Richard Koo on global stagnation, globalisation and the trade war

In the short video below, Richard Koo, originator of the idea of balance sheet recessions, argues that the current global economic stagnation is largely due to private sector firms as a whole in most of world’s largest economies acting as net savers rather than net borrowers and investors, despite very low interest rates. This is weakening aggregate demand and is compounded by the failure of the other sectors in the major economies, namely households and governments, to compensate by borrowing and spending to counter this weakness.

Of course, the US government is running a budget deficit, which has sustained moderate growth there, but for the largest economies taken together, private sector saving is proving to be a drag on continued recovery.

Koo doesn’t go into the reasons for this behaviour, although he has argued elsewhere that the private sector in many countries is attempting to save in order to pay down high levels of debt, producing a balance sheet recession, or stagnation at best. Fiscal policies that boost demand as well as policies that increase private investment opportunities in general would help to counter this.

He also touches on the US-China trade war as adding to global weakness, and notes that it is unlikely to end anytime soon, due to the job losses in the US which decades of current account deficits have reflected. As Koo puts it, free trade has created enough losers economically to make it a political problem in the US, and one that contributed to the election of Trump.

Aside from the trade war, it is quite likely that rising inequality has contributed to global weakness. With much of the income from economic growth accruing to the already wealthy, who save a larger proportion of it than poorer groups, significant increases in consumption in advance of the financial crisis relied on higher household debt since it is less able to be supported by rising wages for the majority.

In economies such as Germany and Japan, the result has been weaker growth, rising public debt in Japan, and a soaring current account surplus in Germany, while in the US and UK the result has been higher household debt and current account deficits. These trends sustained each other for some time, but the resolution of such imbalances may well be the source of much of the current global turmoil which has followed the crisis of more than a decade ago.

This interpretation suggests a need for policies which reduce inequality and increase wages, boosting consumption in a more sustainable fashion, and therefore increasing private investment opportunities. Greater public investment in infrastructure would also help. In a number of countries this has been constrained by policies focusing on austerity and reducing public debt, which have in many ways proved economically and socially damaging.

Michael Hudson: Trump’s new tariffs on China help pay for his corporate tax cut

A video interview below with the always original Michael Hudson on the Real News Network (transcript here). He discusses the impact of Trump’s tariffs, the failure to bring back manufacturing production to the US, and how the President is managing to isolate America and unite much of the rest of the world.

Michael Hudson interview part 2

Following Tuesday’s video, here is more from this interview with Michael Hudson on Trump’s economic policies, from tax cuts and trade wars to infrastructure, privatisation, industrial policy, Wall Street versus Main Street and Artificial Intelligence and its effects on unemployment.

Trumponomics and investment

“The weakness of private business investment in most developed countries through the neoliberal era is difficult to explain on the basis of a standard regression equation. Most of the usual determinants of investment – including profitability, interest rates, and tax and regulatory policies – were aligned in a direction that should have elicited more private investment effort. But the neoliberal recipe delivered less investment, not more. And the failure of accumulated wealth to trickle down creates major economic and political problems for the system and its elites.

For all of Donald Trump’s claims of being an “outsider”, changing the traditional rules of politics and policy, his economic program is absolutely consistent with the general direction of the trickle-down, neoliberal policies that have already governed the US for almost four decades. Trump will further shift the distribution of income upward to corporations and those who own them. His policies will suppress the incomes and the consumption of workers – including cutting their public services. His regulatory and fiscal priorities will favour investment in expensive, capital-intensive sectors (like energy and defense) that support relatively few jobs, while imposing enormous costs on broader society and the planet. His financial and monetary policies will continue to privilege financial wealth and speculation over real investment and production, undoing even the baby steps taken to rein in finance after the conflagration of 2008. The core logic of his approach is transparent: enhance the wealth and power of business and the wealthy, and they will invest more in America, and everyone will prosper. There is very little novel content in Trump’s incarnation of trickle-down policy, and very little reason to believe that it will succeed in revitalizing business investment activity that has chronically disappointed. Outside of bursts of new activity in a couple of targeted sectors (like energy and military industries), there is no reason to expect that the trajectory of US business investment will improve in any sustained fashion under Trump’s guidance. Certainly his program cannot recreate the virtuous combination of driving factors that powered the long postwar boom in US capital accumulation: near-full employment, a growing public sector, and strong productivity growth, all of which (for a while) reinforced the vitality of private investment.

Even if the Trump program did succeed in motivating a generalized resurgence in US private business investment, of course, Americans (and others around the world) would have to ask themselves, “At what cost?” A temporary burst in investment in fossil fuel extraction and consumption, achieved by abandoning environmental regulations that were already too weak, is of dubious value when the costs of fossil fuel use are becoming intolerable. Similar questions could be asked about the general strategy of reinforcing profit margins through the suppression of wages and other socially destructive levers, in a country which already experiences more poverty and inequality than any other industrial nation. Business investment is never an end in its own right; it is socially beneficial only to the extent that it underpins job creation, incomes, productivity, and ultimate improvements in living standards. Trying to elicit a bit more investment effort by suppressing living standards a little further, is self-defeating to the ultimate purpose of economic development.

Investment in the US, and other advanced industrial countries, is held back by more fundamental problems than corporate tax design or environmental regulations. The fundamental vitality of the profit motive in eliciting accumulation, so celebrated in the early chapters of capitalist history, seems to have dissipated. The owners of businesses are content to consume their wealth, or hoard it, or speculate with it, instead of recycling it via new investments. Ever-more desperate attempts to elicit a bit more investment effort never seem to alter this stagnationist trajectory – with the incredible result today that overall production is actually becoming less capital-intensive, despite “miraculous” technological innovations. Trump is giving the trickle-down theory one more kick at the can, having successfully capitalized on popular discontent with the failures of previous attempts. Progressives must work harder to illuminate the failure of this business-led economic logic, and come up with other visions for financing capital investment, innovation and job-creation that do not depend on fruitlessly bribing the investing class to actually do the job it is supposed to.”

Jim Stanford (2017), US private capital accumulation and Trump’s economic program, in Trumponomics: Causes and Consequences, World Economic Association: College Publications, p.135-7.

The complete original article can be accessed for free here.

Trump’s tariffs: is there a better way?

Donald Trump has said that “trade wars are good, and easy to win”. I posted on the issue of protectionism in the wake of his election victory here, and on ‘beggar-thy-neighbour’ policies here, and stand by my arguments.

Contrary to the claims of mainstream economics, free trade is not always mutually beneficial for the nations involved. In particular, the historical record suggests that particular ‘infant’ industries in developing countries can benefit from temporary and selective protection, until they are competitive enough to succeed on world markets.

There are plenty of examples of infant industry protection which have failed, so it is by no means a universal panacea. Success requires the management of a particular balance of power in a developing country between particular groups such as the state and social classes, which might include emerging industrial leaders or the middle class. It will also be context-specific: it depends on the historical evolution of the groups and society involved.

Trump’s tariffs on steel and aluminium imports are not an example of protecting an infant industry. They may protect some jobs in those sectors, but most economists argue that by increasing the costs of these products as inputs for other industries, many more jobs will be lost in the latter, so that the net employment impact will be negative. Continue reading

Trump and the deregulation agenda – a boon for prosperity?

Donald Trump came into office promising to ‘roll back’ the regulatory ‘burden’ on business as part of his economic strategy. The claim is that this will reduce business costs and create jobs by boosting economic growth. But will it work?

The right often complains of the ‘burden’ on business and, particularly in the US, equates the absence of regulation with freedom.

This is emotive stuff. Burden? It sounds bad. Freedom? What’s not to like? But this kind of rhetoric avoids a more nuanced discussion of the issue. Continue reading

Trump’s robber baron presidency – via Lars P. Syll

 

In Trump’s world, ​the rich in the US obviously are not rich enough. So he has set out to lower the corporate tax rate to 20 percent and abolish the estate tax. The working and middle classes are, of course, überjoyed …

via Trump’s robber baron presidency — LARS P. SYLL