Thursday, November 16, 2006

Cooking The Books (2006)

From the November 2006 issue of the Socialist Standard

Cooking the Books (1)

Abnormal behaviour

The Bank of France is worried. Capitalist enterprises, it seems, are not behaving normally.

In an article entitled "Is the investment behaviour of enterprises 'normal'" in the August issue of its Bulletin , the Bank notes that enterprises in the G7 countries (US, Japan, Germany, Britain, France, Italy and Canada) are registering "very strong profitability" and that "as a percentage of GDP enterprise profits are at their highest level for decades", but that an unusually high proportion of these profits are not being reinvested in production. Some (most in fact) are of course but what is not normal, according to the Bank, is that in 2005 the enterprise sector of the economy was a net lender to other sectors, which is "disconcerting as one would normally expect enterprises to be in general net borrowers" (i.e., to be borrowing money to invest in production), adding "in fact this has always been the case up till now" and that "it is particularly surprising to note that investment is not more dynamic when long-term real rates of interest are at their historical lowest level".

Two questions arise. If they are not investing enough, what are enterprises doing with the extra profits? And, more fundamentally, why are they not investing them?

The Bank identifies a number of ways in which enterprises are using the profits that they are not investing. First, holding them as liquid assets (placed on financial markets in forms that can be readily be converted into cash): "liquid assets represent 9 percent of their total assets, a level that is difficult to explain by any historical precedent or traditional economic approach". Second, distributing them to shareholders. Third, spending them on taking over other enterprises.

As to why, the Bank offers two scenarios. In the "optimistic" one, the current underaccumulation of physical assets is seen as the other side of the coin to the overaccumulation that took place in the 1990s; in other words, as one phase of the capitalist business cycle; sooner or later the profit hoards will disappear as they are absorbed by rising wages and interest rates when the cycle moves on to its next phase.

In the "less optimistic" scenario, the unusually high level of uninvested profits is seen as the result of investment in physical assets being more risky than placing the money on financial markets. The Bank lists three reasons as to why investment is currently regarded as being too risky: geopolitical uncertainties, anticipated inevitable exchange rate adjustments, and the threat of protectionism.

At the moment, the Bank says, this can only be conjecture, but:
"A situation where the risk premiums of physical assets are very different from those of financial assets cannot go on for ever. In the long term financial assets only reflect an underlying 'real' economic reality. These two categories of risk premium can in time only converge".

The Bank says that it is "of the greatest importance for the world economy that this process [of convergence] should take place in an orderly manner" (ie., without a financial crash and its consequences), but doesn't seem too optimistic that it will. It might of course. We shall see. In any event, what sort of economic system is it in which it is normal to have to rely on whether or not a big enough profit can be made to get things produced?

Cooking the Books (II)

Statistical errors
There is a silly argument going on at the moment between the government and an organisation called Migrationwatch which favours tougher controls on immigration. The government claims that people born abroad working in the UK have caused "a small but positive increase to gross domestic product per capita". Migrationwatch claims the opposite and argues that in future only immigrants whose work contribution raises GDP per head should be allowed in.

GDP per head, i.e., total annual production of goods and services divided by total population, is simply a statistic; it doesn't cause anything but is a measure or reflection of a situation caused by real facts. If GDP per head falls because GDP has fallen or has remained unchanged while population has gone up this might indicate a deterioration in general living standards (though even then most people could be unaffected since a fall in GDP per head does not mean that everybody is worse off any more than a rise means everybody is better off). But GDP per head is not falling but rising. So, what the government and Migrationwatch are arguing about is the hypothetical question of whether it would have risen faster if there had been fewer immigrants.

But how do you measure what a worker contributes to GDP, i.e., to total annual production? Migrationwatch explicitly, and the government implicitly, assume that a worker contributes only the equivalent of their wages. As Migrationwatch argue in a recent "research paper":
"In the calendar year 2003 the UK's GDP was 1.099 billion pounds. 613 billion pounds of this amount was 'compensation of employees'. So, apportioning this amount of GDP generated by employment earnings amongst the working population of 27.6 million people this gives average earnings per worker of 22,200 pounds a year" ('Selection criteria for immigrant workers', from the migrantwatch website).

But if workers produced only 613 billion pounds of a total production of 1,099 billion pounds who produced the rest? The same statistics show that the rest is made up of profits (25 percent), "mixed income", i.e., the profits and the labour contribution of the self-employed, (6 percent), and the difference between taxes and subsidies.

Since work is the only possible source of new wealth, a more accurate calculation would be to divide 1,099 billion pounds by the working population; which gives a contribution of 39,800 pounds per worker. This would reflect the fact that all productive workers, whether native-born or born abroad, contribute to GDP considerably more than their earnings but what they produce above this goes as profits to their employers.

This rather demolishes Migrationwatch's convoluted calculations to reach the conclusion that "a worker must earn about 27,000 pounds a year to make, on average, a positive contribution to GDP per head" and that only migrants earning this or more should be allowed in.

Migrationwatch's stigmatising of any worker, native-born ones too, earning less than 27,000 pounds as a burden since they contribute less to GDP than average so dragging GDP per head down is just plain ridiculous. As GDP per head is an average there will always be some above and some below it. Migrationwatch's proposal to raise the average by eliminating some of those below it would achieve this but it would reduce GDP (since even Migrationwatch admits that any immigrant who works contributes something to GDP). A bit like cutting off your nose to spite your face. But then, Migrationwatch is only deploying apparently sophisticated statistical arguments to back up its already-decided policy of "keep the riff-raff out".