Saturday, 13 August 2016

Is the world getting richer?

There’s a Twitter hashtag called #firstworldproblems. Your WiFi packs up, a fat person sits next to you on the train and talks into their phone for the entire journey, Waitrose runs out of Italian Prosciutto slices forcing you to buy ordinary ham. Mildly irritating events that appear all-consuming, prompting you to take to social media to vent your frustration and simultaneously display a mature self-awareness that your petty grievances are as nothing in the scheme of things.

For accuracy although not brevity, #firstworldproblems should be rebranded #firstworldproblemsofthereasonablyprivilegedindevelopedcountries. A tweet complaining, ‘Had to wait 1 ½ hours for baked beans & noodles at the food bank today! #firstworldproblems’, doesn’t sound right.

Is, though, economic stagnation and decline a ‘first world problem™’? The 2008 Global Financial Crisis had, as its name suggests, a world-wide impact but has been felt most severely in developed economies. The UK’s economic ‘recovery’ disappears into thin air when GDP is calculated per capita – ie per person, taking into account the increase in population over the last six years. Europe has suffered two recessions since 2008. The near zero interest rates in evidence throughout the developed world betray the fact that no real economic recovery has taken place. If it had, borrowing by companies to invest would have pushed the price of money – the interest rate – upwards. This hasn’t happened.

By contrast, consider China. The Chinese economy has slowed to a growth rate not seen since the last year of the 20th century. But, at 6.8%, it still stands at a level that makes developed economies green with envy and represents a record of economic growth they have rarely equalled at any time in history. Per capita income in China grew fivefold between 1990 and 2010. In advanced economies, the story is the opposite. Between 2005 and 2014, real incomes were flat or declined for two-thirds of households in 25 rich economies.

Elsewhere, India, now the world’s seventh largest economy, has achieved an average of 7% annual GDP growth for the last two decades. The Turkish economy has grown by nearly 4% a year since 1999.  So is the malaise of weak economic growth, halting business investment and dwindling wealth limited to developed economies? Is it a first world problem?

Paul Mason, in his book Postcapitalism, marshals the evidence to suggest it is. According to him, the era of globalisation (the late 1980s onwards) has witnessed a palpable growth in the incomes of two-thirds of the world’s population. In terms of GDP per person, the developing world, he says, has grown by 404% since 1989, a spurt of economic expansion that outpaces even the post-Second World War boom, which was centred in Europe and the US.

In contrast, the people who have decidedly not benefited from globalisation live in the developed world. “They gained almost nothing from capitalism in the past twenty years,” Mason writes. “In fact some of them lost out.” The losers of globalisation include “black America, poor white Britain and much of the workforce of southern Europe”.

Branko Milanovic, a World Bank economist, argues that while the global 1% and the middle classes of so-called ‘emerging market’ economies have been the main beneficiaries of globalisation, they are not, by far, the only ones. The poor have also got decidedly less poor. “The surprise is that those at the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40% and almost 70%,” he says. It is this rise in wealth at the bottom of the ‘global pyramid’, claims Milanovic, which is responsible for the startling fall in the ranks of the world’s ‘absolute poor’ over the last 20 years.

Milanovic does not spare the hype, calling this change, ‘probably the profoundest global reshuffle of people’s economic positions since the industrial revolution’.

Have the poor inherited a bit more of the earth?

But is the hype justified? Are we in the West largely blind to the material progress that has been made in other parts of the world? One reason, however, to remain sceptical of claims of mass global enrichment is that it rests heavily on poverty reduction in one country alone – China. Home to 1/5th of the world’s population, China has been responsible for more than three quarters of global poverty reduction. Without China, whose internal political economy is configured very differently to the market triumphalism dominant in most of the world, the World Bank’s poverty figures would look markedly less impressive.

Another reason for distrust is that world GDP statistics don’t bear out the world-bestriding optimism. “The relative stagnation of the economy since the mid-1970s is a global phenomenon,” insists US Marxist economist Andrew Kliman. He argues that slowdown in economic growth that has taken place in the US since the 1970s is “somewhat less drastic” than that of the rest of the world (advanced and developing countries alike). After 1973, says Kliman, the growth rate collapsed by more than half in Africa, Latin America and the Caribbean, as well as in Europe and Japan. Remove China and India from the mix and the Asian growth rate shows a similarly sharp contraction.

