Returning to the long view

posted 22 Jun 2011, 13:31 by heiko khoo

By Marxist economist  Michael Roberts  

There is much talk in the financial press and among economists of the risk that the major capitalist economies could be slipping back into recession.  Economic data for the US and Europe are indicating a significant slowdown in economic growth and a weak recovery in employment and investment.  Is this just a temporary blip or does it represent a significant downturn?  I would like to answer that by returning to the long view.  

Which way are the major capitalist economies going?  Are they set for a long period of economic growth and rising profitability?  Has the Great Recession ‘cleansed’ the capitalist system of production sufficiently of ‘dead capital’ to allow renewed accumulation?  Well, I’ve looked at the data for the US economy and measured the overall rate of profit in Marxist terms to make a judgement.

In my book, The Great Recession, I argued that you can identify a cycle of profitability in the US capitalist economy using Marxist categories for profitability.   Just taking the post-war period, there was a Golden Age of profitability from 1946 to 1965 when the rate of profit (ROP) was high and even rising. During this period, economic recessions were few and relatively shallow. Then there was a period of crisis when profitability fell steadily until it reached a nadir in 1982.  During this period, economic recessions were more frequent, violent and deep i.e.  1969-70, 1974-5 (the first simultaneous post-war economic recession) and 1980-2 (the deepest recession since the 1930s).  After 1982 there was a recovery in profitability right up to 1997.  This was the period of so-called neoliberalism that many have argued constitutes a completely new structure of capitalism based on ‘financialisation’ and neoliberal policies of privatisation and weakening of the labour movement (see my post, Gerard Dumenil and the crisis of neo-liberalism, 3 March 2011).  There was only one significant economic slump in 1990-1.

But in 1997, profitability peaked according to my calculations (this is denied by many others but also confirmed by others – more on this on another occasion).  Since 1997, despite two economic recessions in 2001 and 2008-9 and two subsequent recoveries (2002-7 and 2009-??), profitability has still not recovered to the level of 1997.  This suggests that we are still in a downphase for US profitability and a new bottom has still to be reached over the next few years.  If the cycle is to be repeated that bottom should happen around 2014.  To achieve that, another econ0mic recession would be needed.

See my graphic here.  The purple line shows the Marxist or value rate of profit (VROP) for the US on the right-hand scale and the left-hand scale shows the organic composition of capital (OCC) as a red line.  The OCC is the main driver of VROP , operating in inverse relation, and is heading towards levels last reached when the rate of profit was at its nadir back in 1982.   The cycle of profitability is revealed and the hypothesis that the rate of profit is still in a downward phase.

After the recovery in ROP since mid-2009, is profitability heading down again?  Well, a Marxist measure of US profitability in not available beyond 2009 – we just don’t have the data.  But we can make some reasonable guesses for 2010 and 2011 based on the likely change in economic growth, workers wages and the accumulation of capital.  On those assumptions, it would appear that the ROP jumped back from its low in 2009 and rose in 2010.  However, my forecasts suggest that in 2011 the ROP will fall back – the beginning of its slide to a new low by 2014.  The graph incorporates those forecasts.

But this is guesswork.  We can use a mainstream measure of profitability (profits as a share of GDP) to provide  a more up to date guide to the direction of the ROP.  This is only a crude proxy for a proper Marxist measure but it does show that the ROP recovered after reaching a bottom in 2009 that was lower that in the recession of 2001 but not as low as in 1982.  We now have figures for the first quarter of 2011 and they show that the ROP still rose but at a slower pace, suggesting that it is about to peak.  This could soon confirm my forecast of a fall in ROP in 2011.

What next?  Once the ROP starts falling, it takes a few years before an economy moves into recession.  The ROP has usually been falling for three to four years before that happens.  On that basis, the US economy will not drop into a new recession until about 2014 onwards.  The debate continues among Marxist economists, but if the underlying cause of capitalist crisis is a falling ROP,  then a new slump is unlikely to develop until 2014.  But it confirms that even the Great Recession of 2008-9 was not big enough to restore a sustained rise in the ROP.  That is because it has not destroyed enough value in accumulated capital or in the excessive build-up of debt (fictitious capital) before 2007.  More destruction of value is necessary to do that.

