Government spending, profits & capitalism

Simon Clarke, Chief Secretary to the Treasury, says there has been “something of a philosophical shift” in Tory attitudes to public spending. Which poses the question: why?

I’m not sure it is the result of high-falutin and rigorous debate. Instead, I’d suggest something else. To see it, let’s start from the perspective that philosophy follows interests and that the Tory party is emergently intelligent: whilst any individual seems cognitively limited, the party itself has a formidable genius.

If these premises are correct, we have a ready explanation for this “philosophical shift”. It’s that the health of capitalism, for now at least, requires big government. This is true in several ways. I’ll focus on just one – that big government spending is necessary to support profits.

To see my point, recall basic national accounts identities. These tell us that GDP is the sum of consumer spending (C), government spending (G), investment (I) and net exports (NX). It’s also the sum of incomes: profits (P), wages (W), other incomes such as those of the self-employed (O), and taxes on production (T). Rearranging these gives us an expression for profits:

P = (C – W) + (I – O) + (G – T) + NX

This just tells us about the circular flow of income. It says that higher wages don’t necessarily cut profits if workers spend those wages. And it tells us that capital spending is good for aggregate profits, as one firm’s outlays are another’s orders. And so on.

This Is an identity, but it helps organize our thinking.

The lockdown of shops and pubs last year forced us to spend less and save more; the household savings rate, which had for years wobbled between 5 and 10% shot above 20%. And even now it’s above 10%. C – W has therefore nosedived (as indeed has investment as projects have been put on hold). Our identity tells us that, on its own, this would have caused a massive drop in corporate profits.

But we saw no such fall, because the government acted. Increased public spending supported the economy and hence profits. We credit such spending with protecting jobs. Which it did: in the absence of such spending, firms would have slashed employment in an effort to protect profits. The point is that capitalism required higher government spending. The “philosophical shift” to big government was therefore necessary to sustain profits.

My chart summarizes this, by showing the counterparts in my equation. You can see that in 2020 the C – W element collapsed and G – T rose, the net effect of which was to actually slightly raise the share of profits in GDP.

And here’s the problem: will we return to the pre-pandemic world in which C – W supported profits?

The OBR forecasts (shown in my chart) suggest that we will to a large extent. If foresees the savings ratio falling below 5% by 2024. That would mean a rise in C – W which would tend to support profits even if G – T falls.

This, however, is far from certain. The fact that retail sales have fallen since their post-lockdown bounce in April suggests we’re a long way from our old spendthrift ways. Some of us have fallen into more frugal habits. Others might need to rebuild the savings they ran down last year as their hours and jobs were cut.

Hence the need to avoid large cuts in public spending. Imposing these at a time when the prospects for consumer spending are still uncertain (and capital spending too) would jeopardize profits. Instinctively – emergently – the Tories grasp this. Hence their “philosophical shift.”

But note something else about my chart. It shows that the government sector has for years been a big counterpart to profits, even more so during recessions. In fact, apart from a brief spell in the late 80s, it has far outweighed investment counterpart. This was not always the case. In fact, in the 60s the investment counterpart was bigger.

Now, I stress I’m only talking identities here. Perhaps if the government were to shrink significantly, capital spending would surge and so we’d see sustained profits and a small state. This did not, however, occur during the austerity of the 2010s, perhaps because of what Ben Bernanke way back in 2005 called the “dearth of domestic investment opportunities.” The Tories can be forgiven for not wanting to take this risk. There’s a good reason why there are so few libertarians among business lobbyists.

There is, therefore, perhaps a simple and powerful reason (or certainly justification) for the Tories’ conversion to bigger government: it is what capitalism requires.

Comments

[Alex]

the profit share line is remarkably stable, isn't it? from 2000 to 2020, 21% +/1 1%.

[rsm]

Why ignore 90% of transactions? Isn't daily repo a $10 trillion market? Why completely ignore that?

[Blissex]

«a simple and powerful reason (or certainly justification) for the Tories’ conversion to bigger government: it is what capitalism requires»

As usual there are two issues with these facile generalizations:

* "Capitalism" is a vague term, and the Conservatives are the party of incumbency, not of "capitalism", and there are different and rival types of incumbency, mostly in current times incumbency in business and in property.