But the claim that globalisation represents ‘the greatest economic event in human history’ does not rest on development since the 1970s but since the late 1980s and, in particular, the early 2000s - when Mason’s figures show growth as particularly marked. But even here Kliman dissents, arguing that “for the period since 2000, World Bank figures indicate that growth of real GDP per capita accelerated only minimally.” According to Kliman, world GDP per capita stood at 1.3% between 1990 and 2000 and at 1.6% between 2000 and 2008. Far from earth shattering and nothing like the 3.2% global growth that occurred in the decade between 1960 and 1970.

You can balk at the notion of using GDP growth as a surrogate for people’s average incomes. GDP growth per capita (per person) does reflect the reality better than bare GDP figures, as the UK’s experience shows, but it is far from perfect. If GDP represents national income, it offers no clue as to who, within the nation, receives that income. So a country with modest GDP, could be internally egalitarian and effective at reducing poverty. Left-leaning Latin American countries such as Uruguay, Bolivia, Venezuela and Ecuador may fall into this category. But GDP still gives a broad indication of how rich a country’s inhabitants are.

You might also have suspicions about the insights of an avowed anti-capitalist like Kliman. Consider then those of Ha-Joon Chang, an ‘institutional economist’ who believes capitalism to be the “best economic system humanity has invented”. According to Chang per capita income growth in the developing world stood at 3% in the 1960s and ‘70s. But it fell by nearly half, to 1.7%, for the two decades from 1980. Income growth did rise in the 2000s, says Chang, bringing the growth rate up to 2.6% for the entire 1980 to 2009 period. This is still, though, below the pre-1980s record, and much of that growth has depended on the commodity boom which Chinese economic growth hugely stimulated. With the Chinese slowdown, the commodity boom has ebbed as well. The South African economy, the 2nd largest in Africa, is ‘in crisis’, the government there admits.

The growth rate for particular regions illustrates a downward trend, hardly commensurate with the greatest spurt of development in human history. Latin America, notes Chang, grew 3.1% in per capita terms in the 1960s and ‘70s. But between 1980 and 2009 at a rate of barely one-third that level – 1.1%. Per capita income growth in Sub-Saharan Africa was 1.6% in the 1960s and ‘70s but only reached 0.2% between 1980 and 2009. For many years in the 1980s and ‘90s African growth, under the tutelage of destructive Structural Adjustment Programmes, was actually negative. According to the NGO, Global Justice Now, in 2008 there were 562 million people living on less than $2 a day in Sub-Saharan Africa, a figure almost double 1981’s 288 million. The overall population of Africa has also increased since the early ‘80s, “but even proportionally, there has been almost no improvement in poverty rates in sub-Saharan Africa since 1981,” the NGO says.

Paul Mason claims that during the post-war boom capitalism suppressed the development of the global south and that “unequal trade relationships forced much of Latin America, all of Africa and most of Asia to adopt development models that led to super-profits for Western companies and poverty at home.” The coming of globalisation “changed all that”.

This is only partly true. Exploitation by the West intensified in the 1980s and ‘90s, and globalisation, for most countries, has not really remedied that disadvantage. So while some large non-western countries, specifically China and India, have grown spectacularly (although poverty reduction is much more marked in China), the great ‘global reshuffle’ is much less profound for most of the world’s population.

Friday, 5 August 2016

Conservative economics has failed. Will the alternatives?

So the Bank of England has revived that old chestnut of making fabulously rich people richer than before by increasing the value of their shares and property. This is allied to dropping interest rates to below their lowest ever level in history in the hope of sparking borrowing and spending.

Given that these are precisely the same policies employed in the wake of the 2008 economic crash and have resulted the slowest ever recovery from an economic downturn since the 1930s, and seen 2/3rds of households in rich countries endure lower living standards than a decade ago, I wouldn’t hold out much hope of them working a miracle this time around.

The question is, will the alternative?

On the eve of the Bank of England’s decision, 35 ‘progressive’ economists (Steve Keen, Robert Skidelsky, Herman Daly, John Weeks and David Graeber among them), wrote a letter to the Guardian newspaper, urging different monetary policies to merely inflating asset bubbles and increasing household debt. The alternatives they recommended were a definite case of hedging your bets but are worth considering. Because if they don’t work, nothing will.

1 Giving everyone some money

I can’t help but find it amusing that a major plank of an alternative economic strategy, supported by eminent PhDs across the globe and at least one famous ex-Central Banker, looks, at first glance, like it’s been dreamt up by a five year old.  Let’s give everyone some money, the theory (?) goes, and they’ll spend it and the economy will get better. Or in the words of the 35, ‘a fiscal stimulus’ could ‘fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.’

