Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Recession

Secular Stagnation

Government policy makers, no matter the party in power, like to project a rosy future. However, claims of economic renewal, absent fundamental changes in the structure and workings of the US economy, should not be taken seriously.  The fundamental changes I would advocate are those that would: dramatically boost worker power; secure a progressive and growing funding base for a needed expansion of public housing and infrastructure and public spending on health care, education, and transportation; and end the production and use of fossil fuels and significantly reduce greenhouse emissions.

Fundamental changes are needed because the United States is suffering from an extended period of slow and declining growth, what is known as secular stagnation.

The following figure, taken from a Financial Times blog post, shows the duration and average rate of growth of every economic expansion in the postwar period.  The current expansion, which started in the second quarter of 2009, is the third longest, although soon to become the second.  Among other things, that means that a new recession is likely not far off (especially with the Federal Reserve Board apparently committed to boosting interest rates).

As we can see, the current expansion has recorded the slowest rate of growth of any expansion.  Moreover, as Cardiff Garcia, the author of the blog post, points out: “Also worrying is the observation from the chart that every subsequent expansion since 1970 has grown at a slower pace than its predecessor, regardless of what caused the downturn from which it was recovering.”

Michalis Nikiforos and Gennaro Zezza begin their Levy Economics Institute report on current economic trends as follows:

From a macroeconomic point of view, 2016 was an ordinary year in the post–Great Recession period. As in prior years, the conventional forecasts predicted that this would be the year the economy would finally escape from the “new normal” of secular stagnation. But just as in every previous year, the forecasts were confounded by the actual result: lower-than-expected growth—just 1.6 percent.

The following figures illustrate the overall weakness of the current expansion.  Each figure shows, for every postwar expansion, a major macro indicator and its growth over time since the end of its preceding recession.  The three most recent expansions, including the current one, are color highlighted.

Figure 1A makes clear that growth has been slower in this expansion than in any previous expansion. Figure 1B shows that “real consumption has grown only about 18 percent compared to the trough of 2009—similar to the expansion of GDP—and also stands out as the slowest recovery of consumption growth in the postwar period.”

Perhaps most striking is the actual decrease in real government expenditure shown in figure 1D.  Real government expenditure is some 6 percent lower than it was eight years ago.  In no other expansion did real government expenditure fall.  Without doubt austerity is one of the main reasons for our current slow expansion.

Significantly, as we see in figure 7 below, the stock market has continued to boom in spite of the weak performance of the economy.  This figure shows that the total value of the stock market has risen sharply, regardless of whether compared to the growth in personal income or profits (measured by net operating surplus).   This rise has generally kept those at the top of the income pyramid happy despite the country’s weak overall economic performance.

No doubt, on-going wage stagnation, which has depressed consumption, and privatization, which has grown in concert with austerity, has helped to fuel this new stock market bubble.  One reason top income earners have been so favorable to the broad contours of Trump administration policy is that it is designed to strengthen both trends.

Recession will come.  In an era of secular stagnation that means the downturn will hit an already weak economy and struggling working class.  And the upturn that follows will likely be weaker than the current one.  Market forces will not save us.  Real improvements demand transformative policy changes.

The US Economy Doesn’t Create Jobs Like It Used To

Business pursuit of private profit drives our economy.  Sadly, firm profit-maximizing activity increasingly appears to view job creation as a distraction.

The official US unemployment rate fell to 4.5 percent in March 2017; that is the lowest unemployment rate since May 2007.  Many economists, and even more importantly members of the Federal Reserve Board, believe that this low rate indicates that the US economy is now operating at full employment.  As a result, they now advocate policies designed to slow economic activity so as to minimize the dangers of inflation.

Unfortunately, the unemployment rate is a poor indicator of the current state of the labor market.  For one thing, it fails to include as unemployed those who have given up looking for work.

An examination of recent trends in the employment/population ratio (EPOP) makes clear that our economy, even during periods of economic growth, is marked by ever weaker job creation.  It also appears that this is not a problem correctable by faster rates of growth.  Rather, we need to change the organization of our economy and reshape its patterns of income and wealth distribution.

The Employment/Population Ratio and the shortage of jobs

The employment/population ratio (EPOP) equals the share of the non-institutional population over 16 that works for money.  The non-institutional population includes everyone who is not in prison, a mental hospital, or a nursing home.

The figure below, from a LBO News blog post by Doug Henwood, shows the movement of the EPOP for all workers and separately for male and female workers.

As we can see, the participation rate of male workers fell steadily from the early 1950s through the early 1980s recession years.  It then slowed its decent over the next two decades until the 2008 Great Recession, which caused it to tumble.  Its post-recession rise has been weak.  The male EPOP was 66 percent in March 2017.

The female EPOP rose steadily from 30.9 percent in 1948 to a peak of 58 percent in 2000.  Thereafter, it drifted downward before falling significantly during the Great Recession.  Its post-recession rise has also been weak.  It was 54.7 percent in March 2017.

The overall EPOP, the “all” line, began at 56.6 percent in 1948, hit a peak of 64.7 percent in April 2000, and was 60.1 percent in March 2017.

The recent decline in the EPOP for all workers over 16 translates into hard times for millions of people. As Henwood explains:

If the same share of the population were employed today as was in December 2007, just as the Great Recession was taking hold, 4.3 million more people would have jobs.  If it were the same share as the all-time high in April 2000, 7.3 million more people would be working for pay.  Either one is a big number, even in a country where 153 million people are employed.

In other words, it is likely that there are many people who want and need work but cannot find it.  And it is important to remember that the EPOP only measures the share of the non-institutional population with paid employment.  It tells us nothing about the quality of the existing jobs.

Flagging job creation  

It is easier to appreciate the growing inability of our economy to provide jobs by examining the movement of the EPOP over the business cycle.  Figure 1, from a note by Ron Baiman, a member of the Chicago Political Economy group, shows the number of quarters it takes for an economic expansion to return the EPOP to its pre-recession level.

As we can see, the expansion that started in November 2001, and which lasted for 73 months, ended with an EPOP that was 2.48 percent below where it had been before the start of the March 2001 recession.   This was the first post-war expansion that failed to restore the EPOP to its pre-recession level.  But, it is very likely not the last.  In particular, it appears that our current expansion will be the second expansion.

Our current expansion started June 2009 and as of October 2016 it was 88 months long.  Yet, it remains 4.78 percent below its pre-recession level, which as noted above, was already lower than the EPOP at the start of the March 2001 recession. Given that the EPOP is currently growing very slowly, it is doubtful that it will close that gap before the next recession begins.

Explanations

Many economists argue that the downward trend in the EPOP over the last business cycles is largely due to the aging of the population.  The EPOP of older workers is always lower than that of younger workers, so as their weight in the population grows, the overall EPOP falls.  However, as Baiman explains, and shows in Figure 2, this cannot fully explain what is happening:

Figure 2 below repeats the analysis of Figure 1, but does so within population cohorts of ages 16-24, 25- 54, and 55 and over, whose shares are held constant at October 2016 levels to remove the effects of changing demographics over the post-war period. For example, this eliminates the impact of an increased over 55 population share that is likely to reduce the overall employment/population ratio.

Thus, even with this correction, the current expansion seems very unlikely to recover its “demographically controlled pre-recession employment/population ratio.”

In fact, it is younger, not older workers that are suffering most from a declining EPOP.  As Henwood points out: “Those aged 35-44 and 45-54 have yet to return to their 2000 and 2007 peaks—but those aged 55-64 have, and those over 65 have surpassed them (though obviously a much smaller share of the 65+ population is working than the rest.”

In short, we can rule out an aging population as the primary cause of the growing inability of economic growth to ensure adequate job creation.

A look at the behavior of our dominant firms produces a far more likely explanation.  As Henwood notes:

despite copious profits, firms are shoveling vast pots of cash to their executives and shareholders rather than investing in capital equipment and hiring workers. From 1952 to 1982, nonfinancial corporations distributed 17 percent of their internal cash flow (profits plus depreciation allowances) to shareholders; that rose to about 30 percent in the 1980s and 1990s, and to 48 percent since 2000. (In 2016, the average was an incredible 64 percent.)

This behavior certainly pays off handsomely for top managers and already wealthy stock holders.  But it is not so great for the rest of us, especially for those workers–and their families–who find paid employment increasingly difficult to obtain, even during an economic expansion.

Even The Good Times of Economic Expansion Aren’t So Good For Most In US

Recessions are bad for most people: production, employment, income all fall.   But economic expansions are supposed to more than compensate for the down times.  However, as we see below, that is no longer the case.

Increasingly, the lion’s share of all the new income generated during economic expansions now goes to a very few.  In other words, a sizeable majority of the US population now loses regardless of the state of the economy.  It is time to shift the focus of our discussions from how best to control the business cycle to how to build a movement strong enough to transform the workings of contemporary capitalism.

Pavline R. Tcherneva has calculated the distribution of new income between the top 10 percent and bottom 90 percent of households and the top 1 percent and bottom 99 percent of households in every post-war US economic expansion.  The following figures come from her Levy Economics Institute of Bard College policy paper titled Inequality Update: Who Gains When Income Grows?

Figure 2 shows a steady rise in the share of income growth claimed by the top 10 percent of households (red bar).  However, as we can see, a striking change takes place with the 1982-90 economic expansion.  Starting with that expansion, the top 10 percent have come to dominate the income gains, leaving little for the bottom 90 percent of households (blue bar).  And as Tchervena comments: “Notably, the entire 2001–7 recovery produced almost no income growth for the bottom 90 percent of households.”  So much for the pre-Great Recession debt-driven golden years.

Figure 4 illustrates the distribution of income gains between the top 1 percent of households and the bottom 99 percent of households.  As we can see, the top 1 percent of households now capture a greater share of newly created income than the bottom 99 percent of US households.  It is no exaggeration to say that our economy now largely works only for the benefit of those few families.

Tcherneva sums up her work well:

the growth pattern that emerged in the ’80s and delivered increasing income inequality is alive and well. The rising tide no longer lifts most boats. Instead, the majority of gains go to a very small segment of the population. As I have discussed elsewhere, this growth pattern is neither accidental nor unavoidable. It is largely a by-product of policy design, specifically, the shift in macroeconomic methods used to stabilize an unstable economy and stimulate economic growth.

Asia’s Economic Future

There is strong reason to expect a further weakening of global economic activity over the next several years, putting greater pressure on majority living and working conditions.

In brief, Asia’s economic dynamism is ebbing.  Given the region’s centrality in the international economy, this trend is both an indicator of current global economic problems and a predictor of a worsening global situation.

Asia’s central role in the global economy

Asia’s central role in the world economy is easily documented.  For example, as the Asian Development Bank points out, “Global headwinds notwithstanding, developing Asia will continue to contribute 60% of world growth.”

Asia’s key position is anchored by China.  China is the single largest contributor to world GDP growth, likely accounting for almost 40 percent of global growth in 2016.  Stephen Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, estimates that China’s contribution to global growth was 50 percent larger than the combined contributions of all the advanced capitalist economies.

The rise of Asia, and in particular China, owes much to the actions of transnational corporations and their strategy of creating Asian-centered cross-border production networks or global value chains (GVC).  In the words of the Asian Development Bank, these networks or chains involve “dividing the production of goods and services into linked stages of production scattered across international borders.  While such exchange of inputs is as old as trade itself, rapid growth in the extent and complexity of GVCs since the late 1980s is unprecedented.”

The strategy was initiated by Japanese transnational corporations who began shifting segments of their respective production processes to developing Asian countries in the late 1980s; US and European firms soon followed.  The process kicked into high gear in the mid to late 1990s once China opened up to foreign investment and decided to pursue an export-led growth strategy.

Asia, as a consequence, became transformed into a highly efficient, integrated, regional export machine, with China serving as the region’s final assembly platform.  Developing Asian economies became increasingly organized around the production of manufactures for export; their share of total world manufacturing exports rose from 18.4 percent to 32.5 percent over the period 1992-3 to 2011-12.   And, following the logic of cross border production, a growing share of these exports were parts and components, which were often traded multiple times within the region before arriving in China for final assembly.   Parts and components accounted for more than half of all developing Asian intra-regional manufacturing trade in 2006-7.

China, befitting its regional role, became the first or second largest export market for almost every developing Asian country, with the majority of those exports the parts and components needed for the assembly of advanced electronics.  Between 1995 and 2014, the electronics share of manufacturing exports to China from Korea grew from 8.5 percent to 32.2 percent.  Over the same period, the electronics share from Taiwan exploded from 9.1 percent to 63.7 percent, for Singapore the share grew from 17.5 percent to 36.8 percent, and for the Philippines it rose from 3.4 percent to 78.3 percent.  China’s exports to the region, and especially outside the region, were mostly final goods, with the most technologically advanced assembled/produced under the direction of foreign transnational corporations.  In line with this development, China became the premier location for foreign investment by transnational corporations from Japan, Korea, and Taiwan, as well as leading non-Asian corporations.

This history allows us to appreciate the forces that powered Asia’s growth.  Growing demand for manufactures by consumers and retailers in the US and the Eurozone became increasingly satisfied by exports from Asia.  The production of these exports triggered the production of and trade in parts and components by developing East Asian countries and their final assembly in China, as well as massive investment in new factories and supportive infrastructure, especially in China.  East Asian export production also required significant imports of primary commodities, which were largely purchased from countries in Latin America and Sub Saharan Africa, who experienced their own growth spurt as a result.

As we now well know, this growth was heavily dependent on the borrowing capacity of working people in the advanced capitalist world, especially in the US, whose incomes had been falling in large part because of the shift of production to Asia.  The collapse of the debt-driven US housing bubble in 2008 triggered a major financial crisis and global recession, which also greatly depressed international trade.   A weak international recovery has followed; international trade and growth remain far below pre-crisis levels, raising questions about Asia’s future economic prospects.  To appreciate why I am pessimistic about Asia’s economic future requires us to delve more deeply into the ways in which Asian economies have been restructured by transnational capital’s accumulation dynamics.

The Dynamics of Asia’s Economic Transformation

The three charts below, which come from an article authored by the Monetary Authority of Singapore in collaboration with Associate Professor Davin Chor of the National University of Singapore, provide a useful visualization of the Asian economic transformation described above, in particular, changes in the trading relationships of the countries, with each other and with the rest of the world.  The authors use what they call a measure of “upstreamness” to highlight “where a country fits in the operation of cross border production networks, more particularly whether it specialized in producing raw input, intermediate inputs or finished goods.”  The more a country specializes in producing raw inputs, the greater is the value of its upstreamness index; the more it specializes in producing final goods, the smaller is its upstreamness index.

More precisely: the upstreamness index for an industry takes on values equal to or larger than 1.  A value of 1 means that the industry’s output “is just one stage removed from final demand.” A greater value means that the industry’s output enters the relevant production process as an input that is a number of stages removed from final demand.  Here are some examples of upstreamness values for select US industries:

index-values

For the charts below, the upstreamness measure for each country is calculated by weighting the upsteamness of its export industries by the share of each industry in the country’s total exports for the year in question.

