by Michael Roberts
Speaking at the close of the G20 summit of world leaders in
Brisbane Australia, British Prime Minister David Cameron exclaimed that “red warning lights are flashing on the dashboard of the global economy”, threatening another recession.
Of course, Cameron was not talking about the UK economy, which is
going great guns, according to the British government, with six months
to go a general election. Instead, he was covering his back, so that if
any downturn in the British economy took place it could be blamed on the
rest of the world. You see, as Cameron put it in an article for the Guardian,
don’t blame me, you lefty liberals. If things go wrong from here, it
will be because of the Eurozone that you all like so much. “The
Eurozone is teetering on the brink of a possible third recession, with
high unemployment, falling growth and the real risk of falling prices
But he had to admit also that “emerging market economies which
were the driver of growth in the early stages of the recovery are now
slowing down. Despite the progress in Bali, global trade talks have
stalled while the epidemic of Ebola, conflict in the Middle East and
Russia’s illegal actions in Ukraine are all adding a dangerous backdrop
of instability and uncertainty.”
In effect, Cameron was accepting that capitalism is now global and no
one country can escape if there is a crisis or slump in another large
one or neighbour. If the Eurozone stays in depression and other major
economies in the G20 also slip back into a slump, the UK economy will
The G20 leaders announced that they were pledging to boost real GDP
growth in the world economy by an extra $2trn, or a cumulative 2%, by
2018. This pledge was full of holes. First, growth is expected to be
very weak over the next four years, at least compared to the rate of
world growth before the Great Recession (see my post, http://thenextrecession.wordpress.com/2014/11/08/the-world-economy-in-low-gear/).
So an extra 2% cumulative, or about 0.4% a year, would still mean
slower growth than the global average in the last 20 years. Second, this
was just a pledge: none of the G20 leaders were committed to
implementing any of the measures necessary to achieve it.
The main method for doing this was to increase infrastructure
investment (i.e more roads, railways, bridges, dams, broadband and other
key long-term projects). A “Global Infrastructure Hub” is to be set up
to promote more spending to close what is calculated as $70trn gap in
such investment, or 100% of world GDP.
Again, this is likely to be pie in the sky. Throughout the neoliberal
period (1980-2007), public investment has been viewed as a dirty word.
So it has been systematically cut back.
Now the IMF has been calling for action to boost infrastructure
spending in its reports for the last year. But when you read the data on
this, you find that the main method for the very necessary ‘austerity’
programs made by the governments of the leading economies to manage the
extra borrowing and debt built up from bailing out the banks and the
loss of income from the Great Recession was by cutting infrastructure
spending! Most of such spending is financed by public investment as
private capitalist companies are reluctant to fund such long-term risky
projects unless backed by governments (the taxpayers). And it is public
investment that has been slashed as the first way of getting government
spending down (followed by cuts in welfare spending).
Take Japan. In order to try and control its government spending and
get its large budget deficit down, the government just stopped its
investment programs for the country.
Talking of Japan, as Cameron warned the world of a possible new
global slump, we got the shock news that the Japanese economy had
contracted by another 0.4% in the third quarter of this year and was
thus technically in a new economic recession, while the fall in Q2 was
revised down further. This was a shock for the mainstream economic
forecasters, who had expected an expansion, although some of us had seen
it coming (see my post http://thenextrecession.wordpress.com/2014/10/13/japan-the-failure-of-abenomics/).
It seems that the huge jump in sales tax imposed by the Abe
government as part of its ‘three arrows’ of reform has driven real
incomes for average Japanese households down so much that they have
stopped spending. Private consumption is down since April at an annual
rate of 10%, buying homes is down even more and most worrying for
growth, business investment fell. And we have seen above that government
investment has also been cut.
The Abe government now look set to delay its proposed second round of
sales tax increase and probably call an early election so that the
government can get a suitably long time to impose further measures on
Paul Krugman has piped up in his blog to argue that it was good news
that Abe was going to delay the sale tax hike – indeed he should drop it
Krugman reckons that the Japanese economy is in a typical Keynesian
liquidity trap and with interest rates ‘zero bound’ more quantitative
easing won’t be enough to get the economy out of dreaded deflation.
What was needed was “a credible promise to be irresponsible”. The
government should spend more and not worry about the budget deficit and
the government’s debt level. More spending will boost growth and
inflation and the deficits and debt will then look after themselves.
Krugman did not tell his readers that just a few years ago he
reckoned that more monetary easing and fiscal spending would get Japan
out of its hole, when this blog argued that it would not. Who was right?
As it is, Japan has been running huge budget deficits to try and
boost the economy and has not imposed any serious measures of austerity.
According the IMF, Japan’s government deficit stood at 7.1% of GDP in
2014, nearly double the OECD average. Japan has reduced its deficit by
30% since the peak of the Great Recession in 2009. But the OECD average
reduction is 60%. If we exclude the effects of the cyclical recovery
since 2009 on government revenues and spending, then Japan’s austerity
program has cut the deficit by 15%, but the OECD austerity average is
60% and Greece’s is over 100%!
What is holding back the Japanese economy is not a lack of government
spending or more credit but the unwillingness of the capitalist sector
The Abe government has made huge efforts to get the profitability of
Japanese capital back to pre-crash levels. And by reducing real wages,
it has succeeded somewhat. But not yet enough it seems.
This is the common story of the weak recovery. The share of new value
going to labour has been squeezed through unemployment, low wage jobs
that are temporary, casual or part-time, along with cuts in welfare,
pensions and higher taxes. So the share of new value going to profit has
rocketed. But not enough to get kick-start capitalist investment. So,
while Cameron turns the red warning lights on, the IMF now calls for
government investment, while governments try to keep spending down.
It’s a funny old mess.
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