Famous Pinochet-backing right-wing economist Milton Friedman dubbed this idea ‘helicopter money’, likening it to a helicopter (presumably with a big smiley face on the front) dropping money on people below (which they then scramble to pick up before their neighbours thus causing outbreak of mass brawling; possibly a metaphor for the right-wing view of human nature). Helicopter money, though, has some august advocates. Adair Turner, former chairman of the UK Financial Services Authority and director-general of the CBI, supports helicopter money. As does Ben Bernanke who was chairman of the US Federal Reserve at the time of the 2008 crash (so definitely ask him what to do).

The advantage of helicopter money (and I’m damning with faint praise here) is that, unlike Quantitative Easing, it is actually a stimulus. The flaw (one of the many) with QE was that this putative multi-billion pound stimulus got stuck with its banking intermediaries and didn’t make it out into the real economy. The BoE has augmented its latest batch of QE with an extra £10 billion which will buy the debt of companies it likes. By contrast helicopter money goes direct to flesh and blood people who are likely to spend it and, should they be inclined to save it or keep it under the mattress, another economist has said helicopter money should take the form of ‘shopping coupons’.

But helicopter money’s status as a genuine stimulus is also its drawback. Many pundits have wondered why QE, by pumping money into the economy, didn’t cause inflation. The reason seems to be that it didn’t pump money into the economy. Helicopter money, however, will. More, artificially created, money will be chasing the same amount of goods, which is the classic recipe for inflation. You might say we need some inflation as it currently just above zero. But if Brexit precipitates inflation by increasing the cost of imported goods, and this is compounded by helicopter money, then the results might go beyond the benign. And if the real incomes of people do not keep up with inflation, then the effect of helicopter money is negated in the first place.

The other problem with helicopter money is that even if its effects are not counteracted by inflation, they are ephemeral. The thinking behind helicopter money seems to be that, like a dying patient miraculously revived by the right medication, the economy will be kick started into steady growth. But helicopter money does not deal, or even try to, with any of the deep structural problems that caused economic stagnation in the first place. So, why, when its effects wear off, will the economy not descend back into the same torpor?

The argument made by its supporters is that helicopter money can be used to ride out a temporary shock such as Brexit. But the world economy, aside from Brexit (which hasn’t even happened yet), is slowing. In the last quarter, the US grew by an annualised rate of 1.2%. The EU has reduced is growth forecasts and Italian banks may need a huge bailout. Brazil and Russia are in recession.

2 Public Investment

But helicopter money was not the only prescription advanced by the 35 economists. They also argue that a fiscal stimulus ‘could be used to fund essential investment in infrastructure projects – boosting the income of businesses and households, and increasing the public sector’s productive assets in the first place’.

UK Labour party leader, Jeremy Corbyn, has promised £500 billion spending over the next ten years on infrastructure, manufacturing and new industries through a National Investment Bank (by comparison, the Bank of England spent £170 billion on Thursday alone). Shadow Chancellor, John McDonnell, says, ‘when you reach some limits of monetary policy, you reach for fiscal policy’.

But the turn from ultra-loose monetary policy to an infrastructure stimulus is not solely the preserve of the Left or ‘progressive’ economists. In the US, Donald Trump, when he is not pledging to repeal bank regulations or institute tax cuts for the rich, advocates repairing the country’s crumbling infrastructure - bridges, roads and the power grid – in an effort he compares to Roosevelt’s New Deal of the 1930s. He claims it could create 13 million jobs.

Commentators suggest this ‘could end up moving him left on the political spectrum because of the massive amount of government spending his plan would entail’. But this shouldn’t come as a shock. The Nazis, who were quite right-wing all told, were implacably hostile to austerity’s 1930s vintage and in favour of public works. “Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred,” said 20th century economist, Joan Robinson.

The question now is: can infrastructure spending revive an economy in the doldrums in a way that conservative economics cannot and evidently doesn’t want to?

Public investment has fallen precipitously in both the UK and US since the crisis. The argument in its favour is that it can substitute for private investment which itself plummeted before 2008, never really recovered and is falling again. Corporations are currently sitting on trillions of dollars and pounds they are not investing.  Declining private investment such as this is a sign that another recession is on the cards.