As the authors explain:

Charts 2 to 4 depict the changing networks of trade flows between the Asian economies, and in relation to the US, UK, Eurozone (EZ), Australia, as well as the rest of the world (ROW). In these charts, the arrows indicate the direction of the net trade balance between each pair of economies, while the width of each arrow is proportional to the magnitude of this balance.

The arrows are color-coded to reflect the upstreamness of the export flows that move in the same direction as the net trade balance between each pair of nodes. For simplicity, export upstreamness values lying between 1 and 2 are labelled as “downstream” (green), those between 2 and 2.5 as “midstream” (yellow), and those above 2.5 as “upstream” (red).

As we can see in Chart 2, in 1995, a time when cross boarder production networks were still limited, Japan dominated the Asian region.  It was a significant downstream (green) exporter to the US, the Eurozone, the UK, and China.  And it was a significant supplier of key midstream machinery to Korea, Taiwan, Hong Kong, Singapore, Thailand and Malaysia.  It generally purchased its upstream inputs from the ROW.   As we can also see, China was well on its way to becoming a major exporter of final goods to the US, the world’s dominant consumer of both downstream and midstream goods.

chart-2

chart-3

By 2005, as illustrated in Chart 3, Japan’s role in the region had dramatically diminished.  China was now the region’s hub, and as such, the dominant exporter of finished goods to the US, the Eurozone, Hong Kong, and the ROW.  The economies of Korea and Taiwan had also been transformed, increasingly oriented to supplying upstream parts and components to China-based exporters.

chart-4

Chart 4, which captures conditions in 2014, shows a deepening of the trade patterns of the previous period.  China’s export dominance is greater yet, as illustrated by the increase in the width of its green trade arrows pointing to the US, ROW, EZ, and Hong Kong.  The Korean and Taiwanese economies are even more dependent on sales of parts and components to China.  Because of their relatively small trade activity, it is difficult to appreciate the transformations experienced by other Asian countries.  Many ASEAN countries, as noted above, had become suppliers of key electronic components to China.  Vietnam, due in large part to the expansion of South Korean production networks, has become an important assembly and export location for some consumer electronics such as smart phones.

What is also not visible from these charts is the effect that transnational corporate-driven regionalization dynamics have had on the structures and stability of individual countries, and of course on the working and living conditions of Asian workers.  One consequence of the rise of China as the region’s key final assembly and production platform is that leading firms from other Asian countries significantly reduced their domestic investment activity as they located operations in China. This deliberate deindustrialization was a natural outcome of the establishment of cross border production networks which involve, as stated above, the dividing of production activities into segments and the location of one or more of these segments in other countries.

The chart below highlights the dramatic decline in Japanese investment as Japanese firms shifted segments of production overseas.   This ongoing decline in investment is one of the most important reasons for the country’s ongoing economic stagnation.

japan

The following chart shows a similar sustained decline in investment, although beginning at a later date than for Japan, for the grouping “Rest of emerging Asia,” which includes Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand.   China, on the other hand, has experienced a dramatic and sustained rise in its investment ratio. Chinese state activity, rather than foreign direct investment, accounts for the great majority of this investment, although in many cases it was undertaken to attract and support foreign production.

asian-investment

As leading Asian transnational corporations expanded their production networks, their actions tended to restructure their respective home economies in ways that left these economies more unbalanced and crisis prone.  For example, almost all Asian economies became increasingly export dependent at the same time that their exports narrowed to a limited range of parts and components.   And with transnational corporations increasingly able to shift production from one national location to another, China’s pull became ever stronger.  One consequence was that governments throughout Asia were forced to match China’s relatively low labor costs and corporate friendly business environment.  In many cases, they did so by transforming their own labor markets though the introduction of new laws and actions designed to weaken labor rights.  This, in turn, tended to suppress regional purchasing power, thereby reinforcing the region’s export dependence.  Not surprisingly then, the decline in exports that has followed the post 2008 Great Recession poses a serious challenge to Asia’s growth strategy.

According to the Asian Development Bank:

Developing Asia’s exports grew rapidly in real terms at an annual rate of 11.2 percent in 2000–2010 (Figure 1.2.1). Excepting a brief rebound in 2010, the region’s export volume growth has slowed since the crisis, recording annual growth of 4.7 percent in 2011–2015. A major concern is that developing Asia’s exports actually declined by 0.8 percent in 2015, which was a particularly bad year for world trade. Regional trends follow the lead of export growth in the PRC, which contributes about 40 percent of developing Asia’s export value.  PRC export growth slowed from an annual average of 18.3 percent in 2001–2010 to 6.4 percent in 2011–2015, falling into a 2.1 percent decline in 2015. The slowdown in developing Asia excluding the PRC was less pronounced as growth halved from 8.0 percent in 2001–2010 to 4.1 percent in 2011–2015, still growing marginally in 2015 at 0.8 percent. . . .

The slowdown has meant that developing Asia’s export growth in 2011–2015 was, at 4.1%, similar to the 4.3% averaged by other developing economies and not much higher than the 3.6% of the advanced economies—two groups that developing Asia has historically outperformed in export growth.

trade-trends

And as the region’s export growth rate declined, so did overall rates of GDP growth, as we see in the table below.

rates-of-growth

Still, these growth rates remain impressive, especially in light of the steep decline in regional exports.  Perhaps not surprisingly, developing Asia’s buoyancy owes much to China’s ability to maintain its relatively high rates of economic growth.  However, as I will discuss in a following post, contradictions and pressures are mounting in China that will intensify its economic slowdown and significantly depress growth in the rest of Asia, with negative consequences for the rest of the world.

