Debt Is Not The Cause Of The Crisis

Finance Minister Jim Flaherty and Stephen Harper are all over the media attacking European Union politicians for failing to take decisive action to deal with the "debt overhang", particularly in places like Greece, Spain, Portugal and Italy. This failure of political leadership they contend is at the core of the problems facing the world economy.

Mr. Flaherty said a failure to adequately address Greece’s debt problems puts the global economy at risk, sharpening his criticism again as he and other top Canadian officials have in recent days.

This is what you call missing the point. The problem is not the debt it is the undemocratic priority-setting imposed by global financial traders, ratings agencies and businesses. The same people who almost destroyed the economy in 2008 by creating an unregulated shadow banking sector that was little more than a giant ponzi scheme are now demanding the economic priorities of sovereign nations be determined by them. The lunatics are truly running the asylum. Not only has this crew demonstrated that it doesn't have the interests of the economy at heart, rather they are interested in wringing profits out of every pore of a country then moving on to the next. They don't care about investments in productive or socially necessary infrastructure. The determinants of good or bad, efficient and inefficient bear no resemblance to common sense understanding of those terms. It is entirely determined by their accumulation of wealth.

But even that is really just a symptom of deeper problems. In Europe, it is true that Greece and some other countries have high levels of public sector debt. But it is to miss the point entirely - as I've argued more than once - to look only at public sector debt. It is total debt within an economy that shapes the likelihood of whether there will be investment to stave off a recession or protracted stagnation. In the USA the federal government has a debt of $14 trillion. That's a lot, representing about 100% of GDP. But it is dwarfed by the $36 trillion in private sector debt that has ensured that monetary policy - basically pushing down both long and short term interest rates to close to zero - has next to know impact on economic growth. There is literally no room left on the credit cards, lines of credit or mortgages of the nation. The parrot is dead.

And total debt loads themselves are a reflection of the fact that profit rates have been falling almost steadily for the past thirty-five or forty years. In the first instance, the decline in profit rates led governments to embark on an assault on working class living standards that has led to stagnant or declining wages and the de-unionization of the workforce - most spectacularly in the United States where the private sector is basically union free.

And for the first time on record, family incomes are actually falling. New figures this week from the U.S. Census Bureau show that the median income for working-age households fell 10 per cent between 2000 and 2010, even as women worked more hours...
Experts say the seeds of this lost decade were planted long before the recession. Wages fell out of step with rapidly rising productivity and soaring corporate profits in the 1980s, and the gap has been growing wider ever since. The average real wage for working men is now lower than it was in 1973.

But in an economy which is 70% consumer spending, this decline creates a roadblock to further growth. To overcome this workers were encouraged to take on ever more debt. Alan Greenspan kept interest rates low, fuelling speculative bubbles, first in tech then in housing, that gave the illusion of growing incomes. Inevitably, that bubble would burst and leave a wasteland of debt, foreclosed homes and unemployment.

Since the decline in living standards was itself an expression of the problems in the core economy, it is not surprising that debt levels rose across the economy as a whole as profit rates stagnated. In particular, with pressure to move in the direction of a "financialized" economy, debt levels in the financial sector went through the roof. Looking at the graph of US data above you can see that while all levels represented - non-financial business debt, federal government debt, household commercial credit debt - have risen since 1953, they have risen astronomically in the financial services sector, particularly beginning in the early 1970s when profit rates really took a hit. If we look at debt in terms of billions of dollars, as opposed to comparing the change in levels over time, we see in a more pronounced form the very real reason for government debt.

This graph includes financial sector debt, non-financial business sector debt, corporate debt, state & local government debt and federal government debt. As you can see, at the start of Bush Jr's term in office, federal government debt had stopped growing. Bush, of course, slashed taxes for the wealthy and ploughed money into foreign wars, which led to the return to deficit and debt growth. But, even with costly tax breaks to the corporate sector, business debt continued to rise - particularly financial sector debt. Now, look at the grey line around 2010, which indicates the 2008 financial crisis and recession. Notice how financial sector debt declines dramatically while federal government debt skyrockets? What this indicates is that the federal government saved the banking sector from itself by taking on toxic debt. This pattern was repeated in country after country. Those same bankers - who resisted all efforts to regulate them post-2008 (largely successfully) are now howling about the high levels of "sovereign debt."

