Long Snake Moan: How Capitalism’s Productivity Failure Is Driving Debt and Speculation

by James Meadway

17 April 2019

Daniel L. Lu /Wikimedia Commons

New research from US business think tank Conference Board shows that the rush into the digital economy is doing nothing for capitalism’s global woes.

Far from spurring the system to greater and greater heights, digital technology seems to be having no impact on the growth in productivity that is crucial to the system’s long-term future. Measured as output per worker, global productivity has risen just 2% a year in the past few years, compared to 2.9% a year in the decade before the 2008 crash. Strikingly, Conference Board reckons almost none of this productivity growth has emerged because new technology has made work more efficient. And with sick man of Europe Britain leading the way, the productivity slowdown here has been worst out of all the so-called ‘advanced economies’.

One traditional culprit for low productivity is low investment, which continues to falter. Business investment in Britain has been falling for some time, but this is about more than just the uncertainty induced by the government’s Brexit failures, since investment is also weak across the advanced economies, including the US and Germany.

As discussed in my previous column, in the place of investment, companies (especially large companies) are hoarding cash at record levels, with British companies holding nearly £700bn unused in their bank accounts, and paying out record amounts to shareholders, often using share buybacks. IMF figures show US corporations making payouts worth 0.9% of their assets to shareholders last year, but making investments worth just 0.7%. At the same time, financial chicanery has become routine for non-financial corporations, with the growth in the use of dubious debt instruments like collateralised loan obligations piggybacking the wider expansion of corporate debt.

For smaller companies lacking the huge cash reserves of Apple, Amazon, and the other tech giants to pay down debts, rising loans leave them increasingly exposed to the risk of failure. A 1% increase in interest rates, Apple revealed to US regulators, would cost it $4.9bn: huge, but absorbable given its $262bn holdings of liquid assets. For heavily indebted smaller companies, only a small knock – a minor increase in interest rates or a small reduction in their cashflow, say – would leave them immediately exposed. If there is a trigger for a future financial conflagration, it is less likely to come through the (now heavily regulated and controlled) household mortgage market, like 2007-8, but one could easily emerge amongst smaller non-financial companies.

But stepping back from speculation about future crises allows us to see the underlying pattern at work. Since the Great Financial Crisis, caused, in the first instance, by the spectacular explosion of a debt bubble, globally capitalism has inflated another. Rising real-world costs for manufactured inputs have combined with falling prices for sold outputs in the digital economy to produce a fearsome mix for capitalism as a whole. Investment looks less and less appealing in these conditions, since the costs are high and returns increasingly uncertain. Instead, the insistent need for profits pushes all parts of the system towards models of generating revenues that depend less on selling specific goods or services at a specific time, and more on demanding subscription fees and grabbing data.

Far from slowing down financialisation, all of this points towards its deepening, in which every large company tries to become more and more like a bank – an institution that sits between every consumer and every other businesses, attempting to earn revenues from them – and where hoarding cash and very liquid assets are the safest possible bet against the future.

This model generates little meaningful ‘productivity growth’, in the way the system usually thinks about it, since fewer items are sold directly and so it is harder to judge how much value has been produced. But where companies can exploit monopoly power, they can do so to earn revenues. And where they can earn revenues, these corporations can create new financial possibilities – such as lending their own hoards of cash and other assets to generate more income. As a result, the 30 largest US corporations hold $1.2tn of corporate debt, turning the likes of Apple, with its $156bn loan book, into major investment managers.

That, needless to say, in turn exposes them to financial risks elsewhere in the system – risks that become more convoluted, the more each corporate hoarder chooses to lend to other corporate hoarders who are themselves making loans to other corporations, and so on down the whole sorry chain. The serpent, driven mad by rising costs and falling prices, is close to eating its own tail.

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