Falling Profit Margins Signal Recession Ahead

Business cycles are intrinsic to the way capitalism operates; they are the outcome of contradictions generated by the private pursuit of profit.  In fact, it is the movement in profits that drives the cycle, with a sustained downward movement in the profit margin signaling growing dangers of a recession.

And, it is a sustained downward movement in the profit margin that is leading business forecasters to raise warnings of a coming recession.  A case in point: a June 2016 J.P. Morgan special report titled Profit Stall Threatens Global Expansion states:

One metric for gauging the stage of the business cycle is the level of the profit margin. In this regard, the timing does not look encouraging. The US experience is instructive in this regard. The rolling over of the profit margin has led every US post-World War II recession by one to three years. Indeed, it is partly for this reason that our medium-term recession-probability models show the odds of a recession within the next three years running near 90%.

Recessions mean hardship, especially for working people.  Unfortunately, because most Americans have benefited little from the current expansion, few will have the financial resources necessary to moderate the social costs that come with any downturn.

Business Cycle Theory

Some definitions are needed to show why profit margins are key to gauging the state of the business cycle.  Profits are the difference between a firm’s total revenue from selling products and its total cost from producing them.  The profit margin is the firm’s profit per dollar of sales or revenue; it is calculated by dividing total profits by total revenue.

If we think about the corporate sector as a whole, we can define total corporate profits as the product of corporate total revenue (or sales) multiplied by the average corporate profit margin (or earnings per dollar of sales).  Total revenue is a function of the level of demand in the economy.  The profit margin is heavily dependent on changes in the cost of production (most importantly changes in productivity, which include the intensity of work, and wages).  Not surprisingly, both demand and business production costs, and thus total revenue and the profit margin change over time, sometimes moving in the same direction and sometimes not.

Coming out of a recession, corporations tend to enjoy rapidly increasing demand for their products and, for them, still pleasingly low costs of production thanks to their recession-era leverage over workers.  This translates into rapidly increasing profits and expectations of continued profitability.  This, in turn, encourages more hiring and investment in new plant and equipment, which helps to strengthen demand and further the expansion.

However, at some point in the expansion, costs of production begin to rise from their recession period lows, causing a fall in the profit rate.  For example, productivity begins to slow as firms press older equipment into use and workers take advantage of the improving labor market to slow the pace of work.  And, as unemployment falls over the course of the expansion, workers are also able to press for and win real wage gains.  With costs of production growing faster than product prices, the profit rate begins to decline.

For a time, the growth in sales more than compensates for lower profit margins and total profits continue to rise, but only for a time.  Eventually steadily declining profit margins will overwhelm slowing growth in sales and produce lower profits.  And when that happens, corporations lose enthusiasm for the expansion.  They cut back on production and investment, the effects of which ripple through the economy, leading to recession.

The Data

The following figure from the J.P. Morgan study shows movements in productivity and the profit margin with each point representing a two year average to smooth out trends.  The grey stripes denote periods of recession.  As noted above, the profit margin turns down one to three years before the start of a recession.  The recession, in turn, helps to create the conditions for a new upward movement in the profit rate.

us profit margin

As J.P. Morgan analysts explain:

Indeed, for the US, the turn down in the profit cycle weighs heavily in our estimate of rising recession risks.  The deeper historical experience of the US better highlights the linkage between productivity and corporate profitability. The latest downshift in US productivity suggests the disappointing profit outturns of late likely will not stabilize absent a pickup in productivity growth to an above-1% annualized pace, all else equal. While some acceleration is embedded in our forecast, recent experience suggests the risks are skewed to the downside.

As we can see, in the case of the current expansion, the profit margin is not just falling, it has now moved into negative territory.  Thus, although profits remain high [see figure below], the current decline into negative territory means that profits are now actually falling.  If past trends hold, it is only a matter of time before corporate responses push the US economy into recession.

profit share

When discussing the business cycle it is also important to add that we are not describing a regular pattern of ups and downs around an unchanging rate of growth.  Corporate responses to the conditions they face influence the pattern of future cycles.  For example, if corporations decide to respond to growing worker gains during an expansionary period by shifting production overseas, future recessions will likely be more painful and expansions weaker in terms of job creation and wages.  If fear of corporate flight leads governments to slash corporate taxes, public finances will suffer and so will support for needed investments in physical infrastructure and social services, again boosting profits but at the expense of the longer term health of the economy and its majority population.  This dynamic helps to explain the growing tendency towards long term stagnation coupled with minimal wage gains even during expansions.