The upshot is that we are expected to pay for the disaster that they caused with further reductions in our living standards - that's what Flaherty and Harper are going on about: screwing us. The irony, of course, is that smashing Greece's economy into tiny little bits - and doing the same to every other economy upon which they've set their sights - will not solve the problems. They will make them worse. People will need more, not less debt, or they will simply stop spending, causing an economic contraction. They aren't stupid - they know this. The point of the austerity exercise isn't about economic efficiency per se. The hope of people like Flaherty and Harper is that a decisive defeat for workers in Greece and beyond will drive down living standards sufficiently to restore the rate of profit - which, in the graph above, can be seen on a long decline from the mid-1960s. The question is not whether their goal is about making us pay for their crisis. It is whether or not they will be successful.

After The Debt Ceiling: Back To Our Regularly Scheduled Economic Meltdown

It must have been pretty weak pixie dust, that debt ceiling agreement that was supposed to stave off imminent collapse, put America on a sound economic footing and bring sunshine and joy to the democratic peoples of the earth, because its affect on the mood of the world's stock markets lasted about thirty two seconds.

The champagne was barely drunk as the meltdown of the world's stock exchanges continued on a bevy of bad US economic data and further targeting of European sovereign debt by the parasites who run the ratings agencies and the human detritus known as bond traders. The only logical conclusion that anyone can draw is that this deal solves absolutely nothing and was really just so much sound and fury at a time when manufacturing was slowing, growth was barely above one percent and income growth is stone cold dead. And while I hate to quote Lawrence Summers, whose lobbying against regulating the derivatives market helped to create the present mess, he has a point when he writes in the Financial Times that the problem here isn't the budget deficit, it's the broader economy:

Economic anxiety should be our final reaction. America’s current problem is much more a jobs and growth deficit than an excessive budget deficit. This is confirmed by the fact that a single bad economic statistic more than wiped out all the stock market gains from the avoidance of default, and the fact that bond yields reached new lows at the moment of maximum apparent danger on the debt limit.

In fact, there are some fundamental contradictions at the heart of the American - not to speak of the global - economy that make it nigh impossible to restore growth using a tool so blunt and simple as cutting public sector debt - something that the present debt ceiling deal doesn't do in any case. Mostly what the shabby compromise does is cut stimulus spending enough to depress the economy without actually eliminating the debt load in the public sector of the economy, thereby freeing it up to provide stimulus spending. The rich will continue to have their tax breaks - notorious for not providing any economic stimulus whatsoever - but everyone else is too broke to spend money, worried that their house will face foreclosure, that they will lose their job or suffer a pay cut. In fact, just as the politicians in Washington are debating how much to slash spending, foreclosure rates continue to rise - the crisis is anything but over.

Lenders are poised to take back more homes this year than any other since the U.S. housing meltdown began in 2006. About 5 million borrowers are at least two months behind on their mortgages and more will miss payments as they struggle with job losses and loans worth more than their home's value, industry analysts forecast.

GDP growth declines slowly starting at the end of the 1960s,
never rising above 5 percent after 1985.

As I've said more than once, the massive growth in debt - and the private sector debt is much bigger than the government debt, by about four times - is a symptom of a deeper problem in the aging, industrialized economies of Europe and America. There has been a long term decline in the rate of profit - roughly, the rate of return on investment - that began in the 1970s, had a slight recovery, and then turned down again. As Chris Harman, a Marxist economist, noted in 2007 as the present recession was just about to seize the world in its grip:

Profit rates did recover from about 1982 onwards—but they only made up about half the decline that had taken place in the previous period. According to Wolff, the rate of profit fell by 5.4 percent from 1966-79 and then “rebounded” by 3.6 percent from 1979-97; Fred Moseley calculates that it “recovered…only about 40 percent of the earlier decline’’; Duménil and Lévy that “the profit rate in 1997” was “still only half of its value of 1948, and between 60 and 75 percent of its average value for the decade 1956-65”.

