacy for President of the European Parliament. Original text via Público.

It is an honour to speak to you all in presenting my candidacy for the presidency of this chamber. This parliament is called upon to represent the sovereignty of Europe and we must, fellow deputies, live up to what that means today.

The dream of Europe has been buried many times but it always managed to awake once again. This is what happened nearly 70 years ago: Europe awoke again in the resistance of its peoples against fascism, in the survivors of the extermination camps, in those who gave their lives for justice and for freedom. Thousands of my own compatriots, who had struggled to defend democracy in Spain, took part in that struggle and that dream of justice. You cannot imagine the pride I have as a Spanish person that the first tanks that entered Paris to liberate it were manned by Spanish combatants. Today, as intolerance and xenophobia threaten us once again, I want to call upon Europe’s memory of antifascism, and that of all those peoples who love freedom and democracy.

My fellow deputies, the best of our continent and our common history was forged in the revolutions that made the people the subject of rights, above kings, gods, noblemen and major property owners. The best heritage of Europe is the will of its citizens to be free and to be the serfs of no-one. To be no-one’s serf, my fellow deputies, that is democracy.

That is why I must tell you today that the peoples to whom we owe our social freedoms and rights did not struggle for a Europe in which its people live in fear of poverty, of exclusion, of unemployment or of abandonment when faced with illness. The expropriation of sovereignty and subjection to the rule of financial elites threaten the present and the future of Europe, they threaten our dignity, they threaten equality, liberty and fraternity, they threaten our life in common.

The creation of new supranational entities does not have to come at the price of leaving the citizens helpless. Our peoples are not children, nor are they colonies of any investment fund. They did not win and defend their freedom so as to hand it over to a financial oligarchy. These are not abstract terms, my fellow deputies: all of you are well aware of the problem.

The ease with which lobbies in the service of major corporations move around here is scandalous, as are the revolving doors that turn public representatives into millionaires in the pay of big businesses. We have to say it loud and clear: this way of operating robs the peoples of their sovereignty, attacks democracy, and turns political representatives into a caste.

My fellow deputies, democracy in Europe has been the victim of authoritarian erosion. In the European periphery the situation is tragic: our countries have almost become protectorates, new colonies, where powers that no-one has elected are destroying social rights and threatening the social and political cohesion of our societies.

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From Alpha to Omega Podcast #050: The Matrix

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This week I am delighted to welcome back the economist, economic historian, and extremely prolific author, Professor Michael Perelman of the California State University, Chico. We talk about the latest book he is working on: ‘The Matrix: An exploratory political economy of the dangerous, paradoxical interactions between war, the economy, and economic ideology’.

We discuss unintended consequences, the difficult of decision-making in complex situations, US Imperialism, Vietnam, Heavyweight Boxing ,and the little talked about darker side of Winston Churchill.

You can check out the Professors books here

And here is his blog:

http://michaelperelman.wordpress.com/

Enjoy!

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Closer to the Bottom than to the Top

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Irish living standards are now closer to the bottom of the EU-15 countries than to the top; they are closer to Greece than to Germany or Belgium or the UK or most other EU-15 countries.

Eurostat has just released its annual estimates of household living standards. To measure this they use Actual Individual Consumption (AIC).  According to Eurostat:

‘In national accounts, Household Final Consumption Expenditure (HFCE) denotes expenditure on goods and services that are purchased and paid for by households. Actual Individual Consumption (AIC), on the other hand, consists of goods and services actually consumed by individuals, irrespective of whether these goods and services are purchased and paid for by households, by government, or by non-profit organisations. In international volume comparisons, AIC is often seen as the preferable measure, since it is not influenced by the fact that the organisation of certain important services consumed by households, like health and education services differs a lot across countries.

For example, if dental services are paid for by the government in one country, and by households in another, an international comparison based on HFCE would not compare like with like, whereas one based on AIC would. . . Actual Individual Consumption per capita is an alternative indicator better adapted to describe the material welfare of households.’

In short, AIC captures goods and services bought by households and by Governments on behalf of households.

