The Consequences of Slow Growth, part one

 Echoes of the global financial crisis of 2007-9 are in the air. Both the US Nasdaq and the tech-heavy South Korean stock market have fallen heavily recently, prompted by threats by the US Federal Reserve to raise interest rates. Back in February 2007, stocks in the US and Asia also nose-dived, presaging ‘Debtonation Day’ in August of that year.

And the proximate cause of the credit crunch, which many very knowledgeable people assured us could never happen, was an incremental rise in interest rates.

But whether an almighty bubble is about to burst, as it has threatened to many times before, there is one thing we in the West can be sure of. We are living in a society defined by slow economic growth, which qualitatively distinguishes it from economies in most of the second half of the 20^th century.

Statistics can lie but not here because they are so stark. In the decade to 2025, UK GDP grew by just 14%, an annual growth rate of just over 1 per cent. In the decade to 1965, growth was 37%, and economic growth per capita (growth adjusted for population growth) in the last 10 years has actually been negative.

The European Union has seen average growth of 1.3% over the last 19 years and 1.1% in the Eurozone.  This is a decline from nearly 5% in the 1960s, 2.1% from 1973-83, and 1.6% in the 1990s.

The US, the world’s largest economy, has performed slightly better but the trends are still unmistakable. In the 1950s and ‘60s, the growth rate was above 4% before decreasing to around 3% in the 1970s and ‘80s. Over the last ten years, the average has been below 2%.

These are not figures relative to other economies. Other parts of the world, like China, have clearly been catching up over the last few decades. But the West’s growth decline is palpable without comparisons to other countries.

Nor, as an aside, is this what was meant to happen. Thatcher and Reagan’s ‘free market’ economic medicine was sold on the basis on reviving the economy, ushering in an era of prosperity. But as these supply-side prescriptions have bedded down into conventional wisdom, they have had precisely the opposite effect.

 And slow growth has definite consequences. One of these is that ‘democratic’ government (to the extent that our government can ever really be called democratic’) gets absorbed by private economic power. Back in the 1930s, US President Franklin Roosevelt called this “the essence of Fascism”.

I was reading recently a book about “deaths of despair” in the US. These are deaths by suicide, drug overdose, or alcoholism, which the authors contend have shot up among white people without a degree since the turn of the century. There are many possible reasons, which I can’t go into here, but one factor is slowing economic growth.

“What may seem like small differences in growth rates have effects over long periods of time”, the authors, Anne Case and Angus Deaton (not that one), say.

One of these effects is increasingly bitter fights over distribution. “With lower growth, there is more pressure to shut out less successful groups”, they write.  This “poisons politics”.

Such a poisoning can be seen in British politics in the demonisation of immigrants and refugees. Or in the intense concentration on attacking the very limited, and very conditional, benefits of sick and disabled people; an issue which simply didn’t exist prior to the 1990s, in an era marked by higher economic growth. The ‘problem’ of excessive benefits paid to vulnerable people has become an obsession of British politics in the age of austerity.

Case and Deaton also say that with slower growth, the “positive-sum game of innovation” gets usurped by “Rent-seeking”. This turns into a “vicious circle that impoverishes everyone”.

Rent-seeking does not just mean seeking housing rents from tenants, but the appropriation by powerful corporations of the existing income of government and society, rather than attempting to create new sources of wealth.

Based on these insights, the basic features of slow growth society, in Britain and elsewhere, can be identified.

In a slow growth society, living standards decline or stagnate

Wage rates in the US have been stagnating for half a century. In Britain, the process has been more telescoped but no less pronounced. According to the Resolution Foundation, if wages had continued to grow as they had been before the 2008 financial crisis, they would be 37% higher than they actually are.

This has taken place in the context of a decline in real GDP – GDP that takes account of a rise in population. “It is extremely difficult for living standards to rise in such circumstances” says socialist economist Michael Burke. Likewise, Case and Deaton say that in an economy growing at 2.5%, living standards double in 28 years but at 1.5% it takes 47 years.

Of course, in a strongly growing economy, there is no guarantee that income will be shared out. While global GDP has increased by 65% since 1990, for example, the number of people living on less than $5 a day has increased by 370 million.

But in a stagnant economy, there is even less chance of living standards increasing. Why should this be so? Partly this is because living standards are dependent on labour productivity which is in turn dependent on business investment. And both of these metrics have been falling over the last few decades. As Case and Deaton say, “investment is a prerequisite for growth, it embodies the latest knowledge and techniques and it raises productivity.”

