Socialist Economic Bulletin

Wages are falling

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Workers and the poor hammered as Hammond gets UK ‘match-fit’ for Brexit

.392ZWorkers and the poor hammered as Hammond gets UK ‘match-fit’ for Brexit By Tom O’Leary

The economic policy outlined by Chancellor Philip Hammond in the Budget is so extreme that it represents a new fierce attack on living standards for the overwhelming majority. This is despite the fact that there is in total a modest giveaway, or fiscal loosening. This is because it is based on narrow class interests, a very large giveaway for big business and an almost equal series of taxes on workers and cuts in social security. 

The character of this Tory attack, and the narrowness of the beneficiaries of the Budget opens a wide political and then economic opportunity for Labour. As a result, it is extremely important to be clear on the fundamental economics behind the Budget. 

Hammond’s gamble

Hammond has effectively signalled a rise in taxes (National Insurance Contributions, NICs) on the self-employed, to widespread criticism. The self-employed now includes a wide array of social categories, from extremely well-paid professionals, through to what are actually small businesses, to a surge in fake self-employment, where workers are forced off payrolls so that employers can avoid employers’ NICs, statutory sick and maternity pay and other protections. Numerically, it is the latter category which is the largest.

According to the Resolution Foundation, the median average income of the self-employed will rise to £13,200 next year. If so, it will still be less than half the average wage. The Foundation’s support for the change in NICs is entirely misplaced. Those on average wages will be at least £200 a year worse off. Any change to workers’ NICs should focus entirely on the very high paid, or on employers’ NICs.

The reason for this political gamble should be clear. Hammond expects much more fake self-employment over the next period in response to Brexit and his own response of ‘making the UK competitive’. This strategy means turning Britain into a low-tax, low-investment, non-union and low-pay economy and Hammond cannot afford to lose the tax revenues from this growing army of ‘self-employed’. This gamble illustrates the high stakes for the labour movement, for the whole economy and all political actors over the next period.

McDonnell’s correct framework

Hammond and this Tory Government share the main tenets of the reactionary and illogical framework of their predecessors. Hammond aims for a zero public sector deficit. As Government expenditure is comprised of two quite separate categories, public current spending and public investment, so aiming for a balance on the entire budget effectively means refusing to borrow for investment. For a Government fond of individual analogies, it is equivalent to refusing to borrow for a mortgage to buy a house because you have confused it with your credit card bill. Perhaps a closer analogy would be a business that refuses to borrow to grow. 

Current Government spending includes all such items as the NHS, the police, all public services, including public sector pay and pensions, and so on. If there is a deficit on current spending it can be brought into balance not by cuts but either by increasing tax or by increasing economic activity which generates tax revenue. As only the latter can sustainable be repeated, the way to raise revenue is by increasing investment. Permanent current budget deficits mean borrowing for consumption when it could be used for investment. As borrowing for consumption cannot sustain growth it simply leads to greater government debt and to a bloated class of ‘investors’, and a finance sector that subsists on the interest payments from that Government borrowing.

By contrast, government investment includes every type of public sector investment, in rail, roads, housing, infrastructure, broadband, and so on. Arguably, spending on education is more appropriate to this category, although not officially classified as such. Investing in these raises output over the long run.

John McDonnell has correctly elaborated a fiscal framework which makes the distinction between current spending balances and borrowing for investment. This is completely different to the Tories, who pursue a deeply reactionary policy of transferring incomes and wealth from workers to business and from poor to rich. This is cloaked in the economic illiteracy of balanced budgets, fixing roofs and gas in the tank.

Labour’s policy is to balance the current spending budget over the business cycle and to increase borrowing for investment. It is based on economic logic not reactionary sound bites, so it has very few serious critics, even from the economic mainstream. This is because the greater the borrowing for, and returns from, public investment, the greater the funds that can subsequently be directed to public services.

The maintenance of the current leadership of the Labour Party is also the only hope of ending austerity, so these questions are of the utmost seriousness.

OBR forecasts surpluses 

The Office for Budget Responsibility (OBR) has a poor record on forecasting GDP growth and its components and their effect on the fiscal aggregates. So its forecasts must be treated with caution. However, the startling fact is that the OBR is forecasting a surplus on the current budget well before the end of this Parliament. 

In the Tory framework, this is of no account because they aim for a balance on the entire budget, including investment. This has nothing to do with fiscal sustainability. Falling investment (and total investment fell in 2016) increases instability, a propensity to crisis and fiscal receipts based on other factors such as unsustainable consumer spending.

