Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: August 2015

Happy Birthday Social Security

Social Security turned 80 on August 14th, 2015.  For some years it has been under attack by Republican and Democratic politicians who, falsely claiming that the system is heading for bankruptcy, want to both privatize it and reduce its benefits.  No doubt the attacks will escalate as we enter another Presidential campaign season.

Happily, polling shows that the great majority of Americans not only believe in the system, they actually want to strengthen it and increase the benefits received by recipients.

Therefore, as Paul Krugman notes:

It’s remarkable, then, that most of the Republicans who would be president seem to be lining up for another round of punishment [by campaigning against the current Social Security system]. In particular, they’ve been declaring that the retirement age — which has already been pushed up from 65 to 66, and is scheduled to rise to 67 — should go up even further.

Thus, Jeb Bush says that the retirement age should be pushed back to “68 or 70”. Scott Walker has echoed that position. Marco Rubio wants both to raise the retirement age and to cut benefits for higher-income seniors. Rand Paul wants to raise the retirement age to 70 and means-test benefits. Ted Cruz wants to revive the Bush privatization plan. . . .

And while most Americans love Social Security, the wealthy don’t. Two years ago a pioneering study of the policy preferences of the very wealthy found many contrasts with the views of the general public; as you might expect, the rich are politically different from you and me. But nowhere are they as different as they are on the matter of Social Security. By a very wide margin, ordinary Americans want to see Social Security expanded. But by an even wider margin, Americans in the top 1 percent want to see it cut.

The following info sheet on Social Security comes from the National Priorities Project,

ss_turns_80

See here for a useful fact sheet that busts some of the more common negative myths about Social Security.

Chinese Economic Woes

China’s economy is dramatically slowing and this has significant consequences for world growth.

The following figure provides a good visualization of the slowdown and why official statistics likely overstate China’s current official growth rate of 7%.

shrinking chinese economy

As you can see, several key indicators of economic health have fallen sharply compared to their 4 year average.  For example, electricity output has basically stopped growing compared to its four year average growth rate of 5%.  Auto sales are in negative territory as are imports, including of key industrial commodities.

The trend in official Chinese government growth statistics leaves no doubt that the country’s rate of growth is slowing: 10.6% in 2010, 9.5% in 2011, 7.8% in 2012, 7.7% in 2013, 7.4% in 2014, and 7% for the first half of 2015.  But, as DW-Asia explains:

Weaker growth, a volatile stock market and faltering exports have highlighted the weakness afflicting the Chinese economy. Experts, however, fear China’s woes are much more serious than what the official data suggest. . . .

Furthermore, concerns abound about bubbles building up in the economy. For instance, analysts at global bank Credit Suisse believe that China is undergoing a “triple bubble” – a combination of the third-largest credit bubble, the biggest investment bubble and the second-biggest real estate bubble of all time.

Many analysts believe that Chinese growth figures are heavily adjusted to ensure that the country hits announced government targets.  They therefore study the performance of more easily measured indicators of economic activity, like electricity output, auto sales, and imports of key industrial commodities.  These indicators, as illustrated above, are in sharp decline and as the Wall Street Journal reported:

When China released its tabulation of first-quarter growth earlier this month, the 7% figure—the worst in six years—stirred fears of a deepening slowdown.

It also raised fresh doubt about the trustworthiness of China’s own statistics.

“Growth Likely Overstated,” said a Citibank report, concluding that actual quarterly growth could be below 6% year to year, depending on the factors weighed. Other research firms put their numbers far lower, with Capital Economics pegging the quarter at 4.9%, the Conference Board’s China Center at 4% and Lombard Street Research at 3.8%.

China’s recent decision to allow its currency to devalue is one measure of government concern.  The government no doubt hopes that the devaluation will jump-start exports and growth but this is unlikely given the general weakness in demand in most markets.

In fact, China’s economic slowdown will itself translate into a deepening global slowdown.  As the country’s growth slows so does its demand for parts and components produced in other Asian countries and primary commodities purchased from Latin American and sub-Saharan countries.  And as growth in all three regions declines this can be expected to put downward pressure on growth in core countries, especially Japan and Germany, both of whom also rely on an export-led growth strategy.

Signs Of Global Slowdown

There are growing signs that the global economy is slowly but steadily heading into another period of stagnation.

Global growth since the 2009 world financial crisis has largely been driven by the third world; developing Asia alone accounted for almost 60% of world growth over the period 2009 to 2014.

