Archive for category: Economy

The semi-annual meetings of the IMF and World Bank start today where finance ministers and central bankers will meet in a slimmed-down but in-person gatherings in Washington.  This meeting is likely to be overshadowed by the scandal involving the IMF chief Kristalina Georgieva, who may well have been forced to resign as I write after a devastating report on the machinations of senior World Bank officials several years ago.  Georgieva has been accused of manipulating data on ‘Doing Business’ to favour China, Saudi Arabia and other states while she was at the World Bank several years ago. The scandal has divided IMF members, with the US pushing for her to go and European powers wanting her to stay.

But more important than even whether we can ever rely on the scientific honesty of the World Bank and the IMF is what is happening to the world economy as these international agencies meet to review progress on the recovery from the pandemic slump in 2020.

Earlier in the year, most mainstream forecasts for growth, employment, investment and inflation were bullish, with hopes for a V-shaped recovery based on the COVID vaccination rollout, the ebbing of the virus cases and the boost to many economies from fiscal spending by governments and injections of credit by central banks.  But in recent months, that unabashed optimism has begun to fade.  Just before IMF-World Bank meeting, Georgieva reported that “We face a global recovery that remains “hobbled” by the pandemic and its impact. We are unable to walk forward properly—it is like walking with stones in our shoes!”

She outlined the three stones in her shoes. The first was growth.  At the meeting, the IMF is set to lower its forecasts for global growth in 2021 and expects the divergence between the richer Global North and the poorer Global South to widen.  The second was inflation: “One particular concern with inflation is the rise in global food prices—up by more than 30 percent over the past year.”  And the third was debt: “we estimate that global public debt has increased to almost 100 percent of GDP.” (No mention of private sector debt, which is much more important and at historic highs).

Georgieva posed the risk of what is called ‘stagflation’, ie low or zero growth alongside high or rising inflation.  This is the ultimate nightmare for the major capitalist economies – and of course, the worst possible scenario for working people who would bear the brunt of rising prices for household while income growth remains weak; leading a fall in real incomes. 

This was the story of the 1970s.  So is stagflation coming back in 2022? Let’s look at the GDP growth side first.  The evidence is building up that the ‘sugar rush’ recovery in the major economies after the end of the pandemic lockdowns and after the impact of fiscal spending and easy money is flagging.  For example, in Q3 2021 just ended, the Atlanta Fed GDP Now! forecast for the US economy suggests a sharp slowdown (compared to consensus calls) to just 1.3% annual rate.  And Q4 is likely to be worse. After the ‘sugar rush’ comes the fatigue.

The ‘high frequency’ business activity surveys called the Purchasing Manager’s Indexes (PMIs) are also showing a distinct slowdown in most regions from the peaks of the summer. 

And in the US, the latest official data showed the jobs recovery stalled for a second consecutive month in September.  Coupled with lower business and consumer confidence, this suggests the ‘sugar rush’ there is also over.  In China, the government is grappling with sporadic outbreaks of the Delta coronavirus variant and the risk of a property debt implosion along with an energy shortage. Strong growth over the summer appears to have slowed sharply in the eurozone and UK.

Also, there is the Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) which compares indicators of real activity, financial markets and confidence with their historical averages, both for the global economy and individual countries, capturing the extent to which data in the current period is normal. The latest twice-yearly update shows a sharp snapback in growth since March across advanced and emerging economies.

On the other side of the stagflation scenario, inflation rates are rising everywhere.  Back in December last year the US Fed’s median forecast for inflation in 2021 was 1.8%. In March that was nudged up to 2.4% and then in June up to 3.4%. It is now 4.2%. Over the same period their median forecast for 2022 has risen from 1.9% to 2.2%. The Bank of England’s and the ECB’s numbers have followed a similar path.

Global grocery bills are rocketing.

And energy prices have taken off.

What is causing this rise in inflation generally and in food and energy, in particular?  The standard macroeconomics view is that there ‘excess demand’.  During COVID, consumers built up huge stashes of savings that they could not spend.  But now that economies are opening up again, households are spending heavily at a time when global supply chains have been disrupted by the COVID pandemic. 