The purpose of the current Tory plan and its predecessors should be clear from the fact that, as taxes have risen for workers and the poor, there have been a series of deep tax cuts for businesses and the rich. The Corporation Tax rate was 28% in 2010 and is set to fall to 17%. This is precisely done to transfer incomes to capital. The claim is that this boosts ‘entrepreneurship’ and business investment. The entrepreneurship is the surge in fake self-employment and as noted business investment fell in 2016.

But a surplus on the current budget matters a great deal in the Labour framework, even if it is only a forecast. The full table from the OBR budget document Economic and Fiscal Outlook is reproduced below. The balance on the public sector current spending is highlighted both in terms of proportion of GDP and in cash terms. 

According to the OBR the current budget will be in surplus in the Financial Year prior to the next legally mandated election in 2020. In GDP terms the surplus will by then be 1% of GDP or £21.3 billion. In the following two years it will be 1.3% and 1.6% of GDP respectively, or £29.6 billion and £37.1 billion respectively.

Table1. OBR Fiscal Forecasts Spring Budget 2017
 

For Labour this surplus would mean that there will be significant additional funds to immediately alleviate and begin to reverse austerity, in addition to its own planned borrowing for investment. Realistically, even with an emergency Budget that would surely be necessary early in the new Parliament in 2020, the following year is when a Labour Government could have a much more significant impact on the direction of the economy and the allocation of public expenditure. In those years the current budget surpluses are forecast to be in the order of £30 billion to £37 billion. 

Calculating the effect of policy

The McDonnell framework represents a break from dominant Left thinking in the Western economies and elsewhere, a ‘keynesianism’ which has nothing to do with Keynes. This argues that increased Government spending will increase economic activity on a sustainable basis. In this case by ‘spending’ is meant current spending. Government current spending has risen by £90 billion in nominal terms under the Tories without ever supporting a sustainable recovery. In fact, it is a marker of economic failure, as cuts have simply led to depressed activity, more poverty and upward pressure on tax credits and social security spending. Taxing one average paid worker to subsidise the wages of one poorly paid worker does not lead to growth.

Instead, investment leads growth. It is the most important factor in determining growth after the division of labour/socialisation of production. The effect of investment on raising output is measured as the Incremental Capital Output Ratio (ICOR), which simply measures the ratio of changes in the capital stock and changes in the level of output. The Office for National Statistics’ current estimate of the ICOR is 4. This means that that the capital stock must increase by £4 billion in order to increase output by £1 billion. The return on investment takes place over several following years.

Chart1. ONS Capital Stock Output Ratio
 

Assuming no change, this means that every £4 billion of increased public sector net investment will yield an additional £1 billion in output, as well a large increase in tax revenues (and reduction in welfare outlays) based on that increase in output. If current ratios are unaltered, then a £4 billion increase in investment will yield a £1 billion increase in GDP and (using UK Treasury analysis) a £750 million improvement in Government finances (comprised of rising revenues and, in a smaller degree lower outlays). This is an annual return on investment directly to the Government of 18.75% per annum for the entire life of the investment. It is about 10 times greater than the Government’s average cost of borrowing. This underpins the mathematical logic of Government borrowing to invest. 

Brexit effect

However, current ratios are altered. Removing the UK economy from its largest market and replacing that with an unknown series of tariffs and non-tariff barriers will have a wholly detrimental effect. 

Yet this will not even primarily be felt in terms of trade, but investment. Investment fell in 2016, which is highly unusual either outside of recessions or as a precursor to them. It was clearly a Brexit effect. Removing the UK from the EU Single Market will depress the level of investment, both domestic and from overseas. It will also reduce the efficiency of that investment, as the UK will be required to pay more for the world’s most advanced capital goods and may even have less access to these in areas such as aerospace, biotech, renewable energy production and storage and so on. 

As the OBR has little or no firm information to go on, its lower GDP forecasts after 2017 do not reflect likely Brexit outcomes. They are simply based on an analysis of current trends. Therefore the forecast level of GDP and the improvement in Government finances is likely to be significantly worse. 

Labour Politics 

If the Brexit timetable is accurate, it is planned that the UK will be outside the EU Single Market before the next election. If the OBR is proven right, the current budget will already be in surplus before then too. 

But Labour does not have to wait until that time before setting out its alternative. The maximisation of economic growth depends on the accumulation of productive capital through investment. But to be politically sustainable, there must also be easily identifiable improvements in the living standards of the population both through its real incomes and its public services. Therefore, a political judgement is required in the allocation of resources. 

