Economics

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From Alpha to Omega Podcast #052: What’s Next?

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This week I am delighted to welcome Professor Peter Hudis, of Oakton Community College, who has recently published his new book: ‘Marx’s Concept of the Alternative to Capitalism‘.

We discuss what Marx had to say about post-capitalist societies, and the reluctance of those on the left to talk about what it might actually look like.

We also talk of the theoretical reasons for the failure of the Soviet and Maoist projects, how abstract labour dominates our lives, and how not even the capitalists are in control of the current system.

You can find the Professors book here:http://www.haymarketbooks.org/pb/Marxs-Concept-of-the-Alternative-to-Capitalism

Enjoy!

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Why China Won’t Suffer a Western Type Financial Crisis

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This article originally appeared on John’s blog Key Trends in Globalisation on the 22nd of July.

Inaccurate articles sometimes appear claiming China faces a “severe debt crisis.” Factually these are easily refuted. Changyong Rhee, the IMF’s Asia and Pacific Department director, pointed out that China’s national and local government debt is only 53% of its GDP, compared to U.S. government debt which is roughly as big as GDP, or in Japan where government debt is 240% GDP. Foreign debt is 9% of China’s GDP – insignificant set against the world’s largest foreign exchange reserves.

Factually, it is therefore unsurprising that China’s predicted “Lehman” or “Minsky” moment, a financial collapse, invariably fails to occur. But there is another, even more fundamental, reason why China’s economy does not suffer severe financial crises of the type that struck the Western economies in 2008 or wracked the Eurozone. As this illustrates a way that China’s economic structure is superior to the West’s, it is worth analyzing.

Starting with fundamentals, the way the argument is constructed that China faces a “serious debt crisis” violates the most elementary accounting rule – more precisely that of double entry book keeping, which was invented in Italy “merely” eight centuries ago! This is that for every debit entry there has to be a credit one, and vice versa. Discussion of only of one side of a balance sheet without the other is financial nonsense. Claims, such as in the Financial Times, that the big story of 2014 is “the black cloud of debt hanging over China” are financially meaningless given they do not discuss assets to be set against debt.

To illustrate this elementary accounting principle, take a simple example. A company borrows $100 million at 5% interest, uses it to build houses, and sells them at 15% profit. To declare “there is a crisis – the company has a $100 million debt” is evidently nonsense. The company has debts of $100 million but assets of $115 million. It can repay $105 million and make $10 million profit – there is no “debt crisis” whatever. That its assets are greater than its debt illustrates why it is financially illiterate to discuss only debt without assets. A “balance sheet” is called that because it has two sides, not one.

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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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From Alpha to Omega Podcast: #048 Whither Underconsumptionism?

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This week we have the second part of our interview with Professor Andrew Kliman. We continue our discussion about his latest book – ‘The Failure of Capitalist Production’ – and in particular focus on Andrews critique of the Underconsumptionist Theory of Crisis, which is pretty dominant on the Marxist and non-Marxist left alike.

We hear how the empirical evidence sits squarely in the face of this theory, what role financialisation has actually played in the economy, and the similarities between Keynesianism and Underconsumptionism.

We also talk about the new book Andrew is working on, and just how impressed I am by how well Marx’s theories are able to explain the world around us today.

You can find the article for the New Left Project that Andrew mentions in the interview, critiquing Sam Gindin’s view of the crisis as financial, here.

And you can find Sam Gindins response to Andrew here.

Enjoy

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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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From Alpha To Omega: #046 Engines, Entropy, and Value

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This weeks our guest is Dr. William Paul Cockshott, a reader in the Computer Science Department of Glasgow University. Paul was trained as an economist, then as a computer scientist, and he has made contributions to the fields of image compression, 3D television, and parallel compilers. He is also known for his work in applying econophysics to classical economics, the field of economic computability, and as the co-author of the book ‘Towards a new Socialism’, advocating for the more efficient and democratic planning of a complex economy.

In this show we discuss the origins of classical political economy, and how it was influenced by the rapid advances in the world of physics. We talk of the importance of Watt and his steam engine, the development of the theories of thermodynamics and entropy, and their importance in economy. The work of Babbage and Alan Turing also get a mention, as well as the human as universal robot. We also discuss the overwhelming empirical evidence for Marx’s Labor Theory of Value, why it is that it works, and the importance of the work of previous guest Prof. Gregory Chaitin in the modern factory. Oh yes, and some roman pottery, Chinese crossbows from the Qin Dynasty, and how difficult it is to fold your clothes.

Enjoy!

