Michael Pettis on Evergrande and China’s debt problem

Another video of an interesting discussion with Peking University Finance Professor Michael Pettis where he explores the issue of China’s property sector and its current dynamics, but also the bigger picture of the Chinese economy’s debt problem. He outlines five possible options for the future evolution of the economy and foresees a significant slowdown in growth akin to Japan in the 1990s, which ushered in many years of stagnation amid its economic rebalancing. This rebalancing is essential for China but also the rest of the world, and will ultimately be good for the latter, albeit with the costs and benefits unevenly distributed between different countries and sectors.

The various impacts of a tight labour market

Hiring-675x380Labour markets in a number of advanced countries, not least the US and UK, have been running hot recently. Employers in various sectors are short of staff, and as economies reopened and consumption, a key driver of aggregate demand, picked up, this has put upward pressure on wages, particularly for jobs offering relatively low pay. This would seem to be good for earners at the bottom of the pay scale, even if it makes life more difficult for employers, for the moment at least. But what kind of economic, social and political forces are at work here? Will markets adjust towards a new optimum equilibrium? And how sustainable are such trends? Will they force dramatic changes upon policymakers? Continue reading

A left Keynesian speaks his mind – reconsidering Kaldor on Thatcher

NPG x104756; Nicholas Kaldor, Baron Kaldor by Antony Barrington BrownI recently reread The Economic Consequences of Mrs Thatcher, a fascinating collection of speeches given to the British House of Lords in the early 1980s during Mrs Thatcher’s first term in office by Nicholas Kaldor. Lord Kaldor, by then a Labour peer, was a Professor of economics at Cambridge, a former advisor to Labour governments and a searing critic of Thatcherite policies. As far as I can gather, Kaldor was always a pragmatic rather than an ideological economist, deeply concerned with matters of policy and how to improve the world around him. In this short volume, he addressed a wide range of issues concerning the British economy, but also of relevance to other advanced nations. In sum, they remain a revealing snapshot of a particular moment in history, which witnessed the turn from the postwar social democratic Keynesian consensus to a more adversarial, individualist state of affairs. I break this post down into sections, in order to comment from a 2021 perspective on Kaldor’s often blistering denouncements of Thatcher’s economic policies. Given that he died in 1986, with almost eleven more years of Conservative government to come, before Tony Blair’s Labour party swept into power in 1997, it is interesting to reflect on Kaldor’s predictions and how many of his ideas stand today, following 13 years of Labour and, to date, a further eleven years of Conservative-led governments. Continue reading

Robert Reich on the real reason the economy might collapse

Below is another useful short and engaging video from former US Labour Secretary and Professor of Public Policy at UC Berkeley Robert Reich. This time, he returns to a recurrent theme, that rising inequality, not least in the US, increasingly constrains aggregate demand and economic growth. As income and wealth become more concentrated at the top of the distribution, due to wages failing to keep up with productivity, the growth of consumption, usually the largest component of aggregate demand, has become dependent on poorer groups going into debt, which itself is unsustainable. This is the underconsumption thesis, which has become influential among many left economists and some politicians.

Richer groups typically spend a smaller share of their income on consumption than poorer groups, so that for the economy as a whole, as long as investment is constrained by consumption rather than by savings, falling inequality will boost economic growth through its effect on raising sustainable consumption. If investment were constrained by savings, then a form of “trickle-down” economics could work, if rising savings led to rising investment. But sluggish underlying growth, notwithstanding the recession and recovery from the Covid crisis, has in recent decades been associated with falling interest rates and rising debt.

Economies have responded to the sluggish domestic demand associated with rising inequality in different ways. Some, such as the US and UK, have overseen rising debt, unevenly distributed among households, firms and the government. For a time this allowed growth to continue and has typically been accompanied by current account deficits, reflecting net borrowing from abroad. Others, such as Germany, have relied on growing net exports (export minus imports) and current account surpluses to sustain demand and growth. Current account surpluses in some countries are of course the necessary flipside of current account deficits elsewhere, since their total sum must be zero: they must balance at the global level. The surplus countries are international net lenders, funding and sustaining the deficit countries.

Crudely speaking, the solution to these imbalances and the unsustainable buildup of debt amid sluggish domestic demand and underlying growth is the same, even if the details vary between countries: policies which reduce the inequality of income and wealth would go a long way to boosting domestic demand, reducing the dependency of growing demand on rising debt or foreign demand reflected in rising net exports. All this has admittedly been complicated by the economic fallout from the Covid crisis, but in the longer term the trend of rising inequality needs to be reversed in order to restore more sustainable and balanced growth trends worldwide.

Reich’s video, which is certainly worth watching, does not go into these details, which concern both the US and the world beyond. But they are an important part of the story.

The “high wage economy” in theory and practice

JohnsonSunakThe UK’s conservative government has declared that it wants to achieve a “high wage economy”. Part of this involves its stated policy of “levelling up” so that the poorer regions of the country, many of which voted for the conservatives at the last election, are given improved economic and social opportunities. The recent spate of supply-chain problems, which has given rise to shortages of certain goods and categories of worker, and which is in part a global problem, but also partly a consequence of Brexit, was recently spun on the hoof by Prime Minister Boris Johnson into a deliberate act of policy. In short, he claimed that mass immigration from the EU had held wages down for lower paid workers, and that shortages of these workers would drive wages up, and give their employers incentives to invest in improving workforce skills and technology, in order to increase productivity. So the aim of a high wage economy seems now to be a key aim and slogan of policy. But what is it, and what can economics tell us about how it can be achieved? Continue reading

Anwar Shaikh on his “real” economic analysis

Below is an interesting recent talk by Professor Anwar Shaikh, organised by the Cambridge Society for Economic Pluralism, a student-run body which champions a pluralist and interdisciplinary approach to economics. The video is quite long, so if you don’t have the time to watch it all, the first thirty minutes sees Shaikh introduce the ideas in his 2016 magnum opus Capitalism: Competition, Conflict, Crises, and explain the rational behind his original approach.

Shaikh is critical of both neoclassical economics and post-Keynesian alternatives, and instead makes the case for a modern classical approach drawing on Smith, Ricardo, Marx and Keynes, in which the economy is turbulently driven by the forces of “real” competition and profit equalisation. For Shaikh, profit-making is the key aim of business, and it regulates both demand and supply. While neoclassical economics tends to be supply-side, and post-Keynesian approaches demand-side, his classical theory is “profit-side”.

One point he makes that really resonated with me is the notion that one’s theoretical framework must be consistent, even if it gives you results that you dislike. An example of this is the post-Keynesian idea that full employment can be achieved and sustained given the right policies. In his book, Shaikh argues that the historical evidence shows this not to be the case, or at least to be very difficult. I have long wrestled with contrasting Keynesian and Marxist ideas on this issue, and admit that I see full employment as a desirable policy goal under capitalism. I will also admit that the evidence shows that it is hard to sustain for the long term.

I applaud Shaikh’s intellectual honesty, and find it inspiring. Capitalism is not all good, even if it has driven rising living standards for a huge number of the planet’s population. Its evolution tends to be uneven over historical time and across geographical space, giving rise to winners and losers, to inequality and entrenched poverty as well as massive wealth and technological advance. I highly recommend his book, aspects of which I have written about on this blog over the last few years.