* Regardless, the Conservatives, like the Republican in the USA, have never been the party of "smaller government", they have been the party of bigger government for their interests, and of smaller government for other people's interests. Consider:

">http://www.coppolacomment.com/2018/01/the-carillion-whitewash.html>
“RBS was deeply insolvent. Rescuing it cost the U.K. Government £45bn, and RBS has lost a further £58bn since. Nearly ten years after the crisis, it is still in majority public ownership.»

That over £100 billion over 10 years of big government spending to refill just one bonus pool. Plus the hundreds of billions spent or lent or given away in propping up other City scroungers, Help-to-Buy, Right-to-Buy, Crossrail, and other property boosting schemes from both the Treasury and the BoE.

The BoE balance sheet has grown from 1 trillion to 4 trillions in a few years:

http://mikenormaneconomics.blogspot.com/2017/05/boe-balance-sheet.html

Is that "small government"?

[Eddie O'Sullivan]

There's a danger you are overinterpreting what is just another fiscal improvisation to add to many since the GFC of 2008/09 which exposed the failure of the intellectual foundations of market-based policies pursued by UK and other governments since c1979. Every budget since 2008 has been a bit of a joke: promises to eliminate deficits and reduce debt/GDP ratios have consistently been broken. Fiscal rules have been changed frequently to allow vote-seeking chancellors to get votes. This is evidence of a profound intellectual crisis among the managerial elite (the failing IMF has been silent about the abuse of truth by the Treasury). After 1945, the managerial class was complacently confident they'd found a way permanently to avoid economic busts (an illusion shattered by the 1973/74 oil price rises etc). After 1979, there was confidence that reduced and more targeted rules-based economic management would work (that went down with the Asian, dotcom, financial and Covid crises). The managerial governing class facing yet another market-theory-busting shock are obliged to respond but are dressing it up as a coherent action plan, which it's not. Meanwhile, in the real world, private capital is increasingly going into intangible investments, some (like Uber etc) don't even produce an operational profit. The incredible assertion that profit-seeking investors will go green without massive state subsidy (which is nevertheless propounded by vote-seeking green politicians) is an extension of the delusion that any of this is within the grasp of technocratic government ministers and private corporations. The key indicator of what's going on is the behaviour of dynamic private sector investors: private equity/hedge funds which are unregulated and heavy financiers of governing parties. It's striking that Bezos is working on space travel: a projection of what may be an internal view that life on earth is degenerating and it's time to get out (but let's loot what we can while we're here). Peter Thiel is another open exponent of the idea that the game's up.

[rsm]

What if there is no cost to printing money faster than prices rise, and distributing it evenly via a basic income?

Perhaps the only "cost" is that mainstream economists lose attention?

Can public hedge funds mobilize enough private green capital to mount a "wall street bets" transparent attempt to corner the futures markets of lumber, meat, oil, etc. and force demand destruction by raising prices, thus using markets to express green views?

Can we sell climate change assets (such as the ecosystem services of not logging) to Jeff Bezos, who can sell them to fellow billionaires like Gates who also run multi-billion dollar climate funds? Will the Fed eventually support this market, so Bezos will just be frontrunning?

In sum, are you all selling short the potential of markets to be used for good? Rather than rely on clumsy, slow state action?

[ltr]

The US experience since 2000:

https://fred.stlouisfed.org/graph/?g=mQUa

January 30, 2018

Labor Share of Nonfarm Business Income and Real After-Tax Corporate Profits, 2000-2021

(Indexed to 2000)

Decline in labor share of income:

91.2 - 100 = - 8.8%

Increase in real profits:

273.3 - 100 = 173.3%

[ltr]

Boris Johnson is doing just what is economically necessary for Conservatives to continue to govern. As for Labour, now that Jeremy Corbyn has been falsely ruined, no credible economic alternative is being presented. British business interests will be bolstered and there will be enough spill-over to ordinary families to set aside New Labour indefinitely.

[rsm]

Who wants to bet inflation will be used as a power play by bond shorts to bully the Fed into tightening into a recession?

