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Overview

The Fourth Teaching Bloc of First Year Economic Theory focuses on Macroeconomics

History of global economy and the South African economy
Labour Market, Unemployment, Inflation and Monetary Policy
Technological change and employment in the long-run
Open economy macroeconomics and gains from trade
Public Policy, economics and politics

The Fourth Bloc is taught by Dr Kenneth Creamer, Mr Ramilane Mohlakoane, with assistance from Professor Michael Sachs
Kenneth Creamer can be contacted on kenneth.creamer@wits.ac.za
Ramilane Mohlakoane can be contacted on ramilane6@gmail.com

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Overview

Brief history of growth in South Africa
A century of macroeconomic change
Impact of the Covid-19 pandemic
Materials:
Core’s “The Economy” Unit 17 on The Great Depression, Golden Age, and Global Financial Crisis
Part of Core’s Unit 10 on Banking and Money

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South Africa’s GDP growth rate 1946 to 2019

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Historical background

Apartheid growth model (1950’s and 1960’s)
SA characterised as Colonialism of a Special Time (CST) settler and colonised living together in one country, period of very unequal growth characterised by super-exploitation and racial exclusion, as well as inward industrialisation around SA’s Minerals Energy Complex (MEC) (unlike pure extractive colonialism in most parts of African and the rest of the colonised world)
Crisis of apartheid (1970’s and 1980’s)
Initially apartheid was functional to capitalism, but in the 1970’s it became dysfunctional – not producing the internal market, the skills or the stability needed - “The apartheid Form became a fetter to capitalist development” (as well as the impact of intensified struggle and international isolation)

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Historical background (2)

Initial Post-apartheid period (Transition to democracy 1994 to 2008)
Growth dividend of peaceful settlement with some growth and employment creation, increasingly open to trade and part of globalising world economy, but not enough investment and strategic state guidance of the economy to overcome the historical structure of race, class and gender inequality
The comparatively high growth rate in the early 2000’s until the Great Recession was largely driven by high global commodity prices
Recent Post-apartheid period (Persistent low growth 2009 to 2021)
Hostile global conditions (global financial crisis and mineral prices falling as China adjusted its growth model) combined with and state capture and corruption resulting in low growth and social and economic indicators in wrong direction
Current challenge: Need new growth and transformation model - infrastructure, basic needs, green transition, digital transition, capable developmental state, racial and social cohesion to guide SA’s economy to a period of rapid and sustained inclusive growth

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Comparing inequality in SA in 2006 and 2015

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SA Household asset ownership 2009, 2011, 2015

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SA Household access to water and electricity 2011

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Global History – A century of macroeconomic crisis and change

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The last 100 years of global economic history

There have been three distinctive economic epochs in the last 100 years

After WW1: The Roaring Twenties ending with the Great Depression
The Golden Age of Capitalism ending with Stagflation, and
The Great Moderation ending with Financial Crisis of 2008

Now COVID-19 global pandemic

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Each epoch ended in a crisis

The end of each of these epochs was a sign that institutions that had governed the economy to that point had failed.
The Roaring Twenties - the stock market crash of 1929 and the Great Depression
The Golden Age - decline in profits and investment and the oil shock and stagflation of the 1970’s
The Great Moderation - the Financial Crisis of 2008-09
The policies adopted in response to the end of the Golden Age restored high profits and low inflation at the cost of rising inequality, but did not restore the investment and productivity growth of the previous epoch, and made economies vulnerable to debt-fuelled financial booms such as the Financial Crisis of 2008-09

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1. Roaring Twenties ending in the Great Depression

1921 to 1941
The World economy was growing (although not in Germany) and the stock markets were booming in the 1920’s.
The crisis of the Great Depression is the defining feature of the first epoch. It inspired Keynes’ concept of aggregate demand, now standard in economics teaching and policymaking.