You can find his books, talks, and research on his website here:

http://www.dcs.gla.ac.uk/~wpc/reports/index.html

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From Alpha to Omega Podcast: #045 Dollar Hegemony

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This week our guest is Matias Vernengo.

Matias is an Associate Professor of Economics, at Bucknell University, and a former Senior Manager of Economic Research at the Central Bank of Argentina. He blogs regularly at his site Naked Keynesianism, as well as for Triple Crisis, and is currently the co-editor of the Review of Keynesian Economics.

We discuss a paper he recently co-authored with David Fields on the hegemonic role of the Dollar in the world economy.

We talk of the advantages of being the worlds reserve currency, the Bretton Woods agreement, Nixon closing the gold window, the Triffin Dilemma, threats to the dominance of the dollar in world trade, and the irrelevance of gold in today’s financial system.

You can find his excellent blog here.

The Triple Crisis blog here.

And the Review of Keynesian Economics Journal here.

You can also find the paper we discuss here.

Enjoy!

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From Alpha to Omega Podcast #042 Oh So Reserved

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This weeks our guest is Dan Kervick. By day Dan works in the book publishing industry. By night, Dan is an independent scholar, specialising in the work of the British Philosopher David Hume, and a regular blogger on progressive and egalitarian economics over on http://neweconomicperspectives.org

We discuss the institutional working of the banking system, how reserves really work, bubble blowing and the logic of quantitative easing, military Keynesianism, and the role of capital flows in the modern economy.

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The Cash Hoard of Western Companies

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This post was originally published on Socialist Economic Bulletin on Monday the 21st of October.

Supporters of ‘austerity’ would have a very strong argument if there really were no money left. In that case, opponents of current policy would be left arguing only for a fairer implementation of those policies, or that perhaps they could be implemented more slowly.

This is not the case. Firms in the leading capitalist economies have been investing a declining proportion of their profits. This is the cause of the prolonged period of slow growth prior to the crisis and a number of its features such as stagnant real wages, so-called ‘financialisation’ and the growth in household debt.

This negative trend of declining proportion of profits directed towards investment reached crisis proportions in 2008 and is the cause of the slump. As a consequence of the sharp fall in this investment ratio there has been a sharp rise in the both the capital distributed to shareholders and in the growth of a cash hoard held by Non-Financial Corporations (NFCs). This cash hoard is a barrier to recovery, releasing it could be the mechanism for resolving the crisis.

The chart below shows the level of surplus generated by US firms (Gross Operating Surplus) and the level of investment (Gross Fixed Capital Formation) for the whole economy. Since the former are only presented in nominal terms, both variables are presented here in the comparable way.

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The nominal increase in profits has not been matched by an increase in nominal investment. In 1971 the investment ratio (GFCF/GoS) was 62%. It peaked in 1979 at 69% but even by 2000 it was still over 61%.

It declined steadily to 56% in 2008. But in 2012 it had declined to just 46%.
In a truly dynamic market economy there is nothing to prevent the investment ratio from exceeding 100% as firms utilise resources greater than their own (borrowing) in order to invest and achieve greater returns.

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From Alpha to Omega Podcast: A Model Economist

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Many thank to Tom O'Brien for allowing us to post the interviews from his podcast series, From Alpha to Omega, as they appear. From Alpha to Omega provides regular in-depth interviews with leading figures in the fields of Economics, Peak Oil, Democracy, Politics, Science, Mathematics, Philosophy, Complex Systems, Agnosticism, Permaculture, Collapse, and the Environment.

Recent interviews have included those with Marxist economists Alan Freeman, Michael Roberts, Michael Perelman and Andrew Kliman. We have already featured the interview with L.Randall Wray, on Modern Monetary Theory.

We will post each interview on the weekend that it appears on From Alpha to Omega – usually every two to three weeks. You can check out the From Alpha to Omega archive here to listen back to the previous 39 interviews that Tom has conducted over the last two years.

#40: A Model Economist

This week the interview is with Professor Matheus Grasselli. Matheus is the Deputy Director of the Fields Institute for Research in Mathematical Sciences, and an associate professor at McMaster University, where he is the co-director of PhiMac, the Financial Mathematics Laboratory. He also writes a blog on Quantitative Finance for the Fields Institute, where he discusses his work, and thoughts on economic modelling, complexity theory, and probability.

Matheus has been working with Prof. Steve Keen to help give a mathematicians viewpoint on his ground-breaking monetary economic models of the capitalist system. We discuss the current state of neoclassical macroeconomic modelling, complexity and emergence, Wynn Godley and his stock-flow consistent models, Hyman Minsky and Ponzi finance, black swans and fragility, Bayesian vs Freqentist statistics, Poker, and Samuel Beckett.