How can a retail investor like me hedge inflation by betting on rising rates? Short TLT? Buy bond futures? Does our blogger know, but can't tell us because if everyone could do it his profits would no longer be special?

So, instead of portfolios that hedge inflation, we get long-winded stories involving statistics treated as data ex machina, that don't even try to maintain a shred of statistical credibility, because they don't include the standard error?

[Blissex]

«There's a danger you are overinterpreting what is just another fiscal improvisation to add to many since the GFC of 2008/09 which exposed the failure of the intellectual foundations of market-based policies pursued by UK and other governments since c1979.»

Taking a face value the propaganda as in "the intellectual foundations of market-based policies" seems to me another example of wykehamism, and at least here our blogger writes more realistically "phisolophical shift" between air quotes and also "conversion to bigger government: it is what capitalism requires" and in the previous post "free markets are a cover, behind which lie exploitation and oppression".

«The managerial governing class facing yet another market-theory-busting shock»

This seems to me a vast misrepresentation of the supposed role of markets: the fancy theory is that markets *respond* to shocks, not that they *prevent* them, and that they respond by reaching a new equilibrium, which is still expected to be a full-employment one, but with a different mix of types of employment and capital.

«The incredible assertion that profit-seeking investors will go green without massive state subsidy»

I am increasingly of the opinion that "lower carbon footprint" is an euphemism for "much reduced living standards" in order to keep the cost of meat and fossil fuels low.

The fiscally contractionary policies of the past 40 years post-1970s oil shock could be regarded as a way to reduce oil imports by pushing down the consumption by "hoi polloi" of oil-intensive goods, That was the purpose of the original, all-classes, "austerity": the neoliberal variant, which is fiscal austerity for "hoi polloi" and wild monetary loosening for the benefit of asset owners, could be seen as a more targeted version.

Note: sometimes I wish there were more people who used "austerity" properly and give its original context, instead of vigorous and misleading handwaving and misuses.

[Blissex]

«It's striking that Bezos is working on space travel: a projection of what may be an internal view that life on earth is degenerating and it's time to get out (but let's loot what we can while we're here). Peter Thiel is another open exponent of the idea that the game's up.»

Both are huge nerds, and Bezos has always been known as space obsessed, Amazon was his way to make the money to get into space. Him and others want definitely a "plan B" for humanity (themselves in the fore of course), but the big deals these people tend to be afraid of is not something slow like "climate change", but a sudden catastrophe like an asteroid strike or a major volcanic eruption or a plague or a nuclear war. Young people today tend to forget that in the 1950s-1970s in many countries there were occasional "rush to the shelters" exercises.

The billionaires are however planning planning for catastrophe *on Earth*: buying vast tracts of Patagonia, etc.

A particularly worrying article in which some very important and well informed megarich give for granted some catastrophe will happen in their lifetime:

https://medium.com/s/futurehuman/survival-of-the-richest-9ef6cddd0cc1
«I just sat there at a plain round table as my audience was brought to me: five super-wealthy guys  —  yes, all men  —  from the upper echelon of the hedge fund world. After a bit of small talk, I realized they had no interest in the information I had prepared about the future of technology. They had come with questions of their own. [...] Finally, the CEO of a brokerage house explained that he had nearly completed building his own underground bunker system and asked, “How do I maintain authority over my security force after the event?”
The Event. That was their euphemism for the environmental collapse, social unrest, nuclear explosion, unstoppable virus, or Mr. Robot hack that takes everything down.
This single question occupied us for the rest of the hour. They knew armed guards would be required to protect their compounds from the angry mobs. But how would they pay the guards once money was worthless? What would stop the guards from choosing their own leader? The billionaires considered using special combination locks on the food supply that only they knew. Or making guards wear disciplinary collars of some kind in return for their survival. Or maybe building robots to serve as guards and workers — if that technology could be developed in time.»

[Blissex]

«or a major volcanic eruption»

BTW one of them is "overdue", and it would surely end all our worries about "global warming" (and much else besides...) for quite a while.

There are some who think that previous high civilization eras ended at Toba. Given so much time has passed we'll never probably know, despite the iranian "vara" story or the indian "vimana" legend.