There are undoubtedly things that need doing. Aside from crumbling American bridges, there is crying need for more public housing in the UK. Corbyn promises to build a million new houses, half of them council homes (by contrast New Labour built a princely 7,870 council houses in 13 years). Public investment would create jobs and bolster private sector supply chains.

But in an era of huge superfluity of private capital seeking investment opportunities, there is also a real danger that public investment will merely subsidise the private sector to do things that are not needed. One economist, Harry Shutt, calls this ‘Capitalist Luddism’, manifested in ‘white elephants’ such as ‘the building of roads and bridges to nowhere in Japan, “ghost cities” of empty apartment blocks in China and airports in Spain that have never opened’. In this sense, the use of taxation to manufacture profit opportunities for the private sector, which has grown massively over the last quarter of a century, will expand even more. This is otherwise called ‘corporate welfare’.

Because a turn to public investment does not answer one glaring question – why is the private sector on an investment strike in the first place? A Marxist answer is that profit has a tendency to decline over time and that investment opportunities are not currently profitable enough, so corporations are sitting on their profits. Another explanation has that, as a result of technological change, the need for investment capital has been drastically reduced, so capital has shifted into financial speculation and away from ‘organic growth’. A Left Keynesian/Marxist perspective says that, as a result of capitalists grabbing a larger and larger share of GDP growth, the distribution of wealth has been become skewed so new investment is put on hold because there is no expectation that people will buy new products.

One Marxist economist, Michael Roberts, follows this situation to its logical conclusion - the only way to restore profitability is through a mass destruction of existing capital value. “Of course, this will be at the expense of everybody’s jobs and livelihoods, because we’re talking about human beings losing their jobs as a result of the closing down factories and businesses, mergers, selling off the assets, displacing workers and reducing the overall level of production to reach higher profitability,” he says. “A slump, maybe a series of slumps, can do that. Until then, we’ll continue with this depression.”

The 2008 crash, had it followed its natural course, would have resulted in such a mass destruction of capital value. However, it was arrested with huge bail-outs, followed by the flooding of the world economy with masses of confected money in the form of Quantitative Easing. George W Bush got his wish - the sucker did not go down.

There are many things to like in Corbynism, most obviously a strange humanitarian insistence that public policy should aim at benefiting ordinary people, not just at safeguarding the health of elites. But in its reliance of public investment, it does not have a solution to what really ails 21st century capitalism.

Monday, 11 July 2016

Jeremy Corbyn is not particularly left-wing

A post-fact fact - that Trotskyist, hard left throwback, Jeremy Corbyn, is nothing of the kind.

The plot to oust him as Labour party leader has awakened memories of a past split in the Labour party – the one that created the SDP in 1981 when a ‘gang of four’ senior Labour politicians, accompanied by 27 MPs, broke away from Labour to form the ‘centre-left’ and ‘moderate’ SDP.

According to press reports, senior figures in both the Tory and Labour parties are considering founding a new centrist grouping “in the mould of the Social Democratic party (SDP)”, should Corbyn be re-elected as Labour leader.

The 172 Labour MPs who voted against Corbyn in the recent no confidence motion have been likened to the SDP’s gang of four. “It all hearkens back to 1981,” wrote one academic, “when four senior Labour Party figures broke away to found their own centrist party, the SDP.”

But the problem with ‘hearkening  back to 1981’ as justification for a new centrist grouping in British politics, is that the contemporary politician the SDP most resembles in its economic outlook is actually …  Jeremy Corbyn. The elite consensus that governs British politics has moved so far to the Right in the last three decades that the centrist SDP of the early ‘80s now appears in retrospect as a radical leftist project (which, needless to say, it was wasn’t).

The SDP’s high watermark was the general election of 1983 where it gained, in alliance with the Liberals, around a quarter of the vote. The SDP manifesto of that year is illuminating and comparisons with Corbyn abound:

The manifesto promised to increase public borrowing in order to reverse a ‘catastrophic’ reduction in public investment and policies ‘which will invest resources in the high-technology industries of the future’.

Corbyn wants to put ‘state investment centre stage’ and form a national investment bank to target investment high tech industries and the public interest. Public investment, which declined under New Labour, even turned negative for a year under the Conservative/Lib Dem coalition.

The SDP was opposed to the privatisation of BT and British Airways and pledged to make nationalised industries ‘properly responsible to their consumers’.

Corbyn wants to reverse a ‘generation of forced privatisation and outsourcing’ which has led to poorer quality services, ‘less transparency and less say for the public’.