Profit rates declined in three of the biggest post-war
industrial economies from the beginning of the 1970s

The decline in the rate of profit had some very clear impacts in terms of economic growth. It meant, on the one hand, that growth in GDP - the total domestic production of the US economy - never went above five percent from about the mid-1980s (see chart above). It also meant a slow decline in industrial utilization, as factories never reached their full capacity.

All of these factors - decline in the rate of profit, decline in utilization, decline in rates of growth of GDP - have had the effect of pushing the system towards seeking out new sources of profit. One of those places has been the newly industrializing countries, particularly the rise of China, which attracted for a time a significant chunk of foreign investment. However, this wasn't sufficient to absorb the surplus in the US economy, particularly as profit rates enjoyed a mild revival in the mid-80s. Instead profits were increasingly invested into those places where higher rates of return seemed a possibility - the casino known as investment banking. This financialization was an attempt to restore profitability but has had the long term effect of making the system less stable and more crisis prone. John Bellamy Foster, writing in Monthly Review, describes financialization as follows:

Financialization can be defined as the long-run shift in the center of gravity of the capitalist economy from production to finance. This change has been reflected in every aspect of the economy, including: (1) increasing financial profits as a share of total profits; (2) rising debt relative to GDP; (3) the growth of FIRE (finance, insurance, and real estate) as a share of national income; (4) the proliferation of exotic and opaque financial instruments; and (5) the expanding role of financial bubbles. In 1957 manufacturing accounted for 27 percent of U.S. GDP, while FIRE accounted for only 13 percent. By 2008 the relationship had reversed, with the share of manufacturing dropping to 12 percent and FIRE rising to 20 percent.

The upshot is that no matter how many panto plays the politicians in Washington put on as long as the weight of the economy continues to weigh more heavily on the financial sector, it will be unstable. It appears from the spreading "debt crises" that a tipping point has been reached where debt threatens to paralyze the ability of the European and American economies to restore growth. However, the irony is that the focus on debt will only result in a painful and further destabilizing shift from public debt to an already bloated private sector debt.

In the US the aggressive rise of the Tea Party model of economic policy - eliminate all borrowing as quickly as possible - will itself only exacerbate the problem as growth goes into full reverse, tax revenues fall, and debt levels rise. If they manage the unlikely act of passing "balanced budget legislation" this will create a positive feedback loop where lost tax revenues lead to more debt which leads to more cuts, leading to slower growth, leading to lower tax revenues. On the other hand, the attempt to put off dealing with the debt for another day will simply delay the inevitable. Ultimately, the system needs a reboot - the debts should be cancelled, the banks nationalized and national investment geared towards building a real economy of infrastructure, green industry, and providing healthcare, decent housing, education and quality food to all.

Relief at an agreement will give way to alarm - FT.com

The Robot Invasion Has Begun

Lock up your family, protect your job! You don't have to be Ray Kurzweil to see that there has been an acceleration of certain kinds of technological progress in the last generation - the rise of the PC, followed by cellphones, the internet, laptops, smart phones (only since 2007!) and now tablet computers. There have also been advances in machine vision and materials technologies - witness the big leap of the Xbox Kinect, which, along with touchscreens in smartphones and tablets, is radically reshaping our concept of human/machine user interfaces. All of this seems to have laid the groundwork for a near-term revolution in robotics. And such a revolution is in many ways overdue. Robotics pretty much stalled after the introduction of industrial robots into the large manufacturers, such as the auto industry, in the 60s and 70s. However, in the last number of years it has slowly been making advances that have created the conditions for a new leap forward.

