Archive for category: Economy

The Governor of the Bank of England, Andrew Bailey set the attitude of the mainstream view on the impact of inflation in February, when he said that “I’m not saying nobody gets a pay rise, don’t get me wrong. But what I am saying is, we do need to see restraint in pay bargaining, otherwise it will get out of control”.

Bailey followed the Keynesian explanation of rising inflation as being the result of a tight (‘full employment’) labour market allowing workers to push for higher wages and thus forcing employers to hike prices to sustain profits.  This ‘wage-push’ theory of inflation has been refuted both theoretically and empirically, as I have shown in several previous posts. 

And more recently the Bank for International Settlements (BIS) study confirms that “by some measures, the current environment does not look conducive to such a spiral. After all, the correlation between wage growth and inflation has declined over recent decades and is currently near historical lows.”

BIS

But this wage push theory persists among orthodox Keynesians because they think full employment breeds inflation; and it is supported by the authorities because it ignores any impact on prices by businesses attempting to boost profit.  Bailey did not talk about ‘restraint’ in market pricing or profits.

The wage-push theory existed before Keynes.  As far back as in the mid-19^th century, the neo-Ricardian trade unionist Thomas Weston argued in the circles of the International Working Man’s Association that workers could not push for wages that were higher than the cost of subsistence because it would only lead to employers hiking prices and was therefore self-defeating.  For Weston, there was an ‘iron law’ of real wages tied to the labour time required for subsistence which could not be broken.

Marx rebutted Weston’s views both theoretically and empirically in a series of speeches published in the pamphlet, Value Price and Profit.  Marx argued that the value (price) of commodity ultimately depended on the average labour time taken to produce it.  But that meant the shares of that labour time between the workers who created the commodity and the capitalist who owned it was not fixed but depended on the class struggle between employers and employed. As he said, “capitalists cannot raise or lower wages merely at their whim, nor can they raise prices at will in order to make up for lost profits resulting from an increase in wages.”  If wages are ‘restrained’ that may not lower prices but instead simply increase profits.

Indeed, that is what is happening now in the current bout of inflation.  In the Great Recession recovery, price growth was actually quite subdued over the first few years of that recovery. Corporations instead applied extreme wage suppression (aided by high and persistent levels of unemployment).  Unit labour costs (ie the cost of labour per unit of production) fell over a three-year stretch from the recession’s trough in the second quarter of 2009 to the middle of 2012.

There has been a general pattern of the labour share of income falling during the early phase of recoveries characterized most of the post–World War II recoveries, though it has become more extreme in recent business cycles.  By 2019, labour’s share was at all-time low.  The decade of the 2010s saw basically a stagnation of average real wages in most major economies.

In a recent report, the Bank for International Settlements (BIS) makes the point that “in recent decades, workers’ collective bargaining power has declined alongside falling trade union membership. Relatedly, the indexation and COLA clauses that fuelled past wage-price spirals are less prevalent. In the euro area, the share of private sector employees whose contracts involve a formal role for inflation in wage-setting fell from 24% in 2008 to 16% in 2021. COLA coverage in the United States hovered around 25% in the 1960s and rose to about 60% during the inflationary episode of the late 1970s and early 1980s, but rapidly declined to 20% by the mid-1990s “

BIS

Since the COVID slump, labour’s share of income and real wages have been falling sharply even as unemployment falls.  This is the complete opposite of the Keynesian inflation theory and the so-called ‘iron law of wages’ proposed by Weston against Marx.  The rise in inflation has not been driven by anything that looks like an overheating labour market—instead it has been driven by higher corporate profit margins and supply-chain bottlenecks. That means that central banks hiking interest rates to ‘cool down’ labour markets and reduce wage rises will have little effect on inflation and are more likely to cause stagnation in investment and consumption, thus provoking a slump.

Prices of commodities can be broken down into the three main components: labour costs (v= the value of labour power in Marxist terminology, non-labour inputs (c =the constant capital consumed, and the “mark-up” of profits over the first two components (s = surplus value appropriated by the capitalist owners). P = v + c + s.