The following table shows the relationship of European countries’ living standards to the EU-15 average, with the EU-15 equalling 100.

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Ireland is approximately 11 percent below the average EU-15 living standards.  We rank 12th in the league table.  What’s noteworthy is that we are closer to Greece than to most other countries.  We are 14 indice points above Greece but 15 points below the UK.  There are eight other countries above the UK.

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Here We Go Again – Blaming Workers Again

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Previously, I discussed the assertions that rising housing costs were caused by over-paid construction workers.  It wasn’t true but that never stops some commentators from trying to find blame – and finding it in workers’ pay packets.  It’s been going on since the start of the crisis.  And it still goes on.

The Irish Times reported that consumer prices in Ireland are still much higher than in most other EU countries:

‘Even after six years of austerity, consumer prices in Ireland are on average 18 per cent higher than the European Union norm, prompting renewed concern about the country’s competitiveness.’

Why should this still be the case?  Costs associated with being an island on the periphery (transport and import costs?).  Oligopolistic price-setting in key sectors?  Alan McQuaid, economist with Merrion Stockbrokers, believes he has part of the answer:

‘The other key issue which these figures highlight is the underlying cost for retailers – eg rents, insurance and wage costs – are higher than elsewhere. You cannot look to have one of the highest minimum wages in Europe, and then not be surprised that prices are more expensive than the rest of the bloc.’

Oh, my, it comes back to those darned over-paid workers, this time in the in the retail sector where workers are undermining our competitiveness by getting an average weekly income of €512 a week (and this includes management salaries; weekly income for shop floor workers are bound to be much lower).

Let’s look at this claim about high wages in the retail sector and see how we compare with other countries, using the National Accounts here and here.  We will use the Wholesale / Retail sector (there is little data at the retail sector only) but this sector as a whole would impact on costs for  consumers.  First up, employee compensation.

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Ireland is below the mean average of other EU-15 countries (no data for Sweden) and well-below most other countries.  We’re only higher than other peripheral countries and low-paid UK.  This shouldn’t be surprising.  Unite the Union examined employee compensation using the Eurostat Labour Cost Survey and found pretty much the same picture.

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Scapegoating During a Time of Crisis

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The following piece is based on a much longer article ‘Scapegoating During a Time of Crisis: A Critique of Post-Celtic Tiger Ireland’, co-written by Micheal Flynn, Lee Monaghan and Martin Power. It is available here.

Austerity and Scapegoating: two sides of the same coin

Class war is in large part a propaganda war; it is in no way confined to formal political life, but  works its way through all the institutions of society. For the most part it is the ruling class that is advancing – most obviously through the commercial media, which so often serves to divide, disempower, demoralise and dis-benefit the working class.

Only a few years ago it was generally accepted that bankers, developers and speculators destroyed Ireland’s economy. In the wake of the collapse, Brian Lenihan’s claim that ‘we all partied’ was rightly understood as an attempt to deflect blame from those actually responsible. Most understood that it was the recklessness of the investing classes, coupled with the political decision to socialise private bank debt that had forced hundreds of thousands on to dole queues and/or through airport departure gates. For a time, the anger of the population was focused squarely of those that had destroyed the economy.

Yet, notions of collective responsibility have been carefully fostered ever since. The idea of a specifically Irish lust for property (or even a ‘property-owning gene’) appears to have become the common-sense of our time. The commercial media, with the help of the trendy economists elevated to celebrity status, such as David McWilliams, reason that everything went askew because of a ‘cult of property’. We Irish gave in to a ‘mass delusion’ – or as Indakinny so eloquently explained ‘we all went a bit mad with borrowing’.

Consequently, and very conveniently, the role of developers, speculators and politicians – their systematic destruction of alternatives to crippling mortgage debt, the role of section 23 tax breaks, the endemic planning corruption revealed by the Mahon tribunal, are all put out of sight as blame is socialised. This makes it far easier to justify the on-going socialisation of debt, which in turn helps to rationalise the ‘tough decisions’ that government insists are unavoidable. The subsequent apportioning of blame to specific targets is likewise done in a manner consistent with the distribution of austerity.