Labour can announce now that it would spend, say, £20 billion of the current budget surplus the OBR has forecast in beginning to reverse austerity in key areas such as the NHS, social care, public sector pay and childcare. That can be announced now as a solid commitment for its first year in office, Financial Year 2020/21. A sustained programme of publicity can be used to illustrate how the NHS will improve in each area, or how public sector pay can rise in the first year, and so on. 

The remaining £10 billion, of the £30 billion, could be added to Labour’s commitments on investment. Here, it seems that the pledge is to increase public sector investment by a further £25 billion in each year. This could now rise to £35 billion to improve rail, build homes, invest in renewable energy and so on. 

This means Labour can promise both to increase current spending, which is what will determine votes and support, as well as increasing investment which will actually sustain recovery. From that, further Government funds can be then allocated to both spending and investment in proportion, based on the 18%-plus returns from investment. In this framework the returns on investment from the previous year can be added to government investment and government consumption. 

Labour must also answer a key question that will be posed What if the OBR is wrong, or significantly lowers its forecasts to reflect the deal on exiting the EU as it becomes more apparent? From the point of view of people who believe that Brexit leads to prosperity this is not a major risk. But, if that risk materialises, then Labour must have a plan for that eventuality, and an answer now, otherwise it has no funding basis for its pledges. 

The current Labour policy has a ‘knock-out’, where the fiscal rules can be suspended in a crisis, with interest rates at zero as a trigger-point. If it is going to use the OBR forecasts as the basis for pledges, and the forecasts could change very adversely once details of the Brexit terms are known, it needs another ‘knock-out’. 

A Brexit/OBR knock-out would maintain the pledges to increase investment and begin to reverse austerity. But, if the forecasts are much worse or the emerging Brexit deal is clearly very adverse, Labour can pledge to meet these by emergency increased borrowing. Labour would also politically need to oppose the Brexit effects by opposing the Brexit deal itself. 

Summary

The Hammond Budget makes no pretence to deficit reduction. It is simply a transfer of incomes from poor to rich and from workers to business. The attack on the ‘self-employed’, who are mainly now casualised workers, is a high-risk strategy, which reflects the expected growth in casualisation in the post-Brexit economy. 

This policy is cloaked with a reactionary determination to balance the entire budget, including even investment. John McDonnell’s framework is borrowing only for investment and balancing the current budget, which is entirely correct. As the OBR is forecasting large surpluses on the current budget balance, these forecast surpluses can be used now to illustrate the benefits of the Labour position of beginning to reverse austerity and increase investment. This is a vote-winning and sustainable combination. 

But the OBR could be wrong, especially as it cannot now take into account the effect of any Brexit terms deal. Labour could adopt an OBR/Brexit ‘knock-out’ on its spending and borrowing plans. If the forecast or the reality deteriorates sharply it would not change those plans but would temporarily increase borrowing to cover both. This would also require politically opposing any Brexit deal which led to such a negative outcome.

Britain isn’t booming. It’s in a crisis

.009ZBritain isn’t booming. It’s in a crisisBy Tom O’Leary

The latest UK GDP data confirm that the British economy remains in a crisis. As government spokespersons never tire of telling us the opposite, and are dutifully echoed by the majority of the media, then it is important to set out the factual case on the economy and to explain where the discrepancy between rhetoric and reality arises.

Once the factual analysis is made the following points are clearly established:

  • The UK remains in a crisis
  • On key measures of the living standards of the population, the UK is in the worst position of all the advanced industrialised economies
  • Fundamental economic factors mean that this crisis is set to deepen
  • The project of austerity will be resumed with a vengeance in response to Brexit
The UK economy grew by just 1.8% in 2016. This is below the average growth level since the recession, which itself has been miserably weak. On a calendar year basis, the recovery began in 2010. Since then GDP growth has been an average of 2%, so 2016 was among the slower years in a poor recovery.
In the 7 years prior to recession, from 2001 to 2007, GDP growth averaged 2.75%. The effect of compounding means that even apparently small differences in growth rates have a large impact on levels of economic activity over time. In the 7 years since recession, a growth rate 0.75% lower leads to a GDP level that is nearly 5.5% lower.
Incomes stagnate, wages fall
Most people do not care about GDP levels, for the very reasonable idea that what matters to them is their own living standards. Of course, without GDP growth its level cannot rise and it is therefore extremely difficult to raise living standards in aggregate. But rising GDP is by itself no guarantee of generally rising living standards (Chart 1 below).
 