The Economic Policy Institute reckons that, since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the producing sector of the US economy have risen at an annualised rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Over half of this increase (53.9%) can be attributed to fatter profit margins, with labour costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth and labour costs over 60%. Non labour inputs (raw materials and components) are also driving up prices more than usual in the current economic recovery.

Current inflation is concentrated in the goods sector (particularly durable goods), driven by a collapse of supply chains in durable goods (with rolling port shutdowns around the world).  The bottleneck is not labour asking for higher wages, shipping capacity and other non-labour shortages.  Indeed, in the current inflation spike, US weekly earnings growth has been slowing month by month.

It’s profits that have been spiralling upwards.  Firms that did happen to have supply on hand as the pandemic-driven demand surge hit have had enormous pricing power vis-à-vis their customers.  Corporate profit margins (the share going to profits per unit of production) are at their highest since 1950.

The BIS study finds similarly: “Firms’ pricing power, as measured by the markup of prices over costs, has increased to historical highs.  In the low and stable inflation environment of the pre-pandemic era, higher markups lowered wage-price pass-through. But in a high inflation environment, higher markups could fuel inflation as businesses pay more attention to aggregate price growth and incorporate it into their pricing decisions. Indeed, this could be one reason why inflationary pressures have broadened recently in sectors that were not directly hit by bottlenecks.”

BIS

An analysis of the Securities and Exchange Commission filings for 100 US corporations found net profits up by a median of 49% in the last two years and in one case by as much as 111,000%!

Chief executives are acutely aware to the ability to hike prices in this inflationary spiral.  Hershey bar CEO Michel Buck told shareholders: “Pricing will be an important lever for us this year and is expected to drive most of our growth.”  Similarly, a Kroger executive told investors “a little bit of inflation is always good for our business”, while Hostess’s CEO in March said rising prices across the economy “helps” profits.

Does this mean that companies can raise prices at will and are engaged in what is called ‘price-gouging’?  Marx, arguing with Weston in 1865, did not think that was the case in general.  The power of competition still ruled.  George Pearkes, an analyst at Bespoke Investment, pointed to Caterpillar, which recorded a 958% profit increase driven by volume growth and price realization between 2019 and 2021’s fourth quarters. Eliminating price increases may have dropped the company’s 2021 quarter four operating profits slightly below the $1.3bn it made in 2020.  “This isn’t price gouging … and it shows pretty concretely that there’s a lot of nuance here,” Pearkes said, adding profiteering is “not the primary driver of inflation, nor the primary driver of corporate profits”.  Indeed, companies that push prices as hard as the current environment allows to maximise profits in the short run may find themselves paying a price in market share down the road as others get into the game.  It is clear, however, that the concentration of capital is any sector, the greater ability to hike prices.  “When you go from 15 to 10 companies, not much changes,” one analyst argued. “When you go from 10 to six, a lot changes. But when you go from six to four – it’s a fix.”

Recently, the UK’s Competitions and Market Authority (CMA) published an important report.  The CMA found a mixed picture.Profit persistence has increased as measured by markups over marginal costs and the return on capital but not when measured by profits before tax. 

And the CMA also found that the more international competition there was, the less ability for firms to increase prices and mark-ups.  “This highlights the important role that international trade plays in contributing to keeping UK markets competitive.” The BIS summed up this debate: “In product markets, the degree of competition comes into play. Firms with higher markups – an indication of greater market power – could raise prices when wages increase, while those without such pricing power may hesitate to do so. Strategic considerations in price-setting are also relevant. Firms may feel more comfortable raising prices if they believe their competitors will also do so. Price increases are more likely when demand is strong. With less concern about losing sales and less room to adjust profit margins, even firms with less pricing power could pass higher costs through to customers.”

As a partner in the Bain consultancy, an adviser to many corporations, argued, “when times are tough, screw your customers while the screwing is good!”.  The consultant went on: “I don’t think this is actually nefarious at all. Companies should charge what they can. Profit is the point of the whole exercise.”

