Stagnation and Institutional Structures

Transcription

1 Stagnation and Institutional Structures David M. Kotz University of Massachusetts Amherst Shanghai University of Finance and Economics Deepankar Basu University of Massachusetts Amherst September,

2 Figure 1. Annual Growth Rate of GDP from Trough Quarter to Following Peak Quarter or Most Recent Quarter, % 8.00% 7.63% 7.00% 6.00% 5.58% 4.90% 5.00% 5.08% 4.28% 4.01% 4.00% 4.39% 4.28% 3.76% 2.80% 3.00% 2.12% 2.00% 1.00% 0.00%

3 Stagnation literature Contributors include Robert Gordon Lawrence Summers Paul Krugman Brad DeLong Barry Eichengreen 3

4 Argument of this paper This paper offers an explanation of the current stagnation in the U.S. based on the effect of the institutional structure of the economy, and its evolution over time, on macroeconomic performance. The institutional structure is referred to as a social structure of accumulation (SSA). 4

5 Outline 1. Comment on the current stagnation literature 2. Brief explanation of SSA theory in relation to economic stagnation 3. Why the current neoliberal SSA in the U.S. gave rise to stagnation after Data analysis to evaluate the main claim of the paper. 5. Concluding Comments 5

6 R. Gordon & Supply Side Explanations Stagnation in the US economy results from 1) Current technologies 2) Population growth slowdown 3) Education: rising cost, declining quality 4) Inequality 5) Government debt Last 4 are called the four headwinds. 6

7 L. Summers and Demand Side Explanations Inadequate investment incentive due to 1) Technologies requiring little investment 2) Slower population growth 3) Inequality 4) Decline in relative price of capital goods Solution: Deficit spending Export promotion Regulatory and tax reform 7

8 Advantages of SSA Analysis of Stagnation 1) Can explain the appearance of stagnation causes cited in the current literature 2) Can explain why stagnation is likely to last for a long time 3) Can uncover additional causes of the stagnation not cited in the current literature 4) Can indicate what development can eventually end the stagnation 8

9 SSA Theory and Stagnation 1) A long period of "normal" economic expansion occurs when a set of institutions emerges that is favorable for capital accumulation. The set of institutions is called an SSA. 2) A new SSA promotes normal expansion for one or several decades but eventually becomes an obstacle to further normal expansion. There follows a long-run crisis (or structural crisis ) involving stagnation or intense macroeconomic instability. 9

10 SSA Theory and Stagnation 3) The resulting structural crisis can be resolved within capitalism only by construction of a new SSA. 10

11 SSA Theory and Stagnation How an SSA promotes accumulation: 1) Regulates the key relations of a capitalist system so as to bring stability and predictability 2) Promotes a high rate of profit 3) Fosters growth in total demand over the long run 11

12 Two Phases of Each SSA Phase 1: The period when the SSA promotes normal capital accumulation Phase 2 (crisis phase): The period when the SSA obstructs normal capital accumulation. 12

13 SSA Phases in U.S. History 1) : Phase 1 of the post-world War I SSA. 2) : Crisis phase of the post-world War I SSA 3) : Phase 1 of the post-world War II regulated SSA 3) : Crisis phase of the post-world War regulated SSA 4) : Phase 1 of the neoliberal SSA 5) 2007-present: Crisis phase of the neoliberal SSA 13

14 SSA Theory of Current Stagnation in US The early SSA analysis assumed that every SSA longrun crisis takes the form of stagnation. That is, it takes the form of no growth or depressed growth. What does history show about the nature of SSA crises in the U.S.? 14

15 Annual U.S. GDP Growth Rates for Selected Periods 4.5% 4.03% 4.0% 3.5% 2.97% 3.0% 3.02% 2.5% 2.0% 1.5% 1.31% 1.0% 0.67% 0.5% 0.0%

16 SSA Crises are not all the same The evidence suggests that not every SSA crisis takes the form of stagnation. The crisis of the 1930s and that of today involve stagnation. However, the crisis of the 1970s did not. 16

17 Wolfson and Kotz (2010) SSAs are of two types, regulated and liberal. Regulated SSA: non-market institutions such as states and trade unions play an active role in regulating economic activity. Liberal SSA: the institutions reinforce the role of market relations and market forces in the regulation of economic activity Non-market institutions such as states and trade unions play a limited role. 17

18 Two Types of SSA Liberal SSAs in US history: 1840s-90s, , 1979-today. Regulated SSAs in US history: ,

19 Crisis of a Liberal SSA The crisis phase of liberal SSA takes the form of a severe financial crisis and sharp recession, followed by stagnation. A liberal SSA gives rise to growing inequality, a tendency to overproduction, and increasing financial speculation financial crisis and sharp recession. 19

20 Crisis of a Regulated SSA The crisis phase of a regulated SSA takes the form of a decline in the rate of profit and severe macroeconomic instability. Why: A regulated SSA gives rise to a high degree of worker bargaining power and increasing state spending. In phase 1 this promotes rapid expansion but in the crisis phase it leads to falling r and macro instability as labor and capital battle over income shares. 20

