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Economic prospects for 2014

4th January 2014

Economic prospects for 2014

Labour Representation Committee interviews Michael Roberts

LRC: Why has the recovery been so slow?

MR: First, let me paint the current picture. Most mainstream economic forecasters (business journals, economists, investment banks and the international institutions) expect faster growth in 2014 and 2015 compared to the last few years. But their forecasts have been pretty terrible up to now. The IMF, for example, has had to revise down its forecasts for world annual real GDP growth six times in a row. But even if it is right this time, the best that can be expected is global real GDP growth of about 4% and growth of about 2.5% in the US, the fastest-growing of the major capitalist economies. And that’s before population increases are taken into account. Growth per head of population will be even lower.

This pace of recovery will still not be enough to get unemployment levels or rates back to the same figures as in 2007, before the great financial crash and global recession - and we are entering the seventh year since then. In this time, there has been a huge fall in the real incomes of average households, not seen since the Great Depression of the 1930s and not even then in many cases. Greek households have lost 40% of their living standard; the tiny populations of the Baltic states and Iceland nearly as much; Spanish and Portuguese have taken a 15-20% hit.
In the UK, according to the independent Office for Budget Responsibility (OBR), average earnings will not get back to pre-recession level until some time in 2017. When you take housing costs into account, it’s never. For those on or below the average, their pay is forecast to continue falling in real terms for the rest of this decade. Among households below the official poverty line, the working poor now outnumber the unemployed, retired and sick put together.

It’s much the same story in the US. Average household real income in 2012 was down 8.3% from the pre-recession 2007 level and off 9.1% from the 1999 all-time top. According to one survey, 77% of all Americans are now living paycheck to paycheck at least part of the time. The official estimate is that 15% of Americans live in poverty and the number of Americans who earn between one-half and two times the poverty threshold is 146 million.

Historically, excluding the years of the world wars, only 20% of all recessions lead to output still being lower than before the recession after two years. Just 13% persist for more than three years and only 6% for more than five. This time, the US, Germany and Canada regained the previous peak level of GDP after some three years. But in 9 out of the 20 top capitalist economies, output remains below its peak six years afterwards.

I think the reasons for this very weak recovery lie first in the underlying nature of the capitalist economic system that we live under and some special characteristics of the recent financial crash. The capitalist system has regular slumps: it is a mode of production of cycles of booms and slumps - very wasteful of human effort and very damaging to the majority of people. It has those cycles because it is a system where profit rules. Nothing is produced, no service is provided unless it makes a profit for the owners and controllers of the means to do so. Producing things or services that people need is only an awkward by-product. Businesses are in the business of making money first and foremost. But there is a flaw in this system - a permanently dodgy heart. Over time, the profitability of capitalist production tends to decline. Eventually profit levels are not enough to make it worthwhile (especially for the weaker companies) to sustain existing investment commitments and their labour force. The economy has a heart attack and there is a slump, necessary in order to ‘cleanse’ the capitalist body and start again.

But reviving the economy can sometimes take a very long time. There are periodic banking and financial crashes independent of the profitability of the capitalist economy due to excessive lending, trickery and fraud. But when you get a capitalist profitability crisis combined with a financial crash - indeed with the former leading to the other, that heralds a really bad time, as in the Great Recession. Profitability in the production sector of the major advanced economies had actually peaked back in the late 1990s and there was a mild slump in 2001. However a massive credit-fuelled boom then ensued, leading to a huge property bubble and ‘financial weapons of mass destruction’ invented by the big banks. This produced a boom that was mainly based on fictitious capital with still weak underlying (and falling) profitability in the productive sectors. This all came crashing down in 2008 when the housing markets of the US and then Europe plunged. But that left a huge level of debt in the banks which had to be bailed out by governments, transferring that debt to the taxpayers (us). The ensuing slump also drove up budget deficits and debt further.

It is taking a long time to get rid of this debt. Until it falls sufficiently through measures of austerity by governments, through banks cutting lending to small businesses and households to the bone and through corporations using any profits to improve their balance sheets rather than invest, the major economies cannot expect profitability to rise enough to revive investment and re-employ the millions who are idle or working on poverty wages. Profits are up for the big corporations in the US and Europe but they are not investing in their own economies because their potential consumers are still heavily in debt, or have falling incomes or both. It’s a vicious circle that will only be broken by another slump, or by a further long period of debt deleveraging or both.

