Two days ago, Allister Heath published one of his diatribes in The Telegraph. It’s almost comical. His targets are economists, specifically macroeconomists. As he writes, not missing the opportunity to quote Paul Romer, the new president of the World Bank, completely out of context, much of macroeconomics contributes negatively to the sum total of human knowledge (see here). The problem with macroeconomic theory is that it is broken. The only ones who seemed to have it right were von Mises, von Hayek and Milton Friedman – what else can be expected from The Telegraph? After that, the rot set in, due to the pernicious Keynesian virus. The world fell in love with central planning. Thatcher’s macroeconomic policies of the early 1980s provided some hope, but it was ultimately to no avail as economists have been proved wrong about any policy imaginable (see here).
Right wing ideology, pettiness and intellectual dishonestly aside, it would be possible to agree with Heath if instead of ‘macroeconomists’ he would speak about mainstream macroeconomists. It is not the Keynesians, the heterodox economists or the Marxists who are responsible for thirty five years of completely failed policies, but the economic mainstream, the neo-classicists, which dominate the academia and almost every institution in the world.
The new United Nations’ report The World Economic Situation and Prospects, 2016 analyses the right wing destruction in great detail. The report is a joint product of the United Nations Department of Economic and Social Affairs (UN/DESA), the United Nations Conference on Trade and Development (UNCTAD) and the five United Nations regional commissions.
In essence, the report shows that the mainstream neoclassical policies of the last thirty to forty years have been radically wrong and that they are bringing the world to the brink of economic collapse. Another debt crisis is unavoidable, unless we quickly and radically change course. Alarm bells are ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion.
The poisonous side-effect of zero rates and quantitative easing in the US, Europe and Japan was to flood developing nations with cheap credit, upsetting their internal development. The reports analyses how destructive this has been. Much of the money was wasted, skewed towards “highly cyclical and rent-based sectors of limited strategic importance for catching up” The money did no good – it did not lead to investment – but it certainly did a lot of bad, and criminally so.
Countries imported the deformities of western finance before they were ready to cope with the consequences. This has undermined what UNCTAD calls the “profit-investment nexus” that ultimately drives growth and prosperity. The extraordinary painful result is that some countries are slipping backwards, victims of “premature deindustrialisation” – no investment in the productive economy is to be found. The indictment is really damning. Many of them have fallen further behind the rich world than they were in 1980, despite opening up their economies and following the global policy script (see here).
The suffocating liabilities built up over the QE years remain. Corporate debt in emerging markets has risen from 57% to 104% of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution.
“If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system.”
And: “There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market”
As Evans-Pritchard writes, we are left with a world in a state of leaderless policy inertia, unable to escape slow suffocation. Trade is stagnant. Deflation is knocking at the door a full seven-and-a-half years into the economic cycle, even with the monetary pedal pushed to the floor. The next downturn will test the regime to destruction (see here).
The UN’s diagnosis is that “shareholder primacy” and the entire edifice of liberal market finance are among the key culprits, all made worse by stringent fiscal austerity that has starved the global economy of sufficient demand. Its prescription is radical. The world must jettison neo-liberal ideology and launch a “global new deal” with massive investment in strategic sectors. It wants a return of the “developmental state”, commanding a potent industrial policy and backed by severe controls on capital flows.
This is exactly what macroeconomists such as Heiner Flassbeck have been saying for decades. The problem is that neoclassical macroeconomics has never worked anywhere – not in the developing world and not in the developed world.
The UNCTAD critique is that activist funds have acquired a stranglehold over the corporate management, leading to a culture of share-buybacks and the relentless extraction of profit. “Corporations are not reinvesting their profits into production capacity, jobs, or self-sustaining growth.”
How many times has Heiner Flassbeck said that a market economy cannot work if companies are not prepared to go into debt in order to invest and innovate? While the profit share of GDP has risen to an historic high of 36% of GDP from 30% in 1980, private investment has slumped to 17% from 21%. The lack of investment leads to collapsing productivity.
The UN’s advice to the emerging nations is to retake control of their destiny and turn the tables on the financial elites. They should impose capital controls, preferential tax treatment for retained earnings, and force fund managers to hold assets for longer.
The report puts the advocates of neoliberal globalisation in a quandary. For decades, the defence has been that it raised living standards in Asia, even if free flows of capital allowed multinationals to play off western wages against low-wage countries. But what the United Nations institutions show is that globalisation has not in fact worked for these countries, except for a few exceptions. As Evans-Pritchard writes, one starts to suspect that it works for nobody except the owners of capital and their close allies (see here).
These arguments and the policy-proposals that follow from it have been made for many years, but nothing changes. Prior to the meeting of the G20 in China, the IMF had to announce yet another reduction in its forecast – nothing too dramatic, down 0.1 percentage point from its estimate issued in April. But the reduction was the fifth one in fifteen months. The IMF now expects global GDP to grow at 3.1 percent in 2016, a forecast which is well above the June forecast of the World Bank, which projects a 2.4% growth in 2016. What are they intending to do about it? The G20 leaders declare, as always, that they oppose trade protection ‘in all its forms’ and that they are committed to further monetary and fiscal measures to ‘strengthen growth.’ US Treasury Secretary Lew said that it was “not the right time for coordinated action similar to that in 2008-09 following the global crisis because economies face different conditions.” So basically, they are doing nothing and continue to rely on policy measures which have completely failed (see here).
It is really aghast. World trade contracted again in May 2016 and is now up only 0.75% from May 2015 in volume. Growth in 2016 is well below the post-Great Recession average of 2.7% a year, which in turn is less than half the rate of world trade growth before the global financial crash (at 5.7%). World industrial production is hardly moving and is actually falling in the advanced capitalist economies. Industrial production growth is below even the post-crash average, which in turn is below the pre-crash average (see here).
‘But now is not the time to take coordinated action.’
‘The return of pernicious Keynesianism has to be prevented.’
The world has lost its mind.
The new UNCTAD report can be read here.