Socialist Economic Bulletin

By John Ross

What are the real U.S. economic choices facing Trump?

China has set its economic growth target for 2025 at “about 5.0%”. That this can be successfully achieved, what is necessary to ensure it, and the implications for achieving China’s strategic goals to 2035, was analysed in an earlier article “China’s economy in 2024 continued to far outgrow the U.S.”. But the other key economy in the world, whose development has major implications for China is the United States. In particular Trump has set as his explicit goal speeding up the U.S. economy, and slowing down China’s. Given the U.S. tariffs, sanctions and other measures taken by the U.S. against China the comparative economic performance of China’s and the U.S. economies is a major factor for geopolitics and the situation facing China.

The aim of this, and a succeeding article, therefore, is to make the most precise analysis possible of the fundamental factors that will determine U.S. economic growth in the next period—and their interrelated geopolitical and U.S. domestic political consequences. This in turn, as will be seen, determines and is affected by the real, as opposed to illusory, choices which face the Trump presidency 2.0.

The real situation facing the U.S. economy as opposed to myths about it

President Trump habitually misrepresents his own economic record. For example, at his 2024 presidential campaign rallies he repeatedly claimed that during his first term the U.S. had the “greatest economy in our history”. In reality, during his first term, the U.S. economy had the slowest growth during any post-World War II presidency (see Figure 1).

Serious Western analysts do not bother to hide their disbelief in these, and similar, fallacious claims. Thus, for example, Financial Times U.S. affairs editor, Edward Luce, wrote of Trump’s recent speech to Congress:

“It is Mardi Gras in New Orleans. Yet no parade could match the carnival in Donald Trump’s Tuesday night speech to Congress… one could almost hear the remnants of the fact-checking community snap their laptops shut… It would be… futile to compare Trump’s address to any by his predecessors… This was in a category of one… Trump’s speech was a fever dream of extravagant promises. His pledge to cover America with a ‘golden dome’ modelled on Israel’s ‘iron dome’ would use up every gold bar in Fort Knox. A few minutes earlier, Trump had promised to balance the federal budget. Was his pledge to take Greenland ‘one way or another’ a threat or a fantasy? Ditto for the Panama Canal… when historians look back on March 4 2025, his speech might barely rate a footnote.”

Discussion in some sections of the media about the Trump presidency also frequently primarily focuses on speculations about his subjective intentions, or what he would like to achieve in a second term, or belief that some short term superficial measure by Trump could substantially speed up the underlying growth of the U.S. economy—as will be seen this is entirely untrue.

Both such approaches are unhelpful when assessing the practical choices possible for Trump: these are not determined by what Trump wants, or by his unreal propaganda claims, but primarily by the objective situation of U.S. politics/geopolitics and the U.S. economy and the interrelation of forces within this.

Making such an analysis of the objective situation facing the U.S. economy, in turn, requires as precise quantitative analysis as possible of the most powerful factors affecting the U.S. economy and their consequences for U.S. politics and geopolitics. The terms “systematic” and “accurate” are stressed here, as any analysis which focuses merely on a single Trump policy does not deal with the consequences of the fact that the U.S., as with every economy, forms an interlinked whole—any changes in one aspect of the U.S. economy therefore have consequences for, and are affected by, its other aspects. To be accurate, in turn, it is necessary to study in quantitative terms the interrelations which exist between the major determinants of U.S. economic performance.

To do this the author, therefore, gives below a great deal of precise quantitative data on the situation of the U.S. economy—and does not apologise for doing so. The situation of the U.S. economy, and its geopolitical implications, is one of the most important factors in the world—including for its consequences of China. It is therefore necessary to analyze the fundamental forces driving this in as much detail, and with the greatest accuracy, as possible—exaggeration or inaccuracy in any direction, “optimism” or pessimism”, is not helpful and is potentially dangerous in such a serious matter as the dynamics of the United States. “Seek truth from facts”, in the field of the economy, requires precise numbers not imprecise and vague generalities.

To deal with these interrelated issues this analysis is divided into four questions:

• What is actual situation of the U.S. economy, what are the domestic political consequences for Trump, and what are the geopolitical consequences, in particular as they affect China, that flow from that situation?
• What are the real steps that would be required to significantly increase the U.S. economic growth rate?
• What are the economic consequences of the policies Trump has chosen, and therefore can they succeed in significantly speeding up the U.S economy?
• What are the political and geopolitical implications of the economic means which Trump has chosen?

The first two of these questions are dealt with in this article, and the other two in the second article in this series.

Figure 1

Section 1—the immediate situation facing Trump

Starting with the immediate situation facing Trump. It is crucial to understand accurately the actual growth trajectory of the U.S. economy. Taking first the results simply for 2024, the U.S. economy grew by 2.8% while China’s economy grew by 5.0%—China’s economy grew 80% faster than the U.S..

This data alone highlights that much Western media during the last period served simply as propaganda rather than objective reporting. Statements from outlets like The Economist, claiming that the U.S. is “leaving its peers ever further in the dust,” or from the Wall Street Journal describing China as having “a stagnant economy,” were either deliberate lies, propaganda distortions, or failures to investigate the facts. Regardless of the reasons for putting them forward these statements are purely misleading, and it is therefore rather disgraceful, and a sign of the real worth of claimed quality “journalism”, which turns out to be propaganda or failure to investigate the facts, that similarly inaccurate statements regularly appeared in the medias.

Current slowing of the U.S. economy—why China’s growth lead over the U.S. is likely to somewhat increase in 2025

The reason that “in the last period” is stated above is because much discussion in the U.S. media now focuses on the possibility of significant slowdown in the U.S. economy. The modelling at the time of writing of “GDP Now” by the Atlanta section of the U.S. Federal Reserve, the U.S. central bank, for example, predicts that in the first quarter of 2025 the U.S. economy will actually contract by 2.4% on an annualised basis.

Whether or not the U.S. falls into an actual contraction or merely slows in 2025 in line with its long term growth rate—and present trends, for reasons shown below, do not indicate why there should be any serious recession in the U.S.—is not crucial for the present purposes of analyzing medium/long term growth trends in the U.S. economy. But what is the case is that in 2023 and 2024, with growth respectively at 2.9% and 2.8%, the U.S. was growing above its long-term trend—which is slightly above two percent annual growth. This means that in 2025, if China achieves its “about 5.0%” growth target, the growth rate lead of China over the U.S. is likely to increase somewhat — to a greater or lesser degree depending on how significant the slowdown in the U.S. economy is. This would have some significant psychological effect on international perceptions of the two economies. It is therefore important to explain this situation internationally—with no exaggeration but simply as an objective presentation of the facts.

What is also clear, however, for reasons analysed below, is that attempts by Trump to raise the medium/long-term U.S. growth rate will inevitably lead to clashes with a series of other countries and also produce conflict within U.S. politics.

Broader international comparisons

Regarding broader international comparisons, a detailed analysis of China’s economic performance in 2024 compared to other countries, including the U.S., was made in “China’s economy in 2024 continued to far outgrow the U.S.”. Therefore, only the most important facts for analysing the international economic situation facing the U.S. are summarized here.

Figure 2, therefore, shows the data now available for GDP growth in 2024 for the major economic centres. China, the U.S.’s, and Japan’s GDP growth of 5.0%, 2.8% and 0.1% are actual results, while the EU’s 1.1% is the IMF’s projections for full-year growth based on the first three quarters results. Based on this data, as well as China’s 2024 GDP growth rate being 80% higher than the U.S.’s, it was four and a half times faster than the EU’s, and fifty times faster than Japan’s.

Looking at this international situation from the U.S. viewpoint, its economic growth was two and a half times faster than the EU, 28 times faster than Japan, but only 56% the rate of China. The objective situation facing the U.S. is therefore that its economic growth considerably exceeds its major Western competitors, the EU and Japan, but is far slower than China—it for this evident reason that the Trump administration will focus its attention on China.