Already, there are a number of popular open-source research platforms, like the PR2 from Willow Garage (something of a spin-off from Google) that is in the video above demonstrating a new software module that enables the PR2 to pick up and scan the bar codes of groceries (bye-bye check-out clerks?). The makers of the very popular Nao robot from France are about to go open-source to speed up the process of developing software "apps" to supply behaviour modules for the cute, versatile little robot. Google has also announced that it will extend its Android open-source software's capabilities into the field of robotics with Android@home, which will provide a common operating system for the growing interest in home management or smarthome systems - things like dimming lights, controlling the thermostat, home security, cleaning robots, etc. And there are popular events like the Robocup, that brings together programmers and robot aficionados to engage in a robot football tournament with the goal of creating better-than-human robot football/soccer players by 2050. To be honest, I think it will be sooner than that.

All of this stuff is interesting and even exciting, however it has mostly been about laying the groundwork and robotics is waiting for the killer device to make the breakthrough into ubiquitous robots in the same way that Apple made the breakthrough for smartphones and tablets. There are two immediate potential contenders in this field - Willow Garage is perhaps a contender but at present their interest is still in the field of research and development platforms with a $400,000 robot that's out of reach to consumers and most businesses. One is Heartland Robotics, headed up by Rodney Brooks a pre-eminent robotics professor, formerly of MIT, and founder of iRobot, which brought the Roomba vacuum cleaner to market. Of the 8.6 million robots in the world, something like 7 million of them are Roombas, so he has a track record of knowing how to convert existing tech into a consumer device. Brooks now intends to take that success into the field of light manufacturing by advancing on the platform developed with the Obrero (worker) robot - basically an intelligent, dextrous arm and hand - from a few years ago. While Heartland is in what's called stealth mode - primary research to complete development of the product out of sight of competitors - the general goal of Heartland is public knowledge.

Brooks wants to create a robot for light manufacturing that will be priced in the $5,000 range, allowing the USA to compete with low wage economies to which a lot of manufacturing has been outsourced - places like China and Asia. I haven't done the math on the relative advantage of a $5,000 manufacturing robot vs a product produced by sweated labour plus the costs of shipping and handling but my guess is that it would make a lot of domestic manufacturing more competitive. Brooks believes that this will generate a new industrial revolution and will eliminate drudge work in the service sector, particularly in health care. The first impact, however, is likely to be unemployment in those industries that can make use of a cheap robot. There will be other impacts, such as the long term decline in the rate of profit once affected industries take up the new technology across the board and the effect of relative advantages is mitigated (I'll take up some of this in a future post). Whatever the ultimate character of the impact, it would no doubt be huge. Check out 32 minute Brooks talk, below, from the Maker Faire in 2009:

The second potential "killer device" is the forthcoming general purpose home robot, Luna. While we have the Roomba in the home, there has yet to be any general purpose robots to perform a variety of tasks. I'm not sure that the Luna is it - it seems to have too little functionality. But the intended future price tag of $1,000 (for this year and next it will be $3,000) might be low enough to encourage enough early adopters with disposable income and a desire to be the first ones on the block to own a home robot to make it a viable business model. The Luna platform is intended to be expandable both in terms of hardware and software, with the idea that developers - in the model of the iphone and Android app stores - can create specific modules to expand the capabilities of the Luna - say voice recognition software or a more advanced arm, etc.

But even if the Luna itself isn't ready for prime time and doesn't take off as the company hopes, it is a sign that the genie is out of the bottle - the age of personal robotics has begun. To be honest I haven't grokked what the cultural implications of a robotics explosion will entail - it certainly won't mean the end of inequality, world hunger or imperialism - most of the "service" robots other than the Roomba are for military use to defuse IEDs, as spotters, UAVs and, already in testing, the next generation of fully robotic fighter planes known as the Phantom Ray. But it would be foolish to think "nothing will change" and the coming robot revolution deserves some serious social analysis. Thoughts?