Marx’s law of the tendency of the rate of profit to fall (LTRPF) has either been heavily criticised or ignored as being an irrelevant explanation of crises under capitalism, both theoretically and empirically.  The critics are not from mainstream economics, who generally ignore the role of profit in crises altogether.  They partly come from post-Keynesian economists who look to ‘aggregate demand’ as the driver of capitalist economies, not profit.  But the biggest sceptics come from Marxian economists. 

Even though Marx considered the LTRPF as ‘the most important law of political economy’ (Grundrisse) and the underlying cause of recurrent cycles of crises (Capital Volume 3 Chapter 13), the sceptics argue that Marx’s LTRPF is illogical and ‘indeterminate’ as a theory (Michael Heinrich).  And the empirical support for the law is non-existent or impossible to ascertain.  Instead, we must look elsewhere for a theory of crisis either by turning to Keynes or amalgamating various eclectic theories like ‘overproduction’ or ‘underconsumption’ or ‘financialisation’ – or just accepting that there is no Marxist theory of crises. In my view, these critics have been answered effectively by several authors, including myself.

But let’s leave aside the logical validity of the law and consider here just the empirical evidence to support Marx’s formula for the rate of profit on capital in an economy is s/C+v, when s = surplus value; C= stock of fixed and circulating means of production and v = value of labour power (wage costs).  Marx’s two key points on the LTRPF are 1) there will be a long-term secular decline in the average rate of profit on capital stock as capitalism develops and 2) the balance of tendential and counter-tendential factors in the law explains the regular booms and slumps in capitalist production.

Thanks to better data and also determined work by various Marxist economists too numerous to name all here, perhaps starting with Shane Mage back in 1963, there is now overwhelming empirical evidence to back Marx’s law.  To begin with, this evidence was exclusively confined to US data, which was the most comprehensive.  However, in the first decade of the 21^st century some Marxist economists began to compile evidence to calculate a world rate of profit. As I argued in my own first attempt to calculate a world rate of profit, this was necessary because capitalism is a ‘closed economy’ at a global level and capitalism had spread its tentacles to all parts of the world through the 20^th century. So to find better empirical support for the law required calculating a world rate. 

As early as 2007, Minqi et al made the first attempt that I know of to calculate the world rate of profit, followed by David Zachariah in 2010.  My first crude attempt was in 2012 (which I revised in 2017).  Then came along a much more comprehensive calculation going back to 1855 for 14 countries by Esteban Maito (2014).  Some Marxist economists were vehement in their scepticism in calculating a world rate of profit (Gerard Dumenil).  But some of us did not desist.  Given new data from the Penn World Tables 10.0 database available for the components of the law (s/C+v) going back to 1950 for economies, I made a much better calculation in 2020.

But now Marxist economists at the University of Massachusetts Amherst led by Deepankur Basu have delivered new evidence using data compiled by Brazilian Marxist economist Adalmir Marquetti.  Marquetti has expanded and modified the Penn World Tables developed by the Groningen Growth and Development Centre into what he calls the Extended Penn World Tables (EPWT).  The EPWT was first developed by Marquetti back in 2004 and I have used that database since then for my world rate of profit calculations.  But now Marquetti has issued an updated series EPWT 7.0.  And this series can be used to calculate a world rate of profit-based a large number of countries going back to 1960.

Basu et al use the new EPWT data to construct a world rate of profit as a weighted average of country-level profit rates, where a country’s share in the world capital stock is used as the weighting.  Of course, this world rate is only an approximate world average.  A proper world average would involve aggregating all the s, C and v in the world.  Basu et al make the point that it is incorrect to aggregate country-level profit rates using the gross domestic product (GDP) as weights. So previous studies like Maito’s and mine have used an incorrect weighting scheme when country capital stock should be used. I agree and in my latest version of the world rate of profit I went further and aggregated the s, the C and the v for the G20 countries using the Penn World Tables 10.0 going to back to 1950.  So no country weighting was necessary.

So much for method.  Let’s look at Basu et al’s results.  They are compelling in support of Marx’s law.  Here is the key graphic using all the countries with data going back to 1960.

Basu et al conclude that: “The country-aggregated world profit rate series displays a strong negative linear trend for the period 1960-1980 and a weaker negative linear trend from 1980 to 2019. A medium run decomposition analysis reveals that the decline in the world profit rate is driven by a decline in the output-capital ratio. The industry-aggregated world profit rate shows a negative linear trend for the period 2000-2014, which, once again, is driven by a fall in the output-capital ratio.”

So Marx’s law is emphatically vindicated empirically at a world level.  On the Amherst figures there has been a secular decline in the world rate of profit over the last 80 years of -25%, starting with the huge profitability crisis from 1966, leading to the major global slump of 1980-82.  That was followed by the so-called ‘neoliberal’ revival in profitability up to 1996 (+11%).  After that, the world economy entered what I have called ‘a long depression’ when profitability slipped back, turning up briefly in the credit boom of the 2000s until 2004, before slipping again into the Great Recession of 2008-9.  Since then, the world rate of profit has stagnated and was near its all-time low in 2019, before the global pandemic slump of 2020.  Each post-war global slump has revived profitability, but not for long.

How does the Basu calculation compare with my own made in 2020?  Bearing in mind that my last calculation was only for the top 19 economies in the world (the EU is a separate G20 member) and my method of calculation is somewhat different, my results show a striking similarity.  There is the same secular decline and the same turning points.  Perhaps this is not too surprising as both Basu et al and I are using the same underlying database.

Marx’s LTRPF argues that the rate of profit will fall if the organic composition of capital (OCC) rises faster than the rate of surplus value or exploitation of labour.  That is the underlying reason for the fall.  Basu et al have decomposed the components of the world rate of profit to ascertain whether that is correct.  They find that the world rate of profit declined at a rate of about 0.5% a year from 1960 to 2019, while the output-capital ratio declined by 0.8% a year (this is a reciprocal proxy for the OCC), and the profit share (a proxy for rate of surplus value) rose about 0.25% a year.  So this supports Marx’s law that the OCC will outstrip the rate of exploitation of labour most of the time and so lead to a fall in the rate of profit.  I found a similar result in my 2020 paper.

Ahmet Tonak, the world’s greatest Marxist expert on national accounts, had some concerns on using the Penn Tables as the raw data source for calculation because it does not distinguish between productive (value creating) labour and unproductive (value using) labour in an economy.  And that can lead to diverging results on the rate of profit in national economies – which he found for Turkey.

We can go some way to dealing with this possible divergence by considering the rate of profit in the non-financial, non-residential property sectors of an economy.  It does not solve the problem of delineating unproductive and productive labour within a sector, but it does provide some greater precision.  For more on this issue, see the excellent work by Tsoulifis and Paitaridis.

Basu and Wasner have also produced a profitability dashboard for the rate of profit in the US which distinguishes non-financial corporate profitability from corporate profitability.  I compared the Basu et al (global) results for the US rate of profit against their results for the US non-financial corporate rate of profit.  Both series follow the same trend and turning points so the divergence at this level is not a significant problem. 

However, during the neo-liberal period, the US rate of profit based on the global data (which does not distinguish productive and unproductive sectors) rises much more than the rate of profit on just the non-financial sector using the Basu-Wasner calculations.  That suggests that the neo-liberal recovery in profitability was mostly based on a switch into the financial sector by capital – another explanation for the fall in productive investment exhibited in the US in that period.

In sum, the Basu et al study has added yet more empirical evidence in support of Marx’s law on a world level. The evidence is overwhelming and yet the sceptics continue to ignore it and deny its relevance. The sceptics of Marx’s law of profitability are increasingly becoming like the climate change sceptics. 

