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This article was originally published in the Socialist Economic Bulletin on Monday, the 14th of September.
John McDonnell, the new Shadow Chancellor, has created something of a stir by his firm opposition to budget deficits to cover current expenditure – writing ‘let me make it absolutely clear that Labour under Jeremy Corbyn is committed to eliminating the deficit and creating an economy in which we live within our means.’ The so called ‘Keynesian’ left has attempted to make a point of defending budget deficits, presenting this as a hallmark of the left. These latter views are politically damaging because they are economically false. Neither do they derive from Keynes but from the confused views of academic pro-capitalist economics. John McDonnell is entirely correct on this point to oppose borrowing to cover current expenditure over the course of the business cycle.
The following article, originally published as ‘A damaging confusion in Western economics books – which followers of Keynes and Marx should correct’ deals with this issue from a fundamental economic point of view. A more comprehensive treatment of the issue, presented in a less technical fashion, can be found in my article‘Deng Xiaoping and John Maynard Keynes’.
Hopefully John McDonnell’s firm stance on the budget deficit will help the left to adopt the positions of Keynes and Marx and abandon the confused ideas on budget deficits that were wrongly presented under the name of ‘Keynesianism’.
This article was originally published on Socialist Economic Bulletin on Tuesday, 2nd of June.
US corporate profits fell in the first quarter of 2015. This is the second consecutive fall, technically causing a ‘profits recession’. The nominal level of profits of $2014.8bn in Q1 was lower than in Q2 2012. Profits have fallen to 11.4% of GDP, compared to 12.2% at their pre-crisis peak in Q3 2006. The trend in corporate profits is shown in Fig. 1 below.
Falling profits in a recovery is extremely unusual. But this is the third time this has happened during this weak recovery. In effect, because the economy lacks any great momentum, it is easy for external effects to push profits lower. This could be poor weather, a stronger US Dollar, shipping strikes, weak overseas demand, and so on.
But the effect of a sustained fall in profits is simple. Companies exist to realise profits and will stop investing if profits fall. In Fig. 2 below US corporate profits and US private sector fixed investment are shown in nominal terms for the purposes of comparison.
The Great Recession was preceded by a decline in profits and the fall in fixed investment followed with a time lag. This was a classic profits-led recession, which was partly obscured by the speculative frenzy that continued until 2007 (but which is a recurring end-of-cycle phenomenon).
This article originally appeared on the Socialist Economic Bulletin on Tuesday, 19th of May.
It is not sufficient for big business to have secured an election victory and an overall Parliamentary majority for the Tory Party. It is also necessary to intervene in the Labour Party to ensure that its leadership also conforms to big business interests too. This has currently taken the form of candidates in the leadership contest being asked to declare that Labour ‘spent too much’ in the run-up into the Great Recession. Answering Yes to this question is effectively a loyalty oath to big business interests, a renunciation even of the social democratic vestige of economic policy under New Labour.
The question is economically illiterate. It is taken as axiomatic that if there was a deficit that spending must have been too high. But all deficits are composed of two items; spending and income. In the case of government that income arises mainly in the form of taxes. It does not follow from the existence of a deficit that the culprit must be spending.
The reality is that measured as a proportion of GDP New Labour spent less on average than Margaret Thatcher. This is shown in Fig. 1 below. On average New Labour’s spending amounted to 41.5% of GDP. By comparison, under Thatcher government spending was 44.2%. In relation to the deficit, the taxation levels were also very different. Under New Labour taxation revenues were on average 37.5% of GDP. Under Thatcher taxation revenues amounted to 42.0% of GDP.
There is widely followed debate between Ben Bernanke and Larry Summers which has important implications for the Irish economy and its trajectory.
Summers, who holds innumerable titles is a Harvard Professor and formerly chief economist at the World Bank, initiated the debate with the view that the advanced industrialised economies were experiencing ‘secular stagnation’ (pdf). Bernanke, who is ex-chair of the Board of the US Federal Reserve Bank, accepts that the industrialised economies have been experiencing weak growth but argues that that this was because of very different and easily remedial problems.
They are both wrong. Those who are interested in their detailed arguments, and the responses and counters, should read their many articles and papers in full. But the debate does shed light on some key problems, and the shortcomings of mainstream answers. Here the particular relevance is to the Irish economy.i
In dismissing the idea of ‘secular stagnation’ (that is, a long-term economic malaise which is distinct from the recent slump and its aftermath) Bernanke argues that it is the imbalances of savings and investment between countries that are the key problems. In a generic sense this would place Ireland in the dock, since the CSO reports a current account surplus in 2014 of €11.4bn, roughly 6% of GDP. Ireland escapes Bernanke’s censure, unlike China, because the scale of the Irish surplus is trivial in a global context.