Figure 2

Medium term economic growth performance

Even more clarificatory for judging trends, as it removes the effect of short-term fluctuations due to lock downs during COVID and recovery since, is to take the situation of the major economic centres during the entire period since before the pandemic. Figure 3 shows that in the five years since 2019 China’s economy grew by 26.2% and the U.S. economy by 12.5%, That is, in the period since the beginning of the pandemic the U.S. economy grew at only 48%, less than half, China’s rate.

This once more confirms that to close the economic growth rate gap between the U.S. and China, the Trump administration must therefore achieve one, or both, of two aims:

• The U.S. must slow China’s economy.
• The U.S. must accelerate its own economy.

Taking the first of these, the U.S. attempt to slow China’s economy, the means available to the U.S. to attempt to achieve this were analysed in detail in the previous article “China’s economy in 2024 continued to far outgrow the U.S.”. To seriously slow China’s economy the U.S., for reasons analysed in that article and briefly below, must secure a significant reduction in the percentage of net fixed capital investment in China’s GDP. However, unlike previous uses of this method, to force their economies to slow down, against competitors which were economically and militarily subordinate to the U.S.—Germany, Japan and the Asian Tigers—the U.S. has no way to compel China to adopt such a course. The U.S. instead has to rely on attempting to persuade China to commit economic suicide by voluntarily reducing its level of investment in GDP—the means used to attempt to persuade it to do so being economically fallacious arguments about consumption, as the previous article discusses.

As the issue of the most serious means by which the U.S. could attempt to slow China’s economy was analysed in detail in the previous article it is not dealt with further here. The present articles only deal with the issues involved in any attempt by Trump to accelerate the growth of the U.S..

That is, the question addressed in these articles, is whether Trump can decrease China’s lead in growth over the U.S. by speeding up the U.S. economy?

Figure 3

Political situation in the U.S.

Turning to the implications of these U.S. economic growth figures for United States domestic politics, the reasons for Trump’s return to office, and therefore the political situation facing Trump, it is clarificatory to examine the trends in the U.S. economy in terms not only of total GDP but also per capita GDP—as per capita GDP is more closely related to living standards than total GDP.

Figure 4 therefore illustrates the long-term post-World War II trends in U.S. per capita GDP growth, using a 20-year moving average to smooth out short-term business cycle fluctuations. This shows a clear 70-year trend of declining U.S. annual per capita GDP growth—with this falling from 4.9% in 1953, to 2.8% in 1969, 2.4% in 2002, and 1.3% by 2024. This last figure is very slow, indeed bordering on stagnation.

Such a very slow rate of per capita economic growth necessarily fuels social and political discontent and instability in the U.S.. This has duly occurred with the increasingly bitter confrontations in U.S. politics during the first Trump term, the Biden presidency, and leading to the second Trump presidency—indices of this being the increasingly harsh rhetoric between the U.S. political parties, the physical attack on the U.S. Congress on 6 January 2021, the forced withdrawal of Biden from the presidential race 2024, the criminal cases started against Trump before the presidential election, the pardoning by Trump of large numbers of violent 6 January rioters, the rapid closing by Trump of entire government departments such as USAID on resuming the presidency etc. Unless the present slow growth of U.S. per capita GDP can be reversed it is impossible to stabilise the social and political tensions in the U.S. This, in turn, has major knock-on geopolitical consequences which affect China.

Figure 4

The U.S. economy under Biden—why Trump won the presidential election

More significantly still for understanding the U.S. social and political situation, is that an increase in U.S. per capita GDP only creates the potential for the possibility to increase living standards for the mass of the population. Whether this actually occurs depends on how that increase in GDP is distributed.

The data shows that In the U.S., in the recent period, the benefits of even the slow increase in per capita GDP which has been occurring did not go to the mass of the U.S. population—the statistics on this easily explain why the Democrats lost the election and why this was foreseeable in advance. During Biden’s presidency, up to latest available data for wages, which is for the third quarter of 2024, U.S. per capita GDP went up by 10.9%, but real inflation adjusted wages were actually lower than when Biden/Harris were inaugurated—see Figure 5. That is, American wage earners, who form the overwhelming majority of the population, became worse off under Biden.

Figure 5

The facts show that the Biden administration carried out a redistribution of wealth from workers, the mass of the population, to owners of capital. Figure 6 shows that during the period of the Biden presidency, from January 2021 to the latest available data for U.S. wages, the S&P500 share index rose by 55.7%, inflation by 21.0%, but U.S. median nominal weekly wages by only 20.4%. That is, owners of capital made large gains in real inflation adjusted terms while wage earners, that is the mass of the U.S. population, became worse off—while simultaneously those able to live from income from capital, a small part of the population, became substantially better off. It is therefore no surprise that social and political tensions in the U.S. rose.

This trajectory under Biden therefore also shows what is likely to happen to Trump if he in turn cannot improve U.S. living standards. Social tensions will rise again, and Trump will become unpopular. It is therefore significant that Trump’s poll approval rating at the end of February, at 45%, was the lowest for any U.S. President, at that time in their presidency, since World War II except for Trump’s first term’s 42%—the historical average approval rating for U.S. president’s since World War II after their first quarter in office was 61%. By 16 February the number of those disapproving of Trump, 51%, was already higher than those approving at 45%.

Figure 6

Economic failure during the first Trump presidency

To complete the immediate picture, it was already noted that, contrary to Trump’s claims that his first presidency was a great economic success, the data shows clearly that this was untrue. Figure 1 above showed that annual average GDP growth during the first Trump presidency, at 1.8%, was the lowest for any post-World War II president. Trump may claim that this was due to the impact of Covid, which was certainly a factor, but the factual reality is that Trump has no track record as president of fast economic growth. The slow economic growth during the first Trump presidency (together with the extremely powerful Black Lives Matter movement following the racist murder of George Floyd in May 2020), was clearly the key factor in the defeat of Trump in the 2020 presidential election

The consequences of the very slow growth of the U.S. economy under both the first Trump presidency, and under Biden, therefore, confirms the socially and politically destabilising effects of the present situation of very slow U.S. growth, and for significant sections of the population decline of U.S. living standards. Unless this trend can be reversed, and U.S. economic growth accelerated, socio-political tension in the U.S. will persist and the Trump administration itself will become unpopular. Failure to understand this factual situation, to instead believe Trump’s self-serving propaganda, or to concentrate on speculation about his subjective intentions, therefore leads to an inaccurate understanding of the dynamics within the U.S.

For both economic and political reason, therefore, the decisive issue for the Trump presidency is whether it can accelerate U.S. economic development. Analysing what would be necessary to achieve this therefore forms the subject of the rest of this series of articles.

The slowing U.S. economy

To initially assess how easy or difficult it is to speed up the U.S. economy, and the political and geopolitical consequences of this, it is necessary to consider long-term U.S. growth rates: these show the fundamental factors in the situation which are sometime obscured by purely short-term fluctuations. Figure 7 shows that U.S. annual average economic growth rates have been declining for almost 60 years. Taking a 20-year moving average, to remove the effect of short-term business cycle oscillations, U.S. annual average GDP growth fell from 4.4% in 1969 to only 2.1% by 2024—that is by more than half.

Clearly a process of economic slowdown which has been taking place for almost six-decades has extremely powerful roots. Only if Trump tackles these, therefore, can this powerful and prolonged slowdown of the U.S. economy be reversed.

Figure 7

Section 2—What is required to speed up U.S. economic growth?

What determines the speed of U.S. economic growth

To then ascertain which policies would be necessary to speed up the U.S. economy it is necessary to analyse the underlying relation between changes in the structure of the U.S. economy and changes in U.S. GDP growth rates. Table 1 shows these for the entire last U.S. business cycle of 2007-2019.

