• Endless Recovery?

  • Por Joachim Bischoff | 23 Apr 18
  • The growth rate of global GDP has increased markedly in the second half of 2016. The main contributors to this are the capitalist core countries, and the most important factors for the accelerated recovery are that:

    • The US has not put into effect its frequently announced comprehensive protectionist measures.
    • The UK’s exit negotiations have up to now not triggered any stronger economic collapse.
    • The Chinese government has been able to stabilise the real estate markets and the financial sector, to preliminarily brake capital flight, and continue China’s high growth.
    • Finally, pro-European parties have prevailed in the national elections of EMU Member States.

    At the same time, it is possible that the recovery cycle in the US has already peaked. Donald Trump’s election, the announcement of a large infrastructure programme, and the prospect of tax cuts have clearly prolonged the present business or economic cycle – but the cyclic character of economic development cannot be suspended.

    See Graph 1: Private nonresidential fixed investment

    Mainstream economists have identified the starting and ending points of the various business cycles and their phases. For the US this occurs through the quasi-official cycle dating done by the National Bureau of Economic Research (NBER).

    Is the US economy approaching the peak of the current economic cycle? The symptoms – stagnating corporate profits, volatile stock markets, the collapsing credit volume of banks, falling bond yields, and rising corporate debt – are signals that a weakening trend is beginning in the US. Nevertheless, the incipient slowdown in 2015 only triggered a dip in investments. The higher growth rate beginning in fall 2016 is not convincing as a return to normality.

    In its 2017-2018 annual report,1 the German Council of Economic Experts has published a chronology of Germany’s business cycles, as it has done ever since 1950. Its method is oriented to the practice of the NBER.2

    See Graph 2: Phases of recessions since 1950

    The length of the upswing that began in 2010 is striking – both in the US and Germany. The Council of Experts does not categorise the economic downturn at the end of 2012 and beginning of 2013 – based on the cycle in the US and therefore the global economy – as a recession but as a temporary interruption of the recovery.

    Long upswing

    Since the 2008 financial crisis the central banks have pumped billions of US dollars into the economies of the developed countries. In fall 2017 the world economy actually no longer needs an artificial respiration machine. Although the economies of the core capitalist countries have grown in the end, they have lost the ability to react to the next downturn, which will inevitably come.

    Global growth has accelerated since the beginning of 2016 and reached an astounding 3.4% in the first half of 2017. In so doing it has surpassed long-term expectations by almost a complete percentage point. The labour markets are doing better, private consumption is robust, and corporate investments are on the rise. Many economists are concluding that we are now in a recovery phase, that, moreover, growth appears to be decoupled from cyclical movements. The world economy has needed almost eight years of recovery before capital accumulation could return to its familiar channels; eight years of great insecurity and continuous fear that growth could tip over into the wrong direction; and eight years in which the world economy was on drip-feed and supported by massive monetary stimulus packages that were put together by the large central banks after the financial crisis and the European debt crisis. The world economy is to grow in real terms by 3.6% in 2017 and 3.7% in 2018. In contrast to the lean years 2015 and 2016, which showed slightly more than 3% growth, this is a hefty acceleration.

    See Graph 3: The global upswing is gaining some momentum

    The serious financial and economic crisis was first of all a challenge for the political establishment of the national states because the very comprehensive bailout packages for banks and for stabilising the economies caused enormous budget deficits and growing national debt. The dramatic rise of state debt since 2009 was not the cause but the result of the economic and financial crisis. It was to a lesser extent caused by Keynesian, in other words deficit- financed, stimulus programmes. Government measures to bail out banks played, by far, the greatest role in increasing the level of state debt.

    After the perils of the collapse were survived, there was scant fiscal room left for business stimulus packages, tax cuts, or infrastructure investments. Therefore the central banks took over the task of assisting economic speedup. They lowered prime lending rates in order to make cheap money available and encourage consumers to take out more credit, and so kick-start the economy. Although this was a classic monetary-policy manoeuvre the effect remained minimal. As a consequence, some of the world’s largest money-issuing banks entered new territory and launched the biggest monetary-policy experiment in history: Along with an extreme low-interest-rate policy the banks of issue resorted to massive purchases of securities. With ‘Quantitative Easing’ (QE) growth was to be stoked and deflationary downward price spirals combated.

    However, the deployed monetary policy of QE also had negative consequences along with its stabilising effect. With their interventions the leading central banks have transformed the traditional business and financial cycles of past years into a dangerous ‘asset price cycle’. In view of the unbelievably long low interest-rate phase today and the resultant booming bond, stock, and real-estate markets, the world economy ought to have entered an equally strong upswing – but this is not what has happened. According to the Bank for International Settlements,3 the extent of the assets held by banks of issue in the last nine years in the most important highly developed national economies (the US, the Eurozone, and Japan) has grown altogether by 8.3 billion US dollars – from 4.6 billion US dollars in 2008 to 12.9 billion US dollars at the beginning of 2017.

    See Graph 4: Asset prices vs. GDP

    Yet these massively expanded balance sheets have not accomplished much. In the same nine-year period nominal GDP rose in these countries precisely by 2.1 billion US dollars. This involves an injection of 6.2 billion US dollars of surplus liquidity – the difference between the increase of the central banks’ assets and nominal GDP – that was not absorbed by the real economy but instead is sloshing around the global financial markets and is leading to a distortion of asset prices across the whole spectrum of risks.

    Social demand today continues to be financed by an excess of loans and debt instruments. Between 1950 and 2007 the private debt of the developed national economies grew from 50% to 170% of GDP. Since 2008 private debt has been shifted to the public sector, in which high budget deficits represent both an inevitable consequence of the recession after the crisis and an essential precondition for maintaining appropriate levels of demand. Total public and private worldwide debt reached a record high in March 2017 of 220% of global GDP. In 2007 it was only 180%. As a result, interest rates could not return to pre-crisis levels without risking recessive effects. The recovery of the global economy this year reflects neither a return to pre-crisis normality nor the success of monetary policy.

    The stimulation of asset prices (real estate, securities) has solidified social inequality in the core capitalist countries. In their annual meeting, the International Monetary Fund’s (IMF) economists criticised the growing inequality in many countries and put forward the theory that this is inhibiting economic growth. The IMF considers higher taxes on the wealthier citizens of the industrialised countries acceptable because, it claims, it would counteract inequality and not harm growth. It sees inequality as harming social cohesion and fostering political polarisation – with the dangerous consequence that growth would, it maintains, no longer be sustainable. If large sections of the population do not come to enjoy the fruits of economic growth and at the same time if they see their jobs and incomes threatened by import competition and technical transformation they will support a politics of isolation that will raise barriers to immigration and imports.

    Europe

    European countries in particular found it difficult to go beyond the pre-crisis level of social added value. For the Eurozone there was an accelerated growth rate in 2017 as well; the economy of the nineteen euro countries has grown by 2.1%. This is almost a half percentage point more than the IMF economists had still been predicting in spring. The prognoses have been revised upward for Austria, Italy, Spain, and Germany. On the other hand, things look less good for Great Britain, which can achieve an economic growth of 1.7% in 2017 and 1.5% in 2018.

    See Graph 5: The recovery was slow, but is real

    The US

    Since mid-2009, when the recession triggered by the financial crisis came to an end, the US has found itself on a growth trajectory. This makes it the third-longest recovery phase in US history. But the average annual expansion was only slightly above 2%, which is lower compared to historical growth figures. In the estimation of the US’ central bank there will be little change in this percentage in the near future. Thus the median projections of the Fed for 2017 were 2.2%, 2.1% for 2018, and 1.9% for 2019. It appears that the figure will continue to oscillate around the 2% mark.

    In the US, Japan, and other developed national economies, the mostly light recovery is being caused by the rise in total demand – conditioned by the ongoing relaxed monetary and fiscal policy – as well as by the growing confidence of corporations and consumers. All together the picture of the US upswing – moderate growth with a slightly inflationary impetus – has changed little. Significant and sustained rises in growth are not expected.

