Will China Save the Global Economy?

Understanding the People’s Republic of China (PRC) constitutes a formidable challenge to every Marxist. Of course it's not a challenge based on some racist notion of “oriental inscrutability” or even the task of unraveling the obstacles presented by size, diversity, and complexity. Instead, it is the perplexing doctrine of “socialism with Chinese characteristics” that confounds many of us. While no one can contest that the Chinese Communist Party is the leading force in Chinese society, some see the Party as leading the PRC in the wrong direction-- along the path of capitalist restoration.

That capitalist relations of production exist and and have grown in the PRC is unquestionable. Both domestic private corporations and multinational capitalist enterprises have gained far more than a toe-hold in the national economy. Nonetheless, it is pointless to engage in the popular parlor game on the left of declaiming the PRC as socialist or capitalist. The more pertinent and useful question is: “Where is the PRC headed?”

I raised that question in an essay-- The Chinese Puzzle-- in December of 2011. Despite many reservations about the deceptively dubbed “reforms” accepted by the Chinese leadership, my judgment was that the socialist underpinnings of the economy, while dangerously weakened, were still intact: the state sector, relative to national annual product, was still five times greater than a typical European social democracy like France; the financial sector was predominantly state owned; and the planning mechanism was weak, but functional.

At the same time, I was fully cognizant of the many problems wrought by capitalist “reforms”:

The entry of capitalist features into the PRC economy has plagued it with the maladies that arise from the anarchy of markets: imbalances, speculative fervor and bubbles, inflation, labor unrest, grey and black markets, and labor market chaos. In the spring and summer of 2010, workers rose against low wages and working conditions in many areas. Again, this year [2011], there were significant actions for better pay, working conditions and against layoffs. In the fall, the PRC’s sovereign wealth fund was forced to buy shares in major Chinese banks. Despite the fact that private investors own a quarter or less of the country’s biggest banks, a sell-off by foreign investors caused a near panic met by the sovereign wealth funds’ intervention. Today, inflation, a construction bubble, and over reliance on exports weigh on the economy. (my emphasis)

But the PRC's economic stability during the worse years of the global economic crisis demonstrated, in my estimation, the existence and value of the remaining socialist base.

I concluded on a note of caution:

The country’s participation in global markets could present problems that even its remaining socialist tools cannot overcome. Moreover, it is not clear if the PRC will strengthen these safeguards or jettison them, as its leading Communist Party shapes this awkward mix of socialism and capitalism.

A Right Turn

Four months later, alarms sounded with the publication of a joint World Bank and the PRC State Council's Development Research Center report that urged an acceleration of privatization, deregulation, financial market liberalization, and openness to foreign corporate penetration. Of course this prescription is the conventional wisdom promoted by the World Bank. But most alarming was the endorsement of this agenda by such a prominent PRC body. The report urges:

In the financial sector, it would require commercializing the banking system, gradually allowing interest rates to be set by market forces, deepening the capital market, and developing the legal and supervisory infrastructure to ensure financial stability and build the credible foundations for the internationalization of China’s financial sector.

The study, China 2030, clearly represented the manifesto of the rightist “capitalist roaders” in the PRC leadership. As I noted at the time (The Battle for China's Future, 3-06-12), “...the leadership [walks] the thin, risky line between emerging capitalism and the remaining socialist institutions. But, clearly, The World Bank and its Chinese allies are determined to influence that direction. And there should be no doubt which direction China 2030 is intended to push those leaders.”

With the subsequent ascendency of the Xi Jinping leadership group, it became clear that further “reforms”-- economic liberalization-- were forthcoming. Xi sought to unleash market forces, diminish the power and size of the public sector, and court, in various ways, foreign capital and corporations. Keen to minimize the rampant corruption that accompanied the expansion of the private sector, the government also mounted an aggressive campaign to investigate and prosecute the most flagrant abusers. They hoped that this would dampen public resentment of economic inequities that invariably comes with the expansion of private profiteering.

Clearly, PRC's new generation of leaders have accepted the market dogma that further growth was threatened by regulation, a prominent public sector, and financial restraint. Clearly, they have been persuaded by liberal ideologues that more capitalism and less socialism is the order of the day.

And clearly, they have not foreseen the dangers lurking on that path.

The decision to go forward with liberalization was felt dramatically in PRC equity markets. PRC leaders urged investors to enrich themselves. Beginning in November of 2014, regulations against leveraging-- margin buying-- were relaxed, interest rates were cut, and international access to stock markets was expanded, resulting in the rapid advance of an already hot market. Initial public offerings (IPOs) multiplied; market capitalization increased five times in one year; margin loans doubled in six months, reaching 2.27 trillion yuan; individual investors surpassed 75 million, with even 31% of college students playing the market. The PRC leaders had unleashed a stock-market frenzy, resulting in Chinese combined equity markets, at their peak, becoming the largest in the world after the New York Stock Exchange.