But this highlights a wider point. The Irish current account surplus barely represents the activities of anyone based in Ireland at all. It is due to the activities of multinational corporations, many of them US-based, who park profits and other activity in Ireland to avail of ultra-low corporate taxes. Any national accounts are the sum of the different sectors, or classes, operating within it.
Risk and reward
Summers’ analysis has the merit of not treating the world as an economic version of the board game Risk. He relates ‘secular stagnation’ to the declining rate of productive investment (plant & machinery, factories, software, vehicles and so on, not housing) by companies operating in the industrialised economies. He also argues austerity is counter-productive, as it reduces their incentives to invest.
But Summers uses the economic jargon the ‘declining natural rate of interest’ to describe the decline of investment. This is in effect a decline in profitable investment or the requirement for investment to achieve profitability (citing companies such as Google and Apple who are hoarding vast sums of cash or WhatsApp which required little productive investment before becoming a stock market darling).
Yet WhatsApp made only losses, not profits before it was bought by Facebook for $22billion. Summers confuses stock market or financial speculation returns with profits. It is also the case that both Apple and Google do invest in new products, and require increasing productive capacity to do so. It is simply that the growth in their profits exceeds the growth in their investment, so that the cash hoard continues to grow. In effect, this is a drain on the economy as profits are realised but this capital is withdrawn from productive use.
How does any of this affect Ireland (apart from many of these companies being based here, for accounting purposes or otherwise)? This is shown in Fig.1 below, the total financial balances of two key sectors of the economy, companies (Non-Financial Corporations, NFCs) and government.
This article is based on a background paper which was delivered to a fringe meeting at the recent Sinn Féin Ard Fheis
In Ireland there are two separate economic entities. Their separation means they run up against the fundamental laws of economics, as first identified by Adam Smith[i].
In the first instance it is the size of the home market which determines the scope of the division of labour. But in Ireland both economies, by their separation, have a truncated home market. This was not always the case. As part of the British Empire the North East portion of the island was highly integrated into what was then the largest ‘home’ market in human history. At the same time most of the rest of the island was primarily a breeding ground for cattle, to help feed the large metropolitan imperial centres.
Post-Partition the situation has dramatically changed. The Empire is gone while the southern economy has both developed a home market of a certain size while integrating itself to one of the world’s largest markets in the EU. This is the key fundamental fact which explains the dramatic changes in average living standards in the two parts of the Ireland since Partition.
This is illustrated in Fig.1 below, which shows per capita GDP using common international Dollars (adjusted for Purchasing Power Parities, first Angus Maddison and then OECD). It amounts to a startling transformation of relative prosperity within Ireland.
To specify the data, Maddison shows that per capita GDP in Ireland in 1921 was $2,533 and that in Britain it was $4,439 (and from a variety of sources that average incomes in the north-east counties of Ireland was at least on a par with Britain). From OECD data per capita GDP in RoI was $37,581 in 2013 and in the UK it was 34,755 (and the ONS data shows NI per capita output was 82% of the UK level).
If five percent of the population suddenly fell ill to an unknown disease a national emergency would be called. Government agencies and health professionals would be brought together under the direction of an emergency cabinet committee to first diagnose the disease, come up with a cure and then deliver it.
Well, we have such a disease – and it affects not five percent but 30 percent of the population. It is not unknown – It is the economic and social disease of deprivation. The CSO released the 2013 Survey of Income and Living Conditions and the data on deprivation is truly alarming.
There are now 1.4 million who are categorised by the CSO as living in deprivation. There are well over 400,000 children living in households suffering from multiple deprivation experiences. Since the start of the crisis, these numbers have more than doubled. The disease is spreading.
You are classified as ‘deprived’ if you unable to afford or experience two of the following items:
Two pairs of strong shoes * A warm waterproof overcoat * Buy new (not second-hand) clothes * Eat meat with meat, chicken, fish (or vegetarian equivalent) every second day * Have a roast joint or its equivalent once a week * Had to go without heating during the last year through lack of money * Keep the home adequately warm * Buy presents for family or friends at least once a year * Replace any worn out furniture * Have family or friends for a drink or meal once a month * Have a morning, afternoon or evening out in the last fortnight for entertainment
This is not a welfare phenomenon. Over 22 percent of all those experiencing deprivation are actually in the working force – well over 300,000.
The number of people experiencing in-work deprivation has more than trebled since 2008 – more than one-in-five working today. Over a third of one-income households are in deprivation. But a substantial number of two-income households also find their living standards marred – one-in-six.
Clearly, having a job is not necessarily a pathway out of poverty.
We are experiencing a privatisation of the economy and society by stealth. We usually associate privatisation with the sale of state assets to a private company. But there’s a larger privatisation process at work, slowly squeezing the ‘public’ from our social life. It is ongoing and the Government has signalled it will continue up to at least 2018 and in all likelihood beyond.
In a previous post I pointed out the ‘real’ cuts to public spending the Government intends to pursue up to 2018 – the second phase of austerity. This phase will entail public spending falling below inflation levels, which means the value will be cut. This won’t mean Ministers standing up in the Dail announcing cuts as they have been doing the last six years. But it will mean a squeeze up to 2018.
But this is against a backdrop of substantial reductions in government spending over the last six years. Indeed, so severe have been the cuts that spending levels on public services and investment are hurtling back some 20 years.
The chart above tracks expenditure on public services (government consumption) factoring out inflation. We find that in 2018 expenditure per every man, woman and child is estimated to be only slightly above spending levels in 2000 (the red line represents the Government projections). There is a continued downward trend that we should expect to continue until the end of the decade.
Budget time is really the only window where citizens are encouraged to engage in economic debate, and even then the space of time is too short and the range of topics up for debate too narrow to make much impact. When it ends, and for the other eleven months of the year, economics is the preserve of technocrats.
That is a serious problem. Economics is the discussion of how things in our society are produced and distributed. If you leave it to experts there is a big cost for democracy. Yet, while people feel comfortable engaging in debate about politics in the Middle East or presidential elections in the United States, there is a reticence to talk about economics.
Part of this is down to economics as a discipline, which has become increasingly remote from day-to-day life. The primacy of the market as a means to resolve problems has led to the rise of ‘market scientists’, who are seen as the authoritative voices on running an efficient economy. The language deployed by these experts is deliberately exclusive. Certainly they are unlikely to start explorations of economics with parables about pin factories, as Adam Smith did in The Wealth of Nations.
Yet they dominate economics discourse. When economics is discussed with any substance in the mainstream press market scientists from universities, think-tanks and finance houses are given free reign to make objective statements about the common good. Research by Julien Mercille has shown that between 2008 and 2012 77% of commentators on austerity were from elite institutions.
Another factor leading to the retreat of ordinary people from economic debate is the narrowing space for democracy in the economy. The democratic sphere only extends to areas where there is or could be public ownership. Outside of this decisions are made by private individuals or organisations. As wealth becomes concentrated in fewer hands, fewer economic decisions are made with public participation.
This has bred a cynicism about what can be achieved by discussing economics. With capital increasingly breaking free from taxation – and mobile enough to defeat strikes – people have come to accept that social problems can only be resolved by appealing to private individuals and organisations to solve problems profitably through the market. And so we are relegated in the economy from citizens to consumers.
This must be reversed if we are to build a politics in Ireland that can reclaim our society from the political establishment and the interests they serve. Joan Robinson, one of the great economists of the twentieth century, was once asked why people should study economics. She replied, “so that economists can’t fool you”. Implicit in this comment is the need for citizen economics.
The consumerism generated by capitalism throughout the ‘Developed‘ or ‘Western’ World is a major obstacle to tackling climate change, the biggest problem facing mankind. So the next question must be: why is capitalism still so widely accepted? Why do workers in the ‘West’ vote overwhelmingly for pro-capitalist parties?
One of the less obvious features of capitalism is that by exponentially expanding its ‘free’ market into every corner of life it puts a price on everything, and it thereby becomes a great social leveller: kings and lords, upper-class birthrights and privileges decline as possession of money, which by chance can be acquired by anyone, comes to measure everything. As a result, other than the massive inequalities of money, we now live in a society with a level of personal equality that was unimaginable throughout human history up to perhaps 40 years ago for gender, race, single mothers, LBGT, etc. But crucially this equality drive of capitalism has always encouraged constantly growing agitation by workers for a just and equal economic share of their social production. They now see themselves as the social equals of their bosses, which causes desperate problems for capitalists. Capitalism thereby lacks the acceptance of difference which earlier civilizations did, and which could last thousands of years in spite of vast degrees of inequality, class divisions, emperors, slavery, etc.
England’s history demonstrates this capitalist dilemma. In response to the rapidly growing agitation the capital-owning class must react, like any ruling class, in two ways: some groups are violently repressed and exploited; some are bribed to keep them loyal. Thus colonies were plundered by Imperialism to deliver ‘bribes’ to English workers (noted in England by Engels1 ) finally resulting in the compromise of social democracy. For example while the famine was devastating Ireland massive amounts of food were exported under British army guard to Liverpool. Violence was used in the 1819 Peterloo massacre of protesters. But when Chartist agitation for equality grew towards 1850, this time instead of violence the Corn Laws were ended to allow imports of cheap food to quieten the agitation. It is clear that most wars fought during Hobsbawm‘s Age of Empire2 and continuing today were concerned with access to cheap labour, food, raw materials, and later oil. The home working class was comfortable enough to forgo dangerous agitation, even gaining the vote over the years. But after 2 diverting world wars, which were much caused by imperial rivalry, in the 1970’s there arose further demands for economic equality by English workers (e.g. the miners strike) and also agitation by the colonies for their own liberty, for the equality of nations. As there were no new colonies to invade Thatcher and others in the West had to find another source of wealth to answer this new agitation.