The SDP thought the burden of the early ‘80s slump was ‘being borne quite disproportionately’ by the unemployed and the poor. The party promised to help the unemployed and the sick by increasing unemployment benefit, sickness benefit and sick pay by 5%. It wanted to ‘raise the living standards of the hardest-pressed families’.

Corbyn thinks the cost of George Osborne’s economic failure is ‘being borne by some of the most vulnerable in our society’. He has also said that benefit sanctions on the unemployed and disabled are ‘barbaric and must be abolished’. He opposed the welfare cap.

The SDP promised an ‘Industrial Democracy Act’ creating employee councils for all companies above 1,000 employees and directors jointly elected by employees and shareholders.

Corbyn wants a debate about ‘how wealth is created and how it should be shared’. He envisages a ‘genuinely mixed economy of public and social enterprise, alongside a private sector with a long-term private business commitment’.

The SDP’s priority was to reduce the gap between rich and poor. It wanted to raise the National Insurance upper limit and reverse increases in the higher tax bands. Corporation tax was, at the time, 50% (yes, really) and the party promised to reduce it only for profit-sharing and share ownership schemes.

Corbyn wants to tackle the UK’s ‘grotesque’ levels of inequality, crack down on tax avoidance and ‘ask those with income and wealth to spare to contribute a little more’. He advocates reducing corporate tax subsidies and not cutting corporation tax (it has been cut  from 28% in 2010 to 17% and George Osborne wants to slash it further to 15%)

In some ways, Corbyn is to the Right of the SDP. The SDP, for example, wanted ‘direct action’ to create 100,000 jobs in ‘labour intensive social services’ and promised with ‘great determination’ to establish a further 250,000 jobs in a state programme of housing and environmental improvement. Corbyn has said nothing about the government directly creating jobs.

If you think this is a hopelessly biased, cherry selecting exercise, consider the words of economist Robert Skidelsky, a founder member of the SDP. In a 2015 article, entitled Taking Corbynomics Seriously, Skidelsky, said Corbyn ‘should be praised, not castigated’ for economic policies such as a National Investment Bank and People’s quantitative easing. “Fiscal austerity has become such a staple of conventional wisdom in the United Kingdom that anyone in public life who challenges it is written off as a dangerous leftist. Jeremy Corbyn …. is the latest victim of this chorus of disparagement.” he pointed out.

Corbyn himself may be a Bennite, says Richard Seymour, author of Corbyn: The Strange Rebirth of Radical Politics, but Corbynism isn’t. “Nothing that Corbyn proposes, bar his opposition to Trident, should in principle be disagreeable to old right-wing social democrats,” he says. “For all that Labour MPs and pundits think they're staring at the abyss of Marxist-Leninism, or crypto-Trotskyism, anyone not trapped in those self-serving illusions can see that Corbyn is taking Labour gently and moderately toward a form of retooled social democracy.”

The reason most Labour MPs cannot see this is that they are not old fashioned right-wing social democrats. New Labour, to which most of them still offer allegiance, transcended old school Labour right-wingers such as John Smith and Roy Hattersley to become an entirely new political current – one significantly to the right of Old Labour’s moderate wing. And the support of Labour’s soft left (what used to be called the Tribune group) was essential to this process. Policies such as conflating the interests of business with what business wants, cutting corporate taxation, punishing the unemployed and the sick for their condition, supporting privatisation and an unerring fondness for expeditionary wars, were breaks with Labour’s right-wing as much as its left. They comprised a new political formation, the extreme centre.

New Labour cannot countenance any backtracking for the same reason it cannot provide the elusive ‘effective opposition’ to the Conservatives. It is complicit in many of the injustices being perpetrated today. Thus Blairism is a peculiarly barren political philosophy. Old right-wing social democracy at least had some intellectual energy. ‘Moderate’ trade union leaders like Bill Jordan supported basic income. Skidelsky, a former SDP member, is a contemporary supporter of basic income. It’s no accident that Labour, under Corbyn, is open to the idea of basic income. With occasional exceptions, New Labour just offers re-treads and clings to a failed orthodoxy for dear life.

There are, it should be pointed out, many things wrong with a 21st century reformulation of the old SDP. Not least a reliance on public investment when near-zero interest rates show there is scant appetite for any kind of investment when the rewards are so meagre. A reformed capitalism may prove to be just as much a failure as the economic orthodoxy. But ditching Corbyn, by hook or by crook, will just see a blanket of mind-numbing conformity descend over British politics. And last thing we need now is mind-numbing conformity.