Chart1. UK GDP and Per Capita GDP Growth, % Change, 2000 to 2016
 
In a society with expanding population per capita GDP will always necessarily grow more slowly that GDP growth itself. But the change on this measure has been dramatic. The beginning of this period saw growth rates in per capita GDP in excess of 3%. In 2016 it was one-third of that level, at 1.1%.
Again the cumulative effect of compounding apparently small differences in growth rates is very substantial. In the 7 years prior to the recession the level of per capita GDP rose by 16%. In the 7 years since, this measure of average output per person has risen by just 8.7%. If the period of the recession is also included, when per capita GDP fell, then the increase in per capita GDP since 2007 has been just 1.9%. No wonder most people believe the economy remains in a crisis.
But the actual situation for workers and the poor is even worse than this data suggests. Severe recessions of the 2008-2009 type are caused by a fall in profits. Although workers are clearly not better off from a recession, the statistical effect of a sharp fall in profits is frequently to lower the profit share and so raise the labour share of national income.
In Marxist terms, the initial effect of falling profits lowers the rate at which surplus value is extracted. The purpose of austerity is to reverse this phenomenon, by driving down wages, raising taxes and lowering public spending that benefits workers and poor, at the same time increasing hand-outs to businesses and the rich, cutting their taxes and increasing privatisation of publicly-owned assets to boost profits, and so on.
Chart 2 UK Nominal Profits, £ and Labour Share of National Income, %
 
As we have already noted, per capita GDP has risen by just 1.9% since the recession began. But this is not shared evenly. At first, the effect of falling profits has been to raise the labour share of national income (as shown in Chart 2 above). Austerity is designed to reverse that and has been partially successful. In 2007 labour’s share of national income was over 51%. Now it is just over 49%.
 
Crucially, the labour share data is based on the compensation of all employees, including very senior management, whose total compensation has risen. Taking wages alone, the picture is even worse. The chart below is taken from the Financial Times. It shows 4 categories of countries in the OECD. The UK is on its own, the only country where the economy has expanded since the recession but where wages have also fallen.
 
Chart 3. FT- UK Alone in GDP Expansion and Wage Contraction
 
Running on empty 
The GDP data reveal that the outlook for the economy is deteriorating. In a capitalist economy growth is determined over the medium-term by the accumulation of capital, first as profits then as investment. But profits growth remains weak and business investment actually contracted in 2016!
 
The UK has had many failed experiments in attempting ‘consumer-led growth’, and the current failure is set to come to an end. Without rising incomes, which must be based on rising output to be sustainable, then all attempts to force Consumption to lead the economy end in a debt-fuelled failure. As Investment is key to the growth of output, only Investment can lead the economy higher on a sustainable basis.
In 2016 Household Consumption accounted for almost the entirety of recorded GDP growth. GDP expanded by £35.5 billion last year, while household consumption rose by £34.6 billion. As we have seen incomes and wages have not risen to keep pace with consumption. In fact incomes have stagnated and over the medium-term wages have fallen. The growth in investment (GFCF, Gross Fixed Capital Formation) was just £1.4 billion over 2016.
This continues the post-recession trends in the UK economy. Startlingly, there has been no growth in Investment (GFCF) since before the recession! In 2007 the real level Investment was £313 billion. In 2016 it was just £310.6 billion (Chart 4).
 
Chart 4. UK Real GDP and Components, 2007 to 2016, £ billion
 
SEB has repeatedly argued that it is not possible for Consumption to lead the economy. If it were possible, rising Consumption alone would be sufficient to induce rising Investment. But that is clearly not the case in the British crisis. The combined rise in Consumption from households and government since 2007 has been over £110 billion. But Investment has in fact contracted. The proponents of Consumption-led growth have no credible explanation for these developments.
 
Without Investment, and with Consumption forced to retreat without the support of rising output and incomes, then the medium-term outlook for the economy must be a gloomy one.
Tory way out of the crisis
Brexit poses a new problem in the British economic crisis, and one which will exacerbate the current trends of low investment and falling real wages. It is also likely to lead to job losses in key sectors.
 
The CBI estimates that 90% of UK exports to the EU will be hit with either tariffs or non-tariff barriers, or both. This would be a very large blow to UK businesses and their profits. The question that arises is therefore, how to increase profits in an environment of contracting access to key markets? The answer must be to do more of the same, driving down wages, increasing taxes, privatisation, reductions in social spending, and so on. The promise of the Tory government to its business supporters will be that all this can be accelerated once freed from the shackles of EU protections for workers’ rights, consumer standards or environmental regulations.
It is doubtful whether this can work. If output continues to grow very slowly, then labour’s share of national income must fall sharply in order to boost profits sufficiently to revive investment. The share of the total social product which benefits workers and the poor must be cut exceptionally harshly, and so on. But the probability of failure will not prevent the project from being initiated. It will be a Poundland Thatcherism, draping vicious anti-worker and anti-poor policies in the cloak of nationalism and ‘getting the country back’.
The rhetoric about Britain’s great economic performance is simply that. It has no factual substance. Living standards have fallen since the crisis. The UK is in a unique position among the advanced industrialised countries as GDP has expanded but wages have contracted. This is a conscious strategy to revive profits. Until they revive sufficiently, investment will not recover. But the new challenge of Brexit means that this project must be redoubled. From the perspective of the Brexit-supporting Tories, there must be a compensation for business to off-set the loss of access to its major market.
 
