February 2022

Trump, Bush and Johnson are to blame for the cost of living crisis

By Michael Burke

The cost of living crisis is now a feature across most of the leading western economies. While hundreds of millions of people are suffering a sharp decline in living standards there is a political imperative to blame others. But the actual responsibility for the crisis lies firstly with the fiscal policies of Presidents Trump and Biden, which in this country are sharply exacerbated by Boris Johnson.

This is a crisis caused by policy, not by naturally occurring phenomena, including the rise in the price of gas and oil.

There is naturally a desperate effort to escape blame and search for scapegoats, although blaming Russia for the energy price crisis seems to have only limited traction currently. The same seems to be true for efforts to blame China for Western supply-chain bottlenecks.

Yet it should be clear that the damage being created by economic policy is being compounded by efforts to shift the burden for the crisis onto workers and the poor.

The US ‘sugar rush’

The outsized surge in US government spending to offset the economic effects of the pandemic are so large that they are widely described by economic and financial market pundits as a ‘sugar rush’. As the name suggest negative consequences are likely to follow.

But the relative scale of the stimulus packages under Trump and then Bush, their skewed composition and their negative effects have been insufficiently analysed, given their scale. In the previous SEB post, these factors were analysed.

It showed that, “U.S. government spending rose by 9.7% of GDP in 2019-2020 – the largest increase in U.S. history apart from World War II. U.S. monetary policy was equally expansionary, the annual increase in M3 money supply reaching a peak of 27% – an increase almost twice as high as any other period in the last 60 years.”

By comparison the much-vaunted Roosevelt New Deal was a tiny fraction of this overall stimulus package. But there were also severe problems posed by the composition of those packages.

“This enormous fiscal and monetary U.S. stimulus was almost entirely focussed on the consumer sector of the economy. Between the last quarter of 2019, the last before the pandemic, and the 3rd quarter of 2021, the latest available data, U.S. consumption increased by $1,571 billion. In comparison U.S. net fixed investment, that is taking into account depreciation, rose by $22 billion – or by only 1.4% of the increase in consumption!”

In effect, Trump and Biden have tested the idiocies of Western post-World War II policies to destruction. Theirs was in effect a Consumption-only stimulus, without Investment. Neoliberal ideologues insist the state should not be concerned with Investment, as this would reduce the private sector’s relative ownership of the means of production. In one sense, this was the errors of post-War ‘keynesianism’ writ very large (although Keynes himself is unlikely to have endorsed such a gross error).

In effect, virtually unchanged productive capacity was unable to meet the effects of surging Consumption plus the exceptional growth in money supply. The result is now the inflationary wave that it is overwhelming living standards for most people in the Western economies and beyond.

The source of the inflationary impulse can clearly be seen in the trends in US, China and German producer prices since the end of pandemic recession (grey area). US producer prices have risen earlier and far faster than either Chinese or German producer prices.

Chart 1. China, Germany, US Producer Prices, percentage change year-on-year (January 2019 to December 2021)

Source: Federal Reserve Economic Databank

Misery at work

The rise in prices is causing misery in the Western economies for workers whose wages are constrained by unemployment and for those on fixed incomes such as pensioners or people on benefits.

In some sectors these same economies are experiencing labour shortages, despite the fact that everywhere there remain substantial job losses arising during the earliest phases of the pandemic. This is the effect of another development with a widely-used nickname, the Great Resignation.

In effect, firms have used the pandemic to mount a huge attack. The have been aided by friendly governments. So workers have suffered a combination of hourly pay cuts, shorter hours, worse contracts and conditions at work. In response some have left the workforce, taken early retirement or gone back into education. In Britain about 200,000 EU workers have also left post-Brexit. Across the Western economies, many workers are also faced with increased care responsibilities because of the pandemic and this falls hugely disproportionately on women workers. They simply cannot go to work.

