Keen on the Profit Squeeze.

For those not in the know, there are several Marxist (some would say, Marx-inspired) theories of crises. Perhaps not surprisingly, beyond recent casual references to Marx, there has been some more serious talk about them on the net.

Well, one of those theories was termed, initially a bit humorously, the "profit squeeze" theory of crises. At any rate, the label stuck and many still use it, without any intended irony, although their first proponents preferred the "class struggle theory of crises" denomination.

In particular, Prof. Steve Keen (University of Western Sydney) has written about it recently, in connection with his own research. (See here)

But, what is the profit squeeze/class struggle theory of crises?

Keen puts it thus:

"(...) to produce output you need factories, and factories can't produce without hiring workers. The level of employment influences worker's ability to get wage rises, and profit is basically what's left after wages have been paid. Capitalists then invest using profits, and that investment determines whether the number of factories increases (because of gross investment) or falls (because of depreciation).

To my knowledge, one of the first expositions of the profit squeeze/class struggle theory of crises (a relatively widely cited and mathematically formalized one, mentioned by Keen) was provided by the late Richard M. Goodwin in 1967 (see here, here and especially here, in Spanish, for related econometric research).

During the stagflation crises of the mid-1970s, profit squeeze ideas gained some prominence among Marxist authors. Prof. John Bellamy Foster (University of Oregon) has recently written on it, contrasting the profit squeeze with Kalecki's views on employment, profits, prices and inflation.

Although Foster refers specifically to research by Raford Boddy and James Crotty published in 1974, other Marxist authors published on the subject around that time.

Sam Williams (from "A Critique of Crisis Theory" blog) analyses the work of Peter Bell and Harry Cleaver (1982), exclusively from a Marxist theoretical view. (See here)

Interestingly around the time, non-Marxist authors otherwise highly dismissive of Marxist economics, also found some interest in profit squeeze ideas, without acknowledging their origin.

Paul Samuelson, quoted by Mark Thoma:

"Actually, Keynes was an elitist exponent of the middle classes. Like Bertrand Russell, he recognized even before Stalin's hegemony the totalitarian inefficiencies of a system run in the name of the working class.
"An optimist who lived at a time when the world economy was running so badly that clever gimmicks could still work wonders, Keynes's object was to save capitalism from itself. In the end, his prescription in its most simple form self-destructed, as the obligation to run a full-employment humanitarian state caused modern economies to succumb to the new disease of stagflation - high inflation along with joblessness and excess capacity". (See here)

References:

Bell, P. & Cleaver, H. (1982). "Marx's Theory of Crisis as a Theory of Class Struggle". Research in Political Economy, 5.
Reprinted as
Bell, P., & Cleaver, H. (2002). "Marx's Theory of Crisis as a Theory of Class Struggle". The Commoner, 5, 1-61. (http://www.commoner.org.uk/?p=9)

Boddy, R., Crotty, J. (1974). "Class Conflict, Keynesian Policies, and the Business Cycle". Monthly Review, 26(5), 1-17.

Foster, J.B. (2013). "Marx, Kalecki, and Socialist Strategy". Monthly Review, 64(11).
(http://monthlyreview.org/2013/04/01/marx-kalecki-and-socialist-strategy)

Goodwin, R.M.  (1967). "A Growth Cycle", in C.H. Feinstein (ed.), "Socialism, Capitalism and Economic Growth". Cambridge: Cambridge University Press.

Herndon, Colbert and Abbott.

or, the Recession we Didn't Have to Have

h/t Mike Norman Economics
link to the same video 

These guys may have spoken about Reinhart and Rogoff, but I'll have to admit, they never said a word about the Grattan report in the Colbert Report...

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One who never fails to mention the important things is the next Australian prime minister, Tony Abbott.

Speaking last night with Leigh Sales (7.30 Report, ABC), the Liberal/National Coalition leader (conservative, centre-right, libertarian) made sure the viewers understood his stance about the surplus and that he is up-to-date with S&P expert assessments of the Australian economy:

"Our triple A credit rating is at risk if there's not a path back to surplus, and frankly, everything right now, Leigh, has to be tested against that framework: how is it going to help us get back to surplus? How is it gonna make our economy more productive?" (See here, my translation from Australian)

In a 13 minute interview, Abbott mentioned "SORE-plus" eight times... Phew! I feel better now that I know "good" economic management is on its way...

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Incidentally, according to this site, the Moon is currently 99% full.

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Are we heading to the recession we didn't have to have? The Abbott Recession?

Update:
05-05-2013 As the video originally linked to here was removed by its poster, I added a link to the same video, but posted under a different account.

The Grattan Report: Good News, Bad News.

The bad news? The Grattan Institute report is long and deadly boring: 86 pages and some 50 charts.

The good news? Its Overview (page 2) is superbly written and tells everything you really need to know about its content.

Thus, the problem.

The basic conclusion of the report is this: "To be sustainable, current budgets need to be in surplus".

Why must budgets be in surplus?

