Sheldon Filger who maintains a regular commentary on the current economic crisis (Global Economic Crisis) provides this prognosis for 2011:
Among the many clouds on the horizon regarding the global economic outlook for 2011, here are three:
1. Greek sovereign debt crisis not cured by the massive Eurozone and IMF bailout. Knowledgeable observers have pointed out that mathematically, it is not possible for the Greek state to deflate its economy in line with deficit reduction commitments required under terms of the bailout package, while simultaneously engineering a miraculous return to robust economic growth at a level sufficient to service the exploding public debt. There is already word being leaked to the Greek press by government officials that after the current bailout package expires in 2013, Athens will seek to restructure its sovereign debt.
2. Irish banking crisis far from over. After receiving a staggering level of bailout assistance from the EU and IMF to cover the country’s insolvency due to guaranteeing the obligations of Anglo Irish Bank ( along with all other banking institutions in Ireland), the Dublin authorities were forced to inject nearly $5 billion into Allied Irish Banks, another bankrupt institution. As with Greece, it seems almost a certainty that Ireland will eventually seek to restructure its public debt.
3. China, the one ray of hope in the global economy due to massive government injections of liquidity that have led to high levels of supposed growth during the global economic crisis, is now beginning to raise interest rates in a frantic effort aimed at reining in burgeoning levels of price inflation. This could lead to a tightening in the Chinese economy, combined with a catastrophic deflation in the Chinese real estate market. Any downturn in China will reverberate with dire impact on the overall global economy.
Just a comment on China. The global economies one ray of hope? Dont tell the Indians,Poles,Brazillians or Indonesians. Chinese growth is due to massive government injections? Hardly, Chinese growth is fueled by its 1.5 Trillion dollars in exports. Exports underpin the Chinese economy not government spending and expots last December were surging. Up substantially on the preceding year. Frantic effort in raising interest rates? All economies that are booming should raise interest rates as a measure against among other things a property bubble.
Lastly, price inflation? Put money into peoples pockets and guess what, they will want to spend it. When people are prepared to spend prices go up. eg when people have money they add more meat to their diets shock horror meat prices rise.
“Any downturn in China will reverberate with dire impact on the overall global economy.” Well yeah they are the second biggest economy in the world and any downturn will hurt I could have told you that.
I know that people are reluctant to read anything I post so here it is you can look at it now or wait a month for someone credible to link to it.
If the link fails its a utube titled Bank Bailouts Explained
http://www.youtube.com/watch?v=yipV_pK6HXw
This is good too
http://www.youtube.com/watch?v=PTUY16CkS-k
I found this article through Arts and Letters Daily. The article contains errors (environmental disaster exaggeration) and superficialities (summary of marx’s theories) but on the positive side does say that capitalism is failing,raises the property question directly and suggests that we need a new form of society:
http://chronicle.com/article/Capitalisms-Dismal-Future/126659/
“As unemployment continues to expand…” “As unemployment continues to expand……” “As unemployment continues to expand…..” ?
Perhaps it will occur to workers that the unemployment rate in the USA is contracting not expanding.
http://www.tradingeconomics.com/united-states/unemployment-rate
Bill that Marxists think that unemployment is rising when in fact it is falling is no surprise.
The interesting fact to come out of the GFC is the success that the US government has had in achieving its objectives.
Objective: stabilise the banking system: tick
Save the automotive industry: tick
Promote 3% growth: tick
Hold down interest rates: tick
Stabilise inflation at between 2-3%: tick
Lower unemployment below 10%: tick
Reduce government spending as a proportion of GDP: tick
Expand health insurance coverage: tick
Restore profitability: tick
US unemployment rate has doubled since 2006 wen the housing bubble peaked. We’re talking about the impact of the financial crisis, right? As of March 2011, the rate exceeded 9% – it was 4.5% in 2006. Yes, Steve, it exceeded 10% in 2010. US Bureau of Labor Stats chart here: http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en&q=rate+of+unemployment+in+the+us
Barry, your graph shows that unemployment is falling, my graph shows that unemployment is falling.(if you update your graph you will see that it’s fallen even further) The article that Bill linked to states that unemployment continues to expand. That the people that write this stuff can’t tell the difference in up and down is no surprise. What is a surprise is that they think unemployment will spur people into questioning social relations. Some will but as a rule unemployment acts as a discipline on workers rather than a spur to action.
Yes unemployment was lower in 2006 but since then we have had an event to “rival” the great depression. Three years into the great depression we had deflation, 25% unemployment, a banking collapse, a continuing share market collapse as well as a collapse in world trade and negative growth. When you compare the outcomes of the Great Depression with those of the GFC the people in charge must be pretty pleased with themselves but I guess that you can always hope that the worst is yet to come.
I’m afraid I’ll have to leave you alone in that hope as I don’t share those feelings.
Global unemployment is at a record high and persisting at about 205 million worldwide
US debt continues to spiral out of control and neither Republicans or Democrats have a credible plan to rein it in
Choices for the future:
a) rein in the deficit which will increase unemployment
b) stablise unemployment until the deficit reaches levels which can no longer be sustained
This analysis is consistent with the original article, which does contain errors, but deserves a better treatment than taking one section out of context, the paragraph that contains the words steve objects to does not specifically mention the USA.
Unemployment in the USA is of course well over 10% since official figures about unemployment are always distortions.
Steve, you have become an apologist for capitalism openly stating your lack of faith in the ability of people to question the system. Since you have decided that capitalism will survive your task is now to persuade others of that, rather than seeing the ongoing crisis as an opportunity to raise awareness of the chronic, ongoing deficiencies of the system. As though 10% unemployment in the USA is acceptable in the first place? Capitalism requires a reserve army of unemployed, why should we accept that?
btw, the Debt Clock link below shows that US government spending to GDP ratio is slowly increasing
Links:
Record highs in global unemployment likely to persist in 2011, UN reports
Global unemployment to remain high in 2011, warns UN report
US Debt Clock
Who will save America from drowning in debt?