21 Claim about Stagnation The revised SSA theory implies that the current stagnation results from the conditions of the crisis phase of the neoliberal SSA, which began in

22 Claim of Revised SSA Theory Thus, the current stagnation results from neoliberal capitalism entering its crisis phase. Question: Why did neoliberal capitalism give rise to a structural crisis in the form of stagnation? Answer: The means by which neoliberal capitalism promoted 25 years of relatively stable capital accumulation gave rise to trends that are unsustainable in the long-run. 22

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24 How Neoliberal SSA Promoted a Long Period of Stable Accumulation 1) Increasing inequality 2) Financial Institutions risky behavior 3 Asset bubbles 24

25 How Neoliberal SSA Promoted a Long Period of Stable Accumulation Rising inequality led to a rising profit rate that created a strong incentive to accumulate. The speculative financial sector made risky loans to households. These loans enabled households to increase spending over time despite declining income. Big asset bubbles created rising household wealth that served as collateral for the loans. 25

26 Unsustainable Trends However, this process gave rise to unsustainable trends: 1) Rising household debt ratio 2) Rising financial sector debt ratio 3) Spread of risky asset-backed securities throughout the US and much of the global financial system 26

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29 Outstanding Value of CDOs in the Global Economy, Billions of US Dollars $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $

30 Crisis These trends were sustainable only as long as the real estate bubble continued to inflate. Every asset bubble eventually deflates In the real estate bubble started to deflate. Result: financial crisis and great recession. 30

31 House Price Index Relative to Homeowners Equivalent Rent

32 Crisis The crisis left the neoliberal SSA unable to any longer promote stable accumulation. The neoliberal SSA still brings rising inequality and risky financial sector activities. But it no longer can lead to rising household spending based on borrowing: The deflation of the real estate bubble continuing paying down of household debt. No new bubble can arise as a result of the effects of the crisis on investors. 32

33 Household Debt as a Percentage of Disposable Personal Income, % 130% 120% 110% 100% 90% 80% 70% 60% 50%

34 Stagnation The neoliberal SSA can still promote a high rate of profit. However, the neoliberal SSA now suppresses growth in aggregate demand. Also, the neoliberal SSA can no longer stabilize the key relations of a capitalist economy. Hence, the neoliberal SSA no longer can promote normal capital accumulation, according to SSA theory. 34

35 Annual Rate of Capital Accumulation for the Nonfinancial Corporate Business Sector 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

36 12.0% After-tax Rate of Profit of the Nonfinancial Corporate Business Sector 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0%

37 Predictions Marxian theory claims that profitability is the primary determinant of capital accumulation. Claim: The phases of an SSA affect not only accumulation but also the responsiveness of accumulation to the rate of profit. 37

38 Phase 1 of an SSA Given that the SSA promotes accumulation in this phase, an increase in the profit rate (r) should have a strong positive effect on the rate of accumulation (ROA). 38

39 Crisis Phase of a Liberal SSA Since the SSA no longer brings stability/predictability or rising aggregate demand, an increase in r should have a reduced positive effect on the ROA. 1) No assurance of growing demand rising r creates little or no incentive to increase accumulation. 2) Lack of stability/predictability do not know if rising r now implies higher r in near future reduced effect of rising r on ROA. 39

40 Crisis Phase of a Regulated SSA The SSA now no longer promotes stability/predictability. But high bargaining power of the working class plus rising state expenditure SSA still promotes rising aggregate demand. Implication: The argument that a rising r will have a reduced impact on ROA is weaker, compared to case of the crisis phase of a liberal SSA. 40

41 Two Claims First Claim We are in phase 2 of neoliberal capitalism => that is the explanation for the stagnation in capital accumulation (and GDP growth) Second Claim The stagnation in capital accumulation in phase 2 of (neo)liberal capitalism is caused by the weakening of the profitability-accumulation nexus. 41

42 Table 1: Summary Statistics Regulated SSA Phase 2 of Neoliberal Capitalism has stagnation of capital accumulation Average Rate of Accumulation (%) Average Rate of Profit (%) Observations Neoliberal SSA (Mean/SD) (Mean/SD) (Mean/SD) (Mean/SD)

43 Summary Statistics 1) No slowdown in the crisis phase of the post-world War II regulated SSA. 2) ROA is slower in phase 1 of the neoliberal SSA than in the preceding regulated SSA. 3) There is a big slowdown in ROA in phase 2 of the neoliberal SSA. 4) There is recovery of the rate of profit in the neoliberal SSA (especially phase 2) but no recovery of capital accumulation. 43

44 Capital Accumulation and Profitability Marxist theory: Capital accumulation is a function of the rate of profit SSA theory: SSA impacts the functional relationship Level effect: depends on the SSA Slope effect: depends on the SSA and on the phase of the SSA (phase 1 or phase 2) The dependence on the phase depends on the type of the SSA (liberal or regulated). 44

45 Regression Model We investigate the relation between ROP and ROA for the Nonfinancial Corporate Business Sector of the U.S. economy over the postwar period ( ) using a regression of the rate of accumulation (ROA) on the rate of profit (ROP) and a constant. To capture changes in the effect of SSAs on ROA, we interact the constant with a dummy variable for SSAs. To capture the change in the responsiveness of ROA to ROP in successive phases of SSAs, we interact ROP with dummy variables for SSAs and for phases of SSAs. 45

46 Regression Model ROA = rate of accumulation = net investment / capital stock (replacement cost) ROP = rate of profit = (after-tax profit + interest) / capital stock (replacement cost) RC = dummy for regulated capitalism (RC=1 for ) RC2 = dummy for phase 2 of regulated capitalism (RC2 = 1 for ) NLC2 = dummy for phase 2 of neoliberal capitalism (NLC2 =1 for ) 46

47 Interpretation of Coefficients suggests ROA is higher in the regulated SSA than in the neoliberal SSA, for every ROP (level effect). To derive the responsiveness of the ROA to ROP in different phases, take the derivative of the ROA with respect to ROP (slope effect): Regulated Capitalism: (1) Phase 1 (RC=1, RC2=0): (2) Phase 2 (RC=1, RC2=1): Neoliberal Capitalism: (1) Phase 1 (RC=0, NLC2=0): (2) Phase 2 (RC=0, NLC2=1): 47

48 Table 2: Regression Results Dependent Variable: Rate of Accumulation RC (0.30) Rate of Profit (1 Lag) 0.533** (2.79) Rate of Profit (1 Lag) X RC (0.08) Rate of Profit (1 Lag) X RC X RC (1.29) Rate of Profit (1 Lag) X (1-RC) X NLC *** (-5.65) Constant (-0.78) Observation 66 Notes. RC = regulated capitalism dummy, which is 1 for , and 0 otherwise. RC2 = regulated capitalism's phase 2 dummy, which is 1 for , and 0 otherwise. NLC2 = neoliberal capitalism's phase 2 dummy, which is 1 for , and 0 otherwise. T-statistics, using robust standard errors, are given in parentheses below parameter estimates. * p<0.05, ** p<0.01, *** p<

49 Table 3: Responsiveness of the Rate of Accumulation to the Rate of Profit Regulated Regulated Capitalism: Capitalism: Phase Phase 11 Estimate of p-value p-value Regulated Regulated Capitalism: Capitalism: Phase Phase 22 (crisis) (crisis) Estimate of p-value p-value Neoliberal Neoliberal Capitalism: Capitalism: Phase Phase 11 Estimate of p-value p-value Neoliberal Neoliberal Capitalism: Capitalism: Phase Phase 22 (crisis) (crisis) Estimate of p-value p-value 0.549*** 0.549*** (0.000) (0.000) 0.593*** 0.593*** (0.000) (0.000) 0.533*** 0.533*** (0.007) (0.007) (0.072) (0.072) 49

50 Econometric Analysis: Results 1) Accumulation rate is quite responsive to profit rate in the first 3 periods. 2) In the crisis phase of the postwar regulated SSA, there is no decline in the responsiveness of accumulation to the rate of profit (in fact, it increases). 3) In the crisis phase of the neoliberal SSA, the responsiveness of accumulation rate to the rate of profit declines significantly. 50

51 Conclusion 1) The current stagnation is not due to a list of individual factors, such as are cited in the current stagnation literature. Rather it results from the entire prevailing neoliberal SSA. 2) One or a few new government policies cannot overcome the current stagnation. Overcoming stagnation requires construction of a whole new SSA. 51

52 3) Resolving stagnation will take a long time The revised SSA theory suggest the following: Resolution of the crisis of liberal SSA requires construction of a new regulated SSA. Resolution of the crisis of a regulated SSA requires construction of a new liberal SSA. 52

53 3) Resolving stagnation will take a long time Constructing a new regulated SSA in the crisis period of a liberal SSA is difficult: Sections of the capitalist class must come to agreement about an active state role in the economy. A compromise must be negotiated between the capitalist class and working class. The liberal SSA hollows out the state, leaving a state that has little ability to effectively regulate the economy. 53

54 Resolving stagnation will take a long time By contrast, constructing a new liberal SSA can be accomplished relatively quickly. It requires deconstructing the institutions of the preceding regulated SSA and enshrining the principle of freeing market forces in the new institutions. A unified capitalist class has the power to carry out such a program relatively rapidly. Conclusion: If a new regulated SSA is to arise, it may take another decade to construct. Until then stagnation will continue. 54

55 4) Stagnation will not be permanent Stagnation eventually creates serious problems for the survival of capitalism. It gives rise to growing political polarization, with both rightwing and left-wing views finding rising support. At the moment, the stagnation seems to be leading toward a right-wing nationalist restructuring of capitalism. This might replace "democratic capitalism" with an authoritarian, repressive, and militaristic form. These same conditions can promote a strengthening of left wing political forces that might lead to either another period of regulated capitalism or even efforts to make a transition to socialism. 55