This is the view of financial analysts, Jefferies: “the $2.5tn in excess household cash is an important buffer against stagflation, and we show that excess savings are distributed across the entire income distribution. To date, there has been very little evidence of demand destruction. Real spending is still close to cycle highs for most discretionary spending categories, despite significant price increases…A more rigorous analysis of price and volume changes by the San Francisco Fed shows that demand effects are the dominant driver of inflation at the moment, contributing 1.1% to y/y core PCE as of August. In contrast, supply-side effects contributed only 0.2%. This flies in the face of the prevailing narrative which attributes most of the price increases to supply chain disruptions. Yes, product shortages and supply bottlenecks are real, but they are largely a function of excess demand, rather than supply outages.”

So the Jefferies view is that this situation is just temporary or ‘transitional’, to use Fed Chair Powell’s expression.  Once production, employment and investment get going and international supply chain blockages ease, then inflation pressure will also ease and things will get back to ‘normal’.

There are serious doubts about this rosy scenario.  First on the demand side, is it really true that released pent up demand is the cause of rising prices?  The idea that ‘excess cash’ will simply ‘sop up’ the extra costs of gas and food prices seems unlikely.  After all, in the major economies this ‘excess cash’ is mostly in the pockets of the rich, who tend to save rather than spend.  Higher prices are more likely to lead to reductions in spending in so-called ‘discretionary items’ as working-class households try to meet the rising costs of food and energy. 

Moreover, accelerating inflation in essential goods and services is more likely to be the result of a ‘supply-side’ shock rather than excess demand.  “We are not dealing with demand-push inflation. What we are really going through right now is a massive supply shock,” said Jean Boivin, a former Bank of Canada deputy governor now at the BlackRock Investment Institute. “The way to deal with this is not as straightforward as just dealing with inflation.”   

On the supply side, there are those who argue that the 2020s are not like the 1970s with its stagflation, but more like the 1950s, when inflation incurred from the disruption and spending during the Korean war gave way to rising investment and profitability, so that industrial output and real GDP growth rates rose and inflation subsided.  “With supply shortages set to persist for the next 6 to 12 months, the current period of “stagflation-lite” will persist a while longer. But it is likely to remain a pale imitation of the 1970s stagflation episode. Meanwhile, we do not share the pessimism of those who think that the current supply shortages are just one of a series of stagflationary shocks likely to hit the economy in the coming years.”

But are the 2020s going to be a new ‘golden age’ for capitalism like the 1950s with high profit rates and investment, real wage rises, full employment and low inflation?  I doubt it; first, because the current supply-side ‘shock’ is really a continuation of the slowdown in industrial output, international trade, business investment and real GDP growth that was setting in in 2019 before the pandemic broke.  That was happening because the profitability of capitalist investment in the major economies had dropped to near historic lows, and as readers of this blog know, it is profitability that ultimately drives investment and growth in capitalist economies.

In previous posts, I have provided the evidence of the decline in profitability in the US and elsewhere.  Brian Green has a new analysis of UK business profitability which gets a similar result “before the UK entered the pandemic, the rate of profit had fallen sharply to stand 20% below the last mini peak in 2015.”

Again, you could even argue that the supply-side shock will remain not just because of low profitability and investment, but also because of the hugely increasing costs of dealing with climate change.  This has led to sharp cutbacks in investment in fossil fuel energy exploration and production, putting many economies at risk of an energy supply crisis.  This is the irony of market solutions to the global warming problem: driving up carbon emission prices and taxes merely causes a severe reduction in energy production because planning for the replacement of fossil fuel production with alternatives is non-existent.

If rising inflation is being driven by the weak supply-side rather than an excessively strong demand side, monetary policy won’t work.  Monetary policy works by trying to raise or lower demand. If spending is growing too fast and generating inflation, higher interest rates supposedly dampen the willingness of companies and households to consume or invest by increasing the cost of borrowing.  But even if this theory were correct, it does not apply when prices are rising because supply chains have broken, energy prices are increasing or there are labour shortages.  As Andrew Bailey, governor of the Bank of England, has said: “Monetary policy will not increase the supply of semiconductor chips, it will not increase the amount of wind (no, really), and nor will it produce more HGV drivers.” 