J.P. Morgan analysts are not just pessimistic about the US.  They also estimate that profit margins are falling throughout the world, as illustrated in the figure below.

global profit margins

Thus:

If the US experience is any guide, recession risks are elevated broadly. Globally, profit margins peaked near the end of 2013, and declines have occurred across nearly all countries with the exception of Taiwan, Korea, and South Africa [figure above]. Margins have been stable in the Euro area, Japan, and China. By comparison to the huge declines in some countries, the margin compression in the US appears relatively modest. Not surprisingly, Brazil—already in its worst recession since the Great Depression—has seen the most significant margin compression. A similar message is seen for Russia. But for those economies still in expansion, the fall in margin is the most concerning for Poland, the UK, the Czech Republic, Thailand, Australia, Turkey, and India, in order of largest margin declines.

The takeaway: we have plenty to worry about.

The 1% Disproportionately Benefit From US Expansions

A new study of the distribution of income by the Economic Policy Institute (EPI) highlights the enormous sway the top one percent of families (defined as tax paying units, either single adult or married couple) has over the US economy.  The authors found:

Between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent.

In 24 states the top 1 percent captured at least half of all income growth between 2009 and 2013.

In 15 of those states the top 1 percent captured all income growth between 2009 and 2013. Those states were Connecticut, Florida, Georgia, Louisiana, Maryland, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, South Carolina, Virginia, Washington, and Wyoming.

In the other nine states, the top 1 percent captured between 50.0 and 94.4 percent of all income growth. Those states were Arizona, California, Illinois, Kansas, Massachusetts, Michigan, Oregon, Pennsylvania, and Texas.

This development, where the top 1 percent captures almost all of the income gains during a period of economic expansion, has now become business as usual.  As the figure below shows, the top 1 percent has increased its share of income, expansion by expansion, starting in the late 1970s.

top income capture

Not a pretty picture—recessions bring losses to the great majority of working people and expansions bring gains only to those at the top.

Clearly, we need significant structural changes to achieve an economy that works for the majority.  Just as clearly, there is a powerful minority that has every reason to use its considerable power to block those changes.  Among other things, they actively use their wealth to influence candidate selection and elections and, by extension, our national and state economic policies.

campaigns

And, perhaps even more importantly, they use their control over media to try and convince us that the existing system is a fair and just one.

Third World Countries Lose Ground

Globalization advocates celebrated the 2003-08 period, pointing to the rapid rate of growth of many third world countries as proof of capitalism’s superiority as an engine of development.  Overlooked in the celebration was that fact that growth and development are not the same thing, and in most countries the benefits of growth were only enjoyed by a small minority.  Also overlooked was the fact that this growth was achieved at the cost of ever increasing damage to the health of our planet.  Finally, these cheerleaders also minimized the unbalanced, unstable, and unsustainable nature of the growth process; some seven years after the end of the Great Recession most countries continue to struggle with stagnation, with working people disproportionately suffering the social consequences.

The following figures, taken from the World Bank’s latest annual Global Economic Prospects report, highlight the severity of the post-crisis growth slowdown.

Figures 1 and 2 illustrate the extent of the growth slowdown.   Emerging Market and Developing Economy (EMDE) commodity exporters have suffered the worst declines.  In terms of region, EMDEs in Europe and Central Asia and Latin America and the Caribbean recorded the lowest rates of growth.  Sub Saharan African countries experienced one of the sharpest declines in growth relative to the 2003-08 period.

Figure 1: Gowth By Group

Growth by group

 

Figure 2: Regional Growth EMDEs (weighted average)

regional growth weighted

This ratcheting down of EMDE growth rates means a significant setback in progress towards achieving advanced economy levels as shown in Figure 3 A and B.

Figure 3: Catch-Up of EMDE Income To Advanced Economies

catch up

The Financial Times discusses the significance of this development:

That downgrade [in world growth] came alongside a new analysis showing that for the first time since the turn of the century a majority of emerging and developing economies were no longer closing the income gap with the US and other rich countries.

Last year just 47 per cent of 114 developing economies tracked by the bank were catching up with US per capita gross domestic product, below 50 per cent for the first time since 2000 and down from 83 per cent of that same sample in 2007 as the global financial crisis took hold.

That, the bank’s economists warned, would have a meaningful impact on the future people in those countries could expect.

“Whereas, pre-crisis, the average [emerging market] could expect to reach advanced country income levels within a generation, the low growth of recent years has extended this catch-up period by several decades,” they wrote.

Leading International Monetary Fund officials have warned in recent months that the so-called process of “economic convergence” had slowed to two-thirds of its pre-crisis rate. But the warning from the bank paints an even starker picture.

In the five years before the 2008 financial crisis, emerging markets could expect to take an average of 42.3 years to catch up with US per capita GDP, according to the bank’s analysis.

But over the past three years, as major emerging economies such as Brazil, Russia and South Africa have slowed or fallen into recession, the slower average growth means the number of years it would take to catch up with the US has grown to 67.7 years.

For frontier markets, those more fragile economies further down the development scale, such as Nigeria, the catch-up period more than doubled from 43.1 years to 109.7 years.

And, it is important to add, even these projections are likely optimistic.  The IMF and World Bank have repeatedly overestimated future rates of growth and tend to downplay the possibilities of yet another global crisis.

The World Economy: Trouble Ahead

Economic conditions are not good and the signs are for more trouble.  The post-Great Recession recovery has been incredibly weak and it appears that it will soon come to an end.  And here I am writing about all the advanced capitalist economies, not just the United States.  Perhaps the key indicator: investment and productivity trends.

