Monday, February 29, 2016

G20 and the mainstream solutions to a global slowdown

The weekend meeting of the finance ministers of the top 20 economies in the world in Shanghai, China was a dismal affair.  Before the meeting, the IMF painted a grim picture of the state of the global economy.  In its, Global Prospects and Policy Challenges, the IMF economists warned that it would be reducing its forecasts for global economic growth in 2016, yet again.

And as the G20 summit met, figures came in for world trade in 2015.  It has recorded its biggest reversal since the Great Recession of 2008-9.  The value of goods that crossed international borders last year fell 13.8 per cent in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor.
world trade
The Baltic Dry index, a measure of global trade in bulk commodities, has been touching historic lows.  China, which in 2014 overtook the US as the world’s biggest trading nation, this month reported double-digit falls in both exports and imports in January. In Brazil, which is now experiencing its worst recession in more than a century, imports from China have collapsed.  Exports from China to Brazil of everything from cars to textiles shipped in containers fell 60 per cent in January from a year earlier while the total volume of imports via containers into Latin America’s biggest economy halved, according to Maersk Line, the world’s largest shipping company.

Measured in volume terms the picture was not as grim, with global trade growing 2.5 per cent. But that fell below global economic growth of 3.1 per cent, extending a depressing trend in the global economy. Before the 2008 crisis global trade grew at as much as twice the rate of global output for decades. Since 2011, however, trade growth has slowed to be in line with — or even below — the broader growth of the global economy, prompting some to raise questions about whether the globalisation that has been such a dominant feature for decades has peaked.

And if you strip out China, the economies of the so-called developing world are now growing more slowly than the developed world for the first time since 1999.  Emerging markets (EMs) ex-China eked out output growth of just 1.92 per cent last year, according to IMF data, below even the spluttering growth of the developed world, where output rose 1.98 per cent.
EM DM growth
This  underperformance of EMs vis-à-vis developed countries in per capita terms is starker still because population growth is faster in EMs than in DMs – indeed the latest census for Japan shows that it has lost 1m people in the last five years.

A Citibank economist commented “It’s called lack of convergence. The theory suggests that emerging markets ought to be growing faster than developed markets and catching up [but] I think [the emerging world] is probably going into a little bit of a recession now…The futures of billions of people will depend on whether this reversal of the trend towards convergence proves to be a blip, or whether it is instead the strong showing of emerging countries during the 2000-2014 period that ultimately turns out to have been anomalous.”

On the other hand, as I have argued before on this blog, we cannot confirm a new global slump unless the US economy also starts to contract.  And that is not happening yet.  In the latest reading for the last quarter of 2015, US real GDP rose at an annual rate of 1% and completed a rise of 2.4% in 2015, similar to that in the UK.  But US economic growth is decelerating, led by slowing business investment and losses on trade with the rest of the world.

It’s not looking good.   As Citibank economists put it, “It is likely, in our view, that global growth will this year once again underperform and, the risk of a global growth recession (growth below 2%) is high and rising.  Should the US economy falter, it would be difficult to identify any major economy that could be the growth engine for the world in the near-term.  And the forecast for US growth in 2016 has meanwhile gone from 3.0% in January 2015 to 2.0% most recently”.

In its G20 Surveillance Note (G20 Note) the IMF concluded that “There is less room for complacency now. Policymakers can and should act quickly to boost growth and plan to contain risks. Coordinating a strong policy response at the G20 level is just as urgent. The G20 must plan now and proactively identify policies that could be rolled out quickly, if downside risks materialize.”  At the G20 meeting itself, current Bank of England governor (the best-paid one in the world), Mark Carney reckoned that the “The global economy risks becoming trapped in a low-growth, low-inflation, low-interest rate equilibrium.”   The G20 ministers put a brave face on it in their communiqué: “The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” it said.

So what is the way out of this global economic slowdown that threatens to turn into a new economic recession?  The search for new economic policy measures to avoid another global slump is on. We have had zero interest rates set by central banks to encourage businesses and people to borrow more; we have had quantitative easing (printing cash and giving it to the banks); now we are having negative interest rates (charging the banks for not lending their cash on to the real economy).  But it’s not working.