In the absence of investment, business tends to concentrate on low-cost labour, possibly overseas, or cheap AI transformations. Neither of which raise living standards.

There is easy money to be made – for some people

But in these circumstances, capital is irresistibly attracted to something else – rent-seeking. This involves making money, not from consumer spending on new products, but from government revenues or unavoidable spending by consumers (on housing or heating costs, for example). Something that is already there and merely has to be tapped or exploited. The deal negotiated by pharmaceutical companies with the Starmer government to double NHS spending on new drugs over the next decade – the cost of which has been variously placed at £64 billion or £44.7 billion, causing hundreds of thousands of excess deaths – is a prime example of rent-seeking.

The “VIP Lane” created by ‘Boris’ Johnson’s Conservative government, to enable firms with political connections to the Tories to get PPE contracts under Covid, is another.

More generally, Britain’s ‘privatised’ utilities – in truth not genuinely privatised but contracted out – are a haven of rent-seeking. They provide both a monopoly ensured by the government and a captive market of consumers who have no choice but to buy the ‘product’ being sold. Unsurprisingly, charges have increased way beyond the rate of inflation.

But rent-seeking can occur in purely private sector settings. When a private equity consortium buys a company, in the process loading it down with debt, and then prepares it for re-sale by asset stripping it and increasing the charges to customers, that is rent-seeking. It is destructive to the viability of the firms that are acquired, but the ‘investors’ acquire massive profits.

These processes come to dominate entire economies. The Tories’ PPE scandal has been described as “the rule of contemporary British capitalism, rather than the exception”, while a recent report by UCL professor Mariana Mazzucato has characterised the European economy as a “capitalism of rent”, where income is captured not by producing anything but by achieving market power, and owning assets and charging for access to them.

It is no accident that this degradation has occurred in an era of slow GDP growth, where the levying of rent becomes a far more lucrative and risk-free strategy than actually creating anything.

In a slow growth economy, everything costs more – for a reason

As the Mazzucato report asserts, the crux of corporate strategies is the achievement of market power, which enables income to flow from charging people or other companies to access what you possess. This brings into focus another aspect of slow growth economies – an increase in price mark-ups.

A price mark-up is overcharging for products. According to orthodox economic theory, the price of goods is determined by the cost of the labour and raw materials it takes to produce them, plus a ‘normal’ rate of profit (as we are talking about a profit-based system).

But under a regime of price mark-ups, this normal level of profit becomes ever more elastic. According to one recent book on the cost-of-living crisis, the largest UK firms have massively raised their mark-ups over the last two decades, from 58% in 2002 to 82% in 2020.

This ability to profiteer, and impose what is essentially a private tax on consumers, is intimately related to size and market power. Research by the anti-monopoly group The Balanced Economy Project, reveals that for the world’s top 20 companies, in the five years to 2022, the average mark-up rose to around 50%. For the bottom half of firms (around 34,000 companies were studied), however, the average mark-up was just 25%.

And for some sectors of the economy – pharma or Big Tech for example – mark-ups can be huge, many hundreds of per cent.

The economist Isabella Weber coined the term “sellers’ inflation”, to account for the inflation that took hold after Covid-19 that, she said, was based on “the ability of firms with market power to hike prices”. In truth this process was happening before the Covid epidemic, but as inflation was so low few noticed.

A decade ago, the Economist magazine found that corporations in the US were raking in “exceptional profits” of $300 billion a year, equivalent to a third of taxed operating profits. Some sectors of the US economy were seeing price rises of double the rate of inflation. This, at a time when inflation was negligible (indeed there was a pervasive fear of deflation). Of course, GDP growth was tiny as well, lower than it had been since before World War Two.

What is interesting is that these price mark-ups were occurring in the most concentrated parts of the American economy. In the same article, the Economist analysed 900 sectors of the US economy and found that 2/3rds had become more concentrated between 1997 and 2012.

Not only do high mark-ups contribute high profits and high market value, they are enabled by it. When it comes to charging much more for your products than it takes to produce them, the bigger you are the better.

Which leads to another insight.

Bigness is a curse

In the late 1930s, Franklin Roosevelt called attention to a “concentration of private power without equal in history”.

0.1% of corporations in America, he told the US Congress in 1938, owned 52% of the assets of all of them. Now that figure has risen to 90%.

