Warning: A wonky, but thankfully short, post follows.
Yesterday, the Naked Capitalism blog reposted some recent research by OECD economist Eduardo Olaberria that looks at the effect of capital inflows on bubbles in assets, particularly housing. With so many other signs of a housing bubble forming in Canada, I decided to quickly see if the dangerous trends highlighted in this report are present in our economy today.
In my previous post, I outlined the disconnect between profitability and investment in Canada’s private sector. While businesses are doing well and profits have rebounded quickly after the global financial crisis of 2007, investment has continued its slow and steady 20-year decline. This decline is especially visible when investment is related directly to profits. Slightly more than 60% of gross profits are currently being re-invested, down by a third relative to just two decades ago. Such a gap between strong profitability and dismal investment does not correspond with standard accounts of how the economy functions. According to standard accounts, strong profitability should encourage investment, not depress it further. This theoretical relationship is not borne out in recent Canadian experience.
While the last post also examined a few factors that could have been at play in creating this odd state of affairs, here I want to move in the opposite direction and look at two competing pictures of how to revive low private-sector investment. The first picture comes from Keynes, the second from Marx. I am particularly indebted to Michael Roberts, who has written extensively on the crisis from a UK perspective and who used a similar framework in a recent article (on the adoption of the idea of a permanent slump by mainstream Keynesians).
The two pictures agree on a diagnosis of on-going stagnation – with low investment being just one feature. Indeed, the lack of sustained recovery across much of the developed world has led increasing numbers of mainstream economists to declare that the current slowdown is permanent. Paul Krugman, likely the most prominent Keynesian economist, recently wrote that we may have entered a “permanent slump.” Even the more hawkish Larry Summers has added his voice to the chorus, referring in a recent speech at the IMF to a period of “secular stagnation”. Many Marxist and other radical economists have, of course, been making the same point for years, citing a variety of structural changes and imbalances in the economy, particularly those that characterize the neoliberal period that began in the 1970s when the great post-war boom lost steam.
While their diagnosis may be similar, Keynesian and Marxian economists see the way out of the current long-term slump rather differently.
Most developed economies continue to experience fall-out from the financial crisis of 2007-8. The Eurozone has been most ravaged, but the US and UK have not fared much better. After the initial rebound from the most severe crisis, growth in many economies has been decelerating to the point that some are once again contracting in real terms. At the same time, unemployment remains high – hitting record levels among youth in Europe for example – real incomes are flat for the vast majority, inequality is on the rise and austerity programs targeted at social services are eating further into living standards.
Canada has partly bucked these trends. While the overall growth rate has not returned to pre-crisis levels, it has not done nearly as poorly as that in Europe or even the US. Other measures of economic well-being do not suggest the level of alarm felt in harder-hit economies. To give two examples, the Canadian unemployment rate has grown relatively modestly and the distribution of gains since the crisis has not been skewed towards the very top to the extreme that it has been in the US and elsewhere. The financial press is increasingly optimistic – just this past week cheering newly-released above-forecast quarterly growth figures – and the Conservative government remains steadfast in touting our supposed economic prudence and resilience.
Finally, but not least, Canadian corporations also have had it relatively good since the crisis. Other than a sharp dip around 2008, profits have remained high and growing.