Because:

"Over the economic cycle of boom and bust, balanced budgets are much better than the alternative. Persistent government deficits incur interest payments, and limit future borrowings. As a result they can unfairly shift costs between generations, and reduce flexibility in a crisis. Yet in good times it is hard for governments to run a surplus. They are invariably tempted to spend money. Many voters prefer outcomes with no obvious losers" (page 2, repeated verbatim in page 10)

So, budgets must be in surplus as a rule to avoid the temptation, full stop: ("lead us not into temptation but deliver us from evil").

So, laid bare and in few words, that's the wisdom behind the Grattan report: deficits are evil, surplus are "much better".

Whatever appearances to the contrary (50 charts!), the Grattan report is not an applied economics work, but a morality tale. How can you tell? Check the usual buzzwords. That's the tale: "courageous leaders" take the "tough policy choices", against the wishes of "many voters [who] prefer outcomes with no obvious losers". It's the "responsible" thing to do.

In fact, unmentioned in that tale there is a propitiatory sacrifice: the "losers", to be scapegoated (this time, they may be looking at you). And there is a reward in the hereafter: all is done on behalf of the future generations.

How can I be so sure that this "study" is worthless? For at least two reasons.

More qualified people than me have explained this at length and you would do well checking with them. But I'll give a quick explanation: a government that issues its own currency doesn't need to borrow money, as the report claims. It doesn't need to collect money as taxes in order to spend, either. It creates its own currency. Monetary policy is, at best, an accessory.

But there is a simpler reason. The "erudite" report offers 8 pages of References. Among the authors cited, there are many luminaries, like Reinhart and Rogoff: 

"Some argue that high debt reduces economic growth... Their successors and financial institutions can then find it difficult to borrow at reasonable costs, and economic growth is often slow for a long time". (page 8)

Their epic and widely publicized debunking at the hands of Thomas Herndon, Michael Ash, and Robert Pollin last week deserves only a footnote. I mean, you wouldn't expect Grattan to revise their "work" in one week, just because its theoretical base was shown to be bunk, right? Besides, Herndon et al at least were included in a footnote, other serious criticism didn't even deserve a footnote.

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I don't wish to be rude. But there is no other way to say this: this report is among the stupidest things I've read in a long time.

When dealing with other people's lives, stupidity is a dangerous thing.

Update:
24-04-2013. The Grattan Institute's record for stupidity surprisingly didn't last long. Standard & Poor's broke it last night:

"Standard & Poor’s has warned that Australia’s AAA rating could be vulnerable in five years if the credit ratings agency doubts the government’s commitment to restoring the surplus, national debt keeps rising and the economy fails to self-correct".

The Moon is 96% full, according to this site, which may have something to do with the S&P announcement.

Farewell to Reason, Something's Gotta Give.

A year and 24 days ago, Australia arguably was in a stronger economic position than it is now: there was no end in sight to the mining boom, mining investment was pouring by the hundred of billions, terms of trade were the best ever.

Although the labour market was sluggish, federal treasurer Wayne Swan (Labor) was promising a dramatic fiscal turnaround. Austerity was all the rage among the local cognoscenti.

At the time, Tim Colebatch (The Age's economic editor) lambasted, in my views quite correctly, Swan's "foolish economic fetish":

"Wayne Swan's determination to deliver a budget surplus, regardless of the state of the economy, is seriously reckless. Labor has chosen to risk sending most of Australia into recession in order to keep a promise it should never have made".

Fast forward one year and 24 days to the present.

The Australian economic position has not strengthened a single bit since last year, quite to the contrary. The mining boom seems to be over, huge mining projects were cancelled, terms of trade worsened; further, by all accounts China is set to change its economic policy to one of slower growth. Colebatch mentions each and every one of these things.

More: just last week we witnessed the collapse of half the empirical evidence for the austerian case: the Reinhart and Rogoff soap opera.

And, according to Colebatch, even the still shadow treasurer, Joe Hockey (Liberal/National Coalition), seems to be - allelujah! - wisening up to the fact that the austerity hysteria will backfire.

And what is it Tim Colebatch advises the government to do?

"Both tax rises and spending cuts will be needed to get our budgets back in balance.
"The tax rises are easy: you don't need to raise tax rates (...)
"Second, the sense of entitlement needs to give way to restraint, almost across the board. In competition policy, the cosy deals done in easy times need to be unwound as they enter hard times. Fiscal policy needs to be tightened as monetary policy is eased (...)
"Wage growth must be restrained, and productivity growth, in all areas, become the priority. Environmental policies should be made 'economically efficient', while 'productivity-enhancing infrastructure' is the one area of spending that should grow."

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That goes to show that you can't praise journalists, as I praised Colebatch one year and 24 days ago: a 180 degrees flip-flop in one year and 24 days. And a flip-flop in the worst possible opportunity.

The only thing that didn't change is this: austerity is still all the rage among local cognoscenti.

Man, we're so totally screwed it's not funny.