    China[4]

    For now, the world’s second largest economy has stable growth. The OECD has assessed Chinese growth for 2017 at 6.8% and for 2018 at 6.6%. China’s central bank is assuming that the economy of the People’s Republic will have grown at 7% in the second half of 2017. Its director Zhou Xiaochuan has announced that progress has been made in the reconstruction of the world’s second biggest national economy, that imports and exports have risen sharply, and that at the same time the current-account surplus has decreased. The People’s Republic has set out to achieve top status in seminal technologies in the next years. At the same time their export dependency is to be decreased and domestic consumption boosted. Zhou emphasised that a forward-looking budget and monetary policy should tackle the Chinese economy’s weak points. In this connection he pointed to the risks in the so-called shadow-banking sector and the real-estate market. The People’s Republic’s growing debt is seen as a serious potential danger, and consequently the rating agency S&P has recently lowered their rating for China.

    See Graph 6: China’s growth is slowing down

    The growth dynamic will abate because the government wants to reduce the high debt level especially of state enterprises. Finally, the OECD has warned of the increasing debt of Chinese enterprises and said that unbridled lending represents a serious danger to China’s economy.

    China’s government is facing the urgent task of reconstructing the economy away from giant investments in infrastructure and towards more growth in the service sector. Therefore the government is – to some extent – putting up with weaker growth.

    In view of a very high savings rate and its emergence as an international creditor China is seen as stable in terms of its financial situation. Due to its low level of state debt, most experts assume that China will have no problem in handling unexpected loan defaults and the attendant financial burdens.

    Measured by its production capacity, China today has the world’s largest processing industry and has become the world’s largest exporter of high-tech goods. In 2014 China had more than 3,840 billion US dollars in foreign exchange reserves and held 1,270 billion US-dollars in US government bonds. In the same year China imported goods at a value of about 1,960 billion US dollars and was thus, after the US, the world’s second largest import market. China today is an important factor in the world economy.

    A reform of current fundamental concepts of economic management is increasingly being seen as necessary – away from extensive growth towards intensive growth, away from a strong export orientation towards more domestic consumption, away from the ‘world’s extended workbench’, with its low-cost and low-priced products, towards more efficiency, technological leadership with its own innovative capacities, high-quality products, and more services.

    The capacity for reform has become central to the Chinese leadership, and this also involves the political system.

    End of the upswing?

    After a long recovery the world economy is trending upward. For the first time in years all capitalist core countries and their most important trading partners are registering economic growth and rising rates of employment. No country is in danger of recession.

    And yet there are sceptical voices. Some economists fear that the tempo of recovery is insufficient to secure the upswing in the middle term. The IMF views the financial markets’ exaggerations critically.

    The economist Barry Eichengreen5 sums it up as follows: ‘The central banks have done what they had to do to stabilise the economy and fuel inflation. As in all medical treatments there are side effects. But just because there are excesses in the financial markets the banks of issue ought not to lose sight of their core task, which is simply to look after price stability’.

    Nouriel Roubini6 can imagine three possible scenarios for the world economy in approximately the next three years. In the bull scenario, the world’s four biggest economies – China, the Eurozone, Japan, and the US – carry out structural reforms to increase potential growth and mitigate financial vulnerabilities. These sorts of efforts would guarantee that the cyclic upswing is tied to strong potential and actual growth and so provide for robust GDP growth, a low but moderately rising inflation, and relative financial stability for many years to come. The stock markets in the US and worldwide would reach new high levels based on the stronger macroeconomic frame.

    In the bear scenario the opposite happens: The world’s biggest economies do not carry out structural reforms to increase potential growth. In this scenario the lack of reforms in the important national economies results in a low trend growth inhibiting the cyclic upswing. If potential growth remains low, a loose monetary and credit policy could lead to price increases for products and/or asset prices and at some point precipitate a cyclic slowdown – and possibly a full-blown recession and financial crisis if asset price bubbles burst or inflation accelerates.

    It is especially the Trump Administration which could play a decisive role in this negative scenario. With the implementation of a policy of tax cuts overwhelmingly benefitting the rich, the continuation of trade protectionism, and increasing limits on immigration the upward trend could be choked. Extreme tax-policy economic stimuli – such as Trump is seeking – cause steeply rising budget deficits and debts, which lead to higher interest rates and a stronger US dollar, which in turn dampens further growth.

    The third and most likely scenario lies somewhere between the other two. The cyclical upturn, both in growth and in the stock markets, continues here for a while due to the remaining tailwind. However, while the important national economies would pursue some structural reforms to increase potential growth, the tempo of the transformation is much less and its extent much more modest than would be required for maximising growth potential.

    See Graph 7: Distribution of wealth in the US since 1917

    Greater economic growth – President Donald Trump’s election campaign promise

    Nothing of what many citizens had expected of the US’ new administration has so far been delivered by President Donald Trump: no infrastructure programme, no tax reform to ease the burden on lower- and middle-income households – and no measures to boost the economy. After the Republicans had to grudgingly concede defeat in the attempt to abolish Obamacare, they turned their full attention to the issue of tax cuts.

    In actuality, the pressure for accelerated economic growth is considerable. Only at first glance is the US economy running smoothly. For years the US has been recording growth higher than, for example, Europe and Japan – and nearly full employment. But on closer inspection the situation is different. Prosperity continues to be unequally distributed. Since 2000 real income has diminished for more than half of US residents. The low unemployment is also deceptive. The reality is that many US citizens have given up hope and left the labour market.

    While President Trump plans tax breaks for the wealthy and corporations, even the IMF is making different proposals. In its view, it is above all lower and middle incomes that need relief. In addition, the Fund would like to see further steps to strengthen the lower income strata. A uniform and higher minimum wage is also among the proposals, which include easier access to the educational system and better social security. All of this, the IMF is convinced, would not only reduce inequality but also raise productivity. Instead, in its budget plan, the US government is providing for major cutbacks affecting the lower- and middle-income groups.

    In recent years it has become increasingly difficult to deny that the incomes of most US citizens are stagnating and that at the same time the elites are better off than ever before. In the last generation, employees’ wages have sunk, most drastically those of white workers, precisely those who – if they have any education at all – have completed secondary school education. For this group Trump’s slogan ‘Make America Great Again!’ really has meaning. But the pathologies they have to suffer go much deeper and are reflected in the data on criminality, drug abuse, and the number of single parents.

    See Graph 9: Debt-to-GDP for New Presidents (OMB, Debt Held By Public, FY End)

    What Trump and the Republicans are offering in reaction to the challenges of sluggish growth is a tax concept whose advantages will overwhelmingly not benefit the middle strata but the US’ millionaires. The problem of inequality will be significantly worsened by the tax reform.

    While as a candidate Trump criticised the indebtedness of the US, he is now proposing tax cuts that would increase debts to several trillion US-dollars over the course of the next ten years – and not ‘just’ 1.5 billion US dollars due to a supposed growth miracle that is to result in more tax revenues. It is the promise to ‘drain the swamp’ in Washington that got Trump elected. Instead it has become bigger and deeper. With the proposed reform he is now threatening to devour the US national economy.

    President Trump’s stated aim is to raise the US’ growth level to over 3%. This is to occur with tax reforms, deregulation, and through trade agreements. There is great doubt that this skittishly acting administration can get growth-promoting reforms off the ground with a solid congressional majority. As for now, at any rate, little points to a leap in the growth rate. In view of Trump’s erratic course one ought to be content simply to hold on somehow to the 2% level.

    The former head of the US bank of issue, the Fed, Ben Bernanke, has great doubts about the 3% economic growth targeted by the US administration.7 ‘It is definitely possible that it can be sustainable but not very probable’, Bernanke said. In the short term tax cuts could indeed ensure stronger growth because demand and consumer enthusiasm would increase. But there would ‘probably not’ be long-term growth. Steven Mnuchin, on the other hand, reinforces the government’s assessment that tax cuts and less regulation of the country’s economy would boost growth to 3% or more.8 On the White House’s internet site the talk is even of 4%.

    Investment gap since the great crisis

    What is decisive for a sustainable course of capital accumulation are investments in private capitalist and public capital stock. Trump announced billions to be invested in the national economy, to build and modernise streets, bridges, airports, and harbours. In actual fact, expenditures for public infrastructure have dropped to their deepest level.

    The American Society of Civil Engineers estimates that the recreation of US infrastructure on an acceptable level would cost ca. 4.6 trillion US dollars between 2016 and 2025. That is 2.1 billion US dollars more than was previously thought. The development of new financing sources for infrastructure investments is therefore decisive for the future of US capitalism.

    See Graph 10: Unreconstructed

    Most economists agree that improvements in infrastructure not only create jobs in the building sector and other related industries in the short term but that they also increase overall economic efficiency in the long term. Less traffic jams, shorter commuting and delivery times, smooth and low-cost energy supply, stable and powerful data networks, etc. are economic factors.

    Trump’s plan for infrastructure investments of a trillion US dollars over five years has met with considerable resistance in Congress. It is possible that there will be partnerships between the private and public sectors – with tax benefits for private firms. This kind of approach can hardly be expected to spur the economy.

    See Graph 11: Development of private net investment in the USA

    But the private capitalist sector’s investments are also weakening slightly. Many corporations are swimming in liquidity. In view of the further sharpening of unequal distribution and the excessive volume of credit the expectations of profitability from increased investments are too low. In the meanwhile, debt has reached a level at which a return to a normal interest-rate cycle is impossible because it would have severe consequences for the economies and the political relations of force.

    The economic-policy lesson then is: Since, in economic development, the whole population is not uniformly involved in the distribution of increases in income it will be increasingly hard to guarantee a sufficient investment development and extension (including modernisation) of the social capital stock.

    The need to create ‘inclusive economic growth’ is on the agenda of the US and the other core capitalist countries. In the latter the tendency to increasingly unequal distribution of wages is a decisive impediment to growth. A background to this partial devalorisation of wage labour is the chronic weakening of the trade unions’ influence. This lag in wage income and with it the undermining of the value of labour power is a long-term tendency.

    See Graph 12: That’s why unions are important

    The weakening of the trade unions is an important factor in growing inequality:

    In recent years international organisations have increasingly pointed to the connection between the weakening of collective bargaining agreements and the downward tendency of wages, which has further intensified in many countries as a result of the financial and economic crisis. On this basis, a connection is seen to increased income inequality in large areas of the OECD Member States, which, in the current economic debate, is increasingly discussed as a stumbling block to the development of the overall economy, while in the previous two decades inequality was mostly considered more of an incentive to growth and as a necessary by-product of ‘employment-friendly’ wage trends.9

    In the last two years in the US there is something approaching full employment, although wages are lagging. Although the unemployment rate has sharply fallen in the last ten years wage increases have been mild. The worldwide ebb in the wage accounts of private households is attached to changes on the side of wage labour: The percentage of total employment represented by forced part-time jobs and temporary employment has clearly risen almost everywhere. There is an unambiguous connection between involuntary part-time employment, precarious work, the continued decline of binding collective bargaining agreements, and a continuously falling wage growth.

    See Graph 13: Wages have been rising again for two years

    The value of labour power can no longer be ensured by trade unions throughout the whole domain of wage labour. Adequate minimum wages and an extension of the collective bargaining agreements made possible by trade unions are essential to an about-turn towards greater wage justice, but this needs to be accompanied by a series of improvements in social transfers. Inclusive economic growth is a condition for a comprehensive investment and innovation offensive in the public and social infrastructure.


    Notes

    1. Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, Für eine zukunftsorientierte Wirtschaftspolitik, Jahresgutachtung 2017/2018.
    2. NBER, Business Cycle Dating Committee, September 2012.
    3. Bank for International Settlements (BIS), ‘Monetary policy: inching towards normalization’, in: 87th Annual Report – 1 April 2016–31 March 2017, 25 June 2017.
    4. See Joachim Bischoff, ‘Xi Jinping, die KP und der Umbau Chinas’, Sozialismus 12/2017.
    5. ‘US-Starökonom: “Die Deutschen brauchen keine Angst zu haben”. Trotz wachsender Wirtschaft müsse die EZB ihre ultralockere Geldpolitik fortsetzen, sagt Barry Eichengreen‘, Interview in Der Standard, 18 October 2017.
    6. Nouriel Roubini, ‘The Global Recovery’s Downside Risks’, Project Syndicate, 5 June 2017.
    7. Ben Bernanke explains what Donald Trump gets wrong on the economy. In an extended interview, the former Fed chair talks tax cuts, infrastructure needs, and why coal jobs won’t come back’, Updated by Jim Tankersley, 6 June 2017.
    8. Gillian B. White, ‘Steven Mnuchin’s Defense of Trump’s Tax Plan’, Atlantic Monthly, 28 September 2017.
    9. Bundesregierung [German Federal Government], Lebenslagen in Deutschland – Fünfter Armuts- und Reichtumsbericht [Living Conditions in Germany – Fifth Poverty and Wealth Report], April 2017, p. 69.