Wednesday, March 11, 2015

Is over-capacity to blame for the last long slump?

So while I was getting up to date with Arrighi reading Adam Smith in Beijing (I’m sad to say I’m finding it way less engrossing than the previous The Long Twentieth Century, of which I talked about in this rapturous post: Arrighi and gonadal vote) I caught a number of references to Robert Brenner’s work which made me race to his two latest books (The Boom and the Bubble; and The Economics of Global Turbulence). According to Brenner, the long slump between 1973 and today has been caused by excess capacity and excess production, that has kept the rate of profit depressed relative to historical levels (too many companies entering the market and too few exiting, and specially big unprofitable incumbents staying in it even at a loss because of sunk costs, that would make them loose even more were they to quit). The boom years of 1993-2007 did not correct the lack of a “shakeout” (although Arrighi accuses Brenner of not defining clearly enough what that shakeout may consist in, as the only historical precedent would be the single case of the Great Depression) to cull the inefficient firms, so the problem was just papered over (and the extraordinary profits of those years were explained by the increased financialization and successive asset bubbles enabled by the ever decreasing interest rates demanded by central banks and historically low yields offered by the productive enterprises in the “real” economy). Now, given that the current crisis that started in 2008 (after he wrote  the aforementioned books) is much deeper and much more destructive than any other one since the (now apparently so distant) halcyon days of the mid nineties (which we now remember for the boom, the talk of a “new economy” and the overcoming of the business cycle, shaky as it all turned out to be, and discredited as the unwarranted optimism of the time has become) we can wonder, is this the shakeout predicted by Brenner (or the terminal crisis expected by Arrighi, too bad it started the year after he passed away)?

If indeed it were, we could ask ourselves how advanced are we in getting rid of that excess capacity (not much, as every indebted firm that should have gone out of business has been bailed out given they were big enough to resort to the government largess). A signal of that advance would be to what extent are profits back to historical levels (given firms sitting in ever increasing piles of cash for lack of profitable investment opportunities, we can conclude that not much). So if overcapacity were at the root of the system wide crash we are still in the midst of (as the talk of “green shoots” has been replaced by more open recognition of a “robust recovery” under way, we can not help but say that if this is the recovery Lord help us when we get back to recession) we can expect things to get only so marginally better as long as said overcapacity is not fully corrected. As a matter of fact, given how anemic aggregate demand is and presumably will continue being as long as the eye can see, the long slump described by Brenner seems entirely like something we will leave our sons to deal with (and, unless they make some substantial change in the capitalist system, something they in turn will leave theirs). Some prominent economists (mostly of a liberal bent, my admired Paul Krugman and Joseph Stiglitz foremost among them) argue that a robust return to Keynesian orthodoxy is our only way out of such dire prognosis, and that public spending can indeed revive that sagging aggregate demand that both companies and individuals are unable, under present austerity dominated conditions, to increase.

It has to be noted that those economists arguments are not entirely without merit, as weak demand and oversupply are two aspects of exactly the same problem (the supply is considered “over” precisely because there is not enough demand for it, thus pushing prices downwards and depressing the profits companies can extract from selling and marketing their products). What we have to ask ourselves is if the tools at the states’ disposal are up to the task of reverting such an entrenched downward trend, which has only accelerated in the last eight years, but which according to Brenner has been going on since the 70’s. And I’m sorry to report that, as much sympathy as I have for their ideological outlook, I don’t think a strong program of public spending would make much of a difference… as the example of Japan is making abundantly clear (as a momentary aside, that lack of dramatic results doesn’t make it less of a necessity, as the alternative –keeping austerity in the face of a recovery that is almost indistinguishable from a recession, with unprecedented numbers of people, specially between the young and less educated, unable to find a decent job- is clearly much worse). To understand why, let us formulate the secular (as in “Centuries in the making”, not necessarily opposed to religious) trends that have culminated in the current almost half a Century long slump:

·         The most productive (in material terms) economies of the world (what Gunder Frank called “the global North”, which includes Australia and New Zealand) basically decided in the 70’s (coincidence?) to stop reproducing themselves, as their resources (time and accumulated wealth) were “better” employed in the production of material goods and services. This collective decision was somewhat masked by the migratory pressures from the still growing global South (specially in the hegemonic power, whose demographic decline in the groups that hold all of its societal power have been long ignored by being surrounded by powerless minorities and immigrants still reproducing above replacement levels), but now most of that apparently inexhaustible source of new consumers is also drying up

·         Technological progress has kept on running ahead of our capability to harness it, enabling productivity gains that are not yet fully realized, as their societal impact would be too big. As each recessive part of the latest business cycles show, companies find one and again that they can lay off between 10 and 20% of their workforce and keep on producing approximately the same amount (admittedly this forced increase in productivity is not only due to the greater automation and more intensive capital use –as in this case it doesn’t require much in terms of capital investment, but also to the remaining workforce having to work more hours to compensate for the laid off). It is not difficult to conclude that probably a similar percentage (around 20%) of the employees in the expansive phase of the cycle are more or less “expendable” (or are performing a “make job”) ,but mostly do not know they are, which translates in generalized insecurity (which in turn translates into a lower propensity to consume, as more income has to be saved for the potential rainy day)

·         However, that technological progress that seems enough to keep the labor market permanently depressed (even in an scenario where the total workforce is not set to expand, and is already contracting n a number of advanced economies) is heavily concentrated in residual sectors of the economy, the agricultural and industrial sectors, it is much less apparent in the services sector (now dominant), and entirely absent in other (energy, transportation, basic research). As I have discussed in previous posts (About decrease in rate of technological advance), the capitalist system, which was noted for its capacity for innovations that improved significantly the lives of its citizens, seems to be petering out in that accord. We have seen recently a significant illustration of this with the much hyped presentation Yesterday of Apple’s latest contraption, its “smart” watch. All that the world’s most valuable company (by the somewhat gimmicky definition of valuing all of its outstanding stock by the price the latest purchaser paid for the latest share, regardless of what price all the overwhelmingly bigger amount of the rest of the shares commanded the last time they were exchanged), that boasts of having given us whole new categories of consumer products, can come up with is a shiny contraption that communicates with a (separate) phone, presents in its face a fraction of what the phone can present, and can vibrate… It will probably sell millions (at 17,000 $ apiece for the most expensive one they don’t even need to manufacture that many units), it will give work to a few dozens, and it will improve the quality of life of none

If companies built in their expectations the idea of perpetual population growth, how should we expect them to react when they discover that the new millions upon millions of consumers they counted on to reactivate their sagging bottom lines are not going to materialize? Exactly as we are seeing: no matter how much money the government showers its citizens with, and how low the interest rates they ask them in exchange for lending them money, as long as they see their inventories not shrinking and the machines (and their operators) in their factories sitting by idling they will not take that money and invest in new capacity, and they will not hire substantial new amounts of employees (we can rest contented if they do not lay off additional workers). And the effect of any big monetary expansion is likely to be very limited, as they probably can absorb it just with the productivity gains they still know they can realize without any investment at all (and without needing any major technological breakthrough).

Now don’t get me wrong, I’m not saying everything is futile, and we will never see any economic recovery anywhere. It’s secular tendencies I’m talking about here (Braudel’s longue durée). We will surely see some short expansion here and there, generally more short-lived than expected, to be followed by a longer and harsher contraction. I’m no determinist either, and I fully recognize it is in the hands of society to change course, if we find the political will to do so. Because without changing, what we are witnessing is the advent of the dreaded “stationary state” predicted by John Stuart Mill, Adam Smith and Karl Marx. A stationary state of growing inequality where a gilded few enjoy most of the advantages of ever more wondrous technologies whilst the vast majority barely subsists performing insecure, occasional, mostly menial jobs.

So it is to the nature of the minimal, feasible changes that have to be made to avoid that fate towards which we have to turn our attention, but not of course in this already too long post

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