Statistically, to avoid distortions caused by short terms economic fluctuations, it is preferable to consider an entire business cycle, but to show that no “cherry picking” has been done Appendix 1 shows these correlations over the entire period from prior to the international financial crisis, 2007, up to 2024. This appendix shows that this makes no fundamental change to the relative significance of changes in the structure of the U.S. economy.

Table 1 shows an entirely clear pattern:

• If merely short-term periods are taken the correlation between changes in U.S. economic structure and its growth rate are moderate/low regardless of whether positive or negative correlations are considered—that is, whether an increase of the percentage of a particular component in U.S. GDP is associated with an acceleration or a deceleration of GDP growth. The highest correlation, taking a one-year period, is 0.53 for net fixed capital formation—a moderate correlation. All other one-year correlations, positive or negative, are between an extremely low 0.08 and a moderate/low 0.47.
• However as medium and longer-term periods are taken the correlations become progressively higher and higher. Taking positive relations, the correlation between the percentage of net fixed capital formation in GDP and GDP growth, the highest correlation for any factor in U.S. economic development, is 0.53 for one-year but rises to a high 0.71 for five years and an extremely high 0.85 over a 12-year period. Taking negative correlations, the 12-year correlations of household consumption in GDP, exports in GDP, imports in GDP and total consumption in GDP are all very high at between 0.77 and 0.85.

What such a data pattern demonstrates is that that in the short term no single factor in the U.S. economy is decisive. But in the medium/long term regarding positive correlations, the correlation of the percentage of net fixed capital formation in U.S. GDP and GDP growth is extremely high—that is an increase in the percentage of net fixed capital formation in U.S. GDP is associated with an increase in GDP growth. In direct contrast the correlation of the percentage of consumption in U.S. GDP and GDP growth is strongly negative—that is, the higher the percentage of consumption in U.S. GDP the slower will be GDP growth.

It is unnecessary, for present purposes, to establish the causal connection between the percentage of net fixed investment in GDP and GDP growth—that is whether the percentage of net fixed investment in GDP determines the rate of GDP growth, or the rate of GDP growth determines the percentage of net fixed investment in GDP, or some other factor(s) determine both. But the consequence of this extremely close correlation means that it is impossible to increase the rate of U.S. GDP growth without increasing the percentage of net fixed investment in GDP.

Therefore, for Trump to succeed in accelerating U.S. medium- and long-term growth, he has no option but to attempt to increase the percentage of net fixed capital formation in U.S. GDP.

Table 1

The short, medium and long term

To show this situation still more clearly, and grasp its practical implications, Figure 8 shows visually the correlation between the major domestic components of U.S. GDP and annual GDP growth taking moving averages for different periods of years. Thus, as can be seen, if only a one-year period is taken there is only the medium correlation, 0.53, between the percentage of net fixed investment in GDP and annual GDP growth. There is also a low correlation, 0.39, between the percentage of gross fixed capital formation in GDP and GDP growth. There are negative low/medium correlations, -0.35 and -0.47, between the percentage of household consumption and the percentage of total consumption in GDP, and U.S. GDP growth.

This once more illustrates, as already noted above, that in the purely short term no single factor has a decisive influence on U.S. GDP growth. However, as the time frame increases from the short to the medium and long term the correlations become higher and higher:

• Taking a 5-year period the positive correlation between the percentage of net fixed investment in GDP and GDP growth has become a high 0.71, and the negative correlation between the percentage of total consumption in GDP and GDP growth is on the verge of becoming high at 0.68.
• By the time a long term 12-year period is taken the positive correlation between the percentage of net fixed investment in GDP and GDP growth is an extremely high 0.85, and the negative correlation between the percentage of total consumption in GDP and economic growth is also a very high 0.83.

The practical implication of these correlations is clear. In the short-term Trump can use other factors (e.g. budget deficits, short term boosts to consumption) to increase U.S. GDP growth, but in the medium and long term the only way that Trump, or any other U.S. President, can increase GDP growth is by increasing the percentage of net fixed investment in U.S. GDP. Similarly, while in the short-term stimuluses to consumption may increase U.S. GDP growth, over the medium and long-term increasing the percentage of consumption in GDP will slow U.S. GDP growth.

It should be noted that in this regard the U.S. is in the same position as China and all large economies—for the detailed data on this see 从210个经济体大数据中，我们发现了中国和世界经济增长的密码.¹

Figure 8

U.S. economic correlations are in line with economic theory

These factual relations in the U.S. economy are entirely in line with economic theory. Consumption plus investment constitute 100% of domestic GDP. Investment is an input into production: therefore, increasing the percentage of the economy used for investment will increase the GDP growth rate. However, consumption, by definition, is not an input into production and therefore increasing the percentage of consumption in GDP, thereby reducing the percentage of inputs into production, will decrease the rate of GDP growth.

To take a longer period than the last business cycle, the extremely strong correlation between the long-term percentage of net fixed investment in U.S. GDP and U.S. GDP growth is confirmed in Figure 9 which takes the entire period of U.S. economic development since 1960—that is, over a 64 year period. As may be seen the long-term correlation between the percentage of net fixed investment in GDP and annual U.S. GDP growth is an extremely high 0.87.

Figure 9

Policy implications for Trump

In terms of practical policy for Trump, therefore already even in one year the percentage of net fixed investment in U.S. GDP has a significant if moderate correlation with annual U.S. GDP growth. But this correlation it is not so high that it dominates the situation. That is, in the short-term Trump could, at least theoretically, increase U.S. GDP growth by measures other than increasing the percentage of net fixed investment in GDP. But over the medium and long-term these extremely high correlations mean that this is impossible—the U.S. can only increase its rate of GDP growth by increasing the percentage of net fixed investment in GDP.

However, practically, a short-term period is quite insufficient to reverse the consequences of the situation of much lower growth in the U.S. than in China—this could only be reversed over a long time period. To accelerate the U.S. economy in a way capable of competing with China, therefore, Trump and succeeding U.S. presidents can only do this by increasing the level of net fixed investment in the U.S. economy. This objective situation strictly determines the policy choices which face Trump.

The negative relation between the percentage of consumption in GDP and the growth of consumption

Given a confused discussion on consumption in some sections of the media, as an aside it should also be noted that the correlation between the percentage of consumption in U.S. GDP and the rate of growth of U.S consumption is strongly negative. That is, the higher the percentage of consumption in U.S. GDP the slower is the growth rate of U.S. consumption. In the case of U.S., taking a five-year moving average, the negative correlation between the percentage of consumption in GDP and the growth rate of consumption is an extremely high 0.89—see Figure 10. This is, in the U.S., the same negative correlation between the percentage of consumption in GDP and the rate of growth of consumption which exists in China and other major economies—for comprehensive data see 从210个经济体大数据中，我们发现了误解促消费对经济的危害.

This negative correlation between the percentage of consumption in U.S. GDP and GDP growth therefore confirms the extreme importance of distinguishing between the percentage of consumption in GDP and the rate of growth of consumption. Not only are they different things but they move in the opposite direction. That is in the U.S., as in China, the higher the percentage of consumption in GDP the slower will be the growth rate of consumption, and therefore the slower the growth rate of living standards.

Figure 10

International comparisons

Finally, to complete the picture, it should be noted that this situation of the U.S. in regard to the relation between the percentage of net fixed investment in GDP and GDP growth, as already noted, is in line with other very large economies—all of which have very similar patterns of development. To see how strong this relation is, Figure 11 shows the development of the world’s 10 largest economies over the entire last international business cycle of 2007-2019. (Once again, the entire business cycle is taken to remove the effect of short-term business cycle fluctuations, although it should be noted that extending the figures to the latest available data makes no essential difference to the correlations despite the fluctuations created by Covid). For the world’s 10 largest economies, including China and the U.S., the positive correlation between the percentage of net fixed investment in GDP and annual GDP growth is 0.95—as close to a perfect correlation as will be found in any practical example.

Figure 11

Growth accounting

So far, to see accurately the determinants of U.S. economic development, the correlations of U.S. GDP growth with the structure of its economy as shown in the national accounts have been analysed. The reason for starting with this analysis is that national accounts are universally used in economics. However, it is also clarificatory to analyse the U.S. economy from the complementary viewpoint of growth accounting—that is measuring in terms of the inputs of capital, labour and total factor productivity (TFP). The fact that, as will be seen, the conclusions arrived at by the two methods are the same, confirms the decisive factors determining U.S. growth.

Taking long-term correlations, Figure 12 therefore shows the long-term correlation of the contributions of inputs of capital (capital services) to GDP growth and U.S. GDP growth during the whole of the last business cycle from 2007-2019. This shows an ultra-high correlation of 0.95 and an R squared of 0.90—once again as close to a perfect correlation as will be found in any real economic phenomenon.

Figure 12

For comparison Figure 13 shows the correlation in the U.S. economy of the contribution to GDP growth of labour inputs. As may be seen the correlation is 0.51 and the R squared is 0.26—that is a moderate/low correlation.

Figure 13

Figure 14 shows the correlation of the contribution of the growth of TFP and the annual growth of GDP in the U.S. economy. The correlation is 0.60 and the R squared 0.40—that is a moderate correlation.

Figure 14

In summary, there is an extremely high, almost perfect correlation, in the U.S. economy between capital inputs and GDP growth, a medium correlation between TFP growth and GDP growth, and a moderate/low correlation between labour inputs and GDP growth.

This finding of the extremely high correlation in the U.S. economy between capital inputs and GDP increase, using growth accounting methods, is entirely in line with the conclusion from national accounts data.

The contribution of factors of production to U.S. GDP growth

So far only the correlations between production inputs and GDP growth in the U.S. have been analysed. But this is insufficient by itself to analyse what are the key determinants of U.S. GDP growth: there may be a high correlation between an input into U.S. production and GDP growth, but if this factor of production only accounts for a small part of U.S. production it will not play a decisive role in U.S. GDP growth. Therefore, to accurately analyse the determining factors in U.S. growth, it is also necessary to know the relative weight of the different inputs. Figure 15 shows this. As may be seen by far the largest contributor to U.S. GDP growth is capital inputs (58%), second is labour inputs (33%) and finally growth in TFP is a small contribution (9%).

In short, therefore, summarising the significance of different factors of production in U.S. GDP growth:

• Capital investment dominates U.S. GDP growth, being both the highest contribution to growth and with the closest correlation to GDP growth.
• Labour inputs are the second largest source of growth in the U.S. economy, although having only slightly over half of the weight of capital inputs, but they have only a medium/low correlation with GDP growth.
• TFP has a moderate correlation with U.S. GDP growth but it only contributes a small part, 9%, of U.S. GDP growth.

In summary growth accounting confirms the national accounts data that capital investment is by far the decisive factor in U.S. economic growth.

Figure 15

Conclusion

In summary, to return to the starting point of whether Trump can close the gap in growth rates between China and the U.S.. If Trump cannot substantially slow China’s economy, the issue of which was discussed in 能否实现2035年远景目标？有一个关键事实中国无法回避, then it should be noted:

• In the short term, the U.S. economy under Trump is likely to experience some slowing in 2025.
• More fundamentally, the only way that Trump can increase the underlying growth rate of the U.S economy is by increasing the level of net fixed capital formation in U.S. GDP.

The reason that in this article such precise detail of the situation of the U.S. economy has been gone into is because this situation that Trump can only significantly increase the growth rate of the U.S. economy by increasing its level of net fixed investment in U.S. GDP is of fundamental importance—with huge consequences flowing from it. It means, if the U.S. cannot slow China’s economy, then the only way in which it can close the growth rate gap with China is by increasing the level of fixed investment in the U.S. The forms in which Trump attempts to increase the percentage of investment in GDP will therefore determine the dynamics of the U.S economy—with great consequences for U.S. domestic politics and U.S. geopolitics as it affects China.

Analysis of this will form the subject of the second article in this series.

Appendix 1—a technical statistical note

This appendix is not necessary to be read by non-economic specialists. It is included because the conclusion that it is impossible in practice to raise the U.S. GDP growth rate without increasing the level of net fixed capital formation in U.S. GDP is so fundamental in its consequences that it is included to show that there has been no “cherry picking” of the data and therefore it is impossible to escape the consequences of this correlation.

Statistically, as the U.S. economy, as with all capitalist ones, has business cycles, in addition to an underlying long term growth rate, it is preferable, to accurately see trends, to make calculations covering an entire business cycle—or from one point in one business cycle to the same point in another (for example from the top of one cycle to the top of another, or from bottom to bottom). Otherwise, cyclical effects obscure the fundamental trends or even produce entirely fallacious results. For example, if the starting point of measuring U.S. economic growth is taken as 1933, the bottom point of the Great Depression, to the peak of the last pre-World War II business cycle in 1937, then during that period the U.S. had an annual average growth rate of 9.4%. The 1930s might appear as a period of rapid economic growth! The reason for this is that the gigantic fall in U.S. GDP, of 26%, between 1929 and 1933 is ignored, that is two peaks in the business cycle are not being compared but a trough and a peak.

For this reason, in this article the entire U.S. business cycle from 2007-2019 is taken as the period focused on. However, to avoid any suggestion that 2019 is chosen as the end date to avoid bringing data up to date, Table 2 shows the entire period from 2007 to the latest available data, for 2024. As may be seen this makes no qualitative difference to the trends.

The one-year correlation between the percentage of net fixed capital formation in the U.S. economy and GDP growth is 0.50, which is a moderate correlation. However, if a five-year period is taken the correlation rises to a high 0.73 and if a 12-year correlation is taken it rises to an extremely high 0.85—by far the highest positive correlation of any major component of the U.S. economy and U.S. GDP growth.

This confirms the fact, the fundamental point, that in the short term no single factor has an extremely high correlation with U.S. GDP growth, but in the medium/long term the correlation between the percentage of net fixed capital formation and U.S. GDP growth is so high that it is impossible to speed up U.S. economic growth without increasing the percentage of net fixed capital formation in GDP and that any reduction in the percentage of net fixed capital formation will reduce the GDP growth rate.

If there is a strong underlying correlation, however, then if very long periods of time are taken, as in the 1960-2024 period in Figure 9 above, then the correlations typically become less affected by whether similar periods in the business cycle are being compared.

The conclusion is therefore clear. In practice the U.S. cannot break out of its present low average annual growth, of slightly above two percent a year, without increasing the percentage of net fixed capital formation in GDP. Or, in comparative terms, if the U.S, cannot succeed in slowing China’s economy, then the U.S. can only decrease China’s lead in growth rate by increasing the percentage of net fixed capital formation in the U.S. economy.

Table 2

Notes:

1. The only exceptions to this are the relatively small number of economies dominated by oil and gas exports, which is not relevant for either the U.S. or China, as neither are dominated by oil/gas exports.

This article was originally published in English at Monthly Review and in Chinese at Guancha.cn.

Michael Burke speaking at the Socialism or Barbarism Dayschool – 29 March 2025 – organised by Arise

By Michael Burke

There can be no doubt that the government’s announcement on welfare ‘reforms’ amounts to a fierce assault on the well-being of the most vulnerable in society.  As this will cause a significant backlash for relatively modest projected savings, the question arises, Why would they do this?

The answer lies in the common interests of workers and poor. Although they are an enormously heterogeneous mass of individuals their pay and conditions are each linked to the overall fight between labour and capital over the share of national income.