The stock market “miracle” drove the benchmark Shanghai Composite index to a new high in mid-June of this year, reaching 5166 from 3334 at the end of last year.

But then the market collapsed. Less than a month later, $3.5 trillion in nominal value disappeared, with the market dropping to 3507. By late August it had further eroded to 3210.

Government measures to stem the crash were ineffectual. Despite suspending IPOs, suspending trading on many stocks, restraining margin buying, and allocating $19 billion to a market stabilization fund, the market continued to falter. Twenty-four million investors left the market, presumably after suffering large losses. To put a perspective on the losses, they were over 14 times the GDP of Greece.

Unlike in the past, the PRC had no socialist tools in their tool box (or they chose not to use them). Unlike in 2008 when the PRC leaders swiftly injected public funds into public enterprises and public projects to propel the economy away from the private folly of the global economy, the PRC leaders were overwhelmed by market forces that they were so eager to unleash.

In their enthusiasm to embrace markets, the leadership had pledged in February to allow the yuan's exchange rate against other currencies to float and remove controls on capital flows. Despite four quarters of capital outflows, the government freed the yuan exchange rate on August 11, unleashing a devaluation that promises to accelerate capital outflows. In the face of a collapse of the PRC equity markets, the leadership chose to answer with further market “reforms.” Moreover, Western commentators (see Paul Krugman, for example) bizarrely blame the rout on too few market reforms rather than the aggressive liberalization that overheated equity markets, an endorsement of a demonstrably failed policy. Capitalist bromides brought the PRC economy to this juncture. Will the PRC leaders continue to embrace them?

Global Turbulence

The current chaos in world-wide equity markets has made the PRC a convenient whipping boy. The commentariat sees economic problems in the world's second largest economy as dragging the global economy down. While China's economy is moving in the wrong direction and, consequently, contributing to the enduring capitalist crisis, it is far from the efficient or final cause of the painful throes of the capitalist system. Long developing, deeply embedded processes are working to undermine the capitalist system (see my The US Economy: A Midyear Report Card, 6-12-15).

But it is important to stress, nonetheless, that the Chinese economy-- even with its remaining socialist features-- is no longer able to rescue the global capitalist economy as it did, in part, in 2008. As Lingling Wei and Mark Magnier wrote in The Wall Street Journal (China to Flood Economy with Cash, 8-24-15):

Beijing’s struggles this summer have spooked many investors into viewing China as a threat to,

 rather than a rescuer of, global growth. During the financial crisis of 2008 and early 2009, China, with a colossal stimulus plan, acted as a shock absorber. Lately, it is China that is providing the shocks.

This is a stark and candid admission of the abandonment to the market of important, critical elements of the socialist economy by PRC leaders. One can only hope that they will come to their senses before they join others in trying to manage the unmanageable.

Zoltan Zigedy

zoltanzigedy@gmail.com

The Chinese Puzzle

Whither China? was the name of a widely circulated pamphlet authored by the respected Anglo-Indian Marxist author, R. Palme Dutt. Writing in 1966, with The People’s Republic of China (PRC) in the throes of the “Cultural Revolution”, the pamphlet sought to shed light on the PRC’s tortured road from liberation in 1949 to a vast upheaval disrupting all aspects of Chinese society as well as foreign relations. To most people – across the entire political spectrum—developments within this Asian giant were a challenge to understand. To be sure, there were zealots outside of the PRC who hung on every word uttered by The Great Helmsman, Chairman Mao, and stood by every release explaining Chinese events in the People’s Daily, Red Flag and Peking Review. A few Communist Parties and many middle-class intellectuals embraced the Cultural Revolution as a rite of purification. Yet for most, as with Palme Dutt, the paramount question remained: Where is the PRC going?

Today, forty-five years later, the question remains open.

The cultish followers of Mao have mostly gone on to their life’s work, though some still uncritically defend every aspect of Chinese Communist Party policies during Mao’s chairmanship.

But the PRC that we know today is a vastly different country from the country worrying R. Palme Dutt in 1966; yet it is one that is just as difficult to comprehend. In place of the economic stagnation of the Cultural Revolution period, the contemporary Chinese economy enjoys one of the highest consistent growth rates in the world and counts as an industrial giant well on its way to challenging the USA in annual national product. The economic autarky of the Mao period has been replaced with a massive effort to trade globally. And state enterprises and common land ownership are now eroded by private investment and private ownership. The PRC today has an abundance of millionaires and not too few billionaires, a fact that would violently offend the militants of the Cultural Revolution.

At the same time, the ruling party in the PRC is the Communist Party. Its theorists and ideologues insist that they are proceeding down a distinctive, deliberate road to socialism. Ironically the PRC is now the darling of many in the right wing of the anti-capitalist movement, embraced by those who defend the market mechanism and a gradualist, evolutionary approach to socialism.

Among those advocating socialism, the PRC constitutes a kind of laboratory for socialist policy, much the way the Soviet Union was regarded after 1917. Partisans of socialism sift through the massive literature, reports, and commentaries on the PRC to find evidence to support ideological positions. For the most part, conclusions are, at best, tentative and speculative. Comprehensive conclusions remain illusive to even the most elevated intellectual egos.

Yet the PRC is entirely too formidable of a factor in global political and economic affairs to ignore. Therefore, I offer some modest observations.

“China-bashing”

Wherever the PRC road leads, it remains a lightening rod to bourgeois politicians and, unfortunately, most labor leaders. To hide their own failings, they easily and often point to some Chinese policy that stands in the way of satisfying the interests of working people. In its crudest form and in its essence, it is vulgar anti-Communism. Exploiting the deeply ingrained collective hysteria of the Cold-War, crass leaders and class-compromised union bureaucrats invoke the words “Chinese Communists” and mass distraction ensues. China-bashing has replaced Soviet-bashing (and the once popular Japan-bashing when Japanese corporate power was on the upswing) as an easy and frequent diversion from the rapacious behavior of multi-national corporations.

Rather than blame US multi-nationals for the destruction of decent paying jobs in the US, leaders scapegoat the PRC. From 1999 until 2009, US multinationals added 2.9 million workers abroad while cutting 864,400 in the US, according to the Commerce Department. In 2009, these monopoly capitalist enterprises employed 23.1 million workers in the US against 10.8 million in other countries. Most overseas employees are in Europe with the Chinese holding only 943,900 jobs from US multi-nationals. Canada, Mexico, and the UK, on the other hand, account for over 3 million of multinational overseas employment.

These same multinational corporations have reduced capital investment spending in the US at a decade long annual rate of .2% while boosting capital investment overseas by an annual average of 4%.

These job shifts are corporate decisions based upon profit expectations and, according to the Commerce Department, “primarily to sell to local customers… rather to sell in the US market.” Thus, politicians and union leaders are hiding behind simplistic and self-serving demagogy in blaming China for the demise of US jobs. And their aversion to class struggle against US corporate giants masks the role of those corporations in taking jobs to where they can recover profits most easily; bogus patriotism obscures corporate fealty to the bottom line.

When pressed to put some meat on the bare bones of China-bashing, bourgeois economists cite the currency policies of the PRC. They argue that the relationship between the yuan and other currencies is consciously maintained at a lower-than-market level to increase the competitiveness of the Chinese export industries. But that argument has evaporated over the last year. Third quarter reports of PRC current-account surplus – a widely acknowledged measure of trade imbalance – show a dramatic decline from a year earlier; against the third quarter of 2010, the PRC current-account balance fell by 43.5%. Through the first three quarters of this year, PRC current-accounts surplus as a percentage of GDP fell from 5.1% last year to 3% currently. Ironically, at the November, 2010 G20 meeting, the US pressed hard to establish 4% or less current-accounts surplus/GDP as the benchmark for determining whether currencies were reasonably valued. With the PRC easily passing this test, the US has no argument. Nonetheless, US policy makers and pundits, including liberals, like Roubini and Krugman, continue to pound away at PRC currency policies.

When these current-account numbers are coupled with the continued high growth of the PRC (9.1% in the third quarter), they suggest that the PRC has made a significant shift from export growth to investment and consumption growth.

For the US left, the myths supporting China-bashing should be emphatically rebuffed. While the PRC policies internationally are generally self-interested – the PRC has seldom demonstrated the kind of international solidarity associated with twentieth century socialism—they are nonetheless independent of US imperialism. That is, the PRC operates to promote its own security and economic health. Where it clashes with US imperialism, for example, in UN votes against NATO aggression, progressives should applaud its role. At the same time, it shares many features with imperialism in its competition for markets, resources, and economic advantage in the global economy. These features often place it on the wrong side in its relations with other countries.

White Cat, Black stripes; Black Cat, White Stripes?

Much heat has been generated over the question of whether the PRC is socialist or capitalist. But from a Marxist perspective – like that of Palme Dutt – the telling question is not where it is, but where it’s going: Is the PRC on a path towards socialism or capitalism? Where is the process leading?

No one can deny that for decades, the PRC has allowed -- indeed welcomed -- capitalism in the front door. Foreign direct investment, joint-stock and private-stock enterprises, privatization, securitization, and acceptance of the market mechanism have all transformed the PRC economy into a prominent player in the global economy. This change has brought forth stunning growth for the country and a general rise in the Chinese standard of living, certainly from the stagnation of the period of the Cultural Revolution. In only a few decades, the PRC leadership has mounted a veritable revolution as profound as the sharp turns organized in Mao’s era.

At the same time, capitalism has brought with it nearly all of its ills: inequalities that rival history’s worse, a shattered health care system, working conditions that too often approach that of Dickens’ England, corruption, cronyism, unemployment, and a broken sense of collective fate or communal solidarity.

The entry of capitalist features into the PRC economy has plagued it with the maladies that arise from the anarchy of markets: imbalances, speculative fervor and bubbles, inflation, labor unrest, grey and black markets, and labor market chaos. In the spring and summer of 2010, workers rose against low wages and working conditions in many areas. Again, this year, there were significant actions for better pay, working conditions and against layoffs. In the fall, the PRC’s sovereign wealth fund was forced to buy shares in major Chinese banks. Despite the fact that private investors own a quarter or less of the country’s biggest banks, a sell-off by foreign investors caused a near panic met by the sovereign wealth funds’ intervention. Today, inflation, a construction bubble, and over reliance on exports weigh on the economy.

Despite these ugly aspects of the PRC’s flirtation with capitalism, the PRC negotiated the most tempestuous waves of the global economic crisis without the catastrophic damage incurred by the other economic powerhouses. In addition, most honest analysts, including even The Wall Street Journal, credit the PRC with a large role in thwarting world economies from being swept over the brink in 2008-2009.

How was this done?

In my view, those structures intact from the PRC’s early commitment to socialist economics proved to be a bulwark against global economic turmoil, especially from the financial sector. Regardless of the future course of the Chinese economy, many elements of socialist economic structures remain and they and they alone, permitted the PRC to evade the harshest consequences of the 2008-2009 collapse and blunt the forces of the market.

1. Banks and finance: The PRC’s four largest banks dominate the financial system along with the Central Bank. Despite recent public offerings, the big four banks remain 75% or more under public ownership. The experiment in raising private funds through stock offerings has proven to be more damaging (a recent sell-off briefly rocked the stability of these public institutions) than advantageous, but, nevertheless, the banks remain steadfast under government management. And the Central Bank, unlike our corporate dominated Federal Reserve, functions as a publicly run and owned institution tuned in closely to government economic goals. The “shadow banking” that rocked Western private banks was virtually unknown in the PRC: no securitized US mortgages, no complex derivatives, opaque bank-to-bank deals, etc. The pillars of the financial system, because they were publicly owned and relatively transparent, stood solid against the crisis; they retained the central functions of a financial system without the corruption of private profiteering.

For sure, private banking in the PRC exists and jolts the smooth functioning and stability of the financial system, but to date the government has been able to adjust financial flows swiftly and efficiently.

2. Economic Policy: The PRC retains indicative planning, though flexible and partial. With the onset of the global crisis, the PRC embarked on a sharp turn towards domestic consumption and investment and away from a deteriorating international market. Quickly adopting a massive $622 billion stimulus program and loosening the valves on lending from the publicly owned banks, the PRC minimized the damage from a collapsing global capitalist economy. While the West, stumbled and delayed, politicizing and horse-trading intervention in the economy, the PRC acted promptly and decisively. As a result, the PRC maintained a growth rate well above Western norms through 2008-2009, while nearly all other countries endured negative growth.

Even with the corrosive and corruptive influences of capitalist social relations, the Communist Party of China remains a leading institution linked to advancing the general welfare of the people. That is, it continues to respect and seek the promotion of national interests. Compare its performance in the face of severe crisis to the appalling submission of bourgeois democratic institutions in the West to the welfare and interests of capitalist institutions; banks and corporations were rescued while living standards were decimated. In terms of serving the interests of the vast majority of the people, the PRC institutions proved far more democratic in content than the formal Western “democracies”.

3. Planned development: The PRC adopted the “National Medium- and
Long-Term Plan for the Development of Science and Technology” in 2006, a plan that proposed doubling the percentage of GDP devoted to research and development through 2020. At the end of this November, the PRC confirmed a plan to spend $1.7 trillion over the next 5 years on sectors including alternative energy, biotechnology, and advanced equipment manufacturing (Reuters, 11-21-11). Such national planning is virtually unheard of in the West since the massive investments in infrastructure, education, and research and development brought forth by the panic over the Soviet launch of Sputnik.

Chinese planning shows much more responsiveness and flexibility than policy initiatives in the West. With global demand shrinking from 2008 through 2009, the PRC shifted swiftly with internal investment and expanded consumption while Western powers debated and hesitated.

4. Public ownership: With state banks opening the floodgates, and a
Communist Party leadership quickly implementing a stimulus program, publicly-owned enterprises reacted immediately and decisively to the call to expand economic activity. While the public sector was curtailed in the early years of the shift to market relations, it remains dramatically larger than in Western countries or most Asian neighbors. In a generally hostile article in The Wall Street Journal (China’s ‘State Capitalism’ Sparks a Global Backlash, 11-16-10), the authors make the point vividly: In 2008, the assets of the PRC’s publicly owned firms totaled 133% of economic output; in the same year, France’s state-owned firms’ assets amounted to only 28% of economic product. While much speculation revolves around the role of the public sector in the PRC, these numbers give a perspective on how important publicly-owned enterprises are in the PRC. Thus, when essential stimulus programs or planning initiatives are undertaken, they translate into rapid, measurable results, unlike in the US where policies are pushed through the sieve of private contractors with the consequent siphoning off of overhead and profits, few jobs created, and long delays.