As a result, the workforce as whole has contracted, with higher vacancies and lower employment at the same time. The so-called jobs boom is a myth. In the US there are still 2.9 million fewer people in payroll employment than before the pandemic began, and in Britain 500,000 fewer total in work.

Of course, in countries which chose to try to suppress the virus there has been no such similar economic dislocation, and employment growth has continued almost uninterrupted.

Johnson’s role

In addition to US fiscally-driven inflation and the terrible economic effects of letting the virus run free, the British government has taken further measures of its own, in addition to supporting the employers’ offensive.

The sheer number of measures is too extensive to list, but the major ones include cuts to:

  • Pensions
  • Reneging on the pensions triple-lock
  • Real cuts to public sector pay with the pay freeze
  • Welfare payments of all types
  • Universal Credit
  • Local government funding
  • Departmental funding (excluding health and defence)

and increases to:

  • National Insurance Contributions
  • Effective tax rates (by freezing income tax bands)
  • Energy bills
  • Council Tax payments
  • Public transport fare
  • Student loan repayments (by freezing repayment thresholds)

According to the Resolution Foundation the 15 years from 2010 to 2025 will see the worst decline in living standards on record. Amid this exceptional attack, some commentators seem to have been mesmerised by the projected increase in total government spending and claimed that austerity was over. This even sucked in some prominent labour movement figures.

But of course, if you cut NHS workers real pay to ‘save’ £3 billion while simultaneously allocating £37 billion to the private sector for failed test and trace, total health spending has risen. Yet austerity, the transfer of incomes and wealth from poor to rich and from workers to business has been brutally increased.

It should be clear that the combination of sharply rising prices in the western economies, a ferocious assault on pay and conditions at work and government austerity adds up to increasing misery for hundreds of millions. It is policy-driven, by Western governments.

China’s socialist economy will deal with the global inflationary wave launched by US economic policy

By John Ross

China’s 8.1% GDP increase in 2021, following on from 2.2% in 2020, will exceed that of any other major economy. However, as is well known, China’s year-on-year growth rate fell to 4.9% in 2021’s third quarter and 4.0% in the 4th quarter, showing downward economic pressure.

Furthermore, China’s economy was aided in 2021 by an exceptionally strong trade performance. China’s annual imports rose in dollar terms by 30.1% in 2021 and exports rose by 29.9%. There were therefore signs of a slowing of very rapid growth of trade at the end of 2021 – although this was less sharp than for GDP. Taking a three-monthly average, to avoid distortions caused by a single month’s figures, annual growth of China’s exports fell from 30.7% in June to 23.3% in December, while the annual growth rate of imports fell from 37.1% to 19.5%. Whether such a strong trade performance as in 2021 can be repeated in 2022 clearly depends not only on conditions in China but on the state of the global economy.

Therefore, in addition to the assessment of China’s growth in 2021, it is necessary to look at both domestic and international facts to see economic perspectives.

Starting with the international economy, there are strong reasons to conclude that global growth in 2022 will be weaker than in 2021. This is due both to general economic conditions and the strongly inflationary side effects of the type of stimulus packages which were launched by the Trump and Biden administrations – unless inflationary pressures are to become out of control U.S. this will force a significant tightening of U.S. monetary policy with consequent downward pressure on growth in the world’s largest economy. Similar pressures are likely in the European Union – the other major centre of the world economy in addition to the US and China. The effects of this U.S. inflationary pressure is therefore a significant risk for the world economy.

Looking at this danger in detail, in December U.S. consumer price inflation reached 7.0% – the highest rate for 40 years. Asset price inflation was even sharper – by October 2021, the latest data, U.S. house prices had increased by 19.1% year on year, which was even more rapid than the 14.1% before the sub-prime mortgage crisis. But such inflation was predictable given the nature of the stimulus packages launched by the Trump and Biden administration.