In effect, impoverishing those on welfare is an attempt to pick off the most vulnerable sections of the working class and poor by targeting them, and to lay the basis for wider and broader attacks on living standards.

In the first instance this is a savage, targeted austerity imposed on those entitled to benefits. According to the Resolution Foundation, if the Government plans to save £5 billion from restricting PIP by making it harder to qualify for the ‘daily living’ component, this would mean between 800,000 and 1.2 million people losing support of between £4,200 and £6,300 per year by 2029-30.

It is disingenuous for ministers to present these reforms as providing broader benefits, which are tiny. Universal Credit (UC) support for up to four million families without any health conditions or disability will rise by around £3 a week. Clearly, this is a pittance by comparison.

The government also presents further cuts as savings, to be achieved by cutting the level of the health-related LCWRA (Limited Capability for Work-Related Activity) element within Universal Credit, which is currently claimed by 1.6 million people. 

Scandalously, these proposed cuts are focused on young people (aged 16-21), who may no longer be eligible for any extra support, and those who fall ill in the future, as their additional support will be halved, from £97 per week in 2024-25 to £50 per week in 2026-27.

This is a policy based on Tory/reactionary tabloid headlines about feckless or indolent young people. These are the same young people already burdened by student debt, who suffer low wages and are more subject to precarious employment. Together these are a strategic project, which aim to permanently lower the expectations and living standards of an entire generation, compared to older workers.

Ministers have played fast and loose with the ‘savings’ element of this package. When challenged about the negative effects of these measures on other areas of social policy and their associated costs (housing, employment, skills, ill-health, mental ill-health, crime and so on), ministers have talked about the cuts being a moral issue, which is simply insulting to welfare beneficiaries.

But this fake moralism is also a tacit admission that the cuts will not lead to anything like commensurate savings, because of the negative impacts on other social budgets.

Ministers are rightly wary of trying to justify the cuts on the basis of savings. As the history of austerity has shown, cuts are not savings. Yet these cuts are also being made as the military budget is rising, there is £3billion a year for the Ukraine war ‘for as long as it takes’, non-doms are being sweetened with reduced taxes and fossil fuel companies’ windfall taxes are set to be abolished.

What is the real motivation behind these cuts? In effect it is an attack on all workers and poor people, with disabled people, the sick and young people first in the firing line. The effect of the cuts will be to force many people to take very low-paid and/or precarious work or go without income altogether. This in turn will have a general knock-on effect on the rate of pay and conditions for all workers on low-paid or average wages. It also paves the way politically for further cuts.

From 2010 onwards austerity has repeatedly transferred incomes and wealth from poor to rich and from labour to business in an attempt to revive the economy. These attempts have failed.

With these severe, targeted measures, the government hopes to have more success precisely because they are targeted on the most vulnerable, the least able to resist. It represents a further, vicious twist to the austerity policy that has been in place for 15 years.

By Michael Burke

“Wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable” – Keynes

As the clamour for increased military spending in Europe grows, so too are the claims about the supposed economic benefits of government outlays on weaponry of all types. These claims are spurious and should be completely rejected.

At a time of budget cuts, the propaganda in favour increased military spending is positively dangerous domestically as well as internationally, as it could only occur at the expense of other, useful or productive areas of government spending. It is therefore vital for the defence of public services and public investment that the false arguments in favour of increased military spending are thoroughly rebutted.

Military ‘keynesianism’

There is an entire body of thought devoted to the idea of promoting military spending as an economic benefit dubbed by its supporters as ‘military Keynesianism’. The idea is a vulgarisation of Keynes’ work, which supporters suggest means that any type of government spending is beneficial to the economy, and given that military spending enhances the power and prestige of the country, then military spending should be prioritised.

The idea had fallen into disrepute partly because its advocates, not just prioritised military spending, but treated it as an exception. In no other sector of the economy did they argue that there would a benefit from increased government spending.

But the decisive development took place in the real world as the ideas behind military Keynesianism (and a left variant known as the ‘permanent arms economy’) were tested to destruction in the Viet Nam war. The US government granted itself unlimited published and covert budgets to fight the war and almost bankrupted itself in the process, as well as destroying the Bretton Woods economic system and unleashing global inflation.

A contrary example is from Britain’s own history. After World War II West Germany was not allowed armed forces. It was obliged to use its Marshall Plan funds for economic regeneration, which became known as the German ‘economic miracle’. Britain had no such restrictions and spent freely on the military. There was no British economic miracle and it became known as the ‘sick man of Europe’.

But in the present era, the suddenly reduced state of Western Europe’s military weight in the world has caused a widespread panic. In the drive to rearm, old or discredited ideas are being dusted off to justify the diversion of public funds, a blatant project of policy-based evidence-making. These include growing claims on the positive effects on technology, R&D and jobs.

None of these claims is correct.

Productive versus unproductive investment

The purpose of investment (GFCF, Gross Fixed Capital Formation) is either to replace or to supplement the existing level of fixed investment in the economy. It is the additional investment, Net Fixed Capital Formation which augments the existing level of fixed investment in the economy. This represents an increase in what was formerly called the means of production and is now more usually called the productive capacity of the economy.

Of course, building a factory that is never used or constructing one of Japan’s infamous (but largely mythical) ‘bridges to nowhere’ does not constitute useful or productive investment. The traditional mainstream definition of investment is an outlay on which there is a financial return.

Yet in many cases, government fixed investment will not include a direct financial return at all. This would apply to a new road or railway, or the latest technology in universities. But in each case there is a financial benefit to the users (who are not charged tolls, or in the form of quicker journeys or cheaper fares or who can develop new scientific methods, and so on). But the users will receive a financial benefit which raises prosperity generally. In turn, government will itself usually benefit from their increased economic activity through its ordinary tax receipts.

But this highlights the fallacy that there is any potential for prosperity through military spending. The benefits of these other categories of government spending arise because they boost other areas of activity. This is because the bridge, or road, or home is not just a social benefit. It has a monetary benefit to the users and then wider society. But there is no benefit to the wider economy from a tank, a bomb, or a missiles system. There is no benefit in terms of efficiency, speed, productivity to other economic sectors. Economically, military spending is not even a bridge to nowhere.

Inputs to military spending

There is also a widespread yet false claim that military spending is ‘jobs rich’.  All types of government spending require labour inputs. Military spending is not unique in that respect, although some of its advocates never suggest that increased NHS spending, or greening the economy creates jobs at all.

But, since military spending does not add to the productive capacity of the economy, the labour used in the manufacture of weapons is the equivalent of Keynes’ digging holes and filling them in again. It has zero net economic benefit.

In a time of high unemployment, even digging holes and filling them in again can have the effect of a stimulus to wider job-creation (which was Keynes’ ironic point). But if the aim is to create better, higher-skilled, higher wage jobs, then there are far better ways to spend government money.

The military budget is already one of the largest areas of government spending, £53bn in 2022/23, behind only the Departments of Health and Education. It is more than the spending of the Departments of Housing, Transport and Work & Pensions combined.

In terms of direct employment, the MoD employs just under a quarter of a million military and civilian staff.  But the claims made for military spending being ‘jobs rich’ rely on assertions about the effect of MoD procurement on creating jobs in the private sector arms industries and related services.

It would be easy to get bogged down in highly technical analyses in this area. Thankfully, though, this work has been down elsewhere, in analysis for the Scottish Government on what are known as ‘employment multiplier effects’.  This is an analysis of the structure of the economy which then shows the relationships between inputs and outputs in the economy. The analysis applies to individual sectors and includes labour inputs.

A full explanation of this analysis is shown here and includes detailed tables for each economic sector.

