99% versus 1%? Or 50% and 40% versus 10%?

Does the phrase ‘the 99% versus the 1%’ make any sense? Firstly, it assumes that there is a clear dividing line of income, or perhaps ownership of wealth, between the bottom 99% and the top 1% in a particular society. Secondly, it assumes there is a difference of political outlook between those who are in the 99% and those who are in the 1%. Thirdly, users of the slogan mostly ignore the fact that there is a clear hierarchy of income and wealth among countries in the world, separate from whatever may be the distribution within a particular country.

Here I will present some information on the first of these issues. The second can be dismissed simply by noting that there is no necessary relationship between a person’s political outlook and their position in a country’s income and wealth tables. A more relevant fact is that masses of people in richer countries can be pro-imperialist, to the point of signing up for a war, even if they are not in the higher echelons of society. The third point has been examined in a number of other articles on this blog.

Statistics for rich countries commonly show that the very richest people have large multiples of everyone else’s income or wealth, so that it does indeed seem as if those at the top, the 1%, are a well-defined separate group. However, a closer look at the figures reveals a different picture.

The examples I will give are focused on the ownership of financial assets in the US and the UK. Not only the ‘rich’, but also millions of others own these assets, perhaps directly, but more commonly via savings plans, endowment policies and pension schemes.

US Census Bureau data for 2007 show the following:

- For US families in the 80-90th percentile of the income distribution, the median holding of equities was $62,000, and for families in the top 10% of the income distribution, the median holding was $219,000.

- By comparison, the median value of equity holdings for families in the 40-60th percentile was less than $18,000; it was less than $9,000 for the 20-40^th percentile.

The families counted were only those owning equities, however half of US households do, directly or indirectly, so the top 20% of these families will account for some 30 million and the top 10% are 15 million people in the US, based on a population of 300 million. These figures exclude other assets, such as bonds, property and pensions, which would substantially raise the sums, especially for the higher income groups.

A variety of UK data sources show the following facts:

- In 2005 there were some nine million people in the UK owning equities either directly or via mutual funds, some 15% of the UK population.

- At the end of 2010, UK individuals directly owned 11.5% of the value of UK equities, of £204.5bn worth, excluding any holdings via investment funds.

- Estimates of the net financial wealth of UK households in 2008-10, including cash savings, bond and equity holdings minus financial liabilities (excluding mortgages), showed a mean figure of £44,200.

- The latter distribution was skewed dramatically, and the median net household wealth was only £6,600, but it is instructive to note the details.

- Nearly a quarter of all households had zero or negative net financial wealth, 55% of households had from zero to £50,000 net financial wealth, 9% had from £50,00 to £100,000 and nearly 12% of households had more than £100,000.

These figures, as in the US case, also ignore the large exposure to equities and bonds that individuals have via pension funds, which in the UK case make up 39% of total household wealth compared to just 11% for financial wealth. Another 39% of household wealth is made up from property holdings, with 68% of households being owner-occupiers.

In conclusion, those who want to use a slogan like the ‘99% versus the 1%’ might consider revising it to ‘the 30% broke and the 50-60% doing all right versus the 10-20% rich’. Admittedly, it is not as catchy, but having to mouth it less often might allow some time to examine the realities of the imperialist world economy today.

Tony Norfield, 17 June 2013

Monopoly

‘If it were necessary to give the briefest possible definition of imperialism we should have to say that imperialism is the monopoly stage of capitalism.’ Lenin, 1916

Lenin’s definition of imperialism involves the control of the world economy by groups of monopolistic companies, not simply monopolised production in particular countries, and also a hierarchy of nations in the world economy, with the biggest capitalist powers dominating. The role of the state is important because of the inevitably uneven development of world capitalism. More economically developed countries will tend to have more productive companies that are larger and stronger in the world market, and a state that will tend to have bigger resources for domination than others. Lenin’s five summary features of imperialism were posed as the key aspects of a single imperialist reality, not as independent factors that happen to coincide, and the monopolistic development of the world economy was key.

Monopoly power is good for the monopolist, but less so for the national economy in which it operates. Hence, there is usually a state policy against local monopolies and cartels, complete with legislation or regulatory bodies to limit the abuse of market power. This is a rational move on the part of state authorities for the working of the domestic capitalist system, since a stranglehold over the supply of key commodities and services by a few companies could be damaging for all the others. Marx had already noted in Capital that the establishment of monopolies in certain spheres had provoked ‘state interference’.

Probably the most famous early example of this was the Sherman Antitrust Act of 1890 in the US, although it took other state measures to limit the power of Rockefeller’s Standard Oil, a trust that refined 80% of the national US oil output and overwhelmingly dominated the production, transport and markets for a range of other oil and energy products. There have been further ‘anti-monopoly’ policies in the US in the past century, and in other countries that have agencies to investigate and rule on markets, such as the UK’s optimistically named Competition Commission, a successor to its Monopolies Commission. Yet these have done little to prevent a steady drift towards further monopoly power in most sectors of the economy. An extreme example is in South Korea, which has been dubbed ‘the Republic of Samsung’ by locals, since the company’s conglomerate structure, from road construction to oil rigs, to hotels, insurance and smartphones, accounts for a fifth of national output.

However, the concern a particular state might have about market domination in the domestic sphere does not extend to the operations of its companies in the international market. On the contrary, large companies get significant backing from their states for expanding their foreign business. The logic here is that the consequence of any exercise of monopoly power is another country’s burden, one that might even favour the home country via the improved profitability of the domestically based company. Apart from any technical cost advantages that might result from larger scale global operations, international expansion also enhances the global market position of the company, boosting its monopolistic power.

Perhaps the only exception to this lax international policy is where EU member states have adopted an anti-monopoly policy within the EU area, as a means to promote a large single market that is considered to be in member countries’ joint interests. Hence, there have been some (limited) measures against price fixing in the EU. That has not stopped widespread manipulation of the ‘free market’, as detailed in a study of some 20 cartels published in 2006.

The result of the trend towards monopoly is that the worldwide production of most of the key products and the provision of most of the key services of modern capitalism is today dominated by a small number of companies. Fewer than around 10 companies often control the bulk of global activity in many areas, despite the further opening up of the world market in the past 30 years. Here are some examples:

• Over half of global vehicle production in 2001 was attributable to just five companies, and 11 companies accounted for over 80% of output.

• In the case of beer, so to speak, just four companies provided over half the world’s consumption in 2009.

• Glencore, ahead of its merger with Xstrata in May 2013 was reported to be controlling ‘more than half the international tradable market in zinc and copper and about a third of the world's seaborne coal; was one of the world's largest grain exporters, with about nine percent of the global market; and handled three percent of daily global oil consumption’.

• In a more recently developed market, mobile phones, the degree of monopolisation is little different: in 2010, six companies accounted for just over 60% of global sales, with Nokia and Samsung having nearly half the market between them.

• Everybody knows about the domination of Apple, Microsoft and Amazon in their respective markets.

Naturally, the monopolistic corporations of the world are not equally distributed among countries. An UNCTAD report showed that of the top 100 international non-financial corporations in 2008, ranked by total assets, 75 had a ‘home’ in just six: the US (18), UK (15), France (15), Germany (13), Japan (9) and Switzerland (5).

None of this information is a big surprise. However, I though it was worth sharing as a further illustration of today’s imperialist world economy.

Tony Norfield, 14 June 2013

Cats, Dogs and People in the Imperialist World Economy

Here is a selection of facts to ponder, sent to me today by a friend. They indicate how it is better to be a cat or a dog in an imperialist economic power than a worker in an oppressed country.

This is another angle on the Bangladesh textile factory atrocity that was recently in the news, something which gave a dramatic example of the human cost of exploitation that goes beyond the figures for wages that I covered in the article 'What the "China Price" Really Means' on 3 June 2011, when analysing how much of the value produced in poor countries finds its way into the consumer lifestyles of the rich.