Here is the International Monetary Fund [IMF] writing in 2015: “Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since.”

More specifically, the IMF finds that:

The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies. For these economies, private investment has declined by an average of 25 percent since the crisis compared with precrisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s.

The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward precrisis investment trends in either sector.

real private investment

The figure above illustrates how far advanced economy investment has fallen relative to the precrisis period and past forecasts and that there has been no recovery in investment spending (the log scale shows percentage change in investment).

The following figure, which covers only advanced economies, demonstrates that the investment slump has affected both residential and nonresidential investment.  And, as far as the latter is concerned, investment spending on both structures and real equipment are significantly down relative to past trends.

types of investment

These trends have real consequences.  As the economist Michael Roberts points out,  “Global industrial output growth continues to slow and in the case of the G7 economies (red line below), industrial production is now contracting.”

world IP

He also highlights the fact that “world trade . . . is in significant negative territory (red line below).  This is partly due to the collapse in energy and other industrial raw material prices.  But even when you strip out the impact of the deflation in prices, world trade volume is basically static (blue line) and well below even the low world GDP growth rate of around 2.5%.  Countries with low domestic demand can expect no compensation through exports.”

world trade

The investment slump has also taken its toll on productivity.  According to the Financial Times:

Output per person . . . grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. A slowdown in Chinese productivity was a big driver, as was poorer output growth in commodity producing countries in Latin America and Africa because of weaker oil prices and production.

Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.

But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006.

Moreover, things are fast deterioriating in the US.  The Financial Times reports that productivity will likely fall this year for the first time in three decades. “Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year.”

us-productivity-growth

Sadly, as Roberts argues, most governments still seek to rejuvenate their respective economies by some combination of monetary easing, cuts in public investment, privatization, weakening labor rights, and new free trade agreements. These policies have not worked and there is no reason to think that they ever will.

The Greek Tragedy Continues

The Greek tragedy continues.  Greece remains in depression.  The economic downturn began in 2008 and the economy has shrunk every year since, with the exception of 2014.  Although millions are suffering from poverty, the Greek government has continued to make its debt payments, first to foreign banks and now to the Troika.  This pairing is the result of two huge loans by Troika institutions in exchange for the imposition of fierce austerity policies.

The Greek people have refused to quietly accept the unraveling of their society.  According to the Greek police, there were 27,103 protests and rallies in Athens alone between 2011 and 2015.  The number of rallies attended by more than 1,000 people were 61 in 2012, 72 in 2013, 58 in 2014 and 72 in 2015.  Knowing the reliability of police record keeping, these are likely undercounts.

article-1273498-09728EC4000005DC-137_468x286

Despite popular resistance, a commitment to more austerity in exchange for yet more debt was recently approved by the Greek parliament.  It includes new cuts to pensions, increases in required social security contributions, and higher personal and business taxes.  Tragically, the current agreement was negotiated by Syriza, the political party elected in January 2015 on the basis of its commitment to end the austerity and renegotiate the country’s foreign debt.

I recently published an article in the journal Class, Race, and Corporate Power which attempts to explain the forces driving Greece’s economic crisis and the failure of Syriza to fulfill its promises.   The abstract is below.  The article can be accessed for free here, on the journal’s webpage.

 

The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece

Abstract:

With its 2015 electoral victory in Greece, Syriza became the first left political party to lead a European government since the founding of the European Union. As such, its eventual capitulation to the demands of the Troika was a bitter development, and not only for the people of Greece. Because the need for change remains as great as ever, and efforts at electoral-based transformations continue, especially in Europe, this paper seeks to assess the Greek experience, and in particular Syriza’s political options and choices, in order to help activists more effectively respond to the challenges faced when confronting capitalist power.

Section 1 examines how Greece’s membership in the euro area promoted an increasingly fragile and unsustainable economic expansion over the period 2001 to 2007. Section 2 discusses the role of the Troika in Greece’s 2008 to 2014 downward spiral into depression. Section 3 discusses the ways in which popular Greek resistance to their country’s crisis helped to shape and nourish Syriza as a new type of left political organization, “a mass connective party.” Section 4 critically analyzes the Syriza-led government’s political choices, highlighting alternative policies not chosen that might have helped the government break the Troika’s strangle hold over the Greek economy and further radicalize the Greek population. Section 5 concludes with a presentation of five lessons from the Greek experience of relevance for future struggles.

Recession On The Horizon

Economic trends do not look promising, at least for working people.

The UN publication World Economic Situation and Prospects 2016 highlights the dramatic slowdown in economic activity in the years following the world recession.

Looking at the 20 leading developed economies we see that average growth fell from 2.8 percent over the period 3rd quarter 2002 to 4th quarter 2007 to 1.3 percent over the period 1st quarter 2010 to 2nd quarter 2015.  At the same time, growth became more unstable as shown by the rise in volatility. Consumption growth and investment growth also fell dramatically with volatility increasing. Trends were similar, although not as drastic for the 20 leading developing nations.

growth trends

The UN study paid careful attention to the collapse in investment.  The authors note:

The global financial crisis has had the most pronounced negative effect on investment rates. . . . After an early recovery in 2010-2011, the growth rates of fixed capital formation have sharply slowed down since 2012, exerting downward pressure on productivity, employment and growth. The growth rates of fixed capital formation nearly collapsed since 2014, registering negative quarterly growth in as many as 9 large developed and developing countries and economies in transition. . . .

Investment in productive capital has been even weaker than the total investment figures suggest, as dwelling and intangible assets account for the majority of investment in developed economies. According to OECD data on fixed capital formation, investments in intangible and intellectual property assets together represent the largest share of fixed capital formation in a number of developed economies in 2014, including in Germany (47.2 per cent) and the United States (42.3 per cent). Acquisition of intangible assets, such as trademarks, copyrights and patents, may increase financial returns to firms without necessarily increasing labor productivity or productive capacity.

Especially noteworthy is that despite their lack of investment in plant and equipment, non-financial corporations have resumed their borrowing.  As the authors of the UN study explain:

A growing disconnect between finance and real sector activities is evident in the data: fixed investment growth nearly collapsed, while debt securities (a financial instrument to raise capital) issued by non-financial corporations increased by more than 55 per cent between 2008 and 2014, representing a nearly 8 per cent increase per year [as the table below shows].

This is noteworthy because it means firms are largely going into debt to engage in mergers and acquisitions, stock repurchases and dividend payments. If world economic growth continues to slide, many of these firms are likely to find themselves in serious debt difficulties.

debt trends

For most of the post-recession period, world growth was sustained by the high rates of growth in the third world, in particular China.  However, the decline in growth in the developed world eventually produced a slowdown in Chinese exports and growth, which caused a decline in Chinese demand for commodities, triggering a dramatic slide in commodity prices and rates of growth in many developing economies.

commodity trends

The slowdown in third world growth is gathering speed.  One factor is the growing capital flight from the third world.  As the economists Joseph Stiglitz and Hamid Rashid explain:

The real worry, however, is not just falling commodity prices, but also massive capital outflows. During 2009-2014, developing countries collectively received a net capital inflow of $2.2 trillion, partly owing to quantitative easing in advanced economies, which pushed interest rates there to near zero.

The search for higher yields drove investors and speculators to developing countries, where the inflows increased leverage, propped up equity prices, and in some cases supported a commodity price boom. Market capitalization in the Mumbai, Johannesburg, São Paulo, and Shanghai stock exchanges, for example, nearly tripled in the years following the financial crisis. Equity markets in other developing countries also witnessed similar dramatic increases during this period.

But the capital flows are now reversing, turning negative for the first time since 2006, with net outflows from developing countries in 2015 exceeding $600 billion – more than one-quarter of the inflows they received during the previous six years. The largest outflows have been through banking channels, with international banks reducing their gross credit exposures to developing countries by more than $800 billion in 2015. Capital outflows of this magnitude are likely to have myriad effects: drying up liquidity, increasing the costs of borrowing and debt service, weakening currencies, depleting reserves, and leading to decreases in equity and other asset prices. There will be large knock-on effects on the real economy, including severe damage to developing countries’ growth prospects.

This is not the first time that developing countries have faced the challenges of managing pro-cyclical hot capital, but the magnitudes this time are overwhelming. During the Asian financial crisis, net outflows from the East Asian economies were only $12 billion in 1997.

The US financial sector is one of the main beneficiaries of this capital flight.  However, the inflow of funds tends to drive up the value of the dollar to the detriment of US manufacturing, investment, and employment.

It is hard to see positive signs for the world economy.  In fact, many analysts are now predicting recession for the US.  The economist Michael Roberts has long argued that key to “the health of a modern capitalist economy is . . . the direction of average profitability of capital, total business profits and its impact on business investment.” In other words, a decline in profit rates will eventually lead to a fall in total corporate profits and then investment.  When that happens a recession is not far behind.

As Roberts describes:

[R]ecently some mainstream economists have paid the movement in profits a bit more attention. . . . And . . . the economists at the investment bank JP Morgan have started to use profits and profitability as a guide to the likelihood of an oncoming recession.

They first noted that global profit margins have been drifting lower for the past two years, mainly driven by a falling profitability in emerging capitalist economies as the great commodity price boom reversed and China’s economy slowed sharply.

And now DM (developed market) margins have begun to fall as US corporations come under pressure from the rising dollar and the concentrated hit to the energy sector, JPM noted.  In another note, JPM economists looked at overall US corporate profits and calculated that corporate profits were likely down 11% annualized last quarter, and down 7% over year-ago levels.”

They “now put the probability of a recession starting within three years at a startling 92%, and the probability within two years at 67%”. However, they temper this result by pointing out that profit margins are still historically high so there is room for a fall without economic contraction and also the expectation that the US Fed will not continue with its rate hikes as quickly or as far as previously planned. On that basis, their forecast of a US recession is beginning within three years at about 2/3 and within two years at close to 1/2″. 

It is difficult to predict economic turning points, but the trends appear clear—the long post-crisis expansion is nearing its end.  Tragically, few people have benefited from the expansion and our social structures are far from sufficient to see us through the new approaching recession.