The profitability dashboard for the US economy can be found here https://dbasu.shinyapps.io/Profitability/ and the dashboard for the world rate and various countries can be found here. https://dbasu.shinyapps.io/World-Profitability/

At the beginning of each year, I make an attempt to forecast what will happen in the world economy for the year ahead.  The point of making any forecast at all is often ridiculed.  After all, surely there are just too many factors to feed into any economic forecast to get even close to what eventually happens.  Moreover, mainstream economic forecasts have been notable in their failure.  In particular, they never forecast a slump in production and investment even a year ahead.  In my view, that shows an ideological commitment to the promotion of the capitalist mode of production.  Although, it is a confirmed feature of capitalism that there are regular and recurring slumps in production, investment and employment, these slumps are never forecast by the mainstream or official agencies until they have happened.

That does not mean making a forecast is a waste of time, in my view.  In scientific analysis, theory must have predictive power and that applies as well to economics if it is to be considered a science and not just an apology for capitalism.  So if Marx’s theory of crises is to be validated, it must have some predictive power – namely that slumps in capitalist production will happen at regular recurring intervals, primarily due to changes in the rate of profit on capital and resulting movements in the mass of profits in a capitalist economy.

But as I have argued in previous posts, predictions and forecasts are different.  From their models, climate scientists predict a dangerous rise in global temperatures; and virologists have also been predicting an increase in deadly pathogens reaching humans in a series of pandemics.  But forecasting when exactly these predictions become reality is much more difficult.  On the other hand, climatologists are not yet able to forecast well what the weather in a country is likely to be over a whole year, but their models are now pretty accurate for the weather over the next three days.  So forecasts for output, investment, prices and employment one year ahead are not so impossible. 

Anyway, let’s bite the bullet and make some forecasts for 2022.  Last year’s forecast was relatively easy.  It was clear that all the major economies were going to make a recovery from the slump of 2020.  I wrote: “Real GDPs will grow, unemployment rates will start to decline and consumer spending will pick up.”  With the rollout of vaccines, the “G7 economies should be recovering significantly by mid-year”.  But I added that “this will be no V-shaped recovery, which means a return to previous levels of national output, employment and investment.  By the end of 2021, most major economies (China excepted) will still have levels of output etc below that at the beginning of 2020.”  These forecasts have been borne out. 

There were two main reasons why I expected the economic recovery would not restore global output to 2019 levels by the end of 2021.  First, there had been a significant ‘scarring’ of the major economies from the COVID pandemic in jobs, investment and productivity of labour that can never be recovered.  This was exhibited in a huge rise in debt, both public sector and private, that weighs down on the major economies like the permanent damage of ‘long COVID’ on millions of people. 

This ‘scarring’ was also exhibited in a fall in average profitability of capital in the major economies in 2020 to a new low, the revival of which in 2021 was not sufficient to restore profitability even to the level of 2019.

Nevertheless, as expected, global real GDP growth in 2021 was probably around 5%, after falling an unprecedented 3.5% in the 2020 slump.  According to the IMF, in the advanced capitalist economies, real GDP per person fell 4.9% in 2020 but rose 5.0% in 2021.  That meant real GDP per person in these economies was still slightly below the level reached at end-2019.  So two years of scarring.

Most forecasts for this year, 2022, are more (or less) of the same as in 2021.  The world economy is expected to grow around 3.5-4.0% in real terms – a significant slowing compared to 2021 (down 25% on the rate).  Moreover, the advanced capitalist economies are forecast to grow at less than 4% in 2022 and at less than 2.5% in 2023. 

Forecast for real GDP growth (%) by the Conference Board.

https://www.conference-board.org/topics/global-economic-outlook/global-economic-outlook-2022-infographic

It’s a similar story for the so-called emerging economies of the ‘Global South’, including China and India.  China was the only major economy that avoided a slump in the year of COVID, 2020.  But growth of China’s output in 2021 was much weaker than after the end of the Great Recession in 2009.   The Conference Board seriously underestimates China’s growth rates, but even so, in 2022 China’s real GDP is unlikely to rise much above 5%.