You should probably sit down before you read this, although the information does not contradict what everyone knows is true:

The UK spends £14.9 billion a year on pet care – an average of around £11 per pet each week – of which pet food is estimated at £2.7bn.

People in the West spend £11 billion a year on ringtones for their mobile phones.

The average monthly wage of a Bangladeshi textile worker is £29.

Bangladesh State annual spending on education $11 per capita.

Mintel Industry Report on the UK retail sector

 

Pet Food and Supplies - UK - March 2011

* UK consumers are heavily invested in the pet care market. Their personal lifestyle, health and hygiene expectations are being transferred to pets, and the market is only too happy to cater to this demand.

* Weight control is becoming as relevant to pets as it is to humans with a third of dogs and a quarter of cats considered to be overweight. The growing awareness of pet obesity has prompted a number of targeted initiatives and also provides further opportunities for specific diet foods for certain breeds and ages.

* Pet treat brands can continue to add value to the category by refocusing on the less mature and relatively underdeveloped cat treat market at the expense of dog treats.

* Another way in which brands can continue to grow sales is by tapping into the trend towards pet parenting, with 70% of pet owners treating their pets with as much care as they would a child, with products such as greetings cards and other gifts.

Tony Norfield, 9 May 2013

Reflections on Reinhart & Rogoff

It turns out that there is no slump in economic output once government debt rises above 90% of GDP – the case for austerity has been blown apart! That is the conclusion of people who have joined the attack on a widely cited piece of research by Carmen Reinhart and Kenneth Rogoff, from the economics editor of the Financial Times, the head of PIMCO, one of the world’s largest investment funds, and many others.

Reinhart and Rogoff’s thesis was that higher government debt, above a trigger level of 90%, would produce much lower growth, so that more government spending to escape recession would backfire.[1] A recent academic paper showed that, among other things, they had miscalculated some of the numbers underpinning the result.[2] The authors admit the miscalculation error, but argue that their broad conclusions remain valid. What should we make of this policy spat?

A debate over econometrics, of all things, has risen to such prominence because austerity is under way in many countries. Opponents of these policies want to show it is unnecessary: there is an alternative; a Thatcherite ‘no alternative’ should have been buried with the rusting Iron Lady last week.

But consider an issue of principle. What if the data, properly assessed, had indeed shown that more government spending – leading, at least in the short-term, to more government debt – was bad for growth? After all, other studies, not simply Reinhart and Rogoff’s, have made the point that high levels of all kinds of debt are associated with weaker growth.[3] Does that mean that austerity can now be an acceptable policy? This indicates the narrow terms of such a debate; one that takes for granted that what is good for the health of the capitalist economy is good for humanity, give or take a bit of redistribution. Not surprisingly, none of the opponents to Reinhart and Rogoff argued that capitalism is a reactionary system whose imperatives should be rejected.

It is difficult to express quite how stupid the usual debate is when the capitalist system is faced with its most serious economic crisis. However, what underlies the common critical view of capitalist policy is not concern with the depredations visited upon the victims of imperialism, but the growing realisation that the cost of the system is now also to be borne by (most of) the inhabitants of the imperialist powers.

The problem they face is that the rationale for government spending cuts as part of a policy to reduce debt and restore conditions of profitable accumulation does make some sense. After all, more or less everything else has already been tried in the major capitalist powers, and to no lasting effect. We have seen a dramatic rise in government spending, including taking on the liabilities of a blown out financial system that was the main source of the previous ‘prosperity’, close-to-zero interest rates at which banks can borrow from the central bank and extraordinary measures of ‘quantitative easing’, including the latest gambit from the Bank of Japan.

To presume that austerity is being introduced as a mistaken policy measure ignores the unwelcome fact that there are basically no alternative policies left. Yes, austerity will bring economic pain and destruction, and (hopefully) political turmoil too, but that is the nature of the beast. Unless that nature is understood, the beast will not be overcome. The most that advocating ‘alternative policies’ rather than a wholehearted opposition will do is delay the beast’s bloody meal of its opponents from breakfast until lunchtime.