The struggle over the direction of the British economy is set to be a prolonged one.

There is no ‘People’s Brexit’

.507ZThere is no ‘People’s Brexit’By Tom O’Leary

The certainty that Brexit will push living standards lower is not really a forecast- it is already happening. Fundamental economic forces mean that Brexit can only have a negative outcome.

Immediately following the referendum the pound fell sharply and has more or less stayed at that lower level since. The 13% decline means that CPI inflation is moving remorselessly higher and will continue to do so. Higher inflation means lower wages and incomes in real terms. 

People are already worse off, and Brexit has not even begun. On the current timetable negotiations are supposed to be concluded in early 2019. Only at that point will the massive disruption caused by Brexit really begin to take effect. 

We will see then whether all the car makers stay, or if the Government has to bribe them with our money to stay. In either event we will be worse off. There should be no silly crowing about the probably departure of the banks either. Most workers in finance are not paid much more than average wages (and 165,000 of them are in unions). In all industries where there is deep connection to the EU there are likely to be job losses or contraction, whether these are complex supply chains, key export markets or simply the dependence on the free movement of labour (such as the NHS, hotels, agriculture). 

The Government has prioritised reducing immigration over increasing prosperity. This too will make us worse off. Migrants are disproportionately workers. Two thirds of EU migrant population are in work, while less than half the UK population is, as they are in school, college or have retired. Reducing them will lower output and output per capita. We will pay the price in terms of lower tax revenues and even worse public services.

There is no socialist or even ‘people’s Brexit’. Everyone operating in the UK will still be subject to the laws of the market. The problem will be that the market will suddenly be much smaller and less productive than the EU Single Market the UK has been participating in for the last 25 years. If the Tories continue to get their way, there will also be a stripping away of the workers’ environmental and consumer rights that were instituted under the EU’s ‘Social Chapter’. These have long been a Tory target for abolition in the UK. Post-Brexit, the economy will be operating behind a series of tariff and non-tariff barriers as others protect their markets. All of these will make the economy less competitive and will increase costs. 

Of course, the pound could depreciate sharply again to offset these disadvantages, but this would lower living standards and real incomes even further. If currency devaluations alone were the answer then Britain would be an earthly paradise. In 1940 there were 5 US Dollars to the pound. Now there are 1.25. Over the same period the relative size of the UK in the world economy has shrunk dramatically in real terms, to less than one-third its proportion of world GDP, 2.3% now versus 7.3% in 1940.

Chart 1. US Dollar/UK Pound Exchange Rate 1940 to 2016
Source: FRED database

There is a widespread notion on the right that Brexit will lead to ‘taking back control’ of the economy. Unfortunately, this is also shared by important sections of the left. It is a delusion. The 1930s saw a whole series of countries taking back control, in what might be called an early anti-globalisation movement. Although the authors of these policies are now widely and rightly derided their arguments will actually be very familiar.

It was said that other countries were taking our jobs, they are dumping their output on us causing our industries to fail and that those industries need protecting and government support, or state aid. Once we have done that, then we would be able to trade freely with the whole world. Of course, the more virulent version also included vile invective against foreigners, immigrants, Jews, gay men and others. When the economic policies went spectacularly wrong, the racist invective became policy.

The reason these policies failed spectacularly should be clear. Behind the protective barriers, costs rise, potential markets are closed off (especially as they respond with barriers of their own), industry becomes less not more productive, profits decline and workers are laid off. The economic crisis that ensued was finally resolved only by general rearmament.

What Adam Smith called the division of labour and Marx called the socialisation of production is actually the most powerful economic force of all. Ever since some of us made the spears and others went hunting with them, we have all collectively benefited from the socialisation of production. Statistically, a key measure of this socialisation are inputs and these grow faster than GDP itself. 

If a country cuts itself off from world markets, or simply erects barriers between itself and the world then it diminishes its own participation in the international division of labour, the international socialisation of production. Now, instead of being part of an intricate supply chain making cars, there are tariffs and other barriers which increase the cost of production. The UK becomes a less efficient place to make cars and production shifts at some point to the larger market where there are fewer or no barriers. Or pharmaceutical companies importing inputs (biochemical products, electron microscopes, processing equipment, and so on) find they now come with the additional costs of tariffs.