What these forecasts suggest is that the ‘sugar-rush’ of pent-up consumer spending engendered by COVID cash subsidies from fiscal spending by governments and huge injections of credit money by central is waning and will do so further this year.  Indeed, as we know, central banks are now planning to ‘taper off’ their credit creation and even raise policy interest rates on borrowing.  The Bank of England has already started to hike its policy rate and the US fed plans three hikes in the latter part of 2022.

And all the forecasts for this year rely on the view that the new Omicron variant of COVID will prove to be short-lived and only mildly damaging to human health, thanks to vaccinations and new medical treatments.  That may be optimistic and even if Omicron turns out not to disrupt economies this year, there is no certainty that another, more devastating variant may not emerge.

Then, in my view, there is a third leg in the aftermath of COVID slump to come, probably in 2022.  In my 2021 forecast, I raised the possibility that such was the size of corporate debt and the large number of so-called ‘zombie companies’ that were not even making enough profit to cover the servicing of their debts (despite very low interest rates), that a financial crash could ensue.

And that is just the risk in the advanced capitalist economies. The so-called emerging economies are already in a dire state. According to the IMF, about half of Low Income Economies (LIEs) are now in danger of debt default.  ‘Emerging market’ debt to GDP has increased from 40% to 60% in this crisis. And there is little room to boost government spending to alleviate the hit.

The ‘developing’ countries are in a much weaker position compared with the global financial crisis of 2008-09. In 2007, 40 emerging market and middle-income countries had a combined central government fiscal surplus equal to 0.3 per cent of gross domestic product, according to the IMF. Last year, they posted a fiscal deficit of 4.9 per cent of GDP.  The government deficit of ‘EMs’ in Asia went from 0.7 per cent of GDP in 2007 to 5.8 per cent in 2019; in Latin America, it rose from 1.2 per cent of GDP to 4.9 per cent; and European EMs went from a surplus of 1.9 per cent of GDP to a deficit of 1 per cent. The Conference Board is forecasting a fall in the real GDP growth rate for Latin America of two-thirds from 6.4% to 2.2% and then even lower in 2023. That’s a recipe for a serious debt and currency crisis in these countries in 2022 – already Argentina is heading for another default on its debt.

Emerging economy governments are thus faced with either applying severe fiscal austerity that would prolong their stagnation; or devaluing their currencies to try and boost export growth. The Turkish government of Erdogan has opted for the policy of cutting not raising interest rates – in the policy style of Modern Monetary Theory. This has led to an outflow of capital and a 40% depreciation of the Turkish lira against major currencies. Inflation has rocketed. In 2022, the Turkish economy will dive and ‘stagflation’ will ensue.

A financial and debt crisis did not happen in 2021.  On the contrary, global stock and bond markets never had it so good.  Central bank-financed credit flooded into financial assets like there was no tomorrow.  The result has been a staggering rise in financial asset prices (stocks and bonds) and in real estate.  Central banks have injected $32 trillion into financial markets since the start of the COVID-19 pandemic, lifting global stock market capitalisation by $60 trillion.  And companies worldwide raised $12.1 trillion by selling stock and taking out loans as a result.  The US stock market index rose 17% in 2021, repeating a similar rise in 2020.  The S&P 500 index reached a record high. The Nikkei 225 Index its highest annual gains since 1989.

But as we go into 2022, the days of ‘easy money’ and cheap loans are coming to an end.  The huge stock market boom of the last two years looks likely to peter out.  Indeed, since April 2021, just five high-tech stocks—Apple, Microsoft, Nvidia, Tesla and the Google parent Alphabet—have accounted for more than half of the rise in US S&P index, while 210 stocks are 10% below their 52-week highs. And one-third of ‘leveraged loans’, a popular form of debt creation, in the US have a debt to earnings ratio exceeding six, a level regarded as dangerous to financial stability.

So this year could be the one for a financial crash or at least a severe correction in stock market and bond prices, as interest rates rise, eventually driving a layer of zombie corporations into bankruptcy.  This is what central banks fear.  That is why most are being very cautious about ending the era of easy money.  And yet they are being driven to do so because of the sharp rise in the inflation rates of prices of goods and services in many major economies.