Indeed, at the G20, BoE governor Carney poured cold water over the current solution to the global slowdown offered by several central banks, namely negative interest rates.  These moves by central banks to cut interest rates below zero risked creating a “beggar-thy-neighbour” environment which could leave the global economy trapped in low growth.  Negative interest rates mean customers effectively pay a fee for parking cash in banks, so Japanese citizens are beginning to hoard yen, according to the Wall Street Journaland they need somewhere to put it.  Sales of safes have doubled from the same period a year earlier at chain hardware store, Shimachu, according to the Journal. The chain has already sold out of one model worth $700. Others savers are considering more unconventional storage spaces.  “In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,”  So people are saving money rather than spending.

The G20 muses: “Monetary policies will continue to support economic activity and ensure price stability … but monetary policy alone cannot lead to balanced growth.” And as the IMF economists said “accommodative monetary policy, while still very much needed, cannot do it alone. There needs to be a comprehensive approach, including fiscal policy (where there is fiscal space) and balance sheet repair. ”

Without action, a new global financial crisis is certain to occur and without reform, it is likely to happen sooner rather than later, according to Carney’s predecessor, former Bank of England governor Mervyn King  in promoting his new book (The end of alchemy, the global economy and the future of money). King, who headed the BoE when the world’s financial system almost collapsed in 2008-09, said only a fundamental rethink of the monetary and banking systems could avert another crisis. “Without reform of the financial system, another crisis is certain, and the failure … to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later,”

The majority view at the US Federal Reserve is not so pessimistic.  Vice Chair Stanley Fischer still hopes for US economic speed-up.  Fischer said: “If the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years–including in the second half of 2011–that have left little visible imprint on the economy, and it is still early to judge the ramifications of the increased market volatility of the first seven weeks of 2016.” So it would be a mistake to launch NIRP in the US. Monetary policy should aim to avoid such risks and keep the expansion on a sustainable track”.

Nevertheless, the voices of doom among economists and policy makers are getting stronger.  So now the talk is for what is called ‘helicopter money’ (just handing over cash to households to spend) and/or fiscal stimulus (increased government spending and tax cuts).  I have commented before on the nature of ‘helicopter money’ named after the idea promoted originally by monetarist economist Milton Friedman and his follower, former Federal Reserve chief, Ben Bernanke, that the monetary authorities could simply drop piles of cash out of helicopters onto the country to be spent.  This money out of air (literally!) would lead to a huge boost in consumer demand and that would get sales, incomes and profits going.  This idea got more traction when Adair Turner, former head of the UK’s financial regulation authority, promoted it in his book Between Debt and the Devil, of course, in reality implemented by adding funds to people’s bank accounts.

This ‘solution’ is now being promoted as the last throw of the dice by the likes of Martin Wolf and Gavyn Davies, the Keynesian economic columnists of the UK’s Financial Times. We get a similar argument from the advisers to the Bernie Sanders US presidential campaign (and for that matter from advisers to the Corbyn-McDonnell Labour opposition in the UK).  Get money directly to the people and this will stimulate consumer demand and the economy will leap forward because there is plenty of pent-up demand waiting to be released.

This approach starts from the Keynesian premise that what is wrong with capitalist economies right now is a ‘chronic lack of demand’.  As Martin Wolf puts it in: “Behind this is a simple reality: the global savings glut — the tendency for desired savings to rise more than desired investment — is growing and so the “chronic demand deficiency syndrome” is worsening.”  The problem with capitalism right now is that “demand is also weak relative to a slowing growth of supply. At the world level, growth of labour supply and labour productivity has fallen sharply since the middle of the last decade. Lower growth of potential output itself weakens demand, because it lowers investment, always a crucial driver of spending in a capitalist economy.”