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2. The Golden Age of Capitalism ending in Stagflation

1948 to 1979
The golden age epoch stretched from the end of the Second World War to 1979, and is named for the economic success of the 1950s and 1960s.
The golden age ended in the 1970s with a crisis of profitability and productivity, and the emphasis in economics teaching and policymaking shifted away from the role of aggregate demand toward supply-side problems, such as productivity and decisions by firms to enter and exit markets.

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3. The Great Moderation ending in the Financial Crisis

1979 to 2015
In the most recent epoch, the global financial crisis caught the world by surprise.
The potential of a debt-fuelled boom to cause havoc was neglected during the preceding years of stable growth and seemingly successful macroeconomic management, which had been called the great moderation.

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Productivity over 100 years

Productivity growth: is the growth of hourly productivity in the business sector. The dashed blue lines show the average growth of productivity for each sub-period.
1. Productivity growth hit low points in the Great Depression,
2. The golden age of capitalism got its name due to the extraordinary productivity growth until late in that epoch.
3. Productivity growth hit low points at the end of the golden age epoch in 1979, and in the wake of the financial crisis.

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Unemployment and productivity growth in the United States (1914-2015)�

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Unemployment over the 100 years

Unemployment:
1. High unemployment dominated the first epoch.
2. The success of the golden age was marked by low unemployment as well as high productivity growth.
3. The end of the golden age produced spikes in unemployment in the mid 1970s and early 1980s. In the third epoch, unemployment was lower at each successive business cycle trough until the financial crisis, when high unemployment re-emerged.

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Income share of the top 1% in USA

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Inequality over the 100 years

Inequality: data on inequality for the US showing the income share of the top 1%.
1. The richest 1% had nearly one-fifth of income in the late 1920s just before the Great Depression.
2. Their share then steadily declined during the Golden Age of Capitalism
3. During the Great Moderation the income share of the very rich was restored and surpassed 1920s levels.

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Changing features of the US economy

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COVID-19 pandemic

Global crisis – all over the world at the same time
Causing contraction on both the supply side and demand side of the economy
Job losses, businesses closing, taxes falling, spending on public health, income support and business support, public debt rising,
But, Financial system itself is not in crisis and can be used to respond to the crisis

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The Great Depression

Capitalism is a dynamic economic system - booms and recessions are a recurrent feature
But not all recessions are equal - in 1929 a downturn in the US business cycle similar to others in the preceding decade transformed into a large-scale economic disaster—the Great Depression.
Three simultaneous positive feedback mechanisms brought the American economy down in the 1930s:
Pessimism about the future – rise in S, fall in I and C
Failure of the banking system - decline in income meant loans could not be repaid and banks failed
Deflation – prices fall so real value of debts rose and could not be repaid (households delay Consumption)

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Effect of Great Depression on US economy (1928-1941)

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Government Policy response to Great Depression

Fiscal Policy – was not expansionary enough until WW2
Monetary policy – even though nominal interest was lower the real interest rate was higher due to deflation (r = R – ( - inflation))
Roosevelt’s New Deal – effective in changing expectations

Programmes to increase employment and Aggregate Demand (AD)
US left the gold standard in 1933 allowing US to have a more competitive currency (fixed rate of $20,67 per ounce of gold devalued to $35)
Reforms to banking system to avoid collapse of banks and bank runs

Note on Gold Standard: Leaving the gold standard allowed the US greater flexibility in managing its own aggregate demand (AD) using interest rates and money supply, while on the gold standard the US had to set interest rates to fix the USD to the gold price and could not simultaneously use the interest rate to stimulate AD
Note on AD: The change in people’s beliefs about the future was just as important as these policy changes. On 4 March 1933, Roosevelt had told Americans that: ‘the only thing we have to fear is fear itself’
Spending decisions have a forward-looking focus. This makes expectations relevant. If people believe that aggregate demand is going to increase (output rise, unemployment fall), they will feel more confident, spend more, and give a further boost to aggregate demand. People will increase their spending, which will reinforce the actions of government – helping to advance a ‘self-fulfilling prophecy’.

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Golden Age – high growth and low unemployment

The growth rate of GDP per capita was more than two-and-a-half times as high during the golden age as in any other period.
Instead of doubling every 50 years, living standards were doubling every 20 years.
Saving and investment rose and capital stock grew almost twice as fast during the golden age
Key drivers:

Changes in economic policymaking and regulation: Larger role for the the state and clear Keynesian stabilisation role for fiscal and monetary policies, also a new system of fixed by adjustable exchange rates the Bretton Woods system
New institutional arrangements between employers and workers: Because trade unions and workers’ political parties were now in a stronger position to bargain for a share of the productivity gains, they supported innovation—even when it meant temporary job destruction

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Postwar Accord

An informal agreement (taking different forms in different countries) among employers, governments, and trade unions that created the conditions for rapid economic growth in advanced economies from the late 1940s to the early 1970s.
Trade unions accepted the basic institutions of the capitalist economy and did not resist technological change in return for low unemployment, tolerance of unions and other rights, and a rise in real incomes that matched rises in productivity.
Note: During this period many African and Asian countries experienced decolonisation and own rule. South Africa displayed much of the high economic growth and productivity growth, but there was sharp racial inequality as the 1960’s and 1970’s was also a period of ‘high apartheid’ where economic growth was built on the system of super-exploitation of black workers.

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The End of the Golden Age

The virtuous circle of the golden age began to break down in the late 1960s
Years of low unemployment convinced workers that they had little chance of losing their jobs. Their demands for improvements in working conditions and higher wages drove down the profit rate.
The postwar accord and its rationale of enlarging the pie gave way to a contest over the size of the slice that each group could get. (rising rate of strikes in advanced economies and falling profits)
The oil price shock of 1973 – also pushed up inflation and reduced real wages
This set the stage for the period of combined inflation and stagnation (unemployment) called stagflation

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End of the golden age

Strikes and wages relative to share prices in advanced economies (1950-2002)

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After the golden age

Unemployment and inflation in advanced economies (1960-2015)

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Demand-side vs Supply-side crises

The Great Depression of the 1930s had been propelled by problems of aggregate demand and for this reason it has been called a demand-side crisis.
The end of the golden age has been called a supply-side crisis, because problems on the supply side of the economy depressed the profit rate, the rate of investment, and the rate of productivity growth.

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After Stagflation

The third major epoch during the last 100 years of capitalism began in 1979.
Across the advanced economies, policymakers focused on supply-side measures to restore investment and job creation.
Expanding aggregate demand would not help as it would accelerate inflation without reducing unemployment and low growth
Employers abandoned the accord (except in some northern European and Scandinavian countries) and policymakers turned to different institutional arrangements to restore incentives for investment.
The balance of power shifted towards capital and away from workers

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Supply-side policies

Restrictive monetary and fiscal policy: Governments showed that in stabilising inflation they were prepared to allow unemployment to rise, weakening the position of workers and halting the rise in real wages
Supply-side interventions:
cuts in unemployment benefits
legislation to reduce trade union power
changing legislation to make it easier to fire workers
policies to increase productivity and international competitiveness
cutting taxes on profits,
reform of competition policy to reduce monopoly power

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Consequences of supply-side policies

Wages: reduced bargaining power meant that productivity growth was not shared with workers, real wages barely changed in the 40 years after 1973.
Inflation: The period after the 1970’s until the global financial crisis of 2008 was called the great moderation because inflation was low and stable, and unemployment was falling.
Inequality: income inequality rose sharply as workers bargaining power was reduced
Investment: investment responded weakly to profit incentives so the rate of growth of capital stock declined
Profits: growth of profits unmatched by new investment helped cause the next crisis