Here the key point is the conclusion. This is that military spending has one of the lowest ‘employment multipliers’ of all economic categories. It ranks 70^th in terms of the employment it generates, out of 100. Health is rated number 1.  Everything from agriculture to energy to food manufacture, chemicals, iron and steel, to computers, construction, and a host of others in between all have greater ‘employment multipliers’ than military spending. Investing in health is two and half times more ‘jobs rich’ than investment in military spending.

Conclusion

The frenzy for increased military spending has generated an enormous number of spurious claims about it alleged economic benefits.

Since the outputs of military spending serve no wider economic purpose, these claims are clearly false. In terms of generating prosperity, military spending is completely wasteful government spending, as historical evidence shows.

The related claim that military spending generates jobs exaggerates its effects, even in these narrower terms. Many other sectors of the economy are far more ‘jobs rich’ that military expenditures. Many of these also have a wider economic better, such as health, construction, food and many manufacturing sectors.

The logic of government investment to restore prosperity and generate higher-skilled and paid jobs should be applied to these sectors instead.

By Michael Burke

The outlook for the British economy is not brightening. In fact there are fundamental trends which point to to a further sharp deterioration, even from the relatively stagnant levels of activity that have been in place for some time. If so, this will have further serious negative consequences for living standards, with adverse political consequences also likely, even as the right and especially the far right are already gaining ground.

In a capitalist economy the level and rate of profits, and how they are allocated, is often decisive for economic activity. This is the natural outcome of the fact that most of the means of production are in capitalist hands, which in turn means that the level of investment in the economy is determined by the private sector. The key, or even decisive factor in the superiority of a socialist economy is that the public sector can determine the overall level of investment in the economy and its social purpose.

But for a country like Britain profits are key. However, on one important measure profits are declining sharply. Chart 1 shows the Office for National Statistics’ measure of profits. As this is solely a measure of profits versus the capital stock, and excludes all the other key factoers determning the profit rate, it is more accurately described as a measure of the rate of return of capital. Even so, this in itself is a valuable measure (albeit partial) of the Return on Capital (RoC).

Source: ONS

Clearly, there has been a sharp deterioration in this measure of profitability, which is hovering above lows last seen during lockdown, when many areas of economic activity were sharply curtailed or ceased altogether. For most of this decade profitability has been in single digits, which is now a longer slump into this territory than the recession after the Great Financial Crisis in 2007 and 2008.

The ONS statisticians have marked on the chart both beginning of the Covid pandemic and the beginning of the war in Ukraine. It is notable that the conflict was followed by a rise in profitability. This contradicts the widespread but mistaken assertion that the war provided a major dislocation to the world economy. Instead, the data supports the idea that profitability was boosted by price gouging or ‘greedflation’ both before and after the war began.

Negative outook

Profits are the main source of funds of business investment, although they can be allocated to a number of different areas, such as dividends to shareholders, interest payable, bonuses to executives, share buy-backs and so on.

The weakness of profits will have a negative effect on business investment (Gross Fixed Capital Formation, GFCF), unless other key factors change. Even before this weakness, British business investment has already been stagnant over a prolonged period.

Chart 2 below  shows the real level of investment since 1997. Business investment peaked in real terms at an annualised rate of £252 billion in the 3^rd quarter of 2016 (the spillover effect of government increases in consumption and investment prior to the 2015 general election). In the most recent quarter business investment was £249 billion (annualised).

Chart 2. Real UK Business Investment, quarterly, £millions

Source: ONS

Yet this stagnation seems set to get worse. The rate of return on capital is declining, which will tend to push business investment even lower. And, as Chart 3 shows the the growth in business investment is already trending woards zero, or below.

Chart 3. Growth Rate of UK Real Business Investment, % change year-on-year

Source: ONS

Of course, the business sector does not operate in isolation from the rest of the economy. As the single largest actor in the economy, the public sector could play a role increasing its own investment. This would also oblige some private sector suppliers to increase their own activity, including investment.

In addition, regulatory measures could be adopted to prevent dividends and excessive executive pay where investment is weak or insufficient. Thames Water is a glaring example of where regulation could be used for this purpose, but there are many more.

However, this government intends to do neither of these. On its plans outlined in the Budget, public sector net investment is set to fall and there will be a drive towards deregulation. As a result, the economy will become even more depdendent on the flailing private sector.

Economist Michael Burke on Labour’s 2024 budget

By Diane Abbott MP

Budgets are accompanied by a blizzard of documentation designed to illuminate the detail of the big fiscal events. But the real effect can be to obscure what the real thrust of policy is and what its impact is.

The confusion surrounding the October 2024 Budget is even greater than usual. Essentially, what is being discussed as a huge tax-and-spend Budget is in reality, a Budget which not only extends austerity but actually deepens it.

First, let us highlight some of the things that have happened (or not) that give the lie to the idea that this is a big tax-and-spend Budget. One striking development is that the IMF has welcomed the Budget. The IMF has never supported what might be called “Keynesian” increases in taxes and public spending; it is an institution gripped by neoliberalism. But it specifically welcomes the central aim to “reduce the deficit by raising revenues.” As we shall see, the burden of that deficit reduction will be taxes on ordinary people.

Similarly, despite all the nervous chatter about how the markets would react to claims of enormous spending increases, the government bond market was largely unmoved. In effect, 10-year borrowing costs for the government are no different from those of the US government, which seems far from a crisis.

But fundamentally, any significant changes to both taxes and spending ought to have large economic impacts, as the government is the biggest single actor in the economy. Huge increases in both ought to have commensurately large economic impacts.

Yet the official forecasts are for almost no net economic impact over the next five years at all. Media outlets which continue to parrot both the size of the Budget measures and the meagreness of the economic response risk making themselves look ridiculous.

This is a pack of dogs that did not bark. The explanation is quite simple. The “huge” rise in both tax revenues and even larger rises in spending are a mirage.

In March 2024, the Tories announced huge cuts in spending and tax increases, timed to be implemented after the election, for obvious electoral reasons. These are the fiscal plans that Labour inherited.

They were so draconian it is doubtful the Tories could have implemented them without huge social unrest (as well as financial market turmoil). The Tories’ poll position suggested there was never any intent to implement them.

Comparing new tax-and-spend plans against these fictional levels does not amount to huge increases in either taxes or spending. By the same token, not imposing most of those reckless Tory cuts does not mean that austerity is ending.

The reasonable comparison is to compare the fiscal plan now with the actual outturn in the previous fiscal year 2023-24. Once the correct comparison is made, all the confusion disappears. So, the Office for Budget Responsibility (OBR) shows that what is presented as an enormous increase in employer’s National Insurance contributions (NICs) is, in reality, nothing more than making good the big loss of government revenue by Jeremy Hunt’s cut to employees’ NICs in March.

So, before Hunt made his NICs giveaway to middle and higher earners, NICS as a whole contributed government revenues equivalent to 6.6 per cent of GDP. After Hunt’s cut, the revenues fall to 5.9 per cent of GDP. After the November Budget move on employers’ NICs, it goes back to 6.6 per cent of GDP over the next few years, a change back and forth of 0.7 per cent of GDP.

To be clear, although higher earners would not be a priority for most progressive taxation policies, the combined Hunt and Reeves moves amount to a transfer of incomes from business to workers.

However, much bigger measures, which are undoubtedly austerity, are taking place. In the same OBR documentation (table 4.1 of the Economic and Fiscal Outlook, for the economics nerds), income tax revenues will rise from 10.2 per cent of GDP to 11.6 per cent by 2028-29, a rise of 1.4 per cent of GDP.

This is double the change in employers’ NICs. It is achieved by freezing the income tax thresholds. Depending on the degree of wage inflation that takes place, this means more ordinary workers will pay some of their income at higher rates of income tax. It is a stealth tax which will clobber ordinary workers.