What Europe’s coming debt default will look like
According to the IMF US government debt to GDP ratio is 99.5% in 2011 and projected to grow to 112% by 2016. Click on the tables in the article above to obtain an enlarged view.
Bill,its clear that I am not an apologist for Capitalism any more than Marx was when he penned words that praised Capitalisms ability to raise the level of production. Clearly having 10% of the work force out of work is a very waste full way of going about producing stuff. Its easy to throw names like apologist about, easier than explaining why a tale of two depressions didn’t hold together or why your support of predictions about the Australian housing market collapsing in 2007 still hasn’t happened.
People try to scare other people by saying that debt to GDP ratios are 100% or 200%. This sounds scary because people dont add any context such as the average family who earn say $50 grand per annum may well owe $300 grand total. Wow their debt to anual income level is 600%. Should they be scared by these numbers well yes if they loose their jobs but no if they don’t.
Lets say that unemployment stands at 10%. Economists say that the habitually unemployed rate is 5%. So the reality is of the workforce who can be offered a job only 5% cant find one and 5% arn’t really looking. Back in the Great depression no more than 2% were considered habitually umemployable so the real rate then was 23% as compared to the 5% in todays USA. But it doesn’t stop there, the great depression figures were distorted by the exclussion of women from many parts of the workforce so the 25% figure of the 1930’s is a big undercounting.
Speaking of undercounting. World unemployment figures are meaningless in a world where China and India have had millions of jobs transferred to their shores. With millions of jobs being transferred accounting for unemployment on a world scale is fraught with people trying to sell slippery ideas.
OK you think that the world is about to plunge into a debt induced crisis and that somehow makes you a Marxist while I see the world poised on the verge of a development surge and that somehow makes me an apologist of Capitalism.
I also think that your idea that there are only 2 choices that between debt and unemployment is a false choice. From memory the economist Stiglitz stated that the US government could borrow money at a 2% rate and that he could think of many infrastructure projects that could return 5% as well as soak up the unemployed. It’s not commercially feasable but government could do it. So theres my answer I agree with Stiglitz the US government should borrow more create jobs and return the surplus to the treasury. The US debt problem is not a problem of debt or of Capitalism but a problem of political will. The answers are in front of people but you can’t force a horse to drink.
Here’s a demand I think we should make, the Australian and the US governments should borrow more, build infrastructure and have faith in the future.
Hi Bill I just thought that I should clarify my position.
One: I do believe that social ownership (socialism) will replace private ownership (Capitalism) and I do support that idea.
Some people argue that negative experiences like high unemployment levels or poverty in general will alter peoples ideas in an anti capitalist way. I don’t share that belief.
Some people argue that third world revolutions in Russia, China, Cuba ect ect will or could lead to world socialism. I support all the above revolutions but sadly they have a tendancy to degenerate into jokes (Enva Hoxa anyone?) rather than lead to world revolution.
What I think will happen is what has happened in the past.
Once divine right of kings was an unquestioned universal belief much like private property rights are today. Over time divine rights is questioned until the king decides that he must defend this once universal idea with force of arms.
I think property rights will go the same way but not because of poverty or because of revolutions on poor countries. Capitalism will go once its obvious necessity no longer becomes obvious.
Analysis of the current state of the economy:
Is the economic crisis over?
I thought the sections about the ‘Great Depression’ in residential construction, the Euro system and Inflation were interesting but still don’t know enough to critically evaluate them
Bill I think that rational people and Capitalists are at loggerheads with unemployment. Rational people see 10% unemployment as a waste but Capitalists see it as part of the invisable hand that makes capitalism work. Every economic commentator puzzels over the fact that profitability in the USA has been restored while unemployment has remained high. Such a conundrum. But it is precisely why profitability has been restored. The fear of unemployment is a whip on the backs of the labour force as workers work harder to try and keep their jobs, unions moderate wage claims, even accept wage reductions as a way of maintaining jobs.
Recently 80% of US companies announced profit increases. Imagine how profitable they could become if they threw another couple of million onto the umemployment line.
There is so much exasperating nonsense in CCT’s analyses it rather defeats his usefulness as a straightforward explication of a Marxist theory of crisis. This is all the more frustrating because there are interesting points at the core of his argument, which rather than being buried under mountains of discursive irrelevancies, should be subjected to empirical rigor. (It may be that as in Austrian school writings, the inverse relationship between discursive BS and empirical rigor is a necessary one.)
The basic analysis of the global crisis is more or less as follows:
1. Falling rates of profit in advanced countries (AC) led to capital flows from advanced countries to developing countries in Asia (DCA).
2. The Asian financial crisis reversed capital flows, with capital now flowing from DCAs to ACs.
3. Competition among lenders led to increasingly lax lending standards in particularly the US, causing massive misallocation of capital primarily in the housing bubble.
4. With the housing market bust, the costs of the misallocation become known (prices begin to reflect fundamentals), leading to a deflation.
(So far so good, right? I mean, there are a minimum of howlers in this sequence, though there is at least one.)
5. During the deflation, both the industrial and financial (“commerce”) sectors build cash reserves…
6. Even as companies are failing in all sectors of the economy, preceded in all cases by the financial sector, with massive bailouts by the US government required to save core financial and industrial interests, credit availability exceeds demand…
7. Long term inflationary pressures caused by “Keynesian” (monetary) stimulus, combined with corporate credit and cash reserves, high unemployment, and rising (headline) inflation signify the return of stagflation…
8. The use of fiat moneys by various governments to create an international currency exchange in which the relative values of those currencies can reflect the relative competitiveness of the issuing economies obscures the Only True evaluation of economic performance as arbitrarily measured in gold…
— 8a. The problems of the European periphery can largely be traced to their participation in the Euro currency standard, whose value is determined by the ECB.
— 8b. The ECB’s policy is determined by the CIA! (That’s only a slight exaggeration of SW’s stated position…)
— 8c. See 9.
9. Against the threat of stagflation and long term profitability issues, capitalists are seeking to maximize downward pressure on wages.
10. The pressures of an international “race to the bottom” for capital may precipitate another round of world wars…
11. Unless a socialist revolution removes the need for capitalist wars…
The first that should be said about SW’s Marxist positions on capital is that in purely economic matters they differ little from the Austrian position, which is to say that it has more in common with Ron Paul than Milton Friedman (about whom SW makes an utterly specious comment). The only real difference is a moral one (ie, capitalism is wrong so must be destroyed, rather than right so must be saved). Thus, it is no real surprise that SW comes down against the Marx-Keynes line toward socialism.
Now the real crux of the argument SW seems to be making, in technical terms, has to do with the process of globalization and the effect on it by the falling rate of profit. But there’s not much of a counter-argument coming from the Marxist camp. SW’s writings on Marx and Keynes promulgate the right’s view of Keynes (delays the inevitable, complete with the misrepresentation of the “we’re all dead” line), while dismissing the socializing aspects of his theory.
After this, what’s left? There is nothing approaching theory anymore from the left as an alternative to capitalism per se, much less “scientific socialism.” If the moral criticism against capitalism is what’s important (ie, not that capitalism is doomed economically), then isn’t it more in keeping Marxism to abandon socialist utopias and focus on the remaining possibility that Marxist-Keynesianism suggests?
To that end, we should abandon discussion of the kind of nonsense which permeates SW’s article above, which is of a kind with the pseudo-left LS used to be so sensitive to. We should focus on clearly delineated theories, emphasizing empiricism.
For example, does SW’s claim about credit flows in the aftermath of the Asian financial crisis and their affect on US interest rates match real world observations? Does his description of credit availability and corporate bottom lines reflect reality? Does his presentation of Keynesian macroeconomics and stagflation reflect what the Keynesians and monetarists really think about macroeconomics and the current crisis? Does the CIA really control the ECB?
The answer to all of these questions, in general the least flagrant of the many howlers in this article, is NO. In the first case, it may be a partial no (credit flows continued and increased in Asia and other developing countries during this period, but returned to the US particularly in the form of interest rate reducing securities purchases). His allusions to stagflation seem oblivious to massive structural differences between the crises in the 1970s and the 2000s, and in fact fail to understand developments in macroeconomics since Friedman’s famous attack on fiscal policy (who is, in any event, essentially a Keynesian and certainly not an Austrian). His analysis is the equivalent of another bloviated Michael Moore documentary.
As such, SW’s analyses don’t represent a workable model for the current crisis.
Thanks lupin3 for critical comments. I’m still focused on acquiring Marx fundamentals so can’t respond in an intelligent manner. Sorry!
The direct link to the current IMF analysis of the economy is
FISCAL MONITOR
April 2011
Shifting Gears Tackling Challenges on the Road to Fiscal Adjustment
http://www.imf.org/external/pubs/ft/fm/2011/01/pdf/fm1101.pdf
They are cautiously optimistic but do flag a whole series of worries and problems.
wrt measuring the economy I came across this article by Duncan Foley.
http://homepage.newschool.edu/~foleyd/
direct link
http://homepage.newschool.edu/~foleyd/FoleyINETBrettonWoods.pdf
It is written from the classical / marxist perspective of distinguishing b/w productive and unproductive labour. By using a productive labour index, Material Value Added, which eliminates dodgy non productive growth in the financial sector he estimates that the 2009 recovery is far weaker than the recovery indicated by the GDP / NI index. He raises the theoretical point that because neo classical (marginal) economics rejects a materialist theory of value then they cannot measure things properly.
Bill it doesnt matter that GDP is an inexact measurement. What is useful about GDP is its comparative use as measured against previous GDP figures. OK they are measuring unproductive GDP elements in 2011 but on the whole they were measuring the same distortions in 2006.
Marxists now argue over the size of the recovery ignoring their previous arguments that there would be no recovery. Remember this was going to be a depression worse than the 1930’s
Lupin3,
I had a closer look at Sam Williams article, Is the Economic Crisis Over?. I now agree with you that his writing style has a tedious discursive aspect insufficiently backed by facts, in parts. I also agree that his suggestion that European governments “state power remains subordinate … (to the) United States” is bizarre. Your questions and partial answers (quoted below) are a valuable starting point for my further analysis, so thanks for that:
steve,
wrt your downplaying of the debt problem on April 28. I have far more confidence in Reinhardt and Rogoff, authors of This Time is Different, a comprehensive historical study of economic crises, than Stiglitz. They say that once debt to GDP ratio exceeds 90% that this impacts negatively on growth.
short version: http://www.voxeu.org/index.php?q=node/5395
long version: http://www.economics.harvard.edu/faculty/rogoff/files/RR-Financial%20crash_February_241.pdf
quote from the shorter version:
Bill I have no argument with Reinhardt and Rogoff when they say that increased debt in the present implies higher taxes and or lower spending in the future. Either that or as Krugman points out that high debt in the 1950’s was resolved by growth in the economy. So yes either the revenue base will widen through growth resulting in a higher tax take or taxes will increase or spending will be cut. The US is hardly likely to face a soveriegn debt crisis because it controls the reserve currency and can if push comes to shove print more of the stuff and run a high inflation policy. High inflation always runs in the favour of the debtor and against the lender. But the US doesn’t want to do this too much as currently the world is lending the US money at or below the rate of inflation, what a sweet deal. I think that people with lots of money do this because of the implied security that investing in US treasuries gives them.
One last thing, of the US debt $4.2 trillion is intragovernmental loans ie the US government passing money borrowed by the Treasury to other governmental agencies.
Steve,
To be consistent with your previous April 28th position of supporting Stiglitz’s position of borrow more, grow more then logically you would have an argument with Reinhart and Rogoff who argue both historical trend and causation for Debt:GDP ratio over 90% leading to lower government spending. One of the points of the Reinhart / Rogoff broad historical analysis is to show that the very high debt following WW2 that did lead to high growth is not typical of the general trend. Most people realise that we are not in an immediate post WW2 situation – rather the economy has been in an ongoing general long downturn since the mid 1970s punctuated with short term recoveries / growth but with the general trend being downwards. I think it’s ridiculous to compare the current economic situation with that immediately following WW2.
You can support the Krugman and Stiglitz fairy tale if you want but their position is in opposition to the better informed realism of Reinhart and Rogoff. It’s not really my job to explain to you the faulty logic of your own contradictory positions so don’t be surprised if I don’t continue the conversation further.
Consistent with the Reinhart/Rogoff position, the best you could expect from the US economy over the next period would be a Japanese type stagnation, which is a far cry from your April 28th stated position:
What Reinhart and Rogoff show is that for advanced economies with a Debt:GDP ratio over 90% that median growth is down 1% and average (mean) growth is below zero. This is why these realists advocate austerity measures for those economies as opposed to the Stiglitz fairy tale. The reason why median growth is above the mean would be due to those immediate post WW2 outliers where high debt did lead to rapid growth.
Bill you state that “….the economy has been in an ongoing general long downturn since the mid 1970s….” I just don’t see it. Lets look at some figures
http://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_(PPP)
I think that these figures indicate that Capitalism at it’s current stage is still pretty dynamic. Even if Reinhart and Rogoff are correct the solution is not revolution but a mere return to Clinton era tax scales.
Rogoff and Reinhart argue that intragovernmental loans should be part of the national debt calculation while Krugman argues that they should not. I think Krugman makes a good argument.
I think that this article is worth a read, not just because Jim reproduces fig one which supports my argument but the whole tone of the argument reflects the high standard of debate that has existed within the pages of the ISJ for so many years.
http://www.isj.org.uk/?id=461
The Krugman Stiglitz Fairy Tale
Bill said: “…Reinhart and Rogoff who argue both historical trend and causation for Debt:GDP ratio over 90% leading to lower government spending. One of the points of the Reinhart / Rogoff broad historical analysis is to show that the very high debt following WW2 that did lead to high growth is not typical of the general trend…You can support the Krugman and Stiglitz fairy tale if you want but their position is in opposition to the better informed realism of Reinhart and Rogoff.”
Isn’t Krugman’s (K) position that using the debt limit described by Reinhart and Rogoff (R&R) as a hard limit is not well supported by the evidence? Krugman claims that when R&R use the US example of the immediate post-war era, it captures the downward effect on GDP by de-mobilization, creating a spurious correlation.
His larger criticism against “This Time Is Different” (TTID) has to do with its lack of theoretical structure to understand the grand sweep of its historical evidence. In essence, that criticism is a way of saying, “Nice bit of data you’ve got there, but what does it all mean?” (1)
One of K’s answers to this is that the data, in some cases, means the opposite of what R&R suggest:
“Reinhart and Rogoff specifically cite data from the United States showing slower growth when debt was above 90 percent of GDP. But if you know the data at all, you know that so far, the only years in which US debt was above 90 was in the immediate postwar period, when growth was indeed slow — but not because of the debt burden; instead, the US was demobilizing after the war, with many women leaving the paid work force. So it’s a terrible example to use.
And I suspect that much of the rest of their result reflects reverse causation: Japan had low debt and fast growth before the 90s, high debt and slow growth since, but surely we believe that Japan’s financial crisis is what both slowed growth and increased debt; similarly, the onset of Eurosclerosis is what led both to slowing growth and higher debt in Europe. And here’s the thing: Reinhart and Rogoff have not, as far as I can tell, made any effort to disentangle the causation here.” (2)
In other words, without accounting for the costs of the crisis independently, it makes little sense to try to correlate slow growth with debt to GDP levels. Another way to look at this is to ask what would growth have looked like without incurring debt via monetary and fiscal spending? The answer is that as the depression worsened, debt to GDP would continue increasing as a function of reduced GDP (by definition). Thus, in a deflationary market, following R&R’s advice would result in contractionary monetary and fiscal policy by the government, deepening the crisis. So obviously R&R’s debt threshold isn’t meant to be taken in real time during a crisis, but is a measurement of some future performance at some future date. But when, and for how long?
The debt threshold view cannot consider the counterfactual of what would have happened to growth absent stimulus? And it turns out, this is a key element of any argument about the costs of financial crises and their policy responses. The answer to this question, according to the IMF, is:
“The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits.” (3)
Would the analytical methods R&R employed in developing the debt threshold have detected a permanently lowered GDP as a consequence of the fiscal crisis? If so, how do they disentangle lowered growth by the crisis from lowered growth by debt? When is the threshold applied, and when is the resulting dip in GDP measured? Reinhart has said in the Wall Street Journal that “Debt is debt. We’re very close to that 90%” (4) One can infer that she is suggesting debt, in terms of the debt threshold criteria, can be measured now – at or near the bottom of the drop in GDP resulting from the crisis. Surely doing so tells us less about the profligacy of the government than the severity of the crisis. If this is the criteria on which R&R base their debt threshold, then it might as well be called a crisis threshold, against which one could measure the long term impact to growth by crisis severity.
In this way the very same data R&R use to call for austerity would also, or actually, argue for aggressive fiscal and monetary responses to crises exceeding the threshold. It may be possible to argue from their own data that increasing debt during a crisis actually removes impediments to long term growth created by the crisis itself. I suspect this is what Bill is referring to when he mentioned the “Krugman and Stiglitz fairy tale.”
The only way to distinguish between the two is to test theoretical models against empirical data, to validate explanations of “why and how” with “what and when.” This is precisely what Krugman criticizes R&R for not doing. And contrary to Bill’s assertion about the need for austerity (in the eyes of R&R), this is fundamentally an argument between Keynesians, about the extent to which stimulus should be applied. However, because of the conflation of the debt threshold with the “austerity doctrine” (not something limited to the comments on this thread, btw), the debate between K and R&R has become a veil for arguments about the nature of financial crises, and thus of capital.
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1) http://www.nybooks.com/articles/archives/2010/may/13/our-giant-banking-crisis/?pagination=false
2) http://krugman.blogs.nytimes.com/2010/05/27/bad-analysis-at-the-deficit-commission/
3) http://krugman.blogs.nytimes.com/2010/05/15/misimformation/
4) http://blogs.wsj.com/economics/2010/02/05/qa-carmen-reinhart-on-greece-us-debt-and-other-scary-scenarios/
##########################################################
A brief history of the debate:
Reinhart & Rogoff: “From Financial Crash to Debt Crisis”
http://www.economics.harvard.edu/faculty/rogoff/files/RR-Financial%20crash_February_241.pdf
(Thanks to Bill for URL)
Krugman and Wells review “This Time Is Different”
http://www.nybooks.com/articles/archives/2010/may/13/our-giant-banking-crisis/?pagination=false
Krugman criticizes the R&R austerity doctrine
http://krugman.blogs.nytimes.com/2010/05/27/bad-analysis-at-the-deficit-commission/
http://krugman.blogs.nytimes.com/2010/07/21/notes-on-rogoff-wonkish/
http://krugman.blogs.nytimes.com/2010/07/22/more-on-reinhart-rogoff/
Reinhart and Rogoff respond to criticisms
http://www.voxeu.org/index.php?q=node/5395
(Thanks to Bill for URL)
Krugman responds to rebuttle
http://krugman.blogs.nytimes.com/2010/08/11/reinhart-and-rogoff-are-confusing-me/
Krugman on the IMF
http://krugman.blogs.nytimes.com/2010/05/15/misimformation/
Interestingly, it turns out Ben Bernanke has a similar view of R&R:
“REPORTER: Mr. Chairman, Ken Rogoff, wrote a book looking at 800 years of financial history and discovered when you have a financial crisis it takes a lot longer for the economy to recover.
Are people expecting too much from the Federal Reserve in terms of helping the economy recover? Has that complicated your monetary policy making?
CHAIRMAN BERNANKE: Let me say first that Ken Rogoff was a graduate school class mate of mine. I even played Chess against him, which was a big mistake. I enjoyed that book very much. I thought it was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.
What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a good deal on the problems in credit markets on recoveries.
Other aspects would include the effects of credit problems on areas like housing and so on. We are seeing all that, of course, in our economy.
That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.
And so we haven’t allowed that historical fact to dissuade us from doing all we can to support a strong recovery.” via Rortybomb (http://rortybomb.wordpress.com/2011/04/28/a-clue-on-what-obama-is-thinking-about-the-weak-recovery-or-why-that-facebook-townhall-has-depressed-me/)
It is essentially Krugman’s complaint: without the theoretical explanation tested against the voluminous data, the data does not support a clear policy proscription.
BTW, here’s R&R’s original paper which suggested the 90% threshold:
http://www.economics.harvard.edu/files/faculty/51_Growth_in_Time_Debt_aer.pdf
Those who actually take or have taken responsibility for making the system work (Bernanke, head of the Fed; Rogoff former chief economist of the IMF) have a more realistic view of the limitations of capitalism than idealists like Krugman who have a more relaxed approach to the growing debt:GDP ratio and broadcast their optimistic advice from the sidelines, knowing that it will never be implemented. Print more money and magic will happen.
Krugman:
Some decades ago 2% unemployment was considered normal, then it rose to 5% and now we can look forward to a higher percentage being considered normal.
Bill be careful about calling unemployment normal. Economists called it habitual which is different. The habitualy unempolyed were those who couldn’t get/hold a job when there were jobs available. I would speculate that the rise from 2% to 5% is a result in the decline in the unskilled job market but it could also be a result of the welfare state. The wide spread use of drugs may also play a part plus the deskilling affect that unemployment has on the working class.
For those who can’t recognise irony when they see it, I should have put normal in quotes, “normal”.
As normal steve, without quotes, you play the role of apologist to capital. Steadily rising unemployment over the decades in a system where workers have no choice but to sell their labour power to obtain the basics of modern life and you and your system loving economist friends rationalise it as habitual, unskilled or drug induced. Unemployment is the fault of the unemployed in your view.
“Steadily rising unemployment over the decades…” Bill I have put the ironic quotation marks in for you.
http://www.infoplease.com/ipa/A0104719.html
steve,
You are correct that I am oversimplifying the analysis wrt unemployment.
wrt unemployment and the long downturn I am following Brenner’s analysis, The Boom and the Bubble.
Long boom 1950-73 (G-7 unemployment average 3.1%)
Long downturn 1973-93 (G-7 unemployment average 6.1%)
Table 1.1, p. 8
We then have a recovery of sorts in the second half of the 90s but Brenner argued (writing before 2007, the version of his book I have was published in 2003) that it could not be sustained. I need to do more work looking at the details of his analysis. Perhaps, you need to do that too.
Latest IMF report on Europe (pdf, long)
IMF press release on Europe
Their official optimism is more apparent in the Press Release. In the longer report serious concerns are raised along with the official optimism.
eg.
“contagion to the core euro area, and then onward to emerging Europe, remains a tangible downside risk” (p. xiii)
“In extreme cases like Spain, close to one young worker out of two is now out of work, raising the specter of a “lost generation.” (p. 2)
“Unemployment rate in Greece, Ireland, Portugal, Spain is close to 16%” (Fig 1.4, p. 3)
“As the situation in the Irish banking sector deteriorated, a new wave of market turbulence erupted in November 2010. Sovereign risks intensifed again in the euro area periphery countries, spilling over to more countries, including Belgium and Italy.” (p. 6)
etc.