[Eddie O'Sullivan]

Blissex. The failure of market-based policies is short-hand for a logical critique of neoclassical/microeconomic theory which I was taught at the LSE and in postgraduate study which informed my work as an economist and analyst of global economic trends for stock market investors. This can be found in my book published in 2008 which is uploaded here; http://edmundosullivan.com/economics2030/about/.
The theory that the free interplay of supply and demand could (in principle) deliver a stable equilibrium which was both technically and socially efficient is both logically flawed and has no empirical support. It's a piece of brilliant abstract theorising that, nevertheless, was essential for government policies and corporate action in the 20th century. This theory completely founders when applied consistently to economies where the creation of services rather than the production of tangible goods is dominant, as it is in advanced economies. The theory underpinned all advanced models of the UK and US economies which reached a highly-sophisticated level in the shape of Dynamic Stochastic General Equilibrium conceptions used by the Bank of England, IMF etc before the 2008 crash. The fact that these models failed to predict what happened wasn't because they weren't brilliant. It was because the theory that underpinned them, as mentioned, is defective.
Economists nevertheless are obliged to continue to assert they know what's happening and will happen. These are improvisations; and Sunak's doing them (he clearly doesn't believe what he's saying).
The reference to Bezos is also shorthand for the behaviour of investors that have (despite Covid) done incredibly well. They aren't investing in tangible capital that can be used to produce goods or create services. They're investing in intangible capital (an accounting fiction) and dabbling like occultists with fantastic notions of life beyond planet earth (or on a giant, privately-owned floating island, like Thiel).
This suggests (as you yourself have witnessed) that there's a collapse of a positive vision of the future for humanity among those with the greatest financial capacity to make a difference.

[ltr]

October 30, 2021

Coronavirus

United Kingdom

Cases ( 9,019,962)
Deaths ( 140,558)

Deaths per million ( 2,056)

China

Cases ( 97,080)
Deaths ( 4,636)

Deaths per million ( 3)

[Blissex]

«The theory that the free interplay of supply and demand could (in principle) deliver a stable equilibrium which was both technically and socially efficient is both logically flawed and has no empirical support»

Indeed from my point of view it was just make-believe propaganda to realize what Samuelson called J.B. Clark's "three parables".

https://www.aeaweb.org/articles?id=10.1257/089533003321165010
https://masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf

https://www.jstor.org/stable/1884976
“Review: Clark's Distribution of Wealth, The Quarterly Journal of Economics
Vol. 15, No. 4 (Aug., 1901), pp. 578-602 (25 pages)”

«It's a piece of brilliant abstract theorising»

I would would not call it "brilliant" or "theorising": to me (reading Steve Keen and Joan Robinson etc.) it seems riddled with gross mathematical and logical errors, that are skipped over in most presentation with a lot of handwaving.

Actual policy I think has not depended for the past 40 years on this, or the similar imagination of the "market clearing price", or on any DSGE models, but on satisfying various finance and property interests.

[ltr]

The objective for Boris Johnson is that the economy recover fast and grow fast enough to satisfy business and household interests. Policy is and will be flexible. The heck with theory:

https://fred.stlouisfed.org/graph/?g=HnKV

August 4, 2014

Real per capita Gross Domestic Product for United States, United Kingdom, Germany and France, 2007-2020

(Percent change)

https://fred.stlouisfed.org/graph/?g=HnKY

August 4, 2014

Real per capita Gross Domestic Product for United States, United Kingdom, Germany and France, 2007-2020

(Indexed to 2007)

[ltr]

What Johnson needs along with low interest rates and more domestic spending, is more international openness. A question then should be how to open further to China, but that does not seem to be understood.

What am I missing here?

[Blissex]

«A question then should be how to open further to China»

As to english imports from China, I am sure that the english ruling classes would love to import more from China, and export more jobs there, given how much lower chinese labour costs are, but they also have to please the american government, so it will be Vietnam or other third world countries rather than China.

As to english exports to China, the big competitive advantage of the english economy is "sovereignty", that is selling, to foreign rich people, the service of secrecy against their governments, but I doubt that the chinese government wants to facilitate the offshoring of lots of "grey" and "black" capital from China to secret accounts in London.

