Friday, 26 June 2015

Wages, profits & investment In Greece

By Michael Burke

The IMF has placed a road-block in the way of a deal with the Greek government and it remains unclear whether any agreement can be reached. The prior agreement which the IMF rejected was itself already very onerous. But the IMF wants to shift the burden of paying for the crisis away from taxes on business and the better-paid towards more cuts in social protection. This is an insupportable burden as net median household incomes are already below €8,000 a year. Many multi-member households without work subsist solely on state and public sector pensions.

The IMF argues that taxes on business will hamper growth, as business profits are needed to fund investment. This argument is an important one and should be addressed. It can be demonstrated that it is false argument. In demonstrating that, it is also possible to identify a way out of the crisis.
In general, in a commodity producing economy profits are the decisive factor in determining the rate of growth. In a capitalist economy it is the profits of the private sector which predominantly fund the accumulation of productive capital via investment.

But if profits alone were sufficient, then there would no crisis at all in Greece. Greece has the highest profit share (profits as a proportion of national income) in the whole of the OECD. The Greek profit share was 52.4% in the most recent data. This is substantially greater than many other countries in the OECD and as a consequence the labour share of national income is also the lowest in the OECD.

Table 1 below shows the profit share and the wage share in selected OECD countries. In effect, the IMF prescription is that those who are least able to pay should bear the burden of the crisis.

Table 1 Profit Share & Wage Share of National income in Selected OECD Economies
Source: OECD, based on Gross Operating Surplus &
Compensation  of Employees as a proportion of GDP, data for Q1 2015.
Does not sum to 100% because taxes on production omitted

It should be noted that the crisis countries of the EU in general have the higher levels of profit share but Greece leads the pack. The trends in Greek profits and wages are shown in Fig. 1 below.

Fig.1 Greek profits and wages

There are already ample funds in Greece for productive investment in the form of the profit share of the business sector. The crucial point- and the driving force behind both the structural and cyclical crises of the Greek economy- is that Greek businesses are not investing, but are hoarding capital instead.

Providing businesses with a shield against austerity while cutting social protection will not provide the investment needed. This is because Greek businesses are unwilling to invest. The level of profits in Greece and the level of investment (Gross Fixed Capital Formation, GFCF) are shown in Fig.2 below, as well as the gap between the two.

Fig.2 Greek Profits and GFCF

In the most recent full year the nominal level of Greek profits was €95bn while the level of GFCF for the whole economy (including government and households) was just under €21bn. It is this level of uninvested profits which is the main cause of the crisis in Greece.

Table 2 below compares the profit share and the rate of investment. Using OECD data it is also possible to show what proportion of that investment is actually made by the business sector itself.

Table 2 Profit Share, Investment Share & Uninvested Profits Share of National income
In Selected OECD Economies
Source: OECD, * Most recent year 2013 or 2014

There are of course many other calls on the Gross Operating Surplus other than investment, such as taxes and social contributions, but in the case of Greece all these taken together amount to no more than 5.8% of national income. The net savings of the business sector are far larger, at 9.2% of national income, along with another 2.9% distributed to shareholders.

In a certain sense the situation in Greece is just an extreme case of the general trend in the Western economies, where the profit share has been rising and yet the investment share has been falling. It is the extremely high level of uninvested profits which is the cause of the crisis. There is nothing to prevent the business sector investing all of its profits and more, via borrowing. This frequently occurs in economies where growth is strong. But in the OECD as a whole the business sector is hoarding capital. Greece is an extreme case because this has been the case over decades, and deteriorated further during the crisis.

These savings are not being held in Greek banks, which is a factor contributing to their precarious state. Bank of Greece data show that deposits by Greek firms fell by €8bn (equivalent to 4.5% of GDP) in the year to April 2015 even though both profits and savings were substantial. This amounts to looting the country; extremely high rates of exploitation combined with minimal investment and spiriting away the resulting savings and shareholder dividends to overseas banks.

It is precisely these idle resources of the business sector, especially the Greek oligarchs which should be tapped. This is not simply to shield workers and the poor from further austerity, as important as that is. But these idle resources could be deployed to fund an investment-led recovery that would regenerate the economy. It is precisely taxes and levies on the business sector which are required, and perhaps stronger measures such as nationalisation, in order to tap these resources. They are also the measures that provoke the fierce hostility of the international institutions led by the IMF.