As a result of all this, investment is likely to be diverted to the bigger market, the market not burdened with tariffs. This is where the investment returns will be greater. Investment is the second most powerful determinant of growth, after the socialisation of production.

The UK will experience lower investment and even that investment will become less efficient, as access to the most technologically developed investment goods becomes more expensive. The UK economy will become a low investment centre of low-cost, low-value added production and wages and living standards will reflect that. So too will public services. 

If I cut my daily calorie intake in half, I cannot say what my weight will be in three months’ time, but it will be lower. Forecasting a disastrous Brexit is not project fear. It is a certainty. It is fundamental economics.

A slightly amended version of this piece first appeared in the latest issue of Labour Briefing (Co-operative). 

The alternative to the EU Single Market is Trump

.790ZThe alternative to the EU Single Market is TrumpBy Tom O’Leary

Once Britain leaves the EU Single Market the sole realistic alternative will be to do a trade deal with Trump. This will be far worse than the current Single Market and will also be far worse than the TTIP (Transatlantic Trade and Investment Partnership) which was formulated under Obama.

The limits on trade are ultimately set by the extent of the world market. Although world trade grows over time and tends to grow more rapidly than world output, the scope for trade is itself limited by the size of the world market. Like any country, the UK cannot trade with Mars, or imaginary countries or under imaginary conditions. It can only trade within the boundaries of the world economy. If the UK leaves the EU Single Market it really only has one other option to partially replace the trade that will be lost. The real choice is not between the Single Market and ‘prosperity on the open seas’ as many Brexit supporters seem to believe. The actual choice is between the EU Single Market and Trump’s America.

The reason the choice is so stark is purely factual. The world has three continental-sized economies, the EU, the US and China. In strictly cash terms they together account for 61% of the world economy. It is not possible to maximise the prosperity of any economy by focusing on the remainder of the world economy. The next largest economy in cash terms is Japan, which accounts for less than 6% of world GDP, and this share is declining.

If Purchasing Power Parities (PPPs, which adjust for distortions created by exchange rates) are used, the EU, US and China still account for half the world economy, 49.8% of GDP using World Bank data. The next largest economy behind these three is India, and is half their size in PPP terms. Table 1 below shows the relative size of the world’s leading economies, and includes the UK economy for reference.

2015 Country Share of World GDP
 Source: World Bank

‘Free trade’

The pursuit of ‘free trade’ deals is a mirage. Currently, the world economy does not operate a free trade system. It is not feasible that it will in the near future, although fundamental forces push in that direction over the longer run. Instead, countries operate behind a system of tariff barriers on goods and services and impose restrictions (non-tariff barriers) on goods and services. Almost all ‘free trade agreements’ are in reality agreements to reduce these tariffs and barriers, not to eliminate them.

This is not the same within economies, which generally operate with far fewer barriers and tariffs. This is true within the US economy, as well as China and the EU, as each of them operate their own ‘single market’ (as does the UK). It is this closer approximation to free trade that the UK is leaving.

It is not possible to construct a single significant trade deal which would allow the same level of unfettered or relatively free trade as currently exists within the EU Single Market. This is especially true given that the parties to a trade agreement operate different currencies. Trade and other barriers remain in place in part to offset the possibility of a sharp currency devaluation by one side, which undermines the competitive position of the other.

Most single markets operate with one main currency. The UK had a highly unusual and privileged position within the EU in being allowed to have freedom for the currency to fluctuate while being in the EU Single Market. Partly as a result of this freedom, the UK has actually been a greater beneficiary since the creation of the Single Market than the rest of the EU (as shown in Chart 1 below).

Chart 1 UK, EU Per Capita GDP (US$, PPPs)

Table 2 below shows the UK and EU per capita GDP from 2003 to 2015. For comparison the US and China are also shown. The UK performed significantly better than the EU and marginally better than the US on this measure, although of course they all performed much worse than China.

Table 2 Per capita GDP (US$ PPPs), 2003 and 2015
Source: World Bank

Relative strength

It is also completely impossible to construct a series of trade arrangements which allow the degree of free trade equivalent to the free movement of goods, capital, firms and labour in the EU. This is because each country’s trade priorities and interests are different. Every trade deal done affects other potential trade deal.