Lupin3 on May 13:
You are correct Lupin3. Really, I am just doing some thinking aloud as I go along rather than waiting until I have developed a deeper analysis that can critique the inadequacies of Reinhart and Rogoff as well as Krugman. But I remembered what you said when reading Maksakovsky’s The Capitalist Cycle (my copy arrived today). I thought this section from his introductory chapter on methodology provided a nice critique of the IMF approach to analysis:
Shadow Government Statistics (SGS) “exposes and analyzes flaws in current U.S. government economic data and reporting”
SGS unemployment rate is 22%
includes long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the Bureau Labour Statistics estimate, which includes short-term discouraged workers http://www.shadowstats.com/alternate_data/unemployment-charts
SGS annual consumer inflation is 10%
methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living. http://www.shadowstats.com/alternate_data/inflation-charts
The Primers and Reports page provides further analysis of how the SGS were developed
What happens when Greece defaults
http://www.youtube.com/watch?v=l-ixJFOTx2M&feature=related
Bill, Andrew Lilico states that Greece will default. Just a matter of time despite his acknowledgment that Greece will recieve another bail out. He doesn’t explain why Greece will default just that it will but he doesnt know when.
At least when you cited some American conspiracy theorist to prove that everyone is really unemployed, the argument could be followed.
The Europeans are running a monetary union. I think that they would like it to continue rather than let it disintergrate.
Given that then I think it reasonable to think that the Central bankers of Germany (who can borrow at 3%) would rather transfer money to Greece (who can only borrow money at 20%) rather than let the EU (for which they have worked so hard) to disintergrate.
Bill the Hitler rant that I posted makes more sense than the Lilico article.
OK Bill I’m still trying to make sense of the Lilico article. Although he doesn’t state it he is talking about Greece’s long term solvency problems rather than Greece’s short term liquidity problems. The alternative that he doesn’t look at is what the other large monetary union (the USA) does and that is to have one central bank rather than 20 or so. Still the EU is a work in progress.
PS when the EU does go to one central bank that will involve a doubling of intra-governmental loans. Wont that set the anti debt crowd into a frenzy.
Sorry Steve, I haven’t been able to keep up with both the current crisis as well as the fundamentals of Marx which I think are needed to understand the current crisis.
But it’s hard not to notice how the world economic situation is again deteriorating. All I can say is: A spectre is haunting Europe, the spectre of Greek contagion. Some interesting looking articles in response to this google search: spectre greece contagion
Bill, I think that what is missing from the analysis is politics.
The strong players are arguing over who will pay what in an orderly restructuring of the Greek debt. Here the Germans own the game. They are very happy that Greece is in trouble and has to beg for help. This help will come at a cost and the cost will be that Greece will have to tighten it’s financial affairs in line with German wishes. Germany wants to avoid Greece dropping out of the Euro as then it could revert to the drachma and default or restructure as it has done 5 times since 1829. The game will cost Germany money but the end result is a German dominated EU that runs a lot tighter rather than the present arrangement where Greece could flout the rules. Anything else doesn’t make sense as Greece accounts for a mere 2% of EU GDP. If the game is not about strengthening the EU then Greece would be allowed to drop out.
Capitalism is yet to fall because of a financial crisis Jesus it’s had enough of them. Look at the Asian financial melt down. The end result was for further imperial penetration into the Asian economies rather than social revolution. The Japanese financial crisis lead to stagnation as the Japanese made the decision to prop up zombie banks rather than let international capital into the Japanese economy.
All is not black for the Greeks. There will be no social revolution as power is in the hands of the social democrats and they know how to talk the talk of workers rights while inevitably bending to the needs of Capital. (Watch me make a fool of myself as we are only 12 hours away from the confidence vote in the Greek parliament)
Any how Greece can replicate the example of Sweden who in the 1990’s had a banking crisis with a government debt to GDP at 80% Ten years later Sweden had a debt to GDP level of 50% and an annual growth rate of 6.4% all this done without any major dismantling of the Swedish welfare state. The Greeks should be so lucky.
In a nut shell Bill what I’m trying to say is that this crisis is more a crisis within capitalism rather than a crisis of capitalism. They are not fighting for capitalism’s survival but for which dog will be top dog. So far top dogs are Goldman Sachs and German state capitalists. Bottom dogs are Lehman Bros. and Greek state capitalists oh yes and honorable bottom dog status to US and Greek working classes
Steve,
Your analysis is based on the premise that capitalism can manage its internal contradictions now and in the future because it has managed to do so in the past. You could apply that analysis to slavery or feudalism and you would be correct up until the time that those systems were replaced by the superior system of capitalism based on the equality of all in the marketplace. The logic of your discussion framework is what makes you an apologist of capitalism rather than someone working for a better post capitalist social system.
Competition is part of capitalism, Steve, which has deeper ramifications than Lehman loses and Goldman Sachs wins, Greece loses and Germany wins etc. You are just arguing on the surface based on your framework that the fundamentals are sound, just a business cycle there and another one here and everything will turn out fine in the end. Don’t take offence steve. I can’t see any reason why you can’t be proud of being an apologist for capitalism, given you work so hard at it.
btw Barry Eichengreen argued back in 2007 and it was reprinted in voxeu in 2010 that adopting the euro is effectively irreversible:
The financial difficulties of leaving the euro are reasonably well identified above, and the costs to Greece may only be exceeded by the eventual costs to the EU. However, absent significant debt restructuring from the Germans and French (see here for why this should happen) it remains the only strategy which is in the interests of the Greek working class. Of course, in order to be successful, it must be accompanied by political and economic reforms within Greece itself, and to my knowledge no such reforms are being considered. (The austerity programs being pushed on Greece by the EU and the IMF relate to its ability to repay its debt, achieved through massive internal deflation, but will not affect Greece’s long term growth except to, perhaps, permanently depress it.)
Much of the conversation in this thread has as its unstated center differing perspectives on the problem of the rate of profit. If one believes, as Bill seems to, that the problem is absolute (ie, that Marx predicted an endemic failure of capitalism which could not, by the usual means of depressions, be overcome), then opposition to the more working class oriented philosophies of New Deal economics and/or Keyensian economics might make sense from a Marxist perspective.
On the other hand, if one believes, as Steve seems to, that the problem of the rate of profit is cyclical, then (complete) opposition to liberal economics makes less sense.
The proper place to discuss these issues is probably the thread on the Marxist theory of crisis. Still, a prediction can be a useful test of the theories suggested in the other thread. Sorting these predictions, and particularly their bases (since many predict similar outcomes based on very different premises), can be a useful tool to understand the larger theories. With a clear explanation of the premises for the predictions, analyses can be done from an empirical standpoint to provide real time updates on the successes of the predictions.
Bill has already started this process, by suggesting data which shows that there is, in fact, a long term and uncorrected decline in productivity among advanced capitalist economies. Here is a discussion of the problem using more mainstream analyses. However, the data presented here tends to contradict the problem of profitability with respect to capital.
My prediction for 2011 is this: we will see essentially no meaningful growth in 2011. The unwinding of balance sheet problems will continue throughout the year in the US, as underwater homeowners continue to direct their savings into paying down debt, and away from the main street economy. US homeowners today have an equity level not seen since 1978, and because the problem is too much debt, demand (which would otherwise stabilize the housing market) cannot function properly. This suggests a depression like self-reinforcing downward pressure on home values, accelerating the demand problem. Homeowners expecting a rational bottom to the price decay might not find it.
The EU, and its currency, will come under increasing pressure as what remains of the left is mobilized in the periphery by the increasingly clear conviction that the ECB and IMF are acting primarily on the interests of France and particularly Germany. The Germans, maintaining an aggressive mercantilist position whose own strong recovery comes, by definition, at the expense of its troubled trading partners, will be faced ultimately with bailing out its own banks at significant cost. Thus, political instability will grow in the core and periphery of the EU.
China, too, is experiencing a recovery based largely on mercantilist policies. The distortions inherent in the monetary policies of various developing nations, including China, will prove unsustainable in a prolonged recession, resulting in the accumulation of significant market bubbles which, when they finally come to bust, will be blamed on the West. Thus, political instability will grow internationally.
Now whether I am right or wrong has little consequence on the larger question of the fall in the rate of profit – the nature of that problem could be absolute or cyclical in either case. However, the question of what should be done about the financial crisis hangs on the outcome of that question.
If the problem is cyclical, then Keynesian policies can clearly moderate the downturn and accelerate the upturn. (What will happen in the absence of these policies also needs examination.)
Lupin3,
Thanks for comment, links and prediction.
You say:
That doesn’t represent my understanding of Marx’s position. My earlier summary of Simon Clarke’s article said:
Since writing that I have read Simon Clarke’s book, “Marx’s Theory of Crisis” which explains that position in much more detail. Unfortunately, I haven’t reached a point where I can summarise quickly or still less apply that understanding to the current crisis.
From one of the lupin3 links:
The problem with this “solution” is that then Ireland, Portugal and down the track Spain can then demand the same favourable treatment. From the various articles I have read no one seems to be coming up with a viable solution to the problem caused by the “insignificant” Greek economy.
Thank you Lupin3 That is exactly what I believe “…that the problem of the rate of profit is cyclical.” I can’t see how any other explanation makes sense. If you believe the other explanation then you believe that Capitalism went into crisis in the 1970’s(which it did) and has been able to avoid the consequences for 40 years simply by lending itself more and more money rather than by engaging in class struggle to restore the rate of profit.
Just on Capitalism entering a final crisis. I believe that this will happen when a class becomes aware that the old system just doesn’t cut it and starts to institute a paralell system ie workers councils
It’s just not enough to have a crisis you need people with an alternative strategy to resolving that crisis. If anyone knows of such a group I would apreciate being put in touch with them.
summary of a section of Simon Clarke’s book, Marx’s Theory of Crisis
What is the significance of Falling Rate of Profit
– falling rate of profit (FROP) analysis has dominated contemporary “Marxist” theorising (unfortunately)
– Marx rejected the analysis that worried Ricardo, that the FROP mechanically determines the fate of the capitalist mode of production
– nowhere does Marx argue that a rise in the organic composition of capital (OCC) leads to a fall in the rate of profit and so to crisis
– nevertheless, dynamically, a rise in the OCC has to be compensated by an increase in the rate of surplus value (SV) if the capitalist is to avoid facing a fall in the rate of profit
– Big capital can respond to this challenge better than small capital
– as OCC increases so does competition increase in order to maintain rate of profit
– speculation, bankruptcy, devaluation, over accumulation and possibly crisis may follow
– if monopoly results then stagnation may follow as an alternative to regular crises
– the fundamental contradiction in capitalism is b/w use value (production for need) and value (production for profit), not the tendency for Rate Of Profit to fall
– the rise in OCC plays an important role
– rise in OCC accompanies increasing concentration and centralisation of capital
– this reduces spur of innovation and also socialises the forces of production, which paves the way for socialism
– OCC also tends to produce unemployment
– the emphasis towards the end of volume one of Capital is on the historic tendencies of capitalist accumulation
Bill To say that because something wasn’t published in Marx’s life time is an indication that Marx didn’t think it important is just a slight of hand. Volumes 2 and 3 of Capital were published after Marx died. In capital vol 3 chapter 13 marx wrote that “since the ratio of surplus-value to the value of the invested total capital forms the rate of profit, this rate must constantly fall.” Marx claimed that The Tendancy for the Rate of Profit to fall is “the most important law of political economy”
My eyes usually glaze over when Marxists talk to me about The Tendancy for The Rate of Profit to fall. To find out from you that Marx didn’t think much of it either is very reassuring.
I think it’s actually an important point Steve. One reason I recommend reading Simon Clarke’s book, Marx’s Theory of Crisis is that he does make a real effort to explain how the various interpretations of Marx, which did cause major splits, are based on selective quotations. Clarke is a good guide because he makes the effort to sort through the confusion caused by that.
The chronology of Marx’s writings has some importance. The final manuscript of volume one was prepared in 1865-7, which was after the notes which later became volume three after Marx’s death were written (1864-5). The notes which later became volume two were not written until 1870 and 1878. Hence, volume three cannot possibly be an adequate integration of volumes 1 and 2 since it was written before volume 2.
It’s a bit strange Steve that you downplay the importance of the falling rate of profit, as I too have now done, and yet cling to the belief that Marx regarded it as the most important law of political economy. I guess that proves you smarter than Marx, right? I prefer to believe that Marx would have mentioned it in his published writings if he had held a consistent belief over a long period that it was the most important law of PE.
Bill I cling to the idea that Marx thought that the Tendancy for the Rate of Profit to fall (TRPF) was “the most important law of political economy” because thats what he wrote and was published in the Grundrisse page 639. He wrote this in 1858. If he changed his mind he should have told someone.
I didn’t start glazing my eyes over when Marxists mentioned TRPF because I’m smarter than Marx. My eyes glaze over because Marxists would tell me that TRPF explained why crisis occurr but could not then explain why, they would just state it as a fact. Just like every time there’s a crisis the village Marxist would tell me that it’s a crisis of overproduction mainly as a statement of belief rather than as an attempt to understand the world.
Steve,
So you cling to a quote from Marx’s rough notes (not intended for publication), have demonstrated no intention to read Clarke who has helpfully sorted through the conflicting interpretations and then in the next breath demonstrate your superiority other others who just mouth some “marxist” dogma.
David Harvey does a good job of sorting through the tangled mess of the falling rate of profit arguments too, in the final section of Ch. 6 The Dynamics of Accumulation in his Limits to Capital. I like Harvey because he is well read and confident enough to interpret and include criticism of Marx and not just parrot him. His conclusion:
Bill my apologies for referring to Marx’s rough notes unintended for publication called the Grundrisse for as Simon Clarke rightly points out the Grundrisse just “…provides an invaluable insight into the development of Marx’s fundamental theoretical ideas.”
Clarke writes some interesting stuff and I am puzzled as to why other blogger here don’t discuss his work with you. Clarke argues that Marx never developed a theory of crisis in the Marxist sense. Clarke is critical of Leninism and notes that Stalin and Hitler murdered most of the people who could have made a decent theoretical contribution. Interesting that from the other bloggers you don’t get any discussion.
For everyone “thrilled” by the revolutionary potential of the current crisis I would recomend Simon Clarkes “Revolutionary hopes and the Crisis of 1857” pg 81 of Marx’s Theory of Crisis.
Bill I know that you are keen on hands Capitalists rather than academic types so here’s the word from Barton Biggs. In the world of Capitalist overlords they don’t come much more hands on than Barton.
http://online.wsj.com/article/SB10001424052702304584004576419783681867012.html?mod=googlenews_wsj
Plus I was surprised to read today that the cost of servicing the US government debt is less today than it was at the height of the Clinton boom. (all about interest rates)
Just as an aside I was reading about Greek pensions. Apparently civil servants could retire at 58 and the government would pay them pensions at the rate of 80% of their last years wage. I’m not saying that’s wrong but the writer made the point that English workers complain about bailing out the Greeks because the effective English retirement age is death.
I’m in a rush, will just post these links now about the current crisis (most of them about Europe but not all) and hope to do more discussion with them later. Hope it is useful to share them now.
The links towards the end about debt restructuring were searched for because when presented on the tube its always hand waving, not much detail of how it would work
David Harvey video
Greece Should Default
http://www.youtube.com/watch?v=-fWlCJp95CE&feature=player_embedded
‘Germany Was Biggest Debt Transgressor of 20th Century’
http://www.spiegel.de/international/germany/0,1518,769703,00.html
(previously provided by Lupin3)
The euro: love it or leave it?
Barry Eichengreen
http://www.voxeu.org/index.php?q=node/729
(previously provided by me)
What happens when Greece defaults
Andrew Lilico
http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/
(previously provided by me)
Andrew Lilico
Greece is going to be kicked out of the eurozone whatever happens
http://blogs.telegraph.co.uk/finance/andrewlilico/100010653/greece-is-going-to-be-kicked-out-of-the-eurozone-whatever-happens/
‘Black swan’ events and the global economy
Nouriel Roubini
http://english.aljazeera.net/indepth/opinion/2011/06/201162275658199491.html
The dam breaks in Portugal
Ambrose Evans-Pritchard
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100009218/the-dam-breaks-in-portugal/
Dude! Where’s My Recovery?
Steve Keen
http://www.debtdeflation.com/blogs/2011/06/11/dude-where%E2%80%99s-my-recovery/
Whither Greece
Michael Hudson
http://michael-hudson.com/2011/06/whither-greece/
Rogoff Says Debt Restructuring in Greece, Ireland, Spain Is `Inescapable’
http://www.bloomberg.com/news/2011-03-02/rogoff-says-debt-restructuring-inevitable-in-greece-ireland.html
The effects of a Greek debt restructuring
Protesilaos Stavrou
http://protes-stavrou.blogspot.com/2011/06/effects-of-greek-debt-restructuring.html
What if Greece goes bankrupt?
Protesilaos Stavrou
http://protes-stavrou.blogspot.com/2011/05/what-if-greece-goes-bankrupt.html
S.&P. Warns Bank Plan Would Cause Greek Default
http://www.nytimes.com/2011/07/05/business/global/05iht-euro05.html?_r=1
‘Greece Is Clearly in Need of Debt Restructuring’
http://www.spiegel.de/international/europe/0,1518,749707,00.html