Economic downturn due to both economic structure and the Coronavirus

By Joe Montero

The U.S. economy looks like it’s going to the dogs. Europe’s is not well either. Countries, like Australia, are not too far behind.

Aggravated by the ongoing Coronavirus, the deteriorating situation can no longer be dressed by a pretense that everything is getting back too normal.

Contracting by 32.9 percent over the last quarter, the US economy has seen the biggest contraction since records began in 1947, according to the nation’s Commerce Department Bureau of Economic Analysis. This follows a 5 percent decline in the previous quarter.

Two declines mark an official recession. But this focus on two quarters tends to hide a longer running trend, and the reality, that no better can be expected in the foreseeable future.

Decline has hit personal consumption expenditure (PCE), exports, private inventory investment, non-residential and residential fixed investment. The only growth area has been federal spending on pandemic relief and this is not going to last. it Is is already being pruned back.

Meanwhile, the European Union’s economy shrank by 14.4 percent, according to its agency Eurostat. It’s decline has similarly been ongoing. It was down by 3.6 percent in the first quarter. This year has marked the worst since their statistics began in 1995.

For many other countries, it’s broadly the same story. The global economy is obviously sick.

Australia is no exception. According to the Treasury, real growth has been on a similar trajectory. This is shown in the graph below. If not for mining, the fall would have been considerably sharper.

Source: Treasury

Like in the other economies, interest rates remain at historical lows. This can be seen in the cash rate.

This means that monetary policy has lost much of its effectiveness as a tool for managing the economy, which has been a key factor pushing towards stimulus responses – something called fiscal policy by economists.

The pattern of real household consumption (an equivalent for personal consumption in Australia), tells its own story.

Source: ABS

What is important here, is the pattern of household expenditure as proportions between retail and services. The rise in services is largely the result of rising and non-discretionary prices, such as that of utilities. There is no option to opt out, and households are forced to further reduce their retail consumption, in the face of negligible income growth.

Retail is the key to economic the performance of an economy. This has been declining continuously in Australia. Total spending as shown by the next graph, shows it.

Source: ABS

This does not sit well with the notions, of an unrestricted market and small government, embodied in the Neoliberal approach.

By definition, an ongoing contraction of the economy is a failure of this market and of government to act on it. Overlooking this, is a convenient way for those who can’t face the truth, to ignore it and continue in the same way.

Add that the failure to deal with the Coronavirus pandemic is in itself part of the same failure.

Denial of the contradiction between notion and reality, lies behind the gathering gathering head of steam to go back towards the past. Intervention is presented as a short-term necessary evil, under the illusion that everything had been running perfectly well before the lockdowns.

Also hidden, is that the damage is deep and long lasting, and that this will shape economic prospects well into the future. There is not going to be a quick turn around, and we could be heading into the biggest economic collapse ever known.

There are two possible courses to the future. The first is to continue reliance on a return to the failed approach. The other is to move in the opposite direction.

A simple turn towards Keynesian econhomics to boost demand is not going to work on its own either. This must be coupled with solving the supply side problem. something is wrong with the structure of the economy, at the point where we make what we consume.

Stimulus in the form of corporate bailouts is even worse. It feeds the problem.

The problem is that there has been a shift the nature of work. Less labour is needed to create a given output. Investment has shifted to technology much more than it has to jobs. This shift has had the added effect that it has been reducing the value we add through our efforts, to what nature and previous effort have already provided. In the process of doing business, this has translated into a declining return on investment, and this fall radiates through the whole economy.

An idea of the shift is provided by the trend in business investment components in the real economy. The decline across the board has become obvious over recent years.

An even better picture is provided by the capital labour ratio till 2014. The ABS stopped at this point. The orange graph shows the rise of the use of capital as the use of labour declined. The blue one shows the dclining ratio between this change and output. Although it is not the same thing, it does give an indication of a relative decline in the creation of new value.

This in turn, has pushed investment away from the real economy. Chasing higher returns elsewhere, investment has flooded into the world of finance, profit through the transfer of assets, and speculative markets that do not add to new value.

An increase in the proportion of the economy that creates no new value, if it passes a certain point, becomes a drain on the whole.

Financial markets have consequently become increasingly volatile, and made economies more vulnerable to economic shocks than they would otherwise have been.

The following graph shows the industry shares of investment.

It its clear that for the longer term, the only target industries for increasing investment in have been mining, and less clearly seen, financial and insurance services, other business services, and secondhand asset transfers, themselves more closely associated with fiance than anything else.

A combination of unrestricted markets, shifting patterns of investment, and lack of appropriate government action, has meant fertile ground for the Coronavirus to thrive.

The pandemic will eventually go, leaving both national economies and the global economy in a weakened state, and even more vulnerable to economic shocks. Unless the underlying problem is taken on, expect more trouble on the horizon.

There is much that is calling for urgent solutions, and the reality is that we are facing a potential precipice. At the same time, adversity is what creates opportunities, unleashes creative responses and the capacity to work together. So long as the will is there, the possibility of overcoming hardship and creating a better tomorrow is real.

The case will continue to be put in the second part of this contribution.

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