The Irish recession which began in the final quarter of 2007 is the most severe in the history of the state. GDP contracted by 12.1% in a little over two years ending in the 4th quarter of 2009. That slump is not over. The latest data shows that the economy still remains 3.4% below its pre-recession peak. In effect it is likely to take 5 years or more simply to recover the output that was lost in the slump.
Even then, the economy will remain way below its previous trend rate of growth. This is illustrated in Fig 1 below, which shows real GDP and real GNP from 1997 to the present. The average annual growth rate of the Irish economy from 1997 to 2007 was approximately 6%. Maintaining the trend rate of growth would have led the economy to be approximately 50% larger than it is currently, and there is a danger that this potential is lost permanently.
Fig.1 Medium-Term GDP & GNP
The causes of the slump are very clear. Over the entire period of the crisis the fall in investment more than accounts for the entirety of the decline in aggregate measures of output, either GDP or GNP. GDP in the 2nd quarter of 2014 is still €6.6bn below its late 2007 peak. Investment (Gross Fixed Capital Formation, GFCF) is €14.4bn below its peak. There are other compoents of GDP which have also failed to recover, notably personal consumption and government expenditure. But even taken together, their combined fall of €10.1bn is less than the fall in investment. The only component of GDP which has risen is net exports. The change in components of GDP is shown in Fig.2 below.
Fig.2 GDP & Components In the Slump. Source: CSO
This data belies the notion that there is an ‘export-led recovery’ under way. Recorded net exports have grown very strongly, up €30.5bn over the period. But only one quarter of this or €7.4bn is a rise in the export of goods. A much larger statistical contribution has arisen from the decline in the imports of goods, down €14.6bn. As both investment and consumption have fallen, this simply suggests that both firms and households have been priced out of world markets by reduced purchasing power. The remainder of the rise in net exports is derived from international trade in services. These are particularly prone to the tax-induced flow of funds that plague the Irish economy and completely distort the economic data. There is little benefit from attempting to unravel them.
More importantly, it is clear that exports have not led a broad-based recovery at all. All the main domestic indicators of activity, consumption, government spending and investment are still far below their pre-recession peaks.
This article was originally posted on John’s blog Key Trends in Globalisation on the 2nd of September.
Since 1978 China has seen the most rapid economic growth of any major country in world history, and the most rapid increase of living standards of any major economy. Furthermore, following the beginning of the international financial crisis, China far outperformed any other major economy – in the seven years from 2ndquarter 2007 to 2nd quarter 2014 China’s economy grew by 78% and the US by 8%. In a single generation China has gone from a ‘low income’ economy to the verge of achieving ‘high income’ status by World Bank criteria.
This unprecedented economic development is sometimes explained in terms of unique ‘Chinese characteristics’, but Western economic research over the last 30 years confirms that the reasons for China’s economic growth are rooted in universal economic processes. To be more precise, while the combination of global forces producing economic growth is unique in China, and produces unique ‘Chinese characteristics’, the forces propelling China’s growth operate throughout the world economy.
These modern advances in Western measurement and analysis of the causes of economic growth have major implications for China. Some economists in China have claimed that its very rapid growth is ‘aberrant’ and not in conformity with economic theory. Instead, supposedly China must switch from a growth pattern based on high investment and exports to one based on productivity, more precisely Total Factor Productivity (TFP), growth. Unfortunately such arguments are based on economic methods and concepts that are 30 years out of date and which have been formally replaced by the UN, US and OECD.
Modern economic methods show that growth in the world economy, therefore including China, is fundamentally driven by high levels of investment and by globalisation, which is division of labour on an international scale. The aim of this article, therefore, is to outline the results of the most advanced Western economic methods and their implications for China. First a brief characterisation of the scale of China’s economic achievement will be given, as this establishes the fundamental implications of this for economic theory, and then the implications of modern Western economic research for understanding China’s growth will be analysed. In particular, attention will be given to the formally registered advances of measurement and understanding of economic growth in general, by international economic agencies, and to the most comprehensive application of these to the study of China and Asia’s economic growth – Vu Minh Khuong’s masterpiece The Dynamics of Economic Growth: Policy Insights from Comparative Analyses in Asia.
This week we have part two of our discussion with Professor Peter Hudis, of Oakton Community College, about his book ‘Marx’s Concept of the Alternative to Capitalism’. The first part can be found here.
In this week’s show we talk about the Soviet experiment and the alienation of labour, the role of the state in a post-capitalist society, the Spanish revolution and the anarchist understanding of revolution, and the co-operative model as an alternative.
You can get the Professors book here.