This is undoubtedly austerity. The same applies to departmental spending. All of it looks incredibly generous when compared to Hunt’s plans for slash and burn. But the actual picture is somewhat different, as shown by the OBR. Total managed expenditure for all government departments goes from 44.9 per cent of GDP in 2023/24 to 44.5 per cent in 2029-30 (OBR, Table 5.1). This is a tightening of government departmental spending.

It is only fair that “resource” spending does rise modestly. But the multiple crises in health, education, transport and housing are, in many cases, near a tipping point. They cannot be cured, or in some cases even ameliorated, by additional resources of 0.6 per cent of GDP. Yet this is what is on offer.

The Chancellor and the Prime Minister, in particular, argued that growth was key to improving public finances and funding sustainable improvements in public services. Public-sector investment is crucial to that, they have argued, not least in drawing in private sector investment. I largely agree with those propositions.

Yet, as we have already shown, the official real GDP forecasts over the next few years are no improvement on previous forecasts and are actually slightly lower.

This should be no surprise, as, despite all the talk, public-sector investment is not increasing. While the average annual real GDP forecast is approximately 1.5 per cent over the next few years, the government’s plans for public sector investment amount to yearly increases of about 1 per cent. In three of the next six years, public sector investment is projected to fall, and it falls as a proportion of GDP.

As a result, the government is left hoping, Micawber-like, that “something will turn up” in the world economy in the next few years to lift the dilapidating British boat. Meanwhile, the Tory plans to introduce “reforms” to the work capability system aimed at cutting the flow of people by two-thirds as well as clamping down “benefit fraud.” Austerity for disabled people has been unremitting since 2010 and is set to remain so.

The outlook is for an economy crawling along at a snail’s pace, hobbled by austerity. This means workers and the poor will continue to pay for a crisis made by others.

Diane Abbott is Labour MP for Hackney North and Stoke Newington. Follow her on X @HackneyAbbott.

The above article was originally published here by the Morning Star.

By Michael Burke

Rachel Reeves’ statement on public finances on July 29 was the opening shots of what seems set to be a long war of renewed austerity. Just as Tory Chancellor George Osborne did in 2010, Reeves has blamed the previous government for forcing the new administration into cuts. His accusation of ‘failure to fix the roof while the sun was shining’ has become her ‘failure to fix the foundations’. But in both cases they are part of a spurious PR campaign intended to provide the mantra for a long campaign of cuts.

Yet one crucial difference remains. Successful industrial action against real cuts to pay gained huge popular support. The actual pay curbs were successfully beaten back over time and are now being reversed. The strength of the industrial action and the popular support for it was undoubtedly a factor in the last government’s unpopularity and eventual defeat. Now, a Labour government is imposing new round of austerity – but dares not include public sector pay.

Why cuts?

There is no doubt that the charge against Sunak and Hunt in particular that they ‘cooked the books’ is fully justified. As the Treasury’s own analysis (pdf) shows, the subterfuge dates back from 2021 onwards, and includes a whole series of commitments on spending which were not included in subsequent Budgets. Half of the £22bn shortfall in public finances arises from sticking to exceptionally low public sector pay forecasts, even when these had already been substantially exceeded.

However, the logic that these must be dealt with by cuts to public spending is entirely spurious. The cuts themselves are wide-ranging:

• £3.1bn in departmental budgets
• £2.4bn in winter fuel payments, adversely affecting millions of pensioners
• Planned cuts in the building of 40 hospitals
• Similar cuts for roads

To this list could be added the refusal to end the 2-child benefit limit and reneging on the promise to cap the costs of social care.

In addition, the Chancellor has been clear that that there will be more of the same in the October Budget, including on cutting welfare and investment.

There is no question that this amounts to another bout of austerity, following Thatcher’s original policies, which were later emulated by Cameron and Osborne.

But the question arises is why the government believes it will work this time around? After all, Einstein’s definition of madness is repeating the same experiment and expecting a different result.

It is worth restating that both previous bouts of austerity completely failed to generate growth and raise prosperity. Thatcher’s policies created an unemployment level of over 4 million people and was saved only by the sudden inflow of enormous North Sea oil revenues. Cameron and Osborne enjoyed no such windfall, with the result that living standards are no higher now than at the beginning of the Global Financial Crisis in 2007-08.

This history holds important lessons for current policy. Both Rachel Reeves and Keir Starmer have repeatedly claimed that their central economic aim is to raise the growth rate of the economy, and, from that raise average living standards and improve public services. But cuts have never delivered growth (Cameron and Osborne knew that and so started to increase public spending in 2014, ahead of the general election the following year).

The key to better public finances is growth, and anything that depresses GDP (including cuts to public spending and investment) will damage public finances. Under a previous Labour government, UK Treasury analysis codified this proposition, that growth reduces the deficit with the finding below:

“Overall a 1 per cent increase in output relative to trend after two years is estimated to reduce the ratio of public sector net borrowing to GDP by just under ¾ percentage point, while increasing the ratio of surplus on the current budget to GDP ratio by just under ¾ percentage point.”  – Public Finances and Cycle, Treasury Economic Working Paper No.5, November 2008, (pdf).

In plain terms every £1 increase in GDP increases public sector receipts by over 50p, while also reducing public sector outlays by over 20p. The combined effect of the two is to improve government finances by 75p.

The government believes that growth is the answer to the current economic stagnation and is required for any improvement in public services. The conclusion of Treasury analysis points in the same direction. History shows too that prolonged bouts of austerity lower growth and mean that any improvement in public finances is extremely limited, at best.

A renewed austerity policy is in direct conflict with the stated aim of raising the growth rate.

Real and stated objectives

Massive job losses and/or real pay cuts, cuts to public services and welfare payments along with privatisations have not mainly been about public finances at all. When Callaghan/Healey first trialled them, it was claimed they were in response to a fictitious balance of payments crisis. Under Thatcher they were variously said to address money supply growth or inflation. It was only under Cameron/Osborne that the same policies were cast as addressing the (genuine) crisis of public sector finances.

When the same recipe is offered as a cure-all but is a remedy for none, it is reasonable to suggest that there is another, unstated motivation behind the policy. As these policies are combined with repeated cuts to taxes on profits, it is easy to see that the austerity policy is actually a transfer of incomes from poor to rich and from workers to businesses.

Profits are the motor force of a capitalist economy, especially an economy like Britain where so much of the economy is in the hands of the private sector. The aim of austerity is to fire up that motor by boosting profits. However, in practice that has been extremely difficult to enact, for a variety of reasons. Key among those has been the resistance of organised labour to real pay cuts.

This is shown in the chart below.

Chart1. Labour share of national income, %

Source: ONS

Callaghan/Healey and then Thatcher had some success in driving down the labour share of national income and so raising the profit share. But there was a bounce-back after Britain was forced out of the Exchange Rate Mechanism in 1993 (which was another attempt to ‘force wage inflation out of the system’), and there it remained under Blair.

Cameron and Osborne later imposed vicious austerity and living standards have stagnated. But 14 years of austerity has produced a decline in the labour share of national income from 60.9% to 59.8% now.  Put another way, austerity did shrink the growth rate of the economy towards zero and has decimated public services, but it has not remotely achieved its real objective of raising profits.

What are Starmer and Reeves hoping to achieve?

There is a fundamental departure in this initial phase of austerity under Labour compared previous episodes. There have already been small policy downpayments to cuts in investment, cuts to the infrastructure for public services and transport, as well as social welfare cuts and threats of privatisation in the form of debt-laden PFI.

Yet at the same time there are promises of pay rises above-current inflation in some parts the public sector, although it is not clear whether these will be funded with new money or from existing departmental budgets.

In some cases the suggested pay offers are way above the current rate of inflation. For example, 22% pay rises for junior doctors over 2 years may only be beginning to catch up with a loss of real pay over more than a decade. It may also be a huge exaggeration compared to what the substance of the offer is. But even if both are true, it completely contradicts all previous bouts of austerity.