Tony Norfield, 22 April 2013

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[1] Carmen Reinhart and Kenneth Rogoff, ‘Growth in a Time of Debt’, NBER Working Paper 15639, January 2010.

[2] See the assessment from the Financial Times, at http://www.ft.com/cms/s/0/1c3bae3c-a6ce-11e2-95b1-00144feabdc0.html#axzz2QXyv5qPi

[3] See Stephen G Cecchetti et al, ‘The Real Effects of Debt’, August 2011, on the BIS website at http://www.bis.org/publ/othp16.htm Also see the articles on this blog: ‘Debt and Austerity’, 8 August 2011 and ‘Capitalist Crisis, Keynesian Delusions’, 5 September 2011.

UK Foreign Direct Investment Profits

The table below is an update of some figures shown in the first article on this blog, 'The Economics of British Imperialism' in May 2011. That article covered the broad mechanism in play, something I am still researching, particularly its financial aspects. This table only refers to one dimension of the total picture, but an interesting one nevertheless. It shows the profit rates of outward UK direct investment, in total and by geographical region, including some key countries.

Profit rates are calculated by measuring company earnings divided by the average value of share capital and reserves owned by UK companies in that year and the previous one. The same pattern of profit rates applies for these numbers that go up to end-2011 as the for the ones to end-2009 in the 2011 article: the bulk of FDI assets are located in the richer countries, but a much higher profit rate is gained from the poorer countries. There are exceptions, especially for UK investment (largely in mining operations) in Australia. However, the overall divergence is clear. Africa, Asia (including the Middle East in these data) and Brazil stand out as sources of huge premium investment returns compared to other locations. The India numbers probably explain UK Prime Minister Cameron's visit last month to India, together with representatives of more than 100 British companies.

It seems odd that there would be such a divergence in profit rates. After all, if a higher profit rate is available elsewhere, then why does not more capital migrate to that country, rather than stay in one of the richer countries? This raises bigger issues about the monopolistic structure of the world market, whether there is much of a process of equalising rates of profit in the world economy, and whether having a presence in major, rich markets is necessary from the perspective of maintaining commercial control of major consumer markets, even if it turns out not to be directly profitable. Or, alternatively the data may just be rubbish, hiding the real locations of company operations and/or giving the wrong view of the returns on investment! One obvious problem here is that companies can relatively easily relocate the location of their profits to countries with lower tax rates, whether by charging 'licence fees' to a pretend headquarters in a tax haven, or by some other means of transfer pricing.

John Smith, cited elsewhere on this blog, has argued correctly that one should distinguish FDI by its type: where is the productive FDI capital located, as opposed to the commercial or financial capital, or other unproductive operations? In addition, what may appear to be productive capital might be getting most of its 'value added' from cheap supplies from poor countries. UK FDI data suggest that most productive UK FDI is located in rich countries, but these are regional figures with little country breakdown, something that is omitted to secure individual company information, but which only adds to scepticism about what the data actually reflect. In any case, such data cannot take into account the benefits to major companies of their links with foreign suppliers that they dominate in so-called value-chains.

This is a complex topic that is hard to resolve with official statistics. However, insofar as the data represent anything, the following table is what they show:

In 2011, the UK gained £102 billion of profits in total from its foreign direct investment, £58 billion more than was accrued by foreign direct investment in the UK, and the highest net earnings figure since 2008. Nice work if, as an imperial power, you can get it ...


Tony Norfield, 22 March 2013

A Private Chat About Provoking a War

The following text cites a conversation between a prominent British imperial politician and an American diplomat in London, in 1910. It is an interesting example of what key players say when they feel free to speak their mind. This was before Wikileaks, after all ...