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Financial Crisis of 2008-09

How can we make an argument that connects the 2008-09 financial crisis to the great moderation, and to long-run rising debt, house prices, and inequality?
Wages were not growing, but one way that working families (mainly in the US) could improve their consumption was to take out a home loan and financial deregulation and aggressive marketing by banks made it easier for working families to take on home loans that were too big to repay (unless it was assumed that the price of houses would always continue to rise – a ‘house price bubble’)
A household debt-to-income ratio of over 100 does not necessarily mean that the household is bankrupt. In a low interest rate environment such a high debt level can still be maintained. A household is bankrupt if its debt is higher than its assets, not its income. When the bubble burst the value of assets falls pushing many into bankruptcy (Assets<Debts).
financial deregulation - Policies allowing banks and other financial institutions greater freedom in the types of financial assets they can sell.

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Household debt-to-income ratio and house prices in the United States (1950-2015)

End of golden age of capitalism:

1973

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When housing bubble burst

The interrelated growth of the indebtedness of poor households in the US and global banks meant that when homeowners began to default on their repayments in 2006, the effects could not be contained within the local or even the national economy.
The crisis in the US spread to other countries.
The recession that swept across the world in 2008–09 was the worst contraction of the global economy since the Great Depression.
The financial crisis took the world by surprise. The world’s economic policymakers were unprepared.
They discovered belatedly that a long period of calm in financial markets could make a crisis more likely.

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The Minskian paradox

The Paradox: a period of moderation sows the seeds of the next crisis
In 1982, Minsky wrote Can ‘It’ Happen Again? about the way in which tranquil conditions lead firms to choose riskier methods of financing their investment. His warning went unheeded.

Instead of producing increased vigilance, the calm conditions of the great moderation bred complacency among regulators and economists.
It was the increasingly risky behaviour of banks in reckless lending to the sub-prime (poor) housing market and related risky banking products (such as derivatives and securities), as Minsky had predicted, that created the conditions of increased financial fragility and set the scene for the crisis.

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What have economists learned from the last 100 years

1. Solutions become problems

Each epoch succeeded initially because the policies and institutions that had been adopted addressed the shortcomings of the previous epoch. But then policymakers and economists have been taken by surprise when virtuous circles have turned into vicious circles.

2. Solutions depend on the circumstances

No school of thought has policy advice that would have been good in every epoch. The value of competing approaches and insights depends on the situation.

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Economic solutions depend on circumstances

In analysing the Great Depression of the 1930’s Keynes realised that:

Instability is an intrinsic feature of the aggregate economy and aggregate demand can be stabilized by government policy.

In analysing Stagflation of the 1970’s Friedman realised that:

The need to maintain profits, investment, and productivity can limit the ability of a government to use aggregate demand policies to achieve low unemployment.

In predicting the Financial Crisis of 2008-09, Minsky realised that:

Debt-fuelled financial and housing bubbles can co-exist with low and stable inflation, and will destabilize an economy in the absence of appropriate regulations.

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Economic crisis of the COVID-19 Pandemic

The COVID-19 is not an endogenous economic crisis – it has an external cause - it is a health crisis, but it is crisis with serious economic consequences
COVID-19 has resulted in a global economic crisis
COVID-19 has resulted in a collapse of both supply and demand throughout the world
This leads to falling output, rising unemployment, falling investment, rising public and private debt, poverty

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Both Supply and demand had collapsed

First, COVID-19 was a Supply shock as production and global supply chains were disrupted (AS0 to AS1)
The Demand effects materialize as workers lose their jobs and consumption and investment fall (AD0 to AD1)
There is a feedback loop back in AS as firms face reduced demand and some shut down (AS1 to AS2), and then back to demand (AD1 to AD2)
Output (Q) falls and falls, and possibly prices too

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Impact of COVD-19

COVID-19 has laid-bare and amplified socio-economic problems in the world and in South Africa
South Africa - re-exposed high levels of inequality, underdevelopment, poor service delivery, weak state capacity, low growth, unemployment
South Africa also faces rising national debt as outlined in government’s June 2020 Supplementary Budget

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Covid-19 Crisis in South Africa

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