You can check out his blog Quantitative Finance: Foundations and Applications here.

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Stop the Presses! Cutting Public Sector Employment Actually Increases the Debt

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Well, well, well.  You know that policy of reducing the number of public sector employees?   Nurses, Gardai, civil servants, local authority workers?   The Government trumpets the success of this downsizing:  since late 2008, public sector numbers have fallen by nearly 30,000.  This has saved, according to Ministers, a lot of money:  the Exchequer pay bill (excluding pensions) has fallen by €5 billion; though some of this is due to pay cuts.  Leave aside the impact on public services – fewer people offering services with less resources; just focus on the fiscal side of things.  It would appear that public sector downsizing is successful.

There’s just one catch:  it is actually driving up the debt.

Readers of this blog will be familiar with the multipliers that the ESRI has produced in the past – estimating the impact of different fiscal measures (tax increases, spending cuts) on the economy, employment and public finances.  Now the ESRI has produced their third impact study:  ‘The HERMES-13 macroeconomic model of the Irish economy’.  In many respects, they confirm their previous results.  But they add a few new wrinkles.  One of them is the impact on the general government debt.  And when it comes to reducing the number of public sector employees, they found that doing such a thing actually increases the debt.

First, let’s go through their numbers.

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Hold Your Breath – We’ll be Underwater for a Very Long Time

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Kevin O’Rourke links to an interesting paper by Jeff Frankel which discusses different ways recessions are measured.  The standard European measurement says that when an economy falls two quarters in a row it is officially in recession (we know all about that given our official double-dip).  This measurement has the advantage of being statistically clear and simple.  This, though, can lead to false readings.  For instance, over two years the economy declines in half of the eight quarters – leaving it much lower.  If, though, none of those quarters were consecutive, then according to the European measurement, there was no recession even though output has fallen.  This may be an extreme case but it shows how quirky this measurement can be.

The US has a different way of measuring recessions.  According to Frankel:

‘In the United States, the arbiter of when recessions begin and end is the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER).    The NBER Committee does not use that rule of thumb (Europe’s two consecutive quarters of decline), nor any other quantifiable rule . . . When it makes its judgments it looks beyond the most recently reported GDP numbers to include also employment and a variety other indicators, in part because output measures are subject to errors and revisions.   The Committee sees nothing special in the criterion of two consecutive quarters.’

The problem with this approach is that there is no single definitive measurement so disputes easily arise.

I’d like to introduce another way to measure a recession.  It is based on the sinking-ship metaphor.  A ship starts sinking.  It eventually stops and starts to rise again.  While it’s rising back to the surface we can say that it is in recovery mode.  However, it will remain below water until it gets back to the surface.

Similarly with an economy:  an economy goes into decline, eventually stops falling and starts rising.  However, it remains metaphorically below water until it returns to the point at which it had started sinking.  If an economy is below its pre-recession levels it remains ‘recessed’.

Take, for instance, the US Great Depression in the 1930s.  The economy tanked big time in 1929.  However, by 1935 the economy had experienced nearly three years of rising GDP, employment, consumer spending and investment.  However, no one then (or now) would have said that the Great Depression was over by 1935 – it was still well below its 1929 level.

Let’s apply the sinking-ship measurement to the Irish economy, using the IMF projections out to 2018.

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Why Do We Have ‘Austerity’ and What is the Alternative?

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The national launch of the People’s Assembly Against Austerity is a very welcome development. It brings together a number of the largest unions, anti-cuts group and political forces both inside and outside the Labour Party in opposition to austerity policies.

Many will have been drawn into active opposition to government policies because a single aspect of them, perhaps the cuts in public sector pay and pensions, or social protection for people with disabilities, or the imposition of the bedroom tax or the very high level of unemployment among young black people, or the string of cuts which have driven women out of public sector jobs, facing reduced childcare provision and increasingly bearing the burden of reduced social care.

All of these policies are linked and generally go under the title of ‘austerity’. The term is a little misleading, as it implies that conditions have generally become worse for all. But that is not the case.

Transfer of incomes

One of the first acts of the Coalition government was a simultaneous increase in VAT and a cut in the level of corporation tax. According to the Treasury these amounted to approximately the same (£12bn to £13bn) in terms of revenue. But the VAT hike was disproportionately paid for by the poor and middle income earners, who spend more of their incomes on VAT-able goods. The corporation tax cut was an increase in the net income for firms. Taken together they amount to a transfer of incomes from workers and the poor to capital and the rich, the owners of firms.

This transfer of incomes from labour and the poor to capital and the rich is the essence of austerity policies. It is workers and the poor who are being made to pay for the crisis.

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