So weak demand causes lower investment causes lower growth.  But is that the order of causation?  In this blog I have argued consistently with evidence that the Keynesian premise is wrong: a lack of aggregate demand in a national economy or globally is the result of a slowdown or slump, not the cause.  The slump comes from a collapse in investment (in particular, business investment) and that happens when it is no longer profitable to invest.  Profit calls the tune, not ‘demand’.

Recently, fellow Marxist economist Alan Freeman presented a paper arguing that Marx and Keynes have much in common in their economic analysis of crises in capitalism and in the policy prescriptions (if not in their politics). Well, I beg to differ.  I don’t think the theoretical ideas of Keynes and Marx can be merged.  In this blog, I have emphasised the economic differences and in this paper here (contributions-of-keynes-and-marx)

The key point right now in the current global slowdown is the Keynesian analysis says that the problem is a lack of aggregate demand and increased government spending through the Keynesian demand multiplier can do the trick.  But the Marxian analysis says that it is profitability of investment that is key to capitalist-dominated economies and that it is the Marxist multiplier of profitability that can do the trick.  The problem with the latter is that profitability can only be restored through the destruction of value by stopping investment, liquidating old capital and making millions unemployed.  That is the contradiction of capitalism that Keynes did not recognise, along with all mainstream economics.

This is why the Sanders plan, admiral in its intention to provide jobs, incomes and public services, including healthcare and education, will not succeed under capitalism.  Sanders supporter, American economist, Gerald Friedman, caused a stir among mainstream economists, when he argued that: “Senator Sanders’s proposed policies would result in average annual output growth of 5.3% over the next decade, and average monthly job creation of close to 300,000. As a result, output in 2026 would be 37% higher than it would have been without the policies, and employment would be 16% higher.”
The idea is that boosting demand with government spending and raising wages significantly would deliver sustained economic growth that would pay for itself.  This idea has even gained support from former Federal Reserve regional director, Narayana Kocherlakota.  He reckons that US growth could easily be much higher than the mediocre rates projected for the coming years. He suggests the US economy could grow at 4-5 per cent a year over the next four years even if (total) productivity growth fails to recover “Under this alternative profile, [capital, labour and economic output] would [all] be (a little more than) 10% higher than is currently projected at the end of 2020.”

Achieving this may involve driving up wages and interest rates, he says, but only to “historically normal levels.” So give people more wages to spend more and demand will shoot up.  There is plenty of slack in the US economy: people without jobs and businesses ready to invest.  Indeed, higher wages would force businesses to invest in new labour-saving technology and drive up productivity growth, which is currently languishing at record lows.

Friedman’s arguments were subjected to a clinical critique by mainstream economists, Christine and David Romer,  romer-and-romer-evaluation-of-friedman1. Their main point was that boosting demand in the way Sanders-Friedman claim would not deliver the growth result because the capitalist economy did not have the ‘demand gap’ claimed and the ‘productive capacity’ of the US capitalist economy was too weak.  In other words, the US capitalist economy could only grow at 5% a year in real terms for the foreseeable future if it could expand investment and raise the productivity of labour over the next ten years.  And boosting demand won’t do that.  Of course, the Romer pair had no alternative to their critique of the Sanders proposals.

Anyway, government policymakers around the world are refusing to launch such fiscal spending programmes, even though infrastructure spending in Europe and the US is at 30-year lows and bridges, roads and railways are crumbling before our eyes.  According to the 2013 report card by the American Society of Civil Engineers, the US has serious infrastructure needs of more than $3.4 trillion through 2020, including $1.7 trillion for roads, bridges and transit; $736 billion for electricity and power grids; $391 billion for schools; $134 billion for airports; and $131 billion for waterways and related projects.  But federal investment in infrastructure has dropped by half during the past three decades, from 1 percent to 0.5 percent of GDP.

Why do governments refuse to introduce such policies in a meaningful way?  Well, it’s because government spending means more taxation on the corporate sector and/or on households, or it means more borrowing when public sector debt is at record highs.  And it means the encroachment of government into the capitalist sector just when profitability is turning down.

Monetarist solutions to the global slowdown have failed; Keynesian fiscal solutions are not being introduced and would not work in the long run anyway.  The only way out is another slump.

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