Taking fiscal policy, U.S. government spending rose by 9.7% of GDP in 2019-2020 – the largest increase in U.S. history apart from World War II. U.S. monetary policy was equally expansionary, the annual increase in M3 money supply reaching a peak of 27% – an increase almost twice as high as any other period in the last 60 years.

This enormous fiscal and monetary U.S. stimulus was almost entirely focussed on the consumer sector of the economy. Between the last quarter of 2019, the last before the pandemic, and the 3rd quarter of 2021, the latest available data, U.S. consumption increased by $1,571 billion. In comparison U.S. net fixed investment, that is taking into account depreciation, rose by $22 billion – or by only 1.4% of the increase in consumption! In short, an enormous increase in demand was pumped into the U.S. economy while almost nothing was contributed to the supply side. Under conditions where there was no great unused capacity in the U.S. economy a huge surge on the demand side of the economy, with no significant increase on the supply side, meant an inflationary surge was inevitable – and has duly taken place.

What led to such a serious error in economic policy? From a theoretical viewpoint it was the false conception that consumption is a contribution to economic growth. But this is simply false. Consumption, by definition, is not an input into production. So, the huge increase in consumption launched by the Trump/Biden stimulus packages did not aid the supply side of the U.S. economy.

From the political viewpoint the reason the Trump/Biden stimulus packages were entirely focussed on consumption was because the U.S. is a capitalist economy – that is, by definition, one in which the private sector has a dominant role in the means of production. This capitalist class, consequently, does not mind the state stimulating consumption, but it does not want it intervening in investment, that is in control of the means of production.

For this reason, the only time the U.S. has pursued an investment, a supply side, led stimulus policy was during World War II. – when the total priority of the U.S. was to defeat Japanese militarism and Nazi Germany. By 1944 79% of fixed investment in the U.S. was in the state sector. This achieved the greatest economic growth in U.S. economic history. Between 1940 and 1944 U.S. grew by 15% a year, the fastest short-term growth recorded by a major economy in world history. But this huge state intervention into the U.S. economy was against the interests of private capital – the share of wages, compared to profits, in the U.S. economy rose for three decades and inequality of income and wealth was sharply reduced. Consequently, except when facing mortal peril such as war, U.S. capital was determined that there would never again be a large-scale state led investment programme even if this resulted in slow U.S. economic growth.

Therefore, because of confused economic theory and political relations, Trump/Biden launched an almost entirely consumer focussed U.S. stimulus programme which inevitably produced the inflationary consequences already outlined. The inflationary consequences of this now require tightening of U.S. monetary policy which will slow its economy.

Given the U.S. economy’s size the resulting U.S. monetary policy tightening, generally expected to be launched by the Federal Reserve in March at the latest, will inevitably have consequences not confined to the U.S.. An increase in Federal Reserve interest rates will put upward pressure on interest rates in numerous countries. It is also likely to put upward pressure on the dollar’s exchange rate. This combination will have negative economic consequences for a number of countries.

It is to be hoped that the world will join hands to manage these financial risks, including via the IMF and G20, but nevertheless these risks will continue to exist, and sufficient multilateral action cannot be guaranteed.

This situation clearly has economic consequences for China. Economic growth for 2021 met projections. But there was significant downward pressure at the year’s end. Meanwhile China’s trade was somewhat slowing and there are negative trends in the world economy. It is therefore difficult to escape the conclusion that there must be a domestic stimulus during 2022 if the negative trends in the world economy are to be avoided. But it is also important to understand the unfavourable lessons of the Trump/Biden stimulus packages and therefore to note that a stimulus in China only on the demand side of the economy, that is on consumption, will have negative consequences. Instead, stimulus will have to significantly include the economy’s supply side – that is investment.

In summary, China in 2022 will face more negative global economic trends than in 2021. This will clearly require more domestic stimulus in China while making it necessary to avoid the errors of Trump/Biden administrations.

This article was previously published by Learning From China and originally published in Global Times in English and Chinese.