In the drive to force wages down and profits up, previous governments have heavily relied on cuts or freezes to public sector pay. A variety of reasons have been given, but the aim is consistent. The public sector remains by far the biggest single employer in the country; it still employs almost 6 million workers. Austerity governments have attempted to use real pay cuts in the public sector to set a ‘going rate’ for the whole economy (economists’ jargon is a ‘demonstration effect’).

But this government has chosen a completely different course, and is supplementing inflation-plus pay rises with adjustments higher for the national minimum wage. This may even encourage pay rises in the private sector. It certainly will not depress them.

As a result, we could describe early Labour policy as social austerity, where cuts are focused on welfare spending and infrastructure. Both of these will prove highly damaging. But, for now, the new austerity does not seem to include wages in some parts of the public sector where there have been significant struggles.

Politically, there will clearly be the hope in government circles that unions will remain quiet in the face of cuts as long as pay is rising. Short-term, this could prove correct. It may allow the government to make dramatic changes to the role of the private sector in public services.

Ministers will surely hope that it will buy peace in key public services and put an end to industrial action. It should be noted that the industrial action itself has been a huge success in beating back efforts to slash real wages any keeping pay rises well below inflation. The multi-year success of the defensive action blocking real cuts to pay has now turned into a victory.

But economically it is incoherent and much-needed growth will not follow. Economic incoherence cannot be sustained.

Wages and public services can be improved through investment-led growth. Or wages too will come under the axe. One certainty is that this economic policy is unsustainable.

By Paul Atkin

The last few weeks have seen a series of statements, by Ursula Von Der Leyen and Janet Yellen complaining about “imbalances” caused by state investment in Chinese industry that makes competition “unfair” (von Der Leyen) and declarations that the US will not stand by while its industries are “being decimated” by Chinese imports (Yellen).

A lot of this focuses on rapidly developing green transition technologies in which China is accused of having “overcapacity”; as if the world could really do with fewer inexpensive solar panels, wind turbines and EVs.

So, the EU is launching an investigation into China’s ability to undercut EU prices in cars, steel, wind turbines, solar panels and medical devices. For example, BYD has launched an EV that retails at below E30,000, wind turbines made in China are 50% cheaper than EU models; and they offer better terms for deferred payment.

The conclusion of this should be evident to anyone who takes a passing interest. China is able to do this because it takes long term strategic decisions about what the key sectors are that need investment, and it invests in them on a large scale with a long-term consistent commitment. This approach has been derided here as “picking winners” and interfering with the unconscious genius of the market. The results of that are evident in undercapacity in the US allied countries in all these sectors.

In reality, countries such as Britain and the US provide huge subsidies to fossil fuel companies. These take the form of tax breaks for investment and opening new fields and decommissioning them. Given their costs and their destructive capacity, China’s critics are in effect picking losers.

The Chinese approach is crucial for the green transition. It is their investment that has made solar and wind more than competitive with fossil fuels and gives us the slimmest of slim chances of limiting the damage that we are already inflicting upon ourselves by transitioning too slowly. China is able to do this because, in the final analysis, it is the state not the private sector that drives strategic planning. If the EU and US (and Britain) want to catch up, they will have to do the same. Because they put the private sector first, they won’t, thereby holding the world back.

That explains why the level of investment in energy transition in China that in 2022 was already almost double that of the EU and US put together, and the gap has widened since.

Rather than rise to the level of this challenge, the EUs response is summed up by the Guardian; “The EU has been arguing that it is the largest free market in the world and that China is essentially abusing its hospitality by dumping products in Europe rather than reducing production“ (my emphasis).

So, rather than invest on a comparable scale, which is what would be necessary to get on track to meet Paris targets – because doing so would require taxation on the wealthy and big corporations and deficit financing – the EUs response is to demand that China cuts back to the inadequate levels the EU is currently capable of; thereby putting the future of the planet at risk. This is posed as “Europe will not waver from making tough decisions needed to protect its economy and security”.

This is in lockstep with the approach of the US, which has just imposed tariffs on the same sectors, among other things;

• from 25% to 100% on EVs,
• from 7.5% to 25% on lithium-ion EV batteries and other battery parts
• from 25% to 50% on photovoltaic cells used to make solar panels.
• Some critical minerals will have their tariffs raised from nothing to 25%.

More tariffs will follow in 2025 and 2026 on semiconductors, as well as lithium-ion batteries that are not used in electric vehicles, graphite and permanent magnets.

The last time the US imposed sanctions on Chinese solar panels in 2021, this did not lead to an increase in US manufacture, but the restriction in supply did lead to a jobs crisis for US workers employed to install them. This time too, the effect of these measures will be to increase costs for US consumers, restrict the supply of essential transition technologies, and therefore slow down the US transition, and that of the EU if it follows suit.

Although the United Auto Workers are arguing that these tariffs will ensure that “the transition to electric vehicles is a just transition”, and the New York Times proclaims that “China is flooding the world with car exports”, the US currently imports very few Chinese made cars (just 1.2% of its car imports in 2023; the same level as Belgium and well behind Mexico on 21%, Japan on 19%, Canada on 16.6%, South Korea on 14.9%, Germany on 11.3%, the UK and Slovakia on 3.1%, Italy on 2.4% and Sweden on 1.9%).

However, 7% of US car exports went to China in 2022. So, if you add the additional costs to US factories of the new tariffs on the 77% of the world’s lithium batteries that are manufactured in China to the inevitable tariff retaliation on US car exports to China, this will hit those exports and also domestic competitiveness. So, the impact of these tariffs on US car workers will be negative.

Hitherto, the Chinese response has been to argue that the growing demand for green tech – which has to be exponential from here on if we are to avoid the catastrophic 2.5 C increase in global temperatures that is now the average prediction among IPCC scientists – means that there will be more than enough work to be done for all economies: and that this should be approached, according to President Xi, with “strategic partnership” involving “dialogue, cooperation, trust and conscious coordination”.

This is also relevant to the economic and political course likely to be pursued by the UK under a Starmer government.

In her Mais lecture, Rachel Reeves argued that the economic stagnation of the UK economy since 2008, and regression in the last few years, can be overcome with “vision, courage and responsible government”, which sounds like an act of will in place of policy, wedded to “new economic thinking shaping governments in Europe, America and around the world”. She has codified this hitherto as “Bidenomics” or, more lately, “Securonomics”, both of which come down to support for a greater government industrial activism. However, the commitment to a £28 billion a year investment in green transition that was the core of that has been gutted; leaving little more than is already pencilled in by the Conservatives.

This leaves little more than the slogan and the act of will; which won’t go very far. A recent report from Nicholas Stern and others published by the LSE spelled out the need for the UK to invest an additional 1% of GDP – doubling its current level – in infrastructure to stop it falling behind the EU and US. Keeping up with China has long gone over the horizon. 1% of GDP amounts to £26 billion. A failure to do this will result in continued decline of the public realm, a failure to make the transition we need and a continuation of the impoverishment of the population that has led Labour focus groups to describe the state of the economy as “damaged”, “fragile” and “unbalanced”.

In relation to the car industry, if the Chinese EV manufacturers are indeed the most efficient and cheapest and, contrary to Western myths, technologically ahead (with no need to “steal” intellectual property that it is already beyond) then the surest course to preserve motor manufacturing in the UK would be to seek investment here from those companies.

The £1.2 billion that Chinese battery firm EVE is planning to invest in a gigafactory outside Coventry, creating 6,000 jobs, is an indication of what might be possible; so long as there is not a deepening of the economic self-harm already seen in the removal of Huawei from 5G provision and CGM from Sizewell C on “security” grounds; helping create political tensions and drum up the war drive that will make everyone in the world far less “secure” and cut off that potential supply of investment.