The argument that this will curb the investment of the business sector does not stand up. Despite claiming 52.4% of national income the business sector’s investment is equivalent to just 4.4%. The bulk of investment in the Greek economy comes from households, mainly on house building and repair. Business investment is just a fraction of the level of uninvested and profits and savings. This remains the source of the Greek crisis, which cannot be resolved without state-led investment.

Wednesday, 24 June 2015

Syriza not crushed yet

By Michael Burke

A majority of European leaders have opted to try to strangle the Syriza-led government slowly rather than immediately crush it. In order to survive the Syriza leadership has had to make a series of compromises. The burden of these new measures offered in the latest negotiations is overwhelmingly tax increases and they mainly fall on companies and the higher paid. But, unless there is a breakthrough on debt reduction, there is no progress on ending austerity.

One faction, led by German finance minister Schauble and supported by his Irish and Spanish counterparts wanted to organise a run on the banks and overthrow the government in a re-run of the crisis that was provoked in Cyprus in 2012. Reports suggest that US Treasury Secretary Lew was instrumental in pursuing a line of compromise instead. But all the institutions ultimately represent the interests of big capital and Greece’s creditors. As a result they remain committed to austerity and the ultimate destruction of all anti-austerity forces in Europe, including the Athens government. What they dare not risk is the possibility of European and possibly global financial market turmoil from a disorderly ‘Grexit’.

The new tax measures Syriza has offered are significant. According to the Financial Times, “More than 90 per cent of the €7.9bn fiscal package would be covered by increases in tax and social security contributions. The tax measures include a special levy on medium-sized companies’ profits, higher value added tax rates, a rise in corporation tax and a wealth tax on household incomes above €30,000 a year.” According to Eurostat, median household net incomes in Greece were €7,680 in 2014.

Other reports suggest that even this is not acceptable to the IMF, which represents US interests. They want the burden of taxation shifted from business to cuts in social security payments. While the US holds no Greek government debt, it is the biggest foreign owner of Greek listed shares.

It is clearly preferable that the fiscal burden is borne by companies and the higher-paid. But there is nothing in the current agreement which improves the position of the mass of the population. The effect of the concessions will be slower growth, even if most workers and the poor have largely been shielded from the worst direct effects.

Further details have yet to be hammered out. The focus on the primary surplus (the balance of government income and spending excluding debt interest payments) is meaningless as it is based on the false premise that spending cuts or tax increases will lead to equivalent savings, ignoring the economic effect of slower growth on both government spending and tax revenues. The only possibility for measures to boost growth via investment is if there is significant debt reduction and lower interest payments. On this, the IMF representing the US is more willing to support debt reduction precisely because almost nothing is owed to the US. For the opposite reason, hostility to debt reduction is most ferocious among some of the European governments.

The majority line among the institutions is clearly based on political considerations. Immediate crisis and turmoil has been avoided because of the wider risks to a fragile set of advanced industrialised economies. But undermining Syriza and demoralising its supporters remains the aim. The latest set-backs are only the first steps and the institutions will welcome any splits in the government.

But Syriza still has room, and some time to act. It can improve the balance of forces domestically and internationally by taking unilateral anti-austerity measures using the resources of the Greek oligarchs, possibly supplemented by overseas investment. It is now obvious that it must have measures to protect bank deposits from another bank run provoked by the ECB and others. The institutions will return with further demands in future, when this new measure fails to produce growth and improved government finances. Syriza should prepare for that inevitability.

Wednesday, 17 June 2015

End Austerity Now - Demonstration 20 June London


Assemble: 12 noon
Bank Of England (Queen Victoria St) London
Tube: Bank (Central/Northern/DLR lines)

Organised by the People's Assembly Against Austerity
Details here




Tuesday, 2 June 2015

Declining US profits and private investment

By Michael Burke

US corporate profits fell in the first quarter of 2015. This is the second consecutive fall, technically causing a ‘profits recession’. The nominal level of profits of $2014.8bn in Q1 was lower than in Q2 2012. Profits have fallen to 11.4% of GDP, compared to 12.2% at their pre-crisis peak in Q3 2006. The trend in corporate profits is shown in Fig. 1 below.

Fig.1 US Corporate Profits
Source: BEA

The motor force of capitalist economies is the accumulation of capital via profits, as the name suggests. ‘Demand-led’ or ‘wage-led’ economies are a logical impossibility for the simple reason the wages, or demand, or any other comparable variable follow the production process. There can be no wages or demand without prior production.

Falling profits in a recovery is extremely unusual. But this is the third time this has happened during this weak recovery. In effect, because the economy lacks any great momentum, it is easy for external effects to push profits lower. This could be poor weather, a stronger US Dollar, shipping strikes, weak overseas demand, and so on.

But the effect of a sustained fall in profits is simple. Companies exist to realise profits and will stop investing if profits fall. In Fig. 2 below US corporate profits and US private sector fixed investment are shown in nominal terms for the purposes of comparison.

The Great Recession was preceded by a decline in profits and the fall in fixed investment followed with a time lag. This was a classic profits-led recession, which was partly obscured by the speculative frenzy that continued until 2007 (but which is a recurring end-of-cycle phenomenon).

Fig.2 Profits & Private Fixed Investment
Source: BEA

However, until now private sector fixed investment has not suffered a fall in the current expansion despite the preceding short-lived declines in nominal profits. Since the low-point in private investment at the beginning of 2010 there has been an uninterrupted rise in private investment until the final quarter of 2014.

That changed in the first quarter of 2015. Private sector fixed investment fell in Q1 2015. The decline was extremely modest, from $ 2,850bn to $2,841.5bn and could yet be revised away. But there are further causes for concern. In real terms real GDP growth has increased by just €254bn over the last three quarters. At the same the stock of unsold inventories has risen by €257bn. If goods remain unsold, profits cannot be realised and the most obvious course of action is to cut back on production.

Many official and private commentators suggest that the latest weak data is simply a one-off, reflecting extremely poor winter weather in the US. That could prove to be the case. But the combination of rising inventories, falling profits and the new fall in private investment does not point to an improving outlook for the US economy.

Friday, 29 May 2015

What can we expect from renewed austerity?

By Michael Burke*

The new Tory government will renew its austerity offensive shortly with the publication of an ‘emergency Budget’ on July 8. It is simple to demonstrate that the previous austerity programme caused the economy to grind to a halt (and with it the improvement in government finances).

Supporters of austerity like to claim that austerity led eventually to recovery. But this is logically impossible. A force applied from one direction, the downward pressure on the economy, cannot sequentially have the effect of lifting the economy. Most children learn these cause and effect relationships through play at the ages of 2 to 4, with marbles, wheels and water.

Therefore the actual course of events of the last round of austerity will prove instructive as to what can be expected in the next 5 years. This has important political as well as economic implications.

Anyone tempted to throw in their lot with Tory economic policy, for example among the Labour leadership contenders, will be obliged to defend the impact of Tory austerity. As there is no solid basis for the current ‘recovery’ which is supported by increasing household debt and borrowing from overseas, the inevitable bust will occur. The ‘Barber boom’, the ‘Lawson boom’ both ended with a slump, and the feeble Osborne recovery reproduces them in a worse environment.

According to the IFS the Tory Government plans imply £45bn of ‘fiscal tightening’ in this parliament equivalent to 4.1% of GDP, although we have yet to see the actual plans of the emergency Budget in June. This is approximately equivalent to the fiscal tightening of the last parliament although it is suggested that all of it will be achieved with cuts to public spending rather than in combination with tax increases as previously. The axe will fall heavier this time.

The previous programme of austerity caused a double-dip recession in most sectors of the economy. The economy had been growing at a very modest pace of 2.1% in the 4 quarters before the last Coalition took office. The double-dip recession in production, construction and agriculture is shown in Fig.1 below. Only services continued to grow.

It is notable too that industrial production (including manufacturing plus energy) is still below the level the Coalition government inherited in 2010. No industrialised economy can sustain growth without growth in industrial production, as the label implies.

Fig.1 Most Sectors Experienced A Double-Dip Recession
Source: ONS

In real terms there was no growth in Government consumption spending in both 2010 and 2011. This turned a modest recovery back close towards recession, only saved by the growth of the service sector in 2012 plus the Olympics effect.

We have already seen how austerity caused a sharp renewed slowdown in the economy as a whole. There is no logic to claim that austerity also led to eventual recovery. Instead, as Tory poll ratings plunged after the ‘omnishambles Budget’ and the economy risked falling back into outright recession, Government policy was changed. There were no new Government spending cuts from 2012 onwards. Government consumption was allowed to grow and the austerity offensive was put hold (Fig.2).

Fig.2 Real GDP & Government Consumption



Table1. Real GDP Growth Real Govt Consumption Growth
Source: ONS

The result of increased Government consumption was a modest expansion. Real GDP grew by 2.8% in the pre-election year of 2014. But this was little more than the 2.1% growth achieved in the year prior to the imposition of austerity. Over the 5-year period 2010 to 2014 real GDP growth has averaged just 0.75%. This is exceptionally weak by historical standards and is striking after a sharp recession, when the usual pattern is for a more rapid recovery. GDP growth has only matched the growth of the population so that per capita GDP has stagnated. Under these circumstances living standards cannot rise.

Investment

However, there is no such thing as a consumption-led recovery. It too is a logical impossibility. Economies are dominated by production. As the proportion of GDP devoted to consumption rises, economic growth tends towards zero. The reverse is also true; as the proportion of GDP devoted to investment rises, so GDP growth increases (including the growth of consumption within that).

Without production, the expansion of which relies on investment, consumption can only be increased by further borrowing.

One of the central fallacies of Tory economic ideology is the idea that by shrinking the state the private sector will thrive. As Government is the largest single customer of the private sector goods and services, the opposite is the case. Cutting public spending damages the private sector and exacerbates its weakness.

Cutting public investment has been a central part of austerity and a key way that government spending has fallen overall. The deficit has fallen by damaging future growth.

This has been the effect of the previous round of austerity. The entire crisis was caused by the slump in business investment, which caused unemployment to rise and Government tax revenues to fall (hence the rise in the deficit). The weakness of business investment can be seen as early as 2006 (Fig.3) and in the sharp decline again in 2008.

Fig.3 Business Investment & Government Investment
Source: ONS

Under the Labour Government investment was increased in 2008 and 2009 to offset a crisis caused by this private sector weakness (Building Schools for the Future, bringing forward planned capital infrastructure projects, etc.).

The Coalition slashed Government investment. The effect was predictable. The recovery in private sector investment was halted. It is only in 2014 with a pre-election rise in Government investment did business investment begin to accelerate again.

If the Tory government attempts to close the deficit by cutting its own investment, or acts on the belief that the private sector will deliver better and more investment in public services, then the effect will be the same once more. Business investment will be cut again. There is no ‘productivity puzzle’. Without investment productivity cannot grow and living standards cannot rise.

‘Welfare’

The Tory Government has also announced plans for further cuts in social security. 64% of all households are in receipt of one type of social security benefit or another, over 20 million households. They, we are the majority.

The previous Coalition Government managed to remove somewhere between 1 million and 2 million households from entitlements that were in receipt of small sums. Most of those of working age in receipt of benefits are actually working. Either their pay and/or their hours are too little to subsist on wages alone. A large proportion of these are single parents.

The Tory party and a supportive media have waged a relentless campaign against ‘welfare scroungers’ in ‘benefits Britain’. The reality is that this is the majority, whose general welfare and wellbeing benefits us all. Not only do cuts in entitlement cause enormous hardship to millions, it actually hits everyone economically. ‘Presenteeism’, being at work but not engaged with it through insecurity or concern for childcare of healthcare responsibilities is widespread and on one estimate is said to depress the economy by £15 billion.

Entitlement to benefits is a function of low pay, disability, old age, poverty and excessive rents. Britain has one of the lowest levels of social security protection among richer industrialised economies. Britain spends 0.4% of GDP on unemployment benefits compared to 1% for the OECD average. In contrast, Britain spends 1.5% of GDP on housing benefits where the benefit goes to landlords while the OECD average is just 0.4%.


Table 2. Social Protection Expenditures As A Proportion of GDP %
Source: OECD


A recent report by Shelter shows that the annual subsidy to private landlords amounts to £14bn, which is greater than the planned welfare cuts. The cuts to welfare will cause enormous human misery. Cutting the handout to landlords would remove incentives for buy-to-let and so act as a brake on the upward spiral in rent and property prices.

In the wider picture, the deficit will soon fall to around £85bn annually and below. Handouts to the corporate sector (tax breaks and incentives) amount to £85bn annually. The entire deficit could be removed by ending this corporate welfare without any of the damaging cuts planned. This alone would address the question of the deficit. But for sustainable growth, public sector-led investment is required.


*This is a slightly modified version of a recent presentation for Labour Against Austerity in the House of Commons