[Blissex]

«A question then should be how to open further to China»

There is an important point here as to that, about the general topic of the ridiculous theory of "comparative" advantage:

* The theory of comparative advantage relies on absurd premises, one of which is full employment, and that is a bit of a problem.

* Suppose that China has lower costs than the UK, a competitive advantage, in every sector, including cellphones and oatmeal biscuits, while its competitive advantage is larger in cellphones than in oatmeal biscuits.

* Then if the chinese economy were at capacity, it should be making cellphones and import oatmeal biscuits from the UK, even if they would cost more than making them in China, because cellphones in China and exporting them to the UK would be more profitable.

* But if the chinese economy were not at capacity, with still vast underused labour (as demonstrated by much lower wages in China than the UK) and other resources, it should use them to make them both cellphones and oatmeal biscuits in China, and export both to the UK, where both are more expensive to make.

The point here is that China is not a backward country that can only make cheaply simple products like flip-flops and t-shirts and tea mugs, it can make more cheaply the whole range of products from airplanes down (even if some of the lowest end stuff is being offshored in a small way to even cheaper locales), and is not yet at capacity.

Which is to mean that "western" countries need to increase their competitive advantage by either substantially devaluing their currencies or by substantially cutting their living costs (not just their labour costs). both of which are against the interests of their rentiers middle to upper classes.

[ltr]

There is an important point here as to that, about the general topic of the ridiculous theory of "comparative" advantage...

[ Please try looking at "ridiculous" Germany, just try. Little matter though, China will thrive entirely apart from any trade with Britain if the Tories are inclined to be separate. ]

[ltr]

https://www.bbc.com/news/business-59070020

October 28, 2021

Impact of Brexit on economy 'worse than Covid'

The impact of Brexit on the UK economy will be worse in the long run compared to the coronavirus pandemic, the chairman of the Office for Budget Responsibility has said.

Richard Hughes said leaving the EU would reduce the UK's potential GDP by about 4% in the long term.

He said forecasts showed the pandemic would reduce GDP "by a further 2%".

"In the long term it is the case that Brexit has a bigger impact than the pandemic", he told the BBC.

His comments come after the OBR said the cost of living could rise at its fastest rate for 30 years, with suggestions inflation could hit almost 5%....

[Blissex]

"There is an important point here as to that, about the general topic of the ridiculous theory of "comparative" advantage..."
«[ Please try looking at "ridiculous" Germany, just try.»

I would rather that other people tried looking at what Chairman Xi says, as he is quite well informed: he made a speech pointing out that while China is by far the largest producer of ballpoint pens, all the balls in the tip of those pens are imported from Germany, because only german industries can produce cheaply enormous numbers of them to very tight tolerances.

That is, many german industries still have a *competitive*, not comparative, advantage, with respect to chinese industries. Germany is one of the few countries with a trade surplus with China accordingly, at least for now. So a completely different case from that of the UK.

Anyhow, noo doubt in some years chinese industries will also be able to produce ballpoints of the same consistent quality as german industries, and cheaper, so Germany will also have some trade problems, and will have to deal with comparative advantage issues.

[Blissex]

«what Chairman Xi says, as he is quite well informed: he made a speech pointing out that while China is by far the largest producer of ballpoint pens, all the balls in the tip of those pens are imported from Germany, because only german industries can produce cheaply enormous numbers of them to very tight tolerances.»

https://economictimes.indiatimes.com/small-biz/security-tech/technology/china-finally-invents-a-ballpoint-pen-of-its-own/articleshow/56592397.cms
https://www.smh.com.au/world/finally-china-manufactures-a-ballpoint-pen-all-by-itself-20170119-gtu6ex.html
“While there were over 3000 companies manufacturing pens in China, none had their own high-end technology for the tip. Instead, roughly 90 per cent of the pen tips and refills, too, were imported from Japan, Germany and Switzerland, according to Chinese state media.”
“In 2011, China's Ministry of Science and Technology took the hint and launched a project called "Research and Development and Industrialization of Key Materials for the Pen Industry." It allocated nearly $9 million and conscripted the Taiyuan Iron & Steel Group Co, a giant state-owned stainless-steel manufacturer, known as TISCO, to lead the venture.”