Indeed, as I have argued ad nauseum on this blog, pumping cash or credit into the financial system with ‘quantitative easing’ does not work to boost the economy if the ‘supply-side’ is not growing through lack of profitability.  You can take a horse to water, but you cannot make it drink.  That disconnection applies just as much when central banks tighten policy (ie withdraw credit and raise policy interest rates).  Reducing demand will do little if supply is stagnant for other reasons. 

Nevertheless, central banks are starting to tighten.  Interest rates have already risen in Norway and in many emerging economies, while the US Federal Reserve and the Bank of England have made moves to tighten monetary policy.  This won’t get inflation rates down, but merely increase the risk of a recession as debt servicing costs rise for companies already low on profits.  That’s the dilemma for central banks and governments as they debate the issue of stagflation this week in Washington.

But let me finish this long post by reminding readers that mainstream economics has no coherent theory of inflation.  As Charles Goodhart, a professor at the LSE and former member of the Bank of England’s monetary policy committee, remarked: “the world at the moment is in a really a rather extraordinary state because we have no general theory of inflation”. The two main theories offered: the monetarist theory that money supply drives inflation; and the Keynesian theory that inflation is caused by tight labour markets driving up wage costs, have been debunked by the evidence. 

So the mainstream has fallen back on a theory of inflation based on ‘expectations’.  As Goodhart remarks, this is “a bootstrap theory of inflation”; that as long as inflation expectations remain anchored, inflation itself will remain anchored. But expectations depend on where inflation already is and so provide no predictive power.  Indeed, a new paper by Jeremy Rudd at the Federal Reserve concludes; “Economists and economic policymakers believe that households’ and firms’ expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.”

As regular readers of this blog may know, G Carchedi and I have been developing an alternative Marxian theory of inflation. The gist of our theory is that inflation in modern capitalist economies has a long-term tendency to fall because wages decline as a share of total value-added; and profits are squeezed by a rising organic composition of capital (ie more investment in machinery and technology relative to employees).  But this tendency can be countered by the monetary authorities boosting money supply so that money price of goods and services rise, even though there is a tendency for the growth in the value of goods and services to fall.

We have tested this theory during the COVID pandemic slump for US inflation. During the year of the COVID, corporate profitability and profits fell sharply. Wage bills also fell. As our theory predicted, the results were deflationary. But the Fed pumped in more money.  US M2 money supply was up 40% in 2020.  So US inflation, after dropping nearly to zero in the first half of 2020, moved back up to 1.5% by year end.

In slumps, the velocity of money, which is the pace of turnover of the existing money supply in an economy, falls.  People and businesses make fewer transactions and instead tend to ‘hoard’ money.  That was certainly the case in 2020, where the velocity fell to a 60-year low.  Such a fall is hugely deflationary.  But in 2021, the velocity of money stopped falling.

In 2021, all the factors that led to a near zero inflation rate in the US in mid-2020 began to reverse.  At that time last year, we made a forecast that if profits and wages began to rise (wages, say by 5-10%; money supply by about 10%, then our model suggested that US inflation of goods and services would rise, perhaps to about 3.0-3.5% by end 2021.  Actually, money supply has continued to rise faster than we forecast.  And so US inflation is now over 4%, not 3.0-3.5% as we forecast. 

What our theory of inflation suggests that the US economy over the next few years is more likely to suffer from stagflation ie 3%-plus inflation with less than 2% growth, than from either deflation or inflationary ‘overheating’ (4%-plus).

Professor David Harvey is probably the best-known scholar of Marxist economics in the world.  Over the years, Professor Harvey and I have engaged in debate and discussion on Marx’s law of value and Marx’s law of the tendency of the rate of profit to fall.  Professor Harvey has always been sceptical of the relevance of Marx’s law of profitability in explaining regular and recurring crises of production and investment under capitalism.  He prefers alternative explanations.  In the past, I have debated with Professor Harvey on this in defence of the relevance, indeed the ultimate causal connection between crises in capitalism and Marx’s law.  You can read the substance of these debates here and also in the excellent book: The Great Financial Meltdown, systemic, conjunctural or policy created, edited by Turan Subasat.  See in particular, Part Two on Crisis and Profitability.