That there is still much fictitious capital in the system is revealed by the value of the stock market relative to a measure of the real value of the companies the stock prices represent.  James Tobin, the leftist economist, developed a measure to tell if the stock market was overvalued or not and whether it would be heading down.  It is called Tobin’s Q, measuring the stock market’s value against the replacement value of all the assets of the companies in a stock market index – in other words, the real value of the accumulated corporate assets.  Tobin’s Q for the US S&P-500 stock index (the top 500 companies by market value in the US) currently looks like this.

The ratio is still relatively high and not near the trough reached in 1982 which created the conditions for a bull market rally.  You can see that the value of the stock market follows closely the movement of the Marxist rate of profit with a lag of about three years.  For example, when the rate of profit peaked in 1997 and started to contract, the US stock market went on rising until 2000 before entering its current period of contraction, or ‘bear market’ as it is called.  It still has some way to go before reaching a trough, probably about 2016-18.

Posted in capitalismeconomicsmarxismProfitability | 2 Comments »

Greece: heading for default

June 13, 2011 by michael roberts

Greece is heading for default on its government or sovereign debt, as it is called.  There are two reasons why it is becoming unavoidable.  The first is economic.  The size of the Greece’s public sector debt is now reaching 160% of GDP (annual output).  That is so large that it cannot be stabilised unless the annual government deficit of spending (excluding interest payments) over tax revenues is turned into a significant surplus (called a ‘primary surplus’).   The swing from deficit to surplus that the Greek government needs is now over 10% pts of GDP by 2014.  There is no possibility that this can be achieved.

The government has announced yet another fiscal austerity package drawn up by the IMF and the EU designed to create a primary surplus.  Public sector jobs will be cut by 15%.  If you exclude the armed forces, Greece has the same number of public sector workers per head of population as Ireland.  Under the package, Greece’s public sector jobs will be 10% smaller than Ireland’s.  At the same time,  the working week for public sector workers will be raised from 37.5 hours to 40 hours.   And on top of the already implemented 20% cut in wages, there will be further pay reductions.   Taxes will be raised by yet another 2-4% on average incomes and the tax threshold will be lowered to just an annual €6000.  So the poorest Greeks will pay even more tax.  The property tax threshold will also be lowered to include very modest properties starting at €200,000.

But none of these measures will do the trick in getting Greek sovereign debt under control because the Greek capitalist economy is now in a deep recession.  The latest data for GDP growth in Q1’11 revealed a fall of 5.5% over the same quarter in 2010.  And the forecasts for 2011 and 2012 are for further falls in real national output of 2-4% a year.  The unemployment rate is now over 16%  and over 40% for young people.  Greek capitalism is on its knees before the dreaded Troika (the IMF, the EU and the ECB).  With nominal GDP falling over the next two years and debt levels in euros rising, it is a mathematical impossibility for Greece’s government debt to be stabilised.

That means the Greek government cannot find the funds to repay the bonds that become due by borrowing from Europe’s banks and other financial institutions.  These institutions are already unloading their holdings of Greek debt and are demanding over 25% annual interest to buy more in secondary markets.  Such a rate of interest would just blow up the budget deficit despite attempts to cut it through fiscal austerity packages.  That is why the Greek government is being forced to get another bailout package from the EU and the IMF.  Back in 2010, it received a package worth €110bn supposedly to tide it over until early next year before it started borrowing again from bond markets.  It has become clear that it cannot ‘return to the market’ next year so it needs more ‘official’ money.  The EU-IMF is preparing a new package in return for yet more cuts in living standards for the average Greek household.  This package will probably involve another €60bn in new money but also €30bn to be raised by selling off Greek national assets like the post office, airports, airlines and lots of real estate (not including the Parthenon yet!).  And there is a tentative plan to raise another €30bn by persuading Europe’s banks to ‘roll over’ their holdings of Greek debt ‘voluntarily’.

This package will be agreed by Europe’s leaders at meetings on 20-24 June and is designed to tide Greece over until 2014 when things will be better (hopefully).  But nobody really believes that it will manage that.  Even by 2014, Greece is unlikely to have got control of its debt levels.  More likely, it will start to fail to meet the targets on the budget deficit set by the EU-IMF over the next year (as it has done up to now).  That will pose the issue for the official lenders.  Will they ignore the failure to meet targets and continue to hand out the money or will they recognise the inevitable and declare that Greece cannot pay and must default?

The second reason that default will happen is that the Greek people are increasingly unwilling to suffer a loss of over 30% in their living standards just to meet government debt payments to European banks, especially as those banks were the cause of very financial collapse globally that triggered the Great Recession and got Greece into this crisis in the first place!  Over the last year public opinion polls showed that the majority of Greeks were prepared to make sacrifices if it meant that Greece could stay in the Eurozone.  Joining the euro was seen by most Greeks as the making of the Greek economy and they wanted to be there.  Of course, most of the gains from Greece’s membership went to Greek business which lived off EU subsidies and a strong euro, while paying little or no taxes to the Greek exchequer.  Corruption and tax evasion were the order of the day for the rich, the corporations and professional classes (the big scandal in Greece has been the revelation that Greek doctors, dentists and lawyers, pop stars and politicians etc paid little or no tax).

But now the leading nations of the Eurozone are driving Greek capitalism into the ground and enthusiasm for sustaining fiscal measures is fading.  The latest polls show that over 80% of Greeks do not want to continue with fiscal austerity. Every Sunday, over 100,000 people have been occupying Syntagma Square in Athens.  The Indignants are copying the style of the Middle East protests and the movement in Spain against the cuts and the unity of the politicians in imposing austerity.   A recent survey found that 25% of of Greek people had been involved in some form of protest in the last month, or 2.2m people, double the previous levels of participation.

The ruling PASOK socialist party in government now trails the conservative New Democracy opposition in the polls for the first time since the crisis began.  More revealing is that both major parties are losing ground to an array of splinter left parties.  Both the leaders of the major parties have all-time low ratings.  If there was an election tomorrow, no party would have an outright majority.  The balance of power would be held by small left parties.  Opposition to meeting the demands of the IMF-EU is growing in PASOK itself and not just from the trade unions.  A split and an early election is possible in the next six months. If that happens, Greece will no longer keep to its fiscal targets and may even opt for default itself.

What would default mean?  The ECB and the banks would consider it a disaster.  They are the institutions that hold the majority of Greek debt.  The value of that debt would plummet by at least 50%, bankrupting Greek banks and causing serious losses to other European banks and the ECB itself.  If markets worried that such a default could lead to defaults in other distressed EMU states like Ireland and Portugal, then there could be a new systemic financial crisis in Europe, this time based on sovereign debt, not private credit.  That is the fear of the ECB and why it opposes those in Germany who are calling for a ‘restructuring’ of Greek debt so that German taxpayers don’t have to keep paying for most of the Greek bailout packages.

For the Greek people it would be the lesser of two evils.  If the Greek government negotiated with bondholders to cut its debt by 50% or more, that would remove a huge burden from the back of the Greek people and enable their sacrifices to be spent on trying to revive the economy through investment and employment rather than paying the interest and principal to to the likes of Deutsche Bank or Societe General.  Greek banks would be nationalised, recapitalised and operated as a public service for loans to Greek small businesses and households, not just as buyers of government debt or conduits for rich Greeks to spirit away their wealth from Greece.

If the Greek government opted for default, they may face expulsion from the euro and certainly they would be frozen out of bond markets for a decade.  Some reckon that it would be a good thing if Greece left the Eurozone.  I don’t see that it benefits the Greek economy.  Sure, leaving the euro and starting a new drachma currency would allow Greece  to devalue heavily and so make its exports much cheaper.  But that would also create a massive rise in inflation, destroying the incomes and savings of Greek households and small businesses, who would still owe money in euros.  Greece would be reduced to a third world economy.    Of course, if they are expelled, Greece would have to take its chances.  But there is no need to go looking for it.  Indeed, a Greek government should appeal to other EMU states to do something similar and dispense with meeting the demand of the banks on public debt and instead bring them into public ownership with a plan for economic revival across Europe.

Default is inevitable.   But it could still be ‘orderly’.  Namely, the upcoming bailout funds may enable Greece to stay out of bond markets until 2014 when economic growth in Europe could have revived sufficiently and Europe’s banks could be strong enough to take a ‘haircut’ on their Greek bond holdings.  That is the hope of the ECB-IMF and the EU leaders.  But the odds of such an orderly default are falling and the odds of a disorderly one are rising.