As expected, cuts to the public sector have gone hand-in-hand with attempts to demonize public sector workers. With the public sector now on the chopping block, ‘over-paid’ and ‘under worked’ public sector workers have been identified as unbearable burdens on the public finances. Rather than remain focused on where the billions are actually going, attention is paid to a ‘privileged’ public sector. This cultivation of resentment gives licence to savage cuts and softens the public up for privatisations. Even better, damage done to the highly-unionised public sector also damages the trade union movement, which when weakened makes for more effective attacks on pay and conditions down the line.

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Championing the Affluent

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The affluent are blessed in their champions.  They have a myriad of commentators fighting their corner.  In the Sunday Independent Colm McCarthy, discussing the benefits or otherwise of a third tax rate on high incomes, stated:

‘In order to raise meaningful amounts, it (the threshold to enter the third rate of tax) cannot be pitched at a level much higher than the €100,000 indicated, but that pulls into the high-tax bracket many people who do not consider themselves exceptionally well-off.’

€100,000 not exceptionally well-off?  Ok, maybe, but they certainly are ‘well-off’; very well-off.  In fact, they are in the top 3 percent of income earners in the state.  If these high-earners don’t consider themselves exceptionally well-off, what would they think if they were part of the 50 percent of income taxpayers who earn below €29,000 a year?  Or the 25 percent of the population who live in official deprivation.

These kinds of comments are part of the don’t-tax-high-earners-too-much-because-then-they-will-leave-in-a-tax-huff argument.  Thomas Molly, writing in the same newspaper, puts it this way when discussing the wealth tax:

‘Any other sort of wealth tax is likely to bring in very little money as the cash moves overseas at warp speed but is guaranteed to scare away many of the people who create wealth and jobs in our society.’

Ah, tax flight – the phenomenon whereby high taxation causes people to leave the jurisdiction.  How valid is this?  Not very.  The US is a good place to study.  Individual states can set their own income and wealth taxes in addition to Federal taxes.  And moving from one state to the next is not nearly as challenging as moving from one EU country to the next.  So what happens when states like Maryland or New Jersey or Oregon raised taxes on the highest income groups?  This study – ‘Tax Flight is a Myth’– found:

‘Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states. The same claim also is used to justify new tax cuts. Compelling evidence shows that this claim is false. The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.’

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Making Work Pay Requires More Social Protection Expenditure

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What are we to make of the two headlines this morning?  First, from the Irish Times:

‘Work pays better than welfare for most unemployed, ESRI finds’

And then there’s this from the Irish Independent:

‘Why families are better off staying on social welfare’

Both stories refer to a study that will be launched today by ESRI researchers, using the institute’s Switch tax-benefit model that allows a detailed examination of households’ financial situation both in work and out of work.  I will be going into more detail once this report is published but in this post I want to address a broader narrative: namely, to ‘make work pay’ requires more social protection spending and more public intervention into key markets.

The Irish Times reports two findings:

  • Nearly six out of seven people would be financially better off in work than on welfare (or nearly 85 percent)
  • Among those people in employment or unemployed facing a situation where work pays less than welfare, more than 70 per cent chose work rather than welfare.  So much for ‘life-style’ choices.

The Irish Times report goes on to state that:

‘The finding appears to debunk the myth that Ireland’s relatively generous social welfare system gives no incentive for people to work.’

Of course, we don’t have a relatively generous social welfare system but that’s another story.

The Irish Independent, however, focuses on the small numbers who would be better off on social protection.  They report that 45,000 workers would not receive any benefit from taking up work, of which 22,000 would actually lose money.  However, even the Indo report admits that most people still take up work, regardless of the financial impact.

So to the degree that people are not better off taking up work, what is the reason?

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Basic Income Summer Forum

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This article originally appeared on Ian Maleney’s Tumblr page, Interstate808.

On Saturday afternoon I attended the first half of the Basic Income Ireland Summer Forum in Dublin. I went along for the talk by Yannick Vanderborght, a leading campaigner for Basic Income in Europe. He spoke for about forty-five minutes or so, just giving a brief overview of the theoretical and political sides of the argument for and against Basic Income. Unfortunately I couldn’t stick around for the discussion afterwards.