Roosevelt said something else in his speech, delivered in the midst of the Great Depression. That the history of modern times “proves that in times of depression concentration of business speeds up. Bigger business then has a larger opportunity to grow still bigger at the expense of smaller competitors who are weakened by financial adversity.”

We are undoubtedly now faced with, and have been for some time, conditions of “financial adversity”.

A slow growth economy means generalized financial adversity — not just among people struggling to make ends meet but among small businesses who are dependent on consumer spending or may be the suppliers of corporate behemoths like Amazon.

One group, though, palpably not suffering from financial adversity are large corporations. Corporate profits are at all-time highs, eclipsing previous all-time highs achieved a few months before.

And the large are getting larger. According to Goldman Sachs, “despite uncertainty in the global economy” mergers and acquisitions – which by definition involve the creation of ever larger economic and financial entities – could hit $3.8 trillion in 2026, surpassing the previous peak in the Covid-year of 2021.

Received wisdom has it that the threat of Fascism is nurtured by conditions of inequality, poverty, anxiety, and a lack of social mobility. Conditions that will call out for scapegoats to be found which temporarily soothe the anxiety.

But if we listen to Roosevelt who was speaking when Nazism was approaching its zenith, that isn’t the whole story. Fascism also has an economic corollary, what he called “a cluster of private collectivisms” … “masking itself as a system of free enterprise” that seeks to control democratic government.

Fascism doesn’t just base itself on the exploitation of popular discontent among its mass base. It also has an elite element, which finds nourishment, as it did in the 1930s, in the conditions of a slow growth society.

What Roosevelt termed the “essence of Fascism” is what I want to consider in the second half of this article.

Speculation and its Discontents

Ask an educated person for a definition of capitalism and you will probably get a recitation of how the desire to make money ensures unmet demand is met. This may lead to a gross state of inequality requiring governmental remedy – and even the creation of undreamt of wants – but the essential carrot of great wealth on the horizon means that someone, somewhere will provide for basic needs – albeit at a price not everyone can afford.

Here lies the system’s essential dynamism and why, whether you like it or not, it ‘delivers the goods’ as they say.

Given the vast array of products available to people with the means to buy them, that’s an understandable viewpoint.

However, as can be seen by the current staggering inflation affecting energy and food prices, it’s not an accurate one. Capital-ism – the investment of money in order to make more money – can in fact contradict the laws of supply and demand, creating perceived shortages where none actually exist.

It’s widely accepted that the huge rises in prices for oil, gas and food are behind the massive rises in inflation in western countries. Inflation, we are told, will reach 18% in the UK by early next year. Putin’s invasion of Ukraine is seen as the catalyst for these increases driven by creating war-induced shortages of basic goods. And shortages, a basic principle of economics tell us, equal spiralling prices.

Or not, as the case may be. Despite wild jumps in wholesale prices, oil, for example, did not stop flowing. Citi, the same bank that predicts 18% inflation in Britain at the start of 2023, believes the price of oil will fall to $45 a barrel by the year’s end, not indicative of a crisis of supply. Ukraine’s imperilled status as the ‘breadbasket of the world’ prompted huge increases in the price of cereals and wheat, surging past historic highs in February and March. But now, as the Economist magazine notes, food prices are tumbling, despite the fact that, as far as anyone is aware, the war in Ukraine has not come to an end.  As it turns out, agricultural corporations saw “substantial gains” and “were not negatively affected by Russia’s invasion of Ukraine”.

So much for the ‘unbuckable’ laws of supply and demand.

The one commodity where there has been a genuine disruption of supply is natural gas, with gas flowing from Russia to Germany through the Nord Stream 1 pipeline reduced by 60%. However, the current ‘global’ price is 9 to 11 times “higher than usual” which, I would suggest, is not commensurate with cut backs in one country’s supply. Before the Ukraine war, the price of gas was already rising and, according to Shell, the influx of hedge funds and other speculators into the market was a major factor. “Prices are becoming less determined by news about supply and demand because of the influence of new financial players moving money in and out of the market,” the company was reported as saying.

These booming ‘world’ prices have caused – and are causing – real suffering to millions, if not billions, of people. Essentially the perception of scarcity, fuelled by trillions of dollars of speculative money, created artificial scarcity by inflating the price of basic commodities like food and fuel beyond the reach of ordinary people. Around 71 million more people have already been pushed into extreme poverty and the UN secretary-general has warned of an “unprecedented global hunger crisis”.

Winter in Britain is looking bleak beyond imagining with millions unable to pay soaring energy bills and thousands dying from the cold.

And this suffering is directly attributable, not just to Putin’s ‘weaponisation’ of gas, but also to the ‘wall of money’ at the top of society which has an unquenchable thirst to accumulate more wealth. The speculators – hedge funds, fund management firms, investment banks, sovereign wealth funds and pension funds – all exist for the unceasing purpose of making money out of money. According to American socialist magazine Jacobin:

As with all speculative bubbles, once cash poured in and pushed up prices, the resulting higher prices ‘confirmed’ the initial story, eliciting fresh capital sending prices even higher … Commodity exchange trade funds received $4.5 billion in a single week as retail investors ploughed their savings into the latest get-rich-quick craze. Institutional investors likewise poured money into the commodity markets, not because of any belief about fundamental supply and demand but to diversify their portfolios with and ‘inflation hedge’.

This is probably the first time in recent memory the ‘rich world’ has been seriously affected by speculation-fuelled surges in the prices of basic goods. But it’s not the first time it has happened to the majority world in this century. In both 2008 and 2010, there were “global food crises”, in which hundreds of millions of people in the Global South were propelled into extreme poverty by rising bread prices, precipitating riots and revolution in countries around the world. Yet the problem wasn’t actual scarcity. Unlike during the French Revolution when a poor harvest did precede the cresting of popular unrest, in 2008 and 2010 prices doubled despite more food being produced in that year than at any other time in history (55.45).

Perverse and unnecessary suffering like this is the consequence of a little appreciated aspect of the huge inequality bestriding the world. Inequality on this scale is not only unjust in that the billions of poor people in the developing and developed world don’t have the resources to live decent lives. Inequality on this scale generates baleful outcomes by virtue of the simple fact that immensely rich people have too much. The world’s largest fund manager, Black Rock, for example, has over $10 trillion under management. And that $10 trillion will be invested in profit-promising opportunities that, over time, will grow and grow in a never-ending process.

Fatal social problems like financial crises, the continued exploitation of fossil fuels, the undermining of democracy, the gutting of the public sector, and the recasting of housing as simply a means to amass wealth (to name a few) have their roots in this perpetual search for new sources of profit for this towering ‘wall of money’. Such activities aren’t merely “socially useless”, in the words of Adair Turner, the former chairman of the UK Financial Services Authority. They’re socially destructive.

Long ago, the economic historian, Karl Polanyi, singled out the “scarcity of Capital” as the factor which crippled “potentially rich countries from developing their natural wealth”. Now, after periodic economic crises smoothed away with bail-outs and capital-creating ‘Quantitative Easing’ schemes, we have the opposite problem. In the description of one economist, we have a glut of capital.

If, on the rare occasions that the chaos caused by commodity price speculation is squarely faced, the answer is invariably presented in terms of the imposition of World War Two-style price controls and the return of regulations that hem in the speculators. Just over 20 years ago the passing of the Commodity Futures Modernization Act in the US (signed into law by ‘New Democrat’ Bill Clinton) ended Roosevelt-era regulation in which speculation was confined to 20% of a given market.

But we are facing a very different world to the one that existed when these regulations were put into effect. According to one assessment, the volume of capital in the world tripled between 1990 and 2010, reaching $600 trillion. This figure was nearly ten times the value of global goods and services, ensuring that the vast majority of it inevitably went into some form of speculation, i.e. betting on an increase in the value of an asset, such as the global price of wheat.  And this was in 2012. It was predicted, then, that global capital would hit $900 trillion by 2020.

The pressure exerted by this mass of money was a pivotal reason for the dismantling of regulation towards the end of the last century – the Commodity Futures Modernization Act was famous for exempting derivatives such as Credit Default Swaps from regulation, which many believe created a direct path to the Global Financial Crisis of 2008. Theoretically, it should be possible to re-regulate; if the hurdle of political systems being dominated by the uber-rich can be overcome. However, where would these trillions of now redundant capital go to? It wouldn’t be invested in the expansion of physical production because the demand for ‘fixed capital investment’, as it’s known, is nowhere near strong enough. It also won’t just cease to exist because there is no (legal) purpose for it.

Re-regulation and the overthrow of the market fundamentalist dogma of the last forty years may be abundantly necessary but they won’t save us from what the capitalist system has become.

 

 

 

 

 

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 20^th 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 1/5^th 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 2^nd 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.