Monday, 1 January 2018

Predictions For 2018 - Part 2

Trump Sends the US Into The Twin Deficits Crisis 2.0

Ronald Reagan became US President in 1980, approximately mid-point in the period of the crisis phase of the long wave cycle, that ran from around 1974 to 1987. The period after 1974 was marked by stagflation, as increasing levels of inflation, combined with repeated crises of overproduction, which ran one into another, with inflation in both the US and UK reaching levels over 20%, in the late 1970's. The inflation was eventually stopped by the introduction of a sharp monetary contraction introduced by Federal Reserve Chairman Paul Volcker, and support for similar policies by Thatcher in Britain.

The consequence was an intensification of the recession, during the period 1980-83, both in the US and UK. Both Thatcher and Reagan committed themselves to supply-side economics. It followed the nonsensical proposal of Art Laffer that by cutting taxes on the rich and large corporations, the government would actually take in more tax revenues, because the rich would be incentivised to work harder, to invest more, and not avoid taxes, and corporations would locate their production where the tax rate was lower, and would employ more people, so producing greater amounts of tax. This is the principle of the so called Laffer Curve

But, of course, instead what happened was that the rich simply took the tax cuts, and used them for unproductive purposes. They used their increased income to speculate in financial assets, property, and to increase their luxury consumption, a lot of which went into the purchase of foreign produced luxury products. Corporations took the advantage of lower corporate taxes to hand out larger dividends to shareholders, and to pay higher stipends to their executives, rather than to invest in additional productive capacity. And, the consequence necessarily was that the government's receipt of taxes was reduced, and the budget deficit exploded. George H.W. Bush, standing against Reagan for the Republican nomination in 1980, described these ideas also called Reaganomics, as Voodoo Economics.

By also thereby stimulating demand, via the tax cuts, without actually stimulating domestic supply, the US began to also increase its imports at a much faster rate than it increased its exports, so that alongside a ballooning budget deficit, it also developed a ballooning trade deficit. This resulted in the so called twin deficits crisis of 1987, and as US interest rates rose, which was a trigger for the 1987 US stock market crash, which set off the biggest global stock market crash in history. The US Budget deficit spiralled out of control, and the national debt more or less tripled, sending the US from being the world's largest creditor nation to being the largest debtor nation.

The way that both the US and UK got out of this situation, in the late 1980's, was that both shifted the burden both of tax and of debt on to the working-class, and these two things were also not unrelated. As Marx describes, tax is a deduction from surplus value. It is then not possible, in the longer-term, to pass the burden of tax on to workers, and away from capital. It is only possible, in the short-term, by pushing wages below the value of labour-power, which then has further ramifications for capital, because it makes the realisation of produced surplus value, as profit, more difficult, especially as workers form an increasing segment of consumption. What really happens is that workers consumption gets deferred, or, as happened in the late 1980's, and after, the consumption gets funded out of borrowing, by workers, rather than out of wages.

This has yet further ramifications, because interest too is a deduction from surplus value, and, sooner or later, workers have to pay back all of the money they have borrowed to sustain their consumption, along with all of the interest payments on that borrowing. Either consumption levels collapse, creating a crisis for capital as it cannot sell its output at prices that realise profits, or wages have to rise, which squeezes profits. We are living with the consequences of those policies today, as, in both the US and UK, we have mammoth levels of private household debt that has been built up over the last 30 years, and whose other side is the massive asset price bubbles that have been blown up on the back of it. The crash of 2008 gave a glimpse of what happens when that unwinds.

Today, Trump is being advised by the same kind of ideologically driven voodoo economics that led Reagan into those twin deficits crises in the 1980's. Indeed, he is being advised by some of the same idiot economists, like Larry Kudlow, who advised Reagan in the 1980's. Despite all of the mountain of evidence that demonstrates the contrary, Trump has argued that his tax plan, just pushed through Congress, will increase government tax revenues, and the same idiotic arguments are again being made by conservatives in the UK. In the late 1980's, it was possible to shift the burden of debt on to workers, including all those workers who, from World War II onwards, had built up some assets of their own, in the form of home ownership, savings, and even some ownership of shares and bonds, as part of their pension funds. The period from the late 1980's has effectively been a period in which the working-class has been collectively stripped of those assets, and collectively turned into debt slaves as well as wage slaves. But, as 2008 showed, in the end, people in negative equity, can walk away from their houses that have fallen massively from their astronomically inflated prices, leaving the banks only with the debt they had issued for their purchase.

Following a period of thirty years, where workers consumption has been kept up by increasing levels of borrowing, the scope for that to continue has reached its limit, and as workers slowly start to be taken on, as the austerity measures of recent years have failed to stop the underlying process of capital accumulation, so the inevitable dynamic for wages to rise sets in, and the dynamic for interest rates to rise also follows behind it. Trump's tax plan is an attempt to keep asset prices inflated, as central banks step back from the plate. But, as with Reagan's Voodoo Economics, it will lead to sharply rising interest rates, which will be a far more effective destroyer of asset prices. US corporate executives have already said openly that the tax cuts will not lead them to invest more in productive capacity, and the increase in consumption from the tax cuts is likely to once more simply set off a large rise in US imports, once more ballooning US deficits, as it did in the 1980's, and creating the trigger for a new financial crash.

But, there is a further aspect of Trump's agenda that will intensify this twin deficits crisis 2.0. Another plank of Trump's electoral campaign was his proposals for a huge infrastructure plan. As with nearly all other aspects of Trump's agenda, he has failed to be able to implement it, in his first year of office. The American Society of Civil Engineers gives US infrastructure a D+. It estimates that $4.6 trillion needs to be spent on US roads, bridges and other infrastructure, to bring it up to scratch . They also estimate that the poor infrastructure is likely to cost the economy that much in lost efficiency, and around 2.5 million jobs.

Some estimates say that more than 50,000 bridges are in a serious state of disrepair, on major roads. One feature of populist regimes like that of Trump is that, not only do they thrive on creating moral panics, but they are also impacted by moral panics that naturally arise. Trump's only political card is his claim that he responds bigger, faster, better than any other politician, to address the problems that afflict the nation. It will not take much in the way of a serious loss of life, as a result of some major road, rail or other bridge failing, to create the kind of moral panic that quickly creates a demand for Trump and Congress to act. In 2018, as Trump goes into his second year, without any significant achievements, or progress on his agenda, with his promises to workers in the rust belt failing to materialise, as they necessarily will, as those industries go into global decline, he will be pushed into increasing attention on the need to undertake a large infrastructure investment programme. As the Congressional elections approach, he will be pushed further in that direction by the Democrats, particularly those behind the movement the Sanders campaign created, as they set out their own demands for government spending.

As with Reagan's Voodoo Economics, Trump's Voodoo Economics will be caught between its falling tax revenues resulting from his tax cut for the rich, and the need to engage in large scale government spending in infrastructure. The US budget deficit and debt will skyrocket, sending interest rates much higher, and pushing wages higher as a labour market already nearly at full employment starts to run short of workers – intensified, as with Brexit, by a reduction in immigration – again creating a squeeze on profits, and further causing interest rates to rise, and asset prices to fall.

Its too early to say whether it leads to the inevitable crash in asset prices, or a re-run of the 1987 Stock Market Crash, but it certainly makes it far more likely.

No comments: