The covid pandemic has had a serious impact on a world economy that was already slackening in late 2019. As the IMF World Economic Outlook report for October 2021 notes, the divide between rich and poor has widened. There has been a rise in world poverty, hunger, unemployment, and unsustainable debt. In Latin America and the Caribbean there may well be a second ‘lost decade’ of growth, as there was after 2010. In South Africa, a third of the workforce is unemployed. Heavily indebted countries are being forced to cut back on health and social spending to repay lenders.
Amid all this, the business press still had something to celebrate in the first half of 2021: there had been a surprisingly fast economic recovery in the US and Europe after the economic disruptions of 2020. But in the second half of 2021, that too has come into question. The world economy has been struck by supply bottlenecks, shortages of parts for manufacturing, an energy crisis, inflation, labour shortages. Western central bankers and economics commentators have been talking about stagflation, which refers to the combination of stagnation or economic depression with inflation, that first hit the world economy in the crisis of the late 1960s and 1970s.
What’s going on? First there are the supply bottlenecks with hundreds of container ships waiting to get a berth at ports around the world, goods stuck at warehouses, or at factories. In response, many retailers are building up their stock of inventory, to hedge against supply disruptions in the near future. This drives up demand even further, worsening the mismatch between demand and supply. Ahead of the Christmas season there have been warnings of shortages of consumer goods on the shelves.
Next, some sectors of manufacturing are hobbled by production shortages of parts and raw materials. Industry representatives speaking at the Financial Times’ Future of Manufacturing event report that they expect shortages to last at least another 18 months. They blame it on parts producers being affected by lockdowns. There is also a factor of conscious restructuring of supply chains away from China for geopolitical reasons. A coalition of business groups in the United Kingdom stated this month that it expected the supply crisis to last into 2023 and beyond. More than 40 percent of German companies said they had lost sales because of supply problems in an August survey by the Association of German Chambers of Industry and Commerce. In July new car sales fell significantly in France, Britain, Spain, Germany, Italy – all due to shortages of microchips.
Then, there’s the energy crisis. In China there has been a crisis in electricity generation (much of it coal powered). The state has imposed electricity rationing for industrial and business use, forcing factories to curb production. India too is on the verge of a power crisis due to a shortage of coal. Meanwhile, the price of US crude oil is at a high, and Biden is considering dipping into strategic stockpiles to ease prices for industry and households.
In the UK and Continental Europe, natural gas prices are five times higher than a year ago. As winter approaches, households will greatly increase their use of gas. It is likely that either many households will not be able to heat their homes properly, or industrial activity will have to be drastically reduced. Why can’t Europe increase its supply of gas? Exporters of shipped Liquified Natural Gas, like Qatar, are sending an increasing portion of their supply to China, whose demand for LNG has tripled in the past decade. Russia, the key natural gas exporter to Europe has used the opportunity of Europe’s gas crisis to secure agreement to the construction of a new pipeline from Russia to Europe that bypasses the Ukraine.
Then, there’s inflation. According to the IMF’s World Economic Outlook report for October 2021, food prices have increased worldwide, with particular ferocity in regions where food insecurity is already high, such as in sub-Saharan Africa, the Middle East and Central Asia. They have risen 40 percent since the start of the pandemic, and the IMF’s food and beverage price index is now at the highest peak since the 2010-11 world food price crisis. The price index for base metals is also up, and is expected to be almost 60% higher by the end of 2021 than it was in 2020. Prices of coal, oil and natural gas are up. All these, plus the shortages of parts, are driving up production costs and consumer prices. In many countries the idle money hoards of the rich have been going into real estate speculation, pushing up house prices. This flows on to increase rents, which are a big portion of working people’s cost of living.
In parts of Europe and the US where economic activity bounced back in the first half of 2021, job vacancies have been hard to fill in some sectors. There is a shortage of truck drivers in the UK and EU, alongside a surge in demand for delivery services. In the US, vacancies are taking longer to fill in high-contact jobs with a higher risk of covid infection for workers, like healthcare, hospitality, and recreation. There has also been a revival of strike actions. Some mainstream economists frame all this as a potential cause of future inflation: workers win a raise, but bosses just pass on the cost to the consumer by raising their price – and in the end workers end up no richer because your higher wage buys the same old bundle of stuff at higher prices. But more to the point, the business press worries that a revival in strike activity means loss of competitiveness, smaller profit margins, and perhaps deepening economic stagnation.
Warnings of stagflation are coming from influential people, like Larry Summers, former US Secretary of the Treasury, and Kenneth Rogoff, former chief economist of the IMF. The stagflation debate has implications for the two camps in mainstream economics that claim to be able to fix economic stagnation.
Orthodox economics has an idealised vision of the market where market prices always equalise supply and demand, and always makes full employment of society’s resources – land, machinery and labour. Persistent mismatches of supply and demand or sustained periods of high unemployment and idle capital are never due to systemic reasons. They are due to external shocks to the economy, or from the distorting effects of state intervention. They tend to focus on the supply side of the economy – on firms. Look after firms, and demand will take care of itself: when the boss and the worker spend the income generated by the firm to buy up whatever products have been supplied by the market. To rush things along, the state can help firms adjust faster by increasing their incentives – lower corporate taxes or wages, give state subsidies to business.
Keynesians tend to focus on the demand side of the economy, saying depressions happen because demand is too low. Against the supply siders, they point out that just because some income has been generated by firms does not mean that income will be spent. Investors can just hoard their money instead of investing. State intervention can fix this by stimulating aggregate demand, whether directly via state spending, or by encouraging investment through credit creation and lower interests rates.
Orthodox economics worries that artificially pushing more money or credit into an economy that has a given volume of commodities in circulation will just push prices up. Keynesian proponents of stimulus argue against this: when the economy has idle resources or labour – like in a depression or stagnation, a credit stimulus grabs these idle resources and puts these to use. So the volume of commodities increases along with the injection of credit, and prices do not rise – at least until after you have fully employed all resources and labour, and have regained a rapid rate of investment. Any inflation before that point is merely transitory and is not a reason to stop stimulus.
Orthodox opponents of stimulus point to the 1970s decade when Keynesian credit stimulus led to inflation even though the economy failed to reach full employment and investment had not revived. Their explanation of the 1970s economic stagnation was that there was too much pro-worker intervention in the market, which obstructed the market from finding its equilibrium – obstructions like minimum wages, unemployment benefits, unions. The Reagan and Thatcher governments used this rationale for their bosses’ assault on labour.
From the perspective of the two rival policy camps, if inflation remains a problem, central banks may hike interest rates in coming months, governments may pull back policies on infrastructure and social spending, and reduce government deficits in order to curb inflation. Yet low interest rates, stimulus policies, and quantitative easing have been important props for the world economy that has been relatively stagnant ever since the 2007 financial crash, and freshly recovering from the pandemic-induced 2020 recession. In curbing inflation you risk worsening the economic stagnation.
Against this policy backdrop, some argue that both the inflation and the stumble in the post-2020 recovery are transitory, pointing to the triggers for these in the lockdown effects on production and transport. Manufacturers would produce more if it were not for these temporary shortages. And the shortages cause price rises in the raw materials and components, which manufacturers pass downstream to consumers. As soon as this is fixed, inflation will disappear. If the inflation is merely transitory, we should not panic by drawing comparisons to the persistent inflation of the 1970s based on just a few months of inflation in 2021. If anything, we need more government stimulus, like Biden’s spending plan currently in Congress.
Some apostles of free trade relish blaming economic stagnation on the trade wars and economic nationalism of people like Trump, Xi and Putin. They give the impression that if only these nationalists would leave trade policy to well-trained economists like themselves, there would not have been this reduction in the level of world trade over recent years, and we would have avoided any worries about stagnation, at least.
To go beyond the orthodox vs Keynesian policy dichotomy, I want to contextualise the present in terms of the pre-existing terrain before pandemic disruptions in 2020. That provides a better appreciation of headwinds facing policy efforts to revive the pace of capital accumulation and get inflation under control.
For Marxists the explanation for stagnation or depression is neither on the supply-side nor the demand-side. It has to do with profitability. Firms invest not to meet unmet demand, but to make profits. Keynesian credit injections can stimulate the economy, but only within limits imposed by profitability. Just trying to shore up investors’ confidence with lower interest rates and quantitative easing may not be enough to revive investment if profitability of new investments is very low. In such a situation, pushing more credit into the system will not lead to new investments to expand productive capacity, but just to a bigger hoard of idle capital or to speculative bubbles. This can also lead to inflation – not because the injection of credit finds that all resources and labour are already fully employed (as Keynesians say), but because the credit cannot find an outlet in capacity expansion – no entrepreneur wants to expand capacity.
Is profitability too low? To answer this we must look at a phenomenon left out of the stagflation debate. There is overcapacity in much of the world economy – too much plant and equipment, too many factories, too many mines and ports. In recent years, overcapacity has dogged heavy industry, which is the core engine of capital accumulation that sets the foundation for other sectors that use these commodities as inputs. A July 2021 report by global consulting firm McKinsey and Co suggests that oil refining is likely to have overcapacity in Asia for another few years, prolonging a problem they have reported since 2015. The OECD has analysed overcapacity in world steelmaking since 2015, and its 2021 report is no rosier. Forbes reported overcapacity in world auto-manufacturing in 2019 before the pandemic, a problem that had plagued the sector since 2014. There is overcapacity in aluminium, coal, chemicals, petrochemicals, and elsewhere.
How can the world economy end up with overcapacity in so many core sectors for years at a time? Marxists argue it is not just an accidental concurrence of a series of miscalculations, but a recurring systemic tendency of capitalism. A key underlying factor is the worldwide tendency for the rate of profit to fall. The tendency is a slow process that plays out over centuries, and that underlies both booms and depressions. To explain depressions we need to add more concrete dynamics and faster processes that emerge from the same competitive forces. Competition pushes firms to build new plant and machinery calculating that they can produce at a lower cost than the less productive old plants of rival firms, and snatch some of their market share by undercutting their prices to the consumer.
But the old plants are not scrapped overnight, and every sector of industry is normally characterised by plants from a range of vintages, some state-of-the-art, others archaic. Why? Once you invest your money capital into some plant and equipment, the capital is stuck in that fixed form until it can turnover into money capital again – whether the same amount of capital initially invested, or more, or less. That turnover process takes years of using the machinery repeatedly – many decades for mines, smelters, ports, shipbuilding, rail, roads. If the firm is forced to exit the turnover process earlier, not only do they forego the anticipated profits from selling the commodities they would have produced, they also lose much of the initial capital because their plant is outdated, and won’t sell for much. If they were operating from borrowed capital, they may not even be able to repay their creditors. Firms can decide to persist with outdated plant, with lower than anticipated profits, in order to get a few more years of production out of the machinery before you have to junk it.
This can produce a situation where new investments in fixed capital no longer expand the total mass of profits made every year across the world. If new investments succeed in turning profits, it is only by reducing the profits that a pre-existing investment was making, in a zero-sum game. This stagnation of the mass of profits despite the addition of more capital leads to what Marx called an ‘absolute over-accumulation of capital’ that lasts until enough excess capacity has been purged from the market. Until that happens, new investments to expand industrial capacity slow to a trickle, while profits just get hoarded or channelled into uses that do not themselves produce new value – like speculation, or the military. In such periods, competition between corporations increasingly becomes a matter of geo-political competitiveness. Which corporations go bust and which ones survive becomes increasingly a matter of the power of the entire national capitalist class, including its state, against rival national capitalist classes – and not just the narrowly economic factors like production costs of the individual firm relative to rivals in the sector.
Overcapacity can persist longer if government bailouts or cheap loans from banks allow the less competitive enterprises to remain in the game. This occurred in many Western countries in response to the global financial crisis of 2007-08, creating a layer of highly indebted ‘zombie firms’ which would be eliminated if left to market competition but can tread water just by taking on more loans. And it can be worsened by state investment to build productive capacity for strategic aims rather than aims of meeting a gap in market supply. The Chinese government’s spending in infrastructure and industry after 2008 is an example, aiming to make Chinese capital more competitive in various world markets. Recent moves to reshore production or restructure supply chains are other examples, aiming to reduce dependence on the economies of geopolitical rivals, even if that means duplicating productive capacity that already exists elsewhere and is perfectly capable of supplying the size of the market. Over the past year the US, EU, China and South Korea have all begun initiatives to reduce their dependence on Taiwanese manufacturers of microchips for strategic reasons.
But if overcapacity hinders new investments, how did we have growth in the first half of 2021 in some leading economies? We must distinguish two processes by which supply can adjust to demand: a slow process of adding or scrapping productive capacity, and a fast process of using the existing capacity more or less intensely. A factory or shop might be used for just one shift a day or two, or for three days a week instead of the seven. A revival in that fast process of supply adjustment does not necessarily predict a revival in the slower process. Investment decisions that govern the slower process are based on a much longer time horizon of anticipations of the size of the market demand and confidence that it will be your firm supplying that demand, not some firm from a rival imperialist power. Yet those factors are up in the air at the moment, given not only the possibility of further pandemic-induced disruptions to production and transport, but also the overcapacity, trade wars, reshoring, and restructuring of international supply chains.
To illustrate, consider this data on the US economy on industrial capacity; the rate of capacity utilization; and the level of industrial production, which is a product of the two.
Graph from the US Federal Reserve (here)
It suggests that aggregated industrial capacity for the economy as a whole has more or less stagnated from the GFC onwards, as compared to the previous 40 years. From this data, the normal trend for US industry from the 1970s to the GFC has been to operate around 78% of capacity. The actual rate of use fluctuates around this to adjust to demand, rising as high as 88% amid surges in demand and falling during shocks like the GFC (to below 65%) or pandemic disruptions in 2020 (even lower). The normal rate of capacity utilization appears to be several percentage lower since the GFC, compared to the preceding trend.
It is important to note that stagnation has not expressed itself in a uniform way in the 15 years since. Some leading economies recovered fairly quickly from the initial recession caused by the GFC, after bank bailouts and an injection of central bank credit. The US had growth in production by 2010. Many commentators saw this as the end of the effects of the 2007 financial crisis, and therefore see all subsequent US economic issues as unrelated – trade wars, protectionism, reshoring, restructuring of supply chains, and the 2020 recession. By contrast, I would argue these are all related through the underlying fact of a plateauing of investment to expand industrial capacity.
The stagnation in new industrial capacity also expresses itself unevenly across the leading industrialised economies. Some countries like China and Germany have grown relatively more, while others like the US and the Eurozone excluding Germany have grown less. Partly, this is a matter of which firms are most competitive in reaching buyers, allowing them to increase the rate at which they use their existing capacity. Partly it is a matter of state investments to increase their national capacity for strategic reasons despite excess capacity in the sector at the level of the world economy.
The EU took longer than the US to get out of the GFC recession. That process was very uneven internally, with economies like Greece going through a terrible contraction while the economic powerhouse of Germany fared better throughout. By 2016 the OECD was again warning of a slowdown in growth and recommending government spending.
China’s huge domestic stimulus in 2008 helped its economy move out of recession over the next few years, with an expansion of infrastructure and housing. But it also left China’s industrial and infrastructure sectors with significant excess capacity relative to demand for their products and services, which government policies have sought to address since 2013 by closing uncompetitive industrial capacity in some sectors and trying to find overseas opportunities for other sectors. Many private and public enterprises in China, including property developers like Evergrande, are burdened with heavy debt to creditors. This is partly a reflection of the overcapacity that means these indebted firms are forced to operate below their desired level of capacity utilization.
Advocates of stimulus point to its success in dampening and quickly ending the recession caused by the 2007 financial crisis – whether through bailouts of banks and industry, or through infrastructure construction and industrial expansion as in China. While this is true, I would argue they worsened the building up of excess capacity in many core parts of the world economy. They did this both by allowing ‘too big to fail’ firms to stay in the market; and by adding new industrial capacity for strategic reasons. These decisions kicked the can down the road in terms of when large scale economic restructuring would have to occur to purge the less competitive capitals and resolve the excess capacity.
Can’t policymakers just kick the can down the road again with more stimulus, or wait out the pandemic disruptions? Perhaps. But more to the point, we must look beyond the debate between Keynesians and orthodox economists on the right policy balance between economic stimulus and dampening inflation. That debate assumes that the problem of economic growth can be compartmentalised from the rest of politics and treated in isolation. But in fact, when there is industrial overcapacity, and profitability on new investments is very low, competition plays out in a more political way. Leading states try to ensure that any purging of excess capacity from the world market will be in someone else’s economy, not theirs. They bail out firms that are too big to fail. They seek foreign trade relations that ensure that their corporations’ products are the ones that sell, not some foreign rival’s. They try to find foreign investment opportunities for the capital that is hoarded up in their country. The problem of stagflation today cannot be compartmentalised from the problem of growing inter-imperial rivalry.