So, where the US might insist on free trade in most agricultural goods which would devastate farming in this country, India would insist on protecting its farmers from British and American competition. India would therefore be unable to conclude a UK trade deal including agriculture and the British approach would to be to limit freer trade in another sector reciprocally. In fact concluding any serious trade deal with India or other countries will be difficult unless the UK changes its attitude to immigration. Theresa May returned from her much-vaunted trade trip to India with virtually nothing, as she refused to allow more Indian immigration, business and student visas.

Therefore, the deal that will be struck with Trump will be decisive. It will also reflect the relative economic interests of the US and the UK. It will not reflect any ideological commitment to free trade. It is clear that Trump has no such commitment.

The terms of negotiations between the UK and US will reflect the real relationship of forces between the two economies. The US economy is approximately 6.5 times greater than the UK economy. But this is not the sole measure of the UK’s relative weakness. There are only two economies in the world larger than the US, which are China and the EU. The UK is leaving the EU and is prevented from allying with China in trade and investment terms because it is hamstrung by its own backward ideology. It has only one choice when the EU is rejected.

By contrast, for the Trump negotiators, there are ten economies in the world whose GDP is greater than or more or less equal to that of the UK (on a PPP basis). It will be the UK which is desperate for a deal, not Trump.

Dealing with Trump

Trump is not a neo-liberal, but a protectionist. He does not favour tearing down all protective walls and barriers in the manner of the ‘Washington Consensus’, which has dominated official policy making for more than 35 years. Trump has issued a series of threats regarding new US tariffs and has suggested that China, Germany and Japan be declared ‘currency manipulators’. Under US law this would allow the imposition of trade tariffs and sanctions on the targeted countries.

This list is not accidental. The three countries have the largest external surpluses (current account surpluses) in the world, while the US is the world’s largest deficit country in cash terms. The US requires capital inflows to fund its deficit and these are the countries which can provide those flows from their own resources. If, as seems likely, Trump will cut taxes for business and the rich and may also increase spending on the military then the external deficits will widen and US dependence on those inflows will only increase.

Germany is a long-standing ally of the US. Japan is too and actually adopts a wholly subservient role to the US. Japanese Prime Minister Abe caused embarrassment and outrage at home when he suggested Japanese investment could create 700,000 US jobs even while Japan itself is stagnating. Japan outdoes the obsequiousness even of the UK’s ‘special relationship’.

Yet Germany and Japan get the same initial treatment as China, who members of the Trump Administration openly describe as an enemy. The UK should also therefore expect the tactics of bullying and threats to be deployed in promoting US economic interests in any trade deal. There is already one trade deal crafted, the Transatlantic Trade and Investment Partnership (TTIP). But, despite the acceptance of US negligible environmental and consumer standards, and the legally privileged role for multi-national companies, and the inevitable assault on public services like the NHS, Trump has binned the TTIP because it did not promote US business interests sufficiently. Trump does not do ‘quid pro quo’. There are only winners and losers in his deals, and it is absolute certain that the UK will not be the winner. Any deal eventually struck will be worse than TTIP.

Will it work?

Because something is objectionable it does not mean it cannot happen, or that it cannot endure for a period. The question must be posed, would a trade deal with Trump work? Would a central trade deal with the US supplemented by less comprehensive deals with other countries compensate for the lost trade with the EU?

Of course, it is impossible to know now the precise level of tariffs and non-tariff barriers that will be imposed on the UK outside the Single Market, although if Theresa May’s Hard Brexit is not opposed the terms are likely to be very onerous. But the sheer volume of the respective UK trade ties to the EU and to the US make it impossible that increased trade with the latter could off-set a significant decline in the former. The total volume of UK-EU trade in goods and services in 2016 was £385 billion. The equivalent volume for UK-US trade was £84 billion. These proportions mean that even a small proportionate fall in EU trade would require a significant rise in US trade volumes simply to stand still.

Here it is important to point out an important fallacy which focuses on trade balances rather than trade volumes. It is an error made by Trump himself, but unfortunately is widely echoed in broader economic commentary, and lends his bombast credence. Trump argues that US industry is being ‘killed’ by cheap Mexican labour and cites in evidence the wide trade gap with Mexico since the introduction of the North America Free Trade Agreement (NAFTA).

NAFTA was introduced in 1994. Since that time the level of US exports to Mexico have increased by 413%. Imports have grown by 591% and the US trade balance has switched from a $5 billion surplus to $58 billion deficit. In the Keynesian system of GDP accounting net exports are now a negative. But the idea that the increase in exports to Mexico, and the jobs that depend on them makes the US worse off is ludicrous. The US is a significant beneficiary from NAFTA in much higher exports as well as much cheaper imports.