"As Germany's industrial and financial power as well as its trade increased, a growing antagonism between Germany and the British Empire arose. Everywhere the ambitious German industry confronted a British competitor avidly observing the growing danger to his monopolistic trade relations, jealously guarded until then. A 1910 conversation between Lord Balfour, leader of the British Conservative Party, and Henry White, then United States Ambassador in London, shows the contrast between the two European industrial powers, and the attitude of the British leadership:

Balfour: We are probably fools not to find a reason for declaring war on Germany before she builds too many ships and takes away our trade.

White: You are a very high-minded man in private life. How can you possibly contemplate anything so politically immoral as provoking a war against a harmless nation which has as good a right to a navy as you have? If you wish to compete with German trade, work harder.

Balfour: That would mean lowering our standard of living. Perhaps it would be simpler for us to have a war.

White: I am shocked that you of all men should enunciate such principles.

Balfour: Is it a question of right or wrong? Maybe it is just a question of keeping our supremacy. "

(This text is from Georg Franz-Willing, ‘The origins of the Second World War’, Journal of Historical Review, Vol 7, Number 1, Spring 1986, p 97. The Balfour-White conversation was taken from a biography of Henry White) 

Tony Norfield, 4 March 2013

Running Out of Rope

It is easy to dismiss the downgrading of the UK’s credit rating by Moody’s as yet another example of an agency stating the blindingly obvious. Indeed, so belated are such judgements that a Bloomberg report notes that bond markets ignore more than half of the agencies’ decisions on sovereign ratings.[1] Moody’s decision is an embarrassment for the UK Chancellor, oleaginous Osborne, as he promised to retain the coveted AAA status. It could also be a soundbite benefit for the opposition, but for the fact that their spokesmen cannot even pronounce the words ‘credit rating’ correctly. However, the significance of the decision is that it shows how the UK is running out of options to manage the crisis and that a more aggressive policy is likely.

Moody’s cited two related problems that result in a third: weak economic growth and high debt levels mean that the UK government is in a much worse position to manage further ‘shocks’.[2] Hence the downgrade. Moody’s assessment is that stagnant growth will hinder the reduction of the UK government debt, which it now expects will reach a level of 96% of GDP in 2016. This figure is high, but it would have been higher still had it not included the Treasury allocating to itself a surplus of some £35bn from the Bank of England’s emergency operations, and if it did not exclude the liabilities from the so-called ‘temporary’ financial interventions after 2007!

These latter items are extraordinary. The £35bn is the accumulated net interest from buying gilts that the Bank of England has gained from the Quantitative Easing programme. It has purchased a huge amount of government debt (£375bn) with monetary financing, got paid interest on the debt by the Treasury and then gave the interest back to the Treasury. This is a form of debt monetisation, one that is moderated only by the Bank of England buying debt in the secondary market and under a specific programme, rather than being open-ended, direct government financing by the central bank. As for the financial interventions to save the banking system, the ultimate scale of the liabilities is unclear, but, taking the cases of Lloyds and RBS, the UK government spent £66bn on their shares in a quasi-takeover. On the latest count it remains under water to the tune of £14bn just on the RBS holdings.

Moody’s analysis focuses on government debt because it is rating the UK government’s credit. However, it is well aware of the extreme levels of debt in the whole UK economy, levels that have also alarmed the Bank of England and underpin the widespread forecasts of stagnation. Some 280 people are declared bankrupt or insolvent every day in the UK, according to Credit Action data, while outstanding personal debt is close to the value of GDP and average debt per UK adult is £29,000, or 117% of average earnings.

The explosion of debt is a function both of the 2007-08 financial sector slump, and of the longer-term dependence of growth on credit expansion. Now the limits have been hit, more or less. This is the most important implication of the credit downgrade decision. Far from Moody’s assessment being an attack on government austerity policy, or endorsing more government spending to rescue the economy, as Labour party commentators like to imply, the agency makes very clear that a further credit downgrade would be in prospect if

“government policies were unable to stabilise and begin to ease the UK's debt burden during the multi-year fiscal consolidation programme. Moody's could also downgrade the UK's government debt rating further in the event of an additional material deterioration in the country's economic prospects or reduced political commitment to fiscal consolidation.”