Now Professor Harvey kindly sent me in advance an article that has been published in the New Left Review.  The article is entitled ‘Rate and Mass’. In this article Professor Harvey spells out again in detail his argument for considering the mass of profit over the rate of profit in the analysis of crises.  At one point, he says: “mainstream commentators are not alone in missing the import of mass. There is a long history of Marxist economists doing so, too—not least in work on the tendency for the rate of profit to fall.”  And later he comments that “Michael Roberts’ studies of the consequences of a falling rate of profit, (are) absent any concern for the importance of the rising mass”, referencing my book The Long Depression.

Well, in my book, go to p26 and you will find me saying: “The underlying contradiction between the accumulation of capital and the rate of profit (and then a falling mass of profit) is resolved by crisis.” And again, on p27 I say “on each occasion,… a fall in the mass of profit led or coincided with a slump”. Indeed, for several pages in that section of the book, I outline the role of the mass of profit in booms and slumps and quote other sources.

What is at debate here?  Marx spells it out in Volume One of Capital: “despite the enormous decline in the general rate of profit…the number of workers employed by capital i.e. the absolute mass of labour set in motion by it, hence the absolute mass of the surplus labour absorbed, appropriated by it, hence the mass of surplus value it produces, hence the absolute magnitude or mass of the profit produced by it, can therefore grow, and progressively so, despite the progressive fall in the rate of profit.”  He then adds: “this not only can, but must be the case…. The same laws “produce both a growing absolute mass of profit, which the social capital appropriates, and a falling rate of profit.” And then Marx asks:  How, then should we present this double-edged law of a decline in the rate of profit coupled with a simultaneous increase in the absolute mass of profit arising from the same causes?”

As Marx explains, his law of profitability has a double-edge.  As the rate of profit falls in a capitalist economy, it is perfectly possible, indeed likely, that the mass of profit will rise.  It’s arithmetical really: a falling rate can still imply a rising mass.  But a double-edge cuts both ways.  As Marx goes on to explain in Volume 3 of Capital (chapter 13).  “The two movements not only go hand in hand, but mutually influence one another and are phenomena in which the same law expresses itself….. there would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0.   at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC.”  So the mass of profit can and will rise as the rate of profit falls, keeping capitalist investment and production going.  But as the rate of profit falls, the increase in the mass of profit will eventually fall to the point of ‘absolute over-accumulation’, the tipping point for crises.

Nevertheless, Professor Harvey wants to argue that Marx saw the mass of profit as more important in any analyses of crises than the rate.  I think the above quote shows that they are integrally connected, in Marx’s view.  Crises erupt when the mass of profit drops, causing over-investment and overproduction, but that happens when the rate of profit falls sufficiently to cause a fall in the mass of profit.

Now in a You Tube video of a recent panel in New York entitled Anti-Capitalist Chronicles, https://www.youtube.com/watch?v=NVqPSF4IlfE, Professor David Harvey tells the audience of his latest views on China, imperialism and crises (see from about 50min). But then a little later, Professor Harvey makes a critical comment on the ‘rate of profit’ theorists, singling out me in particular (at about 1.08).  After supporting Paul Sweezy and Baran’s rival ‘surplus profit thesis’ over Marx’s law of profitability, Professor Harvey remarks that Michael Roberts is obsessed with the rate of profit falling all the time and went on to joke: “if it started falling in 1850, should it not have reached zero by now!”  

Amusing as this joke is, anybody that reads my material on the rate of profit knows that the world rate of profit has not fallen to zero and will not any time soon, if ever, although there is a long term secular fall in the rate.  And there are several reasons for that, as I explain in my work.  The first is that there are counteracting factors to the law of the tendency of the rate of profit to fall and these countertendencies can raise the rate of profit for whole periods, decades even, as they did from the early 1980s to the end of the 20^th century.  The other main reason is that regular slumps in capitalism lead to the devaluation of capital, with companies going bankrupt, writing off fixed assets and laying off workers.  That leads to a rise in profitability possibly for several years.  So there is a cycle of profitability – again something that I explain in detail in the Long Depression, for example.  So the rate of profit does not fall in a straight line towards zero and Professor Harvey’s little joke at my expense does not hold to reality.  You can see in this graph below how that pans out.  Even if the rate of profit fell in a straight line from here, it would not reach zero before 2060 or so – and that won’t happen for the reasons above.  Indeed, there are plenty of periods when the rate of profit rises, often after major world wars or after long periods of economic depression.

A world rate of profit (%) – from the work Esteban Maito using 14 key countries.

In his presentation to the panel, Professor Harvey goes to say that he challenged me personally about why I don’t ever talk about the mass of profit.  Apparently, I replied: “oh, I talk about it, but it doesn’t really matter.”  But that’s not how I remember the discussion.  This discussion actually took place at a public session, a plenary debate between Professor Harvey and myself in front of over 200 people at the HM conference of 2019 in London, after Professor Harvey had sent me in advance a paper which follows the same arguments as in his article for the NLR above.  Now I fully documented (accurately I think) this debate between me and David here. https://thenextrecession.wordpress.com/2019/11/11/hm1-marxs-double-edge-law/.  If you read this post closely, I think you will find the ‘challenge’ and my response was not quite as Professor Harvey portrayed it at the New York panel.

As I say in my post covering that debate with Professor Harvey back in 2019, “Indeed, we ‘falling rate of profit boys and girls’ have been well aware of Marx’s double-edge law (of rate and mass)”.  And in my presentation to that plenary, I outlined the law; and I cited various works by ‘rate of profit’ theorists like Henryk Grossman who have used Marx’s double-edge law to explain crises.  Indeed, Grossman’s whole argument is built around the view that eventually a falling rate of profit leads to a slowdown in the rise in the mass of profit to the point where there is not enough surplus value to sustain investment in production and take a share for their own living and breakdown follows. 

And I provided a batch of empirical evidence showing the close connection between the rate and the mass of profit in leading to crises.  For example, I refer to the work of Jose Tapia from Drexel University published in the book, World in Crisis, jointly edited by myself and G Carchedi, that shows the close connection between the changes in the mass of US corporate profits and investment, leading to successive crises.  Indeed, at the plenary, I also provided a careful modelling of Marx’s double-edge law and applied it to real data from the US economy to show its connection to the Great Recession.

But more important than who said what and when, is what is the best explanation of the causes of regular and recurring crises under capitalism?  In the post on the debate between DH and myself, I concluded that “I think Professor Harvey’s purpose (in his paper and now in his article) was to weaken the role of Marx’s law of profitability and its relevance to crises.  By bringing up the double-edge law, it seems to me, David was saying that a rising mass of profit or capital stock or GDP is the problem. And thus, the problem for capitalism is not insufficient profit due to a falling rate, but too much surplus due to rising mass. How are we going to absorb or cope with ‘too much’ is apparently the problem?  This connects with David’s view that crises under capitalism arise because of too much capital or profit relative to the ability of consumers to use it. Indeed, David argues that it is consumer confidence and the level of consumption that matters in triggering crises not the rate or level of profits and investment. But the evidence on that does not support David’s thesis as I have shown before.”  (See the posts identified at the end).

As readers of my blog will know, in the debates that I have had in the past with Professor Harvey, he rejects Marx’s law of profitability as the underlying cause of crises in favour of what he has called a multiplicity of causes (again see the posts below). He reckons those who focus on Marx’s rate of profit law are being ‘monocausal’. But he has had to admit that the empirical evidence of a falling rate of profit is compelling. So now he has moved the goal posts from the rate to the mass. But shifting the goal posts just leaves us with a new goal to score in.

Marx’s double edge law is not a refutation of the law of profitability as the underlying cause of crises; on the contrary, it is integrally connected. And alternative ‘multiple’ causes (like underconsumption, ‘too much surplus to absorb’, disproportion, financial fragility etc) remain unconvincing and unproven in comparison.

http://gesd.free.fr/rob2dh.pdf

I leave the readers of DH’s new piece and my response to make up their own minds.