[ltr]

China has, of course, long managed to manufacture the finest of ball point pen tips. Yes, the Chinese really do learn as the Chinese GPS, manned space station, rover on Mars, rover of the far side of the Moon show. Nonetheless, Germany trades with China to mutual benefit.

So should the British trade lots more with China to mutual benefit. Britain can meet all sorts of Chinese needs, as China can meet British needs.

(I will continue...)

[ltr]

https://news.cgtn.com/news/2021-09-12/One-of-the-world-s-largest-stainless-steel-producers-going-green-13uVu6HDWTe/index.html

September 12, 2021

One of the world's largest stainless steel producers going green
By Gao Ang

The city of Ningde in east China's Fujian Province is home to one of the world's largest stainless steel producers. And as China continues to spare no effort to achieve carbon neutrality, the company is also going green.

The tip of a ballpoint pen is the most crucial part. But manufacturing this tiny part requires high-precision machinery and extremely thin steel.

As small as this ballpoint pen tip is, it has taken China  – the world's largest ballpoint pen producer  – years to shake off reliance on imports to create it.

Tsingtuo Group is one of the largest producers of such materials. The stainless steel produced by the group meets the requirements for making ballpoint pens. And it already accounts for 20 percent of China's market share.

China used to rely on imported feedstocks to make ballpoint pen tips until 2017 when a domestically developed stainless steel model only 2.3 millimeters thick came out.

In 2020 Tsingtuo Group unveiled a product that was only 1.6 millimeters thick. The keyword behind this is technological innovation....

[Blissex]

«China used to rely on imported feedstocks to make ballpoint pen tips until 2017»

But this shows that the chinese government is determined to import no high value added products, and plans to make them all in China; note that another source mentioned that the total value of ballpoint tip imports into China used to be $17.3 million per year, hardly a big deal.

So what are other countries going to export to China other than raw materials? Some of the very lowest value added production has been in part offshored from China to places like Ethiopia where wages are even lower than in the chinese hinterland (also as part of the ancient tradition of gifts to peripheral countries, of which Belt and Roads is the version used by the current Gongchan dynasty "emperor Xi") but that is not much.

Compare with the USA, whose government (like that of the UK) is quite keen to export jobs to other countries by importing low to middle value added products, and is therefore running huge trade deficits with several grateful (mostly european and far eastern) "first world" protectorates.

[Blissex]

«the chinese government is determined to import no high value added products [...]
So what are other countries going to export to China other than raw materials?»

That is pretty much the japanese development model, and the chinese government seems to have adopted it without the subtlety with which the japanese elites have managed for decades their huge export surplus to the USA (which they have largely "laundered" via China, cleverly), and their informal barriers to imports. Deng's advice to keep a low profile was all about that I guess, a bit too late to go back to that now.

[ltr]

...version used by the current Gongchan dynasty...

[ This is a false, prejudiced, awful analogy. China is in no way about to ever revert to a British, Japanese... colony. Enough of such awful prejudice.

Enough of such prejudice. ]

[ltr]

Some of the very lowest value added production has been in part offshored from China to places like Ethiopia...

[ China or the Belt and Road is profoundly helping partner countries such as Ethiopia or Kenya or... develop. ]

[ltr]

...the Japanese development model, and the Chinese government seems to have adopted it without the subtlety with which the Japanese elites have managed for decades their huge export surplus to the USA (which they have largely "laundered" via ---...

[ Offensive, shameful nonsense. Development is evidently to be reserved solely for the British. ]

[ltr]

But this shows that the Chinese government is determined to import no high value added products, and plans to make them all in China...

[ China would of course import all sorts of high value products from Britain, though the British and the US restrict all sorts of such products from being sold to China to try to limit Chinese development.

By 2011, the US has cut off all Chinese participation on space exploration with NASA. So China developed a space program on its own.

Why not stop trying to stop Chinese development and trade accordingly? Britain and China should be close trading partners for the benefit of each. ]

[rsm]

《This suggests (as you yourself have witnessed) that there's a collapse of a positive vision of the future for humanity among those with the greatest financial capacity to make a difference.》

Don't they rely on the Fed to monetize their fictitious assets, and we too can use the Fed to monetize our positive vision for an animal-slaughter-free world?