US consumer goods and services annual inflation rate (%)

This inflation spike is mainly due to pent-up consumer demand as people run down savings built up during lockdowns coming up against supply ‘bottlenecks’.  These bottlenecks are the result of the restrictions on the international transport of goods and components and continued restrictions on raw materials and components for production – it is part of the aftermath of the COVID slump of 2020 and because much of the world is still suffering from the pandemic.

Mainstream economics is divided over whether this spike in inflation is ‘transitory’ and inflation rate will return to ‘normal’ levels or not.  In my view, the current high inflation rates are likely to be ‘transitory’ because during 2022 growth in output, investment and productivity will probably start to drop back to ‘long depression’ rates.  That will mean that inflation will also subside, although still be higher than pre-pandemic. 

There is a view that 2022 will actually be the start of new levels of GDP and productivity growth as experienced by the US in the ‘roaring twenties’ of the last century after the end of the Spanish flu epidemic.  During the so-called roaring twenties, US real GDP rose 42% and by 2.7% a year per capita. But there seems to be no evidence to justify the claim by some mainstream optimists that the advanced capitalist world is about to experience a roaring 2020s.  The big difference between the 1920s and the 2020s is that the 1920-21 slump in the US and Europe cleared out the ‘deadwood’ of inefficient and unprofitable companies so that the strong survivors could benefit from more market share.  Profitability of capital rose sharply in most economies.  Nothing like that is being forecast for 2022 or beyond, as the Conference Board forecasts (above) show, or for that matter, those of the IMF (below). 

Optimists for a new long boom in the 2020s to replace the long depression of the 2010s, like the Conference Board, base their argument on a revival of total factor productivity (TFP). This measure supposedly captures the role of efficiency and innovation in output growth. The CB reckons global TFP will rise by 0.4% on average annually this decade compared to zero over the past 20 years. That’s not much of an improvement when compared with the forecast slowing or even falling working-age employment and weak capital investment growth globally. Indeed, in Q3 2021, US productivity growth slumped on the quarter by the most in 60 years, while the year-on-year rate dropped 0.6%, the largest decline since 1993, as employment rose faster than output. 

A long boom would only be possible, according to Marx, if there is a significant destruction of capital values in a major slump.  By cleansing the accumulation process of obsolete technology and failing and unprofitable capital, innovation from new firms could then prosper.  That’s because such ‘creative destruction’ would deliver a higher rate of profitability. But there is no sign yet of any sharp recovery in the average profitability of capital.  Probably there needs to be a sustained rise of about 30% in profitability to deliver a new long boom like the ‘roaring twenties’ or the post-war ‘golden age’ or even that modestly achieved in the neo-liberal period of the late 20th century.

And don’t expect any further fiscal and monetary help from governments.  Given the high level of public sector debt, pro-business governments everywhere are looking to reduce fiscal spending and budget deficits.  Indeed, taxes are set to rise and government spending to be curtailed.  According to the IMF, general government spending in 2022 will fall 8% as a share of GDP this year over last year.  This fall is partly due to less spending on COVID support and a rise in GDP. 

But if we look at the US government spending and revenue projections, according to the Congressional Budget Office, federal government spending is set to decline by 7% on average up to 2026 compared with 2021 levels while tax revenues are expected to rise by 25%.  The US budget will be halved in 2022 and kept down for the following years.  So no Keynesian-style fiscal stimulus is planned – on the contrary.

US president Biden’s plans to expand fiscal spending have been stymied by Congress and anyway would have had only a small impact on economic activity.  The EU’s recovery fund for the weaker Eurozone economies has not yet even started and again will be insufficient to sustain faster economic growth.

In conclusion, assuming no new disasters from the continuing COVID pandemic, the world economy will grow in 2022, but nowhere near as fast as in the ‘sugar-rush’ year of 2021.  And by the end of this year, most major economies will have started to slip back towards the low growth, poor productivity trends of the Long Depression of 2010s, with prospects of even slower growth over the rest of the decade.