LRC: Why have some countries (e.g. China) been less affected and recovered faster?

MR: Phew! The first question had a long reply! This second question should take less time. China has been less affected for two key reasons. First, it does not have a dominant capitalist sector, in my opinion. The Communist Party and the state banks and industries control the bulk of economic activity. As a result, it was possible for the government to introduce a massive fiscal spending programme, building cities, bridges and other infrastructure when the global slump hit the country in 2008 through falling exports to the advanced capitalist world. The government can increase spending on real projects in China while governments in capitalist economies are mainly helpless.

Second, China has huge resources of spare labour that it has utilised along with modern technology to become the manufacturing centre of the world; but it can also turn off the tap if that labour is not needed, through restrictions on mobility etc. China has broadly escaped the worst of the global slump, but not entirely. Real GDP growth has slowed from 10% a year to less than 8%, and that is bad news when you have millions wanting to leave the poverty of the rural areas and join the sweatshops of the cities where incomes are much higher. And China has been building up debts in a property boom in the big cities that may require a nasty period of deleveraging.

LRC: Can the ‘emerging economies’ go through an independent capitalist industrialisation?

MR: Big question! Well, clearly some have. The economies of Korea, Taiwan and the small city state of Singapore could claim to have done so, but all are increasingly dependent on China. But the very large emerging economies, like India, Brazil, Mexico, Indonesia, Turkey, etc, despite significant foreign capital inflows, are not really closing the gap in per capita income with the advanced capitalist economies. There has been some industrialisation and now the majority of people in these countries live in urban areas and are not farmers. But that industrialisation is dominated by foreign capital and foreign banks. So they are subject to vagaries of the imperialist interests of the US and the other major powers. In that sense, they have no independence.

LRC: What role has growing inequality played in slowing or speeding economic growth?

MR: Levels of inequality are as high as they were in the early days of industrial capitalism in the 19th century. And in the US, a study of household incomes over the 2002-2012 decade shows that the top 0.01% gained 76.2% in real terms, but the bottom 90% lost 10.7%. In 2012, the top 1% by income got 19.3% of total US income. The only year when their share was bigger was 1928 at 19.6%.

And on my blog I have recounted the results of the UN study of global wealth (not income) i.e. what people own. The UN found that just 8.4% of all the 5bn adults in the world own 83.4% of all household wealth (that’s property and financial assets, like stocks, shares and cash in the bank). About 393 million people have net worth (that’s wealth after all debt is accounted for) of over $100,000, that’s 10% own 86% of all household wealth. And yet the bottom 50% of all the world’s people have just 1% of all the wealth.

Many left economists have made much of the undoubted growing inequality of income and wealth in the major economies over the last 30 years, in particular. Rising inequality results from straight greed from the rich, but it is really a manifestation of the increased rate of exploitation of capitalists trying to restore profitability through Thatcherism or Reaganism and neoliberalism (crushing trade union rights, privatisation, cutting taxes for the rich and corporations, reducing the size of the state and welfare) - and it succeeded for a while.

But some lefts argue that this is the reason for the crisis of 2008-9. Households had their incomes squeezed and ran up debts. Eventually, these could not be serviced and the banks went bust. If that were the explanation of the crisis and it had nothing to do with the profitability of capitalist production, it would suggest that the answer to future slumps and the way to get a quick recovery is to boost wages, tax the rich and reduce inequality.

Well, that would certainly help the average household and nobody in the labour movement would oppose that. The problem is that if profitability, not inequality, is the real issue, then rising wages and rising corporate taxation would drive down capitalist profitability and probably provoke a new slump. Capitalists would go on an investment strike. Indeed, that is why all governments wedded to preserving the capitalist system, whether officially ‘left’ or not, will not adopt such a programme. Reducing inequality would be great but it would not solve the problem of regular booms and slumps or revive economies quicker.

Michael Roberts blogs at http://thenextrecession.wordpress.com/