Marx got many things wrong about capitalism, but this capital glut dilemma is now playing out in 70mm.
If the world is turning protectionist, from USA to Britain to even mainland Europe, where anti-immigrant parties are growing in strength, there are several reasons for it. Jobs, growth and incomes have not been rising in the western world.
But underlying this “secular stagnation” is a stark reality of the global political economy: the balance of power between capital and labour has tilted dramatically in favour of capital in recent decades, thanks in part to globalisation, automation, and the relatively greater freedom and tax benefits given to facilitate global capital movements relative to labour.
Put simply, capital moves more easily across borders than labour, and capital owners are taxed less than those making a living from labour, whether physical or mental. This is why Warren Buffett, the iconic investor, says he pays a lower tax rate than his secretary.
This state of affairs makes even less sense when the world is awash with excess capital and an abundance of “relatively less skilled labour” (hence the voter attraction to Trump, and for Brexit), which ends up making things worse.
When capital is in surplus and cheap, and returns on capital taxed lower, it is even more tempting to replace labour with capital (which means more automation, and a dramatic shift in the focus of employment from the less skilled to the more skilled, which further increases income skews and the creation of even more capital surpluses).
To give just a few illustrations of the kind of cash sloshing around with corporations, here are some pointers.
Apple Inc alone has $246 billion in idle cash right now. Around the middle of last year, the top five tech companies (including Google, Oracle, Microsoft and Cisco) accounted for more than $500 billion in corporate cash holdings.
A CNBC report says that US corporations are holding around $2.5 trillion (more than India’s GDP) abroad, and another $1.94 trillion in domestic assets. Over and above this, the US money markets held $2.66 trillion in investor cash, while banks were stashing another $2.15 trillion in excess reserves with the Fed. Taken together, that’s $9.25 trillion in idle cash – half the size of the US economy.
In Japan, thanks to two decades of flat or shrinking demand, corporate savings have been consistently over 20 per cent of GDP for some years now.
In Britain, the FTSE companies were sitting on $66 billion of free cash some time ago.
In our own country, cash-spewing companies are not that many in number, but concentrated in the tech sector. According to a Business Standard calculation, Infosys hold nearly 15 per cent of its market value in cash, TCS 8 per cent, HCL Tech 8 per cent, and Wipro a massive 27 per cent. Such high cash levels in these companies are indicative of low investment opportunities at current valuations.
But India’s tech companies are exceptions, and pale in comparison to the first world’s growing cash surpluses. These indicate low possibilities of profitable investment, especially in a climate where the central banks have been offering almost zero-cost money to borrowers. The people gaining most from this free money are speculators, who have used cash to invest in shares and other assets, including bonds at low yields, increasing income inequalities and the wealth skew.
The global financial crisis of 2008 and consistently misdirected policies of central banks – especially endless cheap money – have helped enrich exactly those people who brought the financial sector crashing eight years ago.
The only way to start ending this capital glut is to reverse the current tax situation, where earnings on idle capital (capital gains on shares, interest income, dividends) are given kid-glove treatment, and income and corporate taxes are higher. It is time to tax earnings on passive capital on a par with earnings from business and wages/salaries.
Tax incentives must be focused on encouraging real job-creating investments, including public and private investment in public infrastructure, and not retention of savings with cash-rich companies.
Rebalancing the taxation of capital and labour earnings will, hopefully, lead to more job creation and less capital-intensive investment.
The world is simply too awash with capital to really create jobs. Beyond a healthy level of corporate savings, surplus cash is counter-productive. The more capital accumulates, the easier it gets to invest in labour-displacing investment.(evident from the leanings of previous Industrial Revolutions)
It’s time for capitalists to read Karl Marx, who predicted precisely this kind of capital glut and a maldistribution of incomes that reduces the possibility of expanding markets. Marx got many things wrong about capitalism, but this capital glut dilemma is now playing out in 70mm.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.