The ratings change will likely have little effect on UK bond yields, at least in the immediate period. It is only a one-notch downgrade from the top rating by one agency, and similar downgrades of the US in 2011 and France in 2012 had no measurable impact – one that would indeed be difficult to measure, given the extraordinary crisis policies followed by all central banks. Furthermore, Moody’s points out that the UK is in a robust position in its debt financing, given its freedom in monetary policy and the relatively long maturity of its outstanding debt. So, the end is not nigh yet.

Neither is any abrupt UK policy change likely to follow from Moody’s downgrade. Instead, the background default policy remains as before: a remorseless squeeze on living standards. In the five years to early 2013, average weekly earnings rose by 9%, but retail prices (RPI measure) rose by 17.2%, resulting in a fall of 7% in real earnings. More of the same is in prospect, with a variety of price hikes in the pipeline and little effective resistance from workers.[3]

However, this squeeze is showing no sign of recreating conditions for renewed economic growth. This is not because austerity curbs demand, as Keynesians like to argue, but because conditions for profitable accumulation remain stubbornly absent. Boosting ‘demand’ through more government spending would only make the debt dynamics worse, yet limits on spending have obviously done little to encourage investment. By the third quarter of 2012, the volume of business investment had recovered somewhat from the trough of 2009, but it remained 8% lower than at the beginning of 2008. At the end of 2012, the GDP measure of output was still more than 3% below its level four years earlier. Official interest rates are the lowest on record, both in the UK and elsewhere, but the rates at which companies can borrow do not make investment attractive. Stagnation persists.

A striking fact is that while there have been many reports of cuts in government spending, and plans for more cuts in future years, the latest data to January 2013 show no reduction in central government spending on social benefits or other expenditure (outside debt interest). Nominal spending has risen roughly in line with inflation.[4] This suggests that the complaints over ‘cuts’ are more about the cuts that are in prospect, while the real austerity is yet to come.

With a desperate economic situation at home, it was no wonder that Prime Minister Cameron recently took the largest ever delegation of companies, more than 100, to India to tout for business. The main items up for sale were British military hardware, and Cameron extolled the virtues of the Eurofighter jet, partly built in Britain, over the decision India looks already to have made, to buy 126 French-made Rafale fighters in a multi-billion dollar deal. Aside from exports, Cameron also represented the interests of British companies that wanted to invest directly in the Indian domestic market, one that looks more promising than Europe in coming years.

Another policy that is ripe for conflict with other struggling powers concerns the exchange rate of sterling. Over recent months the Bank of England has continued to endorse a fall in the value of sterling on the foreign exchanges to ‘rebalance’ the economy. Since mid-December, sterling’s value has slumped by close to 7% versus both the euro and the US dollar. That will do little to boost exports in a world economy where output growth remains weak and where many other countries also toy with devaluation policies. However it is another point of tension, to complement the debates over Europe’s proposed financial transactions tax and other populist initiatives.

Tony Norfield, 23 February 2013

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[1] Fergal O’Brien, ‘UK Loses Top Aaa Rating From Moody’s as Growth Weakens’, Bloomberg News 22 February 2013.

[2] “Moody's believes that the mounting debt levels in a low-growth environment have impaired the sovereign's ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody's has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.” The UK report is on their website: www.moodys.com

[3] Note that the Bank of England’s monetary policy committee is not bothered about ‘above target’ inflation when real earnings are falling and the rate of inflation has not (yet) become too embarrassing. This is especially when they are in no position to raise interest rates to curb inflation, as the old policy stance would have it, because of the still disastrous levels of debt.

[4] Total current central government expenditure rose by 6.3% year-on-year in January 2013, and for the period from April to January, the rise was 3.6%. ONS, Public Sector Finances, January 2013, Table PSF3A.