However, the economic fortunes of most third world countries, including those in developing Asia, are now being pulled down by weak core country growth.  And this development will in turn deepen economic problems in Japan, most Eurozone countries, and even the U.S.

For example, Asian growth has largely been fueled by exports to advanced capitalist countries, in particular the U.S.  However, as a result of core country economic difficulties developing Asian countries have seen their exports plummet. The following figure shows year-on-year export growth for developing Asian countries; the last data point (April 2015) is an average growth rate only for Korea, China, and Taiwan.

export growth rates

The next figure shows that all of Asia’s leading economies are suffering a similar fate, with their exports now barely growing in value compared with growth rates of over 40% in 2010.

NA-CA967_OUTLOO_G_20140427160604

The Wall Street Journal explains what is happening as follows:

For decades, Asia fueled its development by selling products to the West. That engine is now sputtering, threatening to sap the region’s economic expansion. . . .

Today, it is unclear whether exports can still provide that oomph. Overall growth is slowing in many Asian nations, forcing policy makers to ponder whether demand from their own consumers can fill the void.

“That model that Asia had of relying on the trade channel—that’s gone,” said Markus Rodlauer, deputy director for Asia and the Pacific at the International Monetary Fund in Washington.

The following figure shows aggregate exports by destination for six leading Asian economies: China, Hong Kong, Korea, Singapore, Taiwan and Thailand.  The declines in sales to Japan and the EU are especially striking.  However, even intra-Asian export growth has fallen, in large part because of China’s slowing economic activity.

asian-exports

To this point, Asian economic growth has not fallen as much as one might expect given the export trends highlighted above.  Perhaps the main reason is that China’s massive investment spending has, up to now, served to support Asian exports, although at a reduced rate.  But China’s investment first policy has largely run its course, leaving the country with a growing number of empty towns, shopping centers, theme parks, airports, and high-speed rail lines and its regional governments deep in debt.

Here is one illustration of the problem from the South China Morning Post:

When officials reopened the airport on the sparsely populated Dachangshan island off the mainland’s northeast coast after a US$6 million refurbishment in 2008, they planned to welcome 42,000 passengers in 2010 and another 78,000 in 2015.

However, fewer than 4,000 passengers – or just a 10 a day – passed through its gates in 2013, data from the civil aviation authority showed.

Since February last year [2014], China has approved at least 1.8 trillion yuan (HK$2.3 trillion) in new infrastructure projects to counter a slowing economy. The approvals come just as the full costs of the underused airports, expressways and stadiums built during the last spending binge are beginning to emerge.

While construction firms profited from the boom, it saddled provincial governments with US$3 trillion worth of debt, with the most over-exuberant seeing their local economies weaken and become imbalanced towards the building sector.

As noted above, some analysts believe that Asian governments are likely to try and compensate for the loss of demand from stagnate exports by supporting policies to boost domestic consumption.  However, this is extremely unlikely.

To put it bluntly, governments throughout the region remain committed to their export growth strategies.  This has left them locked in competition to attract and hold corporate investment and determined to keep labor costs as low as possible.  The Chinese government, for example, has decided to counter the recent rise in labor activism and wages by engaging in a massive push to replace workers with robots.

As the New York Times reports:

Chinese factory jobs may thus be poised to evaporate at an even faster pace than has been the case in the United States and other developed countries. That may make it significantly more difficult for China to address one of its paramount economic challenges: the need to rebalance its economy so that domestic consumption plays a far more significant role than is currently the case.

Another indicator of global fragility is the decline in commodity prices.  Of course this trend is largely a consequence of the previous one.  Asia’s export decline has translated into a decline in regional manufacturing activity and a fall in the demand for as well as price of most commodities.  The following figures from the Guardian illustrate this trend.

gold

crude

platinum

aluminum

copper

iron ore

These sharp declines in commodity prices threaten to dramatically slash rates of growth in sub-Saharan African and Latin American countries, most of whom depend on exports of these commodities to finance the imports they need to support domestic production and consumption.

In brief, growth prospects in core countries are poor.  As a consequence, developing Asia faces the exhaustion of its export-led growth strategy.  And the same is true for sub-Saharan Africa and Latin America.  Compounding global problems is the fact that Germany and Japan continue to embrace their own export-led growth strategies and U.S. growth is unlikely to prove strong enough to ensure sufficient global demand.

In sum, without significant structural changes in most economies, changes that include support for policies designed to boost majority living and working conditions or said differently privilege people over profits, workers everywhere are in for a long period of economic hardship.