In reality the generalised trade deficits of the US, like the UK, arise because it is uncompetitive. The US is uncompetitive because it invests too little to sustain both the prevailing level of the currency’s exchange rate and trade balances or surpluses. It runs trade deficits with virtually every other country on the planet, including countries where wages are higher, such as Germany. One measure of the US lack of competitiveness is that the US even runs a trade deficit with the UK, and is the only large economy to do so. Only a sharp increase in the rate of investment, probably combined with a large currency devaluation could reduce the chronic US trade deficits. Trump may consider the latter at least, but a falling US Dollar would undermine efforts to get overseas investors to increase their funding of growing US deficits.

Conclusion

The only realistic alternative to membership of the Single Market is for the UK to do a trade deal with the US. Trump’s version of ‘making America great again’ is to make other countries worse off. The UK will be obliged to take whatever deal is offered, which is likely to be worse than the TTIP. Any new deal is unlikely to compensate for the lost trade with the EU and will come at a significant price, in terms of workers’ rights, environmental protections, consumer safeguards and the privatisation of UK public services. This will all be a direct consequence of Brexit.

2016’s economic data shows the claim of US ‘strong economic recovery’ was a myth

.093Z2016’s economic data shows the claim of US ‘strong economic recovery’ was a mythBy John Ross

The publication of official US economic data for 2016, which shows only 1.6% US GDP growth for the year, and only 0.9% per capita GDP growth, clearly demonstrates two things:
  • The major global economic development in 2016 was a sharp slowing of the US economy – as is shown below;
  • Large parts of the financial media failed to analyse this reality of slow US growth and continued to repeat a myth of ‘strong US recovery.’
Two questions follow from this reality:
  • What is the real state of the main centres of the world economy – the US, the EU and China?
  • Given that accurate analysis of the state of the US economy is extremely important both in itself and for economic policy, why did sections of the financial media continue to publish inaccurate material about the US economy?
Using the method of ‘seek truth from facts’ first the data on the growth of the main global economic centres will be given and then an analysis of this.
US economy
Official data for US GDP for 2016 was recently published. This confirms clearly the sharp slowdown in the US economy during 2016.
  • US GDP growth fell from 2.6% in 2015 to only 1.6% in 2016 – that is during 2016 the US economy slowed down by almost 40% from its previous growth year’s rate.
  • US per capita GDP growth fell from 1.9% in 2015 to only 0.9% in 2016 – US per capita GDP growth therefore declined to under half of its previous year’s growth rate, and fell to less than an annual 1% which is approaching stagnation.
This data is shown in Figure 1. This trends shows clearly that the claim of ‘strong recovery’ of the US economy during 2016 was entirely a myth. In fact, the US economy was slowing sharply.
Figure 1
Comparison to other major economic centres
This data on the slowdown of the US economy is even more striking when compared to the statistics for the other two major world economic centres – China and the EU. What this data shows is that far from the US undergoing ‘strong recovery’, the US was the slowest growing of the major world economic centres in 2016
Final data for 2016 for China and the US is already published. Final data for the EU is not yet available, but it is published up the 3rd quarter of 2016, showing growth at 1.9%. The October 2016 IMF World Economic Outlook, based on the most up to date statistics, concludes this growth rate will continue until the end of the year. Given the closeness of this data to the end of the year it would be unlikely the final figure would differ greatly from this projection. Furthermore, Eurozone data already released shows growth in 2016 to be 1.8% and EU growth is normally slightly faster than Eurozone growth.
Given these trends GDP growth in 2016 would be:
  • China – 6.7%
  • EU – 1.9%
  • US – 1.6%
Therefore, not merely did the US economic decelerate sharply in 2016 but the US was the slowest growing of the major economic centres.
Figure 2
 
Myths of Western media
It was, of course, perfectly possible during the last year to factually follow this sharp slowing of the US economy as it was taking place. Already in August 2016 I analysed this data. At that time, major sections of the Western media were already attempting to propagate the myth of a ‘hard landing’ in China and ‘strong recovery’ in the US. Bloomberg, in particular, was publishing articles with titles such as ‘Soros Says China Hard Landing Will Deepen the Rout in Stocks’. But in fact, China’s economy slowed only marginally in 2016, from 6.9% to 6.7%, whereas as shown above, the US underwent a sharp economic slowdown.

That is the actual trends in the world economy were the exact opposite of those being claimed in Bloomberg and other sections of the Western media.

Inaccuracy of sections of the media
In addition to the inherent importance of accurately analysing trends in the global economy for economic policy making and company strategy clear conclusions can be drawn from the contradiction between the facts of economic development in the last year and analