In part one, I noted the strange anomaly that an ever more munificent corporate tax regime has resulted more and more frugal rates of investment by the private sector. Waving farewell to the relative high points of the 1960s and ‘70s, corporations have chosen to keep hold of a larger and larger proportion of their profits. Governments around the world have played the role of useful idiot, plying multinationals with multiple tax cuts, while pretending not to notice that the money given away almost never goes into production.
Especially in developed countries, says the United Nations Conference on Trade and Development (UNCTAD), corporations are now mainly using profits to pay out dividends or buy back their own shares, rather than investing in new plants or equipment. Or they are simply banking the profits, often in zero percent tax havens. It is estimated that corporations are sitting on $700 trillion worldwide.
This graph, from Chapter 5 of UNCTAD’s 2016 Trade & Development Report, illustrates just how extreme the fall in investment in the major economies has been over the last three decades:
The crucial concept here is the decline in ‘fixed capital formation’ – investment in tangible things like equipment, factories or new products. So-called ‘investment’ in financial instruments – just betting on a rise in the value of these assets – has grown exponentially.
In a remotely rational world, this outcome might have prompted a bit of a rethink on the part of governments. But, in keeping with the era of alternative facts, it has, in fact, inspired the realisation that these efforts to lighten the burden on corporate-land were, in retrospect, paltry and what is called for is a far more muscular approach to taxing cutting. The ‘love fest’ embodied by Donald Trump and Theresa May is leading the charge for a more reasonable levy on the world’s richest people. Where this will end is anyone’s guess. Probably in us sub-humans paying for the privilege of being exploited, except, of course, we’re doing that already.
What is eminently predictable is that if Britain and America set the pace by radically cutting rates of corporate taxation, other countries will feel obliged to follow suit for fear of appearing unattractive to roaming corporations. Ireland, with its corporate tax rate of 12.5%, may well be a harbinger of everybody’s future. Though Ireland will doubtless want to revise that rate downwards in an effort to retain its competitive advantage.
But for those of us keen on keeping our reality principle intact, there is another kind of realisation. That the mantra of austerity, of no money left, of ‘expansionary fiscal contraction’, is nothing more than an excuse for unnecessary suffering. There is plenty of money left, it’s just in the wrong hands, and, most importantly, is not being used. The Tax Justice Network estimates that there is up to $32 trillion lying idle in tax havens, equivalent to 10 to 15% of global wealth. US corporations alone – led by the likes of Google, Apple and Microsoft – have $2.1 trillion stockpiled overseas.
Interestingly, there is a law in America that penalises firms found to be hoarding cash. They have to pay 20% above the normal corporate tax rate. But since 1986, multinational companies have been exempt from this restriction. They can avoid all taxes on profit paid to affiliates, known as ‘passive foreign investment companies’, with no conditions on its (lack of) use. The result has been multi-trillion dollar cash mountain, untouched by the American government and not used for any productive investment.
Donald Trump is planning a ‘repatriation holiday’ for these multinationals – a discount tax rate of 10% if they bring it all back home. The narrative – as ever with Trump – is that this will create jobs. But the last time it was tried – in 2004 – it actually eliminated nearly 21,000 jobs, despite its proponents claiming it would create 660,000. The money was repatriated but was mainly used for mergers and acquisitions, the perfect rationale for streamlining workforces.
The alternative to Trump’s plan is obvious. Reinstate the pre-1986 penalty and properly tax the trillions of dollars siphoned overseas and doing precisely nothing. Apple alone has over $200 billion. The money could be used for … just to pluck a few ideas out of the air, creating a single payer health care system, rebuilding infrastructure or instituting a basic income.
Other countries could follow the American lead, triggering a healthy race to the top, rather than the bottom, which is whether global tax competition has led us over the past 40 years. The adoption of such a policy would also have the attractive side effect of stealing the nationalist right’s thunder. Trump is, aside from the misogyny and immigration bans, relentlessly focusing on creating jobs and cajoling corporations into not moving to China. Apart from pointing out the glaring flaws in his plans (see above), the answer cannot be a centrist blank.
The Investment Dilemma
But this policy is, at best, half a solution – because it does not address why private sector investment is so feeble in the first place. If corporations could smell profit on the horizon, they wouldn’t need any encouragement to invest. They wouldn’t need the meaningless inducements of tax cuts or a regulatory cull.
We are, as some economists have noted, in the middle of depression. Global GDP rates are a pale shadow of what they were pre-2008, interest rates remain at rock bottom, companies shun investment and hoard money and global trade is running at less than a quarter of its pre-crisis rate. None of the 20 largest shipping container companies in the world are forecasting a profit.
An economy in such a parlous state clearly has effects. One of the most apparent is that businesses become obsessed with cost-cutting and reducing their overheads. They look to shore up their profit margins, rather than expand production. Part-time, zero hours and other flexible contracts have mushroomed in this environment. Good, stable jobs and adequate pensions rapidly become a memory of the capitalist golden age. Economic insecurity consciously becomes the order of the day.
There are also dire geo-political consequences. The word antisemitism dates back to 1879, not coincidentally in the midst of the long depression of the late 19th century. The Great Depression of the 1930s ushered in Nazism and consolidated totalitarian rule in the Soviet Union. In our time, Trump is threatening trade war with China, which could easily escalate into actual war. Humanity, it was nice knowing you.
So to say that ending the capitalist depression is important is the understatement of the 21st century. But, ignoring the legions of apologists for the system, there is no consensus as to the cause and therefore the way out.
The 21st Century Depression
The most moderate of the critics – in the sense that they often (but not universally) believe that capitalism can be successfully reformed in the public interest – are the Left Keynesians. This is where you’ll find left-wing politicians like Jeremy Corbyn and Bernie Sanders.
Left Keynesians hone in on capitalism’s effective demand problem. Through perpetual competition, businesses are compelled to clamp down on costs, including wages – a process eased by the vanquishing of organised labour across the Western world in the 1980s and ‘90s. But, of course, workers, in their other incarnation, are also consumers. So this is akin to cutting off your nose to spite your face. In economic terms, the gap between supply and demand grows dangerously wide. According to a report last summer, the real incomes of around 2/3rds of households in 25 advanced economies were flat or fell between 2005 and 2014.
“The roof might cave in,” American thinker David Schweickart wrote presciently in 2002. “A deep and enduring global depression is a real possibility.”
The obverse is also true. Well paying, stable jobs and pensions that allow consumption not just subsistence living to happen, ensure the equilibrium of the system.
But the difficulty in accepting waning demand as the ultimate cause of global depression is that consumerism – the motor of the economy in industrialised countries for many decades – has not really abated. Still, nine years after the 2008 crash and a ‘lost decade’ of wage (non) growth, consumer spending is the dominant force behind UK economic growth, responsible for 70% of economic activity. The endurance of consumer spending has been called ‘privatised Keynesianism’.
What is true is that this consumerism – founded on personal borrowing – is much more precarious than in the past. A rise in interest rates, as happened in the US in 2007, or a blip in unemployment could cause the roof to cave in once again. But ebbing demand is not, in itself, the problem. You could safely argue that demand would be stronger had wage growth kept pace with previous decades. But in no sense has consumer demand collapsed.
The other solution often proposed by Left Keynesians is that public investment should substitute for moribund private investment. In the UK, Corbyn is proposing £500 billion government spending over 10 years through a National Investment Bank. Former Greek finance minister Yanis Varoufakis wants a revitalised European Investment Bank to spearhead economic recovery and an end to austerity.
The argument is that when, in Keynes’ words, the ‘animal spirits’ of the private sector are depressed, government should fill the gap. In any case, as interest rates are so low, government borrowing is begging to happen and, most importantly, will ultimately pay for itself through higher economic growth and increased tax receipts.
The flaw is that no convincing reason is given as to why increased public investment will stimulate a revival of private investment. Japan, the world’s third largest economy, has stubbornly resisted the siren song of austerity and invested hugely in infrastructure – planning, in 2013, to outlay over $2 trillion over ten years, with the explicit aim of spurring growth. Yet Japan has not emerged from nearly three decades of anaemic economic performance and its economy actually shrank in the last quarter of 2015.
Interestingly, Japan illustrates how a country can combine huge private and public debt and masses of unused corporate profits. “Japan’s corporate savings glut is unique in scale,” says Martin Wolf of the FT. In common with their counterparts in other countries, Japanese corporations are making high profits and not investing. The country also has the highest debt levels in the world.
So, in order to understand why private investment refuses to budge in response to financial inducement, government investment or Trump-style cajoling, I believe you have to look elsewhere – into the realms of anti-capitalist economics:
The Marxist Dissidents
Karl Marx called the tendency of the rate of profit to fall “the most fundamental law of capitalism’. According to this theory, all profit derives from human labour but as mechanization inevitably spreads through the economy, replacing workers with machines, the overall rate of profit declines. Various counter-tendencies – such as paying workers more, finding new markets or using dirt cheap labour – continually operate and can for a long time eclipse the tendency of profit to fall. But, in the end, this law will reassert itself.
The relevance for my argument is that the decline in the rate of profit first makes itself felt through a slump in investment. Expectation of profit is the motivation for all private sector investment, and if this expectation is dampened or vanishes, investment won’t happen, or will happen on a much smaller scale. A decline in investment is a sign that a recession or depression is impending.
There is disagreement among Marxists of this kind as to when the decline in the rate of profit started to kick in. Some, such as Andrew Kliman, trace it back to the first recession of the post-war period in 1973. Others, such as Michael Roberts, claim it was postponed until 1997. But all agree it is a fact of life now.
One way of temporarily offsetting the decline in the rate of profit is financial speculation, or a rise in ‘fictitious capital’, as Marx called it. “If the capitalists cannot make enough profit producing commodities, they will try making money betting on the stock exchange or buying various other forms of financial instruments,” says Roberts.
It is a conviction of Marxists of this ilk that capitalism can only be restored to health – rates of investment will rise to support a growing economy – if there is a mass destruction of ‘capital value’. This means a spiral of bankruptcies and a huge rise in unemployment. The crash of 2008 didn’t involve such destruction; it was arrested and bailed-out. Andrew Kliman thinks we are thus doomed to experience a state of ‘not quite recession’. Another Marxian economist – Roberts – says we are in the midst of an ‘economic winter’, awaiting another crash which will finish the job of 2008.
Under this variant of Marxism (most Marxists reside in the Left Keynesian camp), there is no final apocalypse, no final and irrevocable crisis. The decline of profit is cyclical – if is allowed to play out, levels of profit are restored and the whole process (or ‘crap’ in Marx’s description) can begin afresh. However, given the geo-political events that would be triggered by another crash of capitalism, and one much deeper than 2008, one can assume that the apocalypse will be general, not economic, involving world war and mass physical, human destruction. Kliman thinks that the warlordism afflicting parts of Africa and Asia is likely to become the norm if capitalism persists. The only way to avoid such a scenario is to transcend a profit-driven economy.
However, there are other post-capitalist thinkers who don’t regard capitalism’s travails as cyclical. By contrast, they think its troubles stem from having reached the limits of its technological capacity. And having over-stayed its welcome, the defects of capitalism are now grossly outweighing its benefits.
The Capital Glut
Capitalism epitomises a strange combination of abundance and scarcity. Corporations hoard money, landowners and developers hoard land. But there is also, says economist Harry Shutt, an over-abundance of capital at the summit of society, perpetually seeking financial returns.
This ‘wall of money’ does not merely comprise the profits of corporations. It is also made up of pension funds (a vast number of occupational pensions have been invested on the stock market since the 1980s), insurance companies and other ‘investment’ firms seeking returns for their clients.
And it is in the nature of capital-ism, money used as capital, that the profit made is immediately recycled as new capital seeking fresh returns. “The inevitable consequence of maintaining a high return on the capital stock as a whole,” writes Shutt, “is that yet more investible funds will be generated for which outlets must be found.”
Others, such as the geographer David Harvey, have noted the same expansive logic. “To keep to a satisfactory growth rate right now would mean finding profitable opportunities for an extra $2 trillion compared to the ‘mere’ $6 billion that was needed in 1970,” he writes in Seventeen Contradictions and the End of Capitalism. “By the time 2030 rolls around, when estimates suggest the global economy should be worth more than $96 trillion, profitable investment opportunities of close to $3 trillion will be needed.”
But, to my knowledge, Shutt is unique in adding another dimension. The pressure to find new investment opportunities to satisfy the perpetually expanding horde of capital has been intensified by a steady decline, since the 1970s, in outlets for fixed investment – investment in physical things such as plants or equipment. Technological change means that capital-intensive industries are becoming rarer (as are labour-intensive factories but that is another story).
Last year’s UNCTAD report hinted at this process (see graph above). In the leading developed economies (France, the USA, UK, Japan and Germany), the report reveals, fixed capital investment rates fell from over 20% GDP in 1990 to ‘historically low levels’ of less than 16 per cent in 2015.
In 2016, Bank of England Governor, Mark Carney, lamented ‘more savings chasing fewer investment opportunities’ – an acknowledgement that there is now ‘too much capital for capitalism to function’.
This pincer movement of declining fixed investment opportunities and an ever-growing mass of money clamouring to be used, means an incessant pressure for financial deregulation and privatisation. This money becomes, in Marx’s description, ‘fictitious capital’. The original rationale for privatisation – loss making state industries requiring the bracing discipline of private investment – has been quietly abandoned. Profit-making state enterprises – particularly profit-making state enterprises – are now considered the most succulent fruit, as a means of supplying safe outlets for private investment. In the language of international government bodies like the IMF, the OECD and the Bank of International Settlements, deregulation and privatisation are urgent ‘structural reforms.’
Privatised utilities are one essential source for private investment. Prices and investment strategies, such as London’s ‘Super Sewer’- are now set at a level guaranteeing a high return for private investors. Over-investment is mandatory and set, in Shutt’s words, “on the basis of a hypothetical market rate which effectively guarantees a stream of profit on whatever investment is allowed”.
“For decades,” says one Guardian economics commentator, “they [savers] have bullied governments to release assets for sale that can then be leased back at high returns. In the UK, this is why we have privatised utilities and a swath of other safe, previously state-owned, assets in private hands.”
Opening up public, taxpayer funded assets, such as the NHS, to private sector investment – whether at home or from countries like the US, is now an integral component of government policy. This wall of capital at the summit of society is the main reason why neoliberalism did not die in 2008, despite disparate predictions of its imminent demise.
So under this understanding of the present state of capitalism, its travails are not cyclical. Mass destruction of capital value will naturally abate the pressure on public assets for a while, but the intractable problems of technological advancement, which does not demand huge capital investment as it did in the past, will reassert themselves. Capitalism, as a system, has outlived its usefulness. Its deformities are now front and centre.