While many in the West are skeptical of the PRC’s ability to move away from export-driven manufacturing to domestic consumption, the following figures are revealing: Exports as a percentage of GDP have fallen from 35% in 2007 to 27% in 2010; third quarter 2011 import growth exceeded export growth; and retail sales grew by 17% in August and 17.7% in September of this year against the prior year.

Of course the PRC’s success in weathering the economic crisis is no guarantee that it will do so going forward. Certainly the PRC leadership is aware of difficulties ahead. The PRC Vice Premier, Wang Qishan, was recently quoted by the Xinhua news agency: “The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic.”

The country’s participation in global markets could present problems that even its remaining socialist tools cannot overcome. Moreover, it is not clear if the PRC will strengthen these safeguards or jettison them, as its leading Communist Party shapes this awkward mix of socialism and capitalism.

Thus, forty-five years after Dutt’s pamphlet, we are still left with the burning question: Whither China?

Zoltan Zigedy
zoltanzigedy@gmail.com

The Battle for China’s Future

Suppose your favorite basketball team leads by twenty points at half-time, with more rebounds and steals and far fewer turnovers than its opponent. The athletic director rushes into the locker room and announces to the coach and players that unless they radically change the game plan, they will suffer a devastating defeat. Your first thought would likely be that the athletic director has taken leave of his senses. Or that he or she has been bought off by the rival.

Yet this is exactly like the advice that The World Bank and the Development Research Center urged upon The Peoples’ Republic of China on Monday, February 27. In a report entitled “China 2030,” the two entities—one a notorious cheerleader for free markets, privatization and meager social spending and the other an arm of the State Council of the People’s Republic of China—concede that the PRC has enjoyed 30 years of an average of nearly 10% annual growth. Besides this stunning achievement, the PRC negotiated the treacherous shoals of the world-wide economic crisis far better than any other large economy.

One would think that the study would probe the basis for this remarkable achievement and urge its continuance. Perhaps The World Bank would even suggest a similar approach for other countries. But instead, the authors of the report issue dire warnings of rough times ahead and prescribe urgent changes.

They warn that the average growth rate for the next 19 years will only be 6.6%. Assuming that the projection has some theoretical justification (World Bank predictions have fallen on hard times), the PRC economy would, at this rate, double in GDP every 11 years. Indeed, the report notes that it would become the world’s largest economy before 2030. Apparently, the authors of China 2030 are not impressed.

This warning is even more puzzling when we remember that most mainstream developmental economists project a declining growth rate as economies mature. Following W. W. Rostow’s heralded theory, high growth rates are only a feature of economies experiencing a “take-off.” Necessarily, growth slows, they agree, after the initial rapid expansion. Such a theory justifies the relatively low growth rates of the most advanced capitalist nations.

The PRC’s “friends” evade these questions by raising the dangers posed by the “middle-income trap,” a theoretical construct first suggested by economists in 2007. Noting the difficulties that many emerging market economies had in the 60’s and 70’s, they offer a muddled explanation of their failings, ignoring their political turmoil, dependencies, resource deficiencies, etc. Of the rare thirteen proclaimed “successes”—countries that elevated to the high-income category – four are now spiraling into the low-income ghetto. Greece, Portugal, Ireland, and Spain dutifully followed the prior prescriptions of The World Bank and The International Monetary Fund and are now choking on the Kool-Aid. The authors of China 2030 see no irony in this.

The report comes at a particularly opportune time, a week before the PRC’s annual meeting of the National People’s Congress. Media reports signal a heightening of tension between political leaders who wish to press forward with privatization and market de-regulation and those who want to preserve or even expand the socialist elements still extant in the economy and social life. A recent article in The Wall Street Journal (Fate of Two Chiefs Gives Clues on China, 3-3/4-12) embodies this struggle in the views of two rising leaders, Bo Xilai and Wang Yang. Clearly, China 2030 is ammunition for the rightists typified by Wang Yang.

While the Western media anticipated a lambasting of the state-owned sector, a boost for privatization, reduced government intervention and more doors open to Western corporations (see New Push for Reform in China, WSJ, 2-23-12 for a lengthy discussion), the report complied in somewhat veiled, measured econ-speak. Its primary recommendation was to implement structural reforms to:

…strengthen the foundations for a market based economy by redefining the role of government, reforming and restructuring state enterprises and banks, developing the private sector, promoting competition, and deepening reforms in the land, labor, and financial markets. As an economy approaches the technology frontier and exhausts the potential for acquiring and applying technology from abroad, the role of the government and its relationship to markets and the private sector need to change fundamentally. While providing relatively fewer “tangible” public goods and services directly, the government will need to provide more intangible public goods and services like systems, rules, and policies, which increase production efficiency, promote competition, facilitate specialization, enhance the efficiency of resource allocation…

In case the point was not made emphatically enough, the report goes on:

In the enterprise sector, the focus will need to be further reforms of state enterprises (including measures to recalibrate the role of public resources, introduce modern corporate governance practices including separating ownership from management, and implement gradual ownership diversification where necessary), private sector development and fewer barriers to entry and exit, and increased competition in all sectors, including in strategic and pillar industries. In the financial sector, it would require commercializing the banking system, gradually allowing interest rates to be set by market forces, deepening the capital market, and developing the legal and supervisory infrastructure to ensure financial stability and build the credible foundations for the internationalization of China’s financial sector.

Why these “reforms” are necessary and how they will improve prospects is never fully explained, except through blatant appeals to the neo-liberal manifesto. Since the state-owned industries represent 45% of non-agricultural GDP and they almost tripled their contribution to gross industrial output from 1998 to 2009, something beyond dogma is wanted.

The West and its accomplices in the PRC have their eyes on key state monopolies in petroleum, chemicals, electricity, and telecommunications as well as the state-dominated banking system. Under the guise of stimulating competition, the report argues for “breaking up state monopolies or oligarchies in key industries,” the first steps towards privatization. Undoubtedly, foreign capitalist monopoly corporations are lusting after these assets.

As I argued several months ago (The Chinese Puzzle, ZZ’s Blog, 12-14-11), the future of the PRC remains a mystery, with the leadership walking the thin, risky line between emerging capitalism and the remaining socialist institutions. But, clearly, The World Bank and its Chinese allies are determined to influence that direction. And there should be no doubt which direction China 2030 is intended to push those leaders.

Zoltan Zigedy
zoltanzigedy@gmail.com

A Painful Anniversary

Exactly ten years ago this past April 7, I posted an article on Marxism-Leninism Today entitled Tabloid Political Economy: The Coming Depression (for those who missed it, it is reproduced below). It was my first and only attempt at economic prognostication, always a challenging and risky venture. The “Tabloid” in the article’s title was a tongue-in-cheek reference to the headline in the April, 2007 issue of a now defunct supermarket tabloid, Weekly World News. Featured between Virgin Mary Slaps Boy and Jews Invented Pizzoh was the shrill admonition: Surviving the Next Great Depression! It’s Coming This Summer!

It didn’t come in the summer of 2007.

In fact, the Dow Jones Industrial Average continued to climb seemingly with no limit, reaching a new peak in the fall of 2007. The pundits continued to extol the virtues of unbridled capitalism.

While the folks at WWN built their case on scant evidence (“Skyrocketing gas prices, escalating war, crashing housing prices, calamitous weather and freefalling stock prices…”), there were many other good reasons to take their prediction seriously, reasons which I offered in my article. Unfortunately, the print edition did not survive to see the collapse that rocked the foundations of the global capitalist economy the following year. Nonetheless, the zany supermarket tabloid proved to be far more prescient than the Nobel laureates, academics, and popular pundits who postured as learned economists yet never saw the collapse coming. 

Ten Years On

The global economy never fully recovered from the crash of 2008. Instead, it has stumbled along from one setback to another, with economic growth only marginally topping population growth. When both the enormous loss of wealth from the crash and the obscenely unequal distribution of the wealth recovered since the crash are configured, it is fair to say that the vast majority of the world’s population have seen little or no recovery. In fact, the casualties from the crash continue to pile up.

The US economy is neither healthy nor without serious symptoms. Despite the market euphoria that surprisingly accompanied the Trump election, the Atlanta Federal Reserve has lowered its growth expectations for the first quarter to .5% from an earlier forecast of 3%. Other projections have similarly dropped.

For three months in a row, since January, durable goods orders (excluding volatile transportation orders) have dropped. Industrial production fell .1% in January and was unchanged in February. Factory output dropped .4% in March from February and was only up .8% from a year earlier.

Bank loan growth has slowed.

Retail sales slowed by .3% in February and .2% in March. Inflation, as a measure of consumer demand, dropped .3% in March. Retail stores are closing in unprecedented numbers and retail employment growth has slowed.

Sales of new cars-- the principal driver of consumption growth since the crash-- has fallen for three straight months. Auto dealers are now offering buyer incentives that are greater than the labor costs of production (labor costs are less than $2500 per car, on average). Incentives account for 10.5% of average sticker price ($31, 435). Yet the average car sits for over 70 days on the lot.

Used car prices were down 8% in February, another sign of declining demand. And auto loan defaults are on the rise.

The US trade gap-- the difference between imports and exports-- reached a 5-year high in February.

In stark human terms, the US economy is failing working people. Between January 2016 and January 2017, average hourly earnings slipped .1% and the hours of the average workweek dropped .3%. This calculates to a .4% loss in real average earnings for those twelve months.

With reduced earnings, more and more workers are drawing on their retirement savings: 20% of 401(k)s have been reduced through self-loans.

Not surprisingly, household debt in 2016 grew the most in a decade. Unlike in the lead-up to the crash, mortgage debt is growing modestly, still below the explosive growth rate of that time. Instead, the growth in debt is in credit cards, auto loans, and student loans. Auto loan debt has reached $1.2 trillion, while student debt has risen to $1.3 trillion.

Student debt is particularly crippling. There are 42 million outstanding loans. The average student loan debt jumped from $26,300 in 2013 to $30,650 in 2016. Defaults went from 3.6 million in 2015 to 4.2 million in 2016.

And senior citizens are saddled with growing debt as well. In 1998, 30% of people 65 and older were in debt. In 2012, the percentage of seniors in debt reached 43.3. Growing debt comes in the wake of the collapse of net worth since 2005, when it topped $300,000 among those 55 to 64. By 2013, average net worth within that group dropped to $168,900 (even below the net worth of $175,300 reached in 1989).

Talking heads and media “experts” hail the job market. But they seldom delve deeply into its performance. Put simply, capitalists are hiring additional workers, rather than purchasing labor-saving equipment, because labor is cheap and flexible. The failure of organized labor to defend or advance labor’s relative position has served as a disincentive for capitalist investment in new technologies and equipment. They see no need to do so, when labor power can be used on demand, with no restrictions, and at low costs.

That trend is clearly reflected in the most recent period’s historically poor growth in productivity, among the lowest periods of productivity growth since the Second World War. Contrary to the widespread hawking of the idea that most workers are in danger of being replaced by robots, corporations are showing little interest in the introduction of new or old technologies. They are spending very little on equipment. While the technology may be there, capitalists have shown little need for it, given low labor costs.

As Shawn Sprague shows in a recent BLS paper, since 2009 the growth of aggregate hours-worked has grown more quickly than the growth of non-farm business output. This fact demonstrates that US capitalists feel little pressure to “save” labor while restoring profits during the so-called “recovery.” Rather than having existing workers work more hours, they are hiring more workers at low wages and contingently. Profits rebounded nicely because the working class had been slammed by the downturn, rendering the employment costs so low that there was no need to invest in labor-saving equipment.

This harsh truth has been ignored by economists and labor leaders alike because it shows the complete bankruptcy of class collaboration as an approach to social justice for workers.

US capitalists have enjoyed a decade of low labor costs, no pressure to invest retained earnings, and high profits (corporate after-tax profits dipped in 2015, but came back smartly in 2016). By securing labor power at low costs, they have foregone the purchase of labor-saving instruments and achieved modest growth by expanding employment. Today, capital is profoundly afraid that, with reduced unemployment, competition for labor power will drive up the costs of labor and erode profits. The Trump tax change package, favorable to corporations and the repatriation of profits, is one ruling class response to this anticipated problem.

Despite the return of an overheated housing market with escalating prices (lagging new construction is fueling demand), no systemic accumulation crisis comparable to that of 2007-2008 appears on the immediate horizon. Instead, the post-collapse era of stagnation and deteriorating living standards continues for the working class. As the shrinking income and mounting debt of working people erodes aggregate consumption, the possibility of a business cycle contraction grows more and more likely. The long, tepid expansion transferred nearly all its gains to the wealthy few, leaving little but debt or asset cannibalization for the majority. With declining retail sales, especially auto sales, and the growing weight of personal debt, the likelihood of further consumption growth is in doubt.

A business cycle contraction will only further weaken the position of working people, setting them up for a further dose of sacrifice and pain.

Isn’t it time to get off the capitalist roller coaster?

Zoltan Zigedy

zoltanzigedy@gmail.com

April 7, 2007 MLToday (unedited)

Tabloid Political Economy: The Coming Depression

Always alert to emerging trends, I spotted the latest issue of the Weekly World News at the checkout counter of my supermarket. The headline announced the coming depression scheduled for this summer. Sandwiched between a sighting of Batboy in the New York Subway and alien abductions was the dire warning to prepare for a severe decline in the world capitalist economy. Now, Left sects sport this prediction more frequently than Elvis sightings or the announcement of Armageddon. Nonetheless, I paused for a moment. Who, I asked myself, has their fingers on the pulse of the economy more than the tabloids? Should we trust the tabloids less than the battery of economists periodically assembled by The Wall Street Journal? Would Ben Bernanke of the Federal Reserve tell us a depression was coming if he knew? Would Bush? Or Hillary?

The pieces of the economic puzzle began to come together for me. The housing bubble - the steady march of rising residential values that fueled enormous borrowing against assets - had finally began deflating, with no signs of let-up. The US middle class - saddled with record consumer debt and living from pay check to pay check – mortgaged their homes to maintain their “middle” status. Deathly afraid of falling below the media fueled standards of respectable success, they drew from their most precious assets to stay in the game.

At the same time, predators seized the moment afforded by the heralded market-place. Sub-prime lenders fed on the false prosperity by drawing the poor and the status-hungry to absurd loans, front loaded with instant gratification and back loaded with long-term pain. Stoking the housing bubble, budding entrepreneurs borrowed irresponsibly to purchase residential properties fully expecting values to rise and affording them the opportunity to “flip” the properties for an easy profit.

Like all hustles, the lure of easy money drew the most vulnerable, the most gullible, and the greediest into the game just as the bubble was bursting. Millions are facing stifling debt, foreclosures, and destruction of much of the value of their most valuable asset, their home. Economists estimate that 1,300,000 homes will foreclose this year, throwing additional housing stock into a market already suffering low demand. With an expected 50% decline in sub-prime and other easy mortgage terms in 2007, fewer people will have even a remote chance to buy from the swelling housing glut.

Of course those wiser heads who diligently worked two jobs, overtime, and  ignored the temptation of easy credit also lost big time.  The value of all housing is expected to drop 5% this year - the steepest drop since the Great Depression. In other words, the most precious asset of the working class will decline to 95% of last year’s value through the sheer irrationality of the market economy.

Nor is this a short term setback. A late March report by Emmanuel Saez and Thomas Piketty shows a level of inequality in 2005 unmatched since before the Great Depression (see The New York Times 3-29-07). Based upon 2005 IRS data, the authors concluded that the top 10% of the US population now commands 48.5% of all annual income, leaving 51.5% for the other 90%. Similar inequalities exist within the top 10%: The top 1% receives 21.8% of all income (nearly half of the income share of the top 10%). And so it goes. The top 1/10 of 1% (roughly 30,000 individuals) shares nearly as much income as the bottom 150,000,000.

In short, the US has become a society rivaling and exceeding pre-industrial England in class division and inequality. One of the earliest reasonably accurate surveys of class and income division – the famous 1688 estimates of English incomes by Gregory King – show the top 5% of English families garnering 28% of incomes (the top 1% of US individuals receive 21.8% of all incomes!). So the barons, lords, merchants, and traders of Olde England were less privileged than our own capitalist class. And we fought a revolution to escape the tyranny of the English ruling class only to replace it with our own home – grown privileged class!

No doubt the insightful team of political economists at the Weekly World News are aware that the post-2000 economic “recovery” was fueled by consumer spending, a source of energy that would appear to be nearly tapped out with personal debt at an all time high and personal wealth - the home - declining in value.

While bourgeois economist whistle past the graveyard, the coveted market – the magical mechanism that guides capitalist economic growth—seems to reflect deep – seated fears and insecurities. Despite being awash in capital, financial power searches for investment opportunities to no avail. Economic theorists have been puzzled by the low returns available, even for high-risk or long-term investment. Under normal circumstances, risk and patience earn a premium in investment, but not today. Instead, the enormous pool of wealth concentrated in fewer hands can only lure borrowers at modest rates. There is simply too much accumulated wealth pursuing too few investment opportunities.

Other alarm bells sound: Productivity growth, a centerpiece of US economic health, is now slipping below historic averages. Much of the economic success of the Clinton era is attributed to the restoration and maintenance of high productivity. During the last half - decade of his term productivity hovered at the same level as the post - World War II period. Most economists attribute this largely to the integration of new technologies into US industry. After the 2000 decline, productivity rose again thanks to the Bush administration's support for draconian management practices that squeezed every extra ounce of labor from the retreating working class. Outsourcing, downsizing and bankruptcy maneuvers forced fewer workers to work harder for less. Thus, the first hike in productivity came from technological change and the second from sweated labor.

But now productivity is dropping. Apparently, the technology impact has played out and the squeeze on labor is bearing limited returns: productivity growth dropped to a low of 1.4% in the last quarter of 2006.   

The enormous national debt adds to the list of ominous signs of decline. The obscene costs of the Iraqi occupation, the hysterical “war on terror”, and tax relief for the rich have left the US with unprecedented debt. Foreign trading partners have largely financed this debt by using their enormous surplus of dollars to buy US treasury notes. Yet there are increasing signs that as the dollar declines in value, they may be looking at other options.

The recent US tariff against Chinese high – gloss paper signals increasing tension between the US and its leading trading partners. There is a strong feeling internationally that the US is anxious to pass its economic burdens onto others. In the past, US economic might was sufficient to bully other countries to accept this sacrifice. But today, there is a growing resistance to US unilateralism—another sign of declining economic power.

Since both political parties maintain a general consensus on economic doctrine, it is unlikely that any new solutions will emerge to confront these serious cracks in the US economy. This ideological uniformity limits the policy decisions of the two parties to faith in the neo-liberal market and free, unfettered trade. With no answer to growing inequality, wasteful imperial aggression, and market anarchism, the prospects for avoiding crisis appear bleak. Let’s see if the Weekly World News gets it right.

Zoltan Zigedy