The first part of the talk related to the “theory” side of Basic Income, the justifications for it and challenges to it, and it’s on this part that I would like to focus here. There’s plenty of information available online about the political side, with organisations all over Europe (and further afield) all engaged in pursuing the BI agenda and attempting to raise awareness for it. The Basic Income Earth Network is a good place to start.

Vanderborght outlined three main challenges to the idea of a Basic Income Guarantee.

—The Migration Challenge:

This argument says that any state that enacts Basic Income would instantly become a “welfare magnet”, attracting huge numbers of migrants looking to avail of it. EU law says that each EU state is required to provide social security to any EU citizen resident there. So, if Ireland were to enact BI, any citizen from any EU country could come here to live and the state would have to provide them with the same BI as they would someone born here. The argument suggest that such potentially high inward migration would make the scheme unfeasible.

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The Long Term Deceleration of the US Economy

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This chart shows the dominant long term trend in the US economy – gradual deceleration. A 20 year moving average is used to eliminate all cyclical or short term trends. The deceleration from 4.4% in 1969, to 4.1% in 1978, to 3.5% in 2002, to 2.5% in the first quarter of 2014 is clear. The temporary recovery in the late 1990s and beginning of the 21st century proved unsustainable and was followed by a sharper fall.

This trend shows that the most enduring feature of the US economy, which must be explained by any analysis, is not any analyses of business cycles, particularly those of a ‘manic-depressive’ type, but this very long term slowdown of the US economy.

Furthermore, as this deceleration has been going on for 40 years, it clearly has extremely deep roots which are very difficult to reverse. Unless dramatic changes in US economic policy take place, therefore slow deceleration should be built into projections for the US economy.

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The Cost of Our Health

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Do we spend too much on healthcare?  The EU Commission seems to think so.  In their country-specific recommendations for Ireland they state:

‘Even though Ireland has a relatively young population, public healthcare expenditure was among the highest in the EU in 2012 at 8.7% of GNI, significantly above the EU average of 7.3%.’

The implication is that our spending on healthcare is 16 percent above EU average levels.  What more justification does the Government need to continue cutting our health services than to get a recommendation from the EU?

There’s only one problem.  The EU Commission numbers are wholly unreliable and not a proper representation of health spending in the EU.

Before getting into the EU numbers, let’s see if we can discover just how much Ireland and other EU countries spend on health care by referring to the OECD’s Health at a Glance.

There are two measurements that can be used; first, health spending as a proportion of economic output.  The latest year they have data for is 2011.  To compensate for the fact that GDP is not a good measure for Ireland, I have used the Irish Fiscal Advisory Council’s hybrid GDP which measures fiscal capacity.  This hybrid measurement stands between GDP and GNP.

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Ireland is just below the average expenditure of other Advanced European Economies (i.e. EU-15) – but there is a major caveat which I will refer to below.  It should be noted that if we used a straight health spending as a percentage of GDP, Irish spending would be 8.9 percent of GDP.  Of course, benchmarking any expenditure against GDP has its problems, especially when a Government has been pursuing austerity policies that actively reduce the GDP.

For an alternative view, we can turn to the OECD’s measurement of healthcare expenditure per capita, using purchasing power parities to account for differences in currency and living standards.

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Housing Action Ireland Manifesto Launch: 12th of June, @6pm, Teachers’ Club Parnell Sq

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Housing Action Ireland

Housing Action Ireland has been working away quietly for some time, but on the 12th of June we’re launching our Housing Manifesto. This is a public event so we hope to see as many of you there as possible. The manifesto will be available one week before the launch – watch this space to get a copy. Full details below and more to follow.

Housing Action Now

in The Teachers Club Parnell Square

On Thursday June 12th 2014 at 6pm.

Screening of the 15 minute film Scattered by Joe Lee

and O’Devaney Gardens Residents and Workers.

Aidan O’Halloran and Raymond Hegarty will play some music.

A short version of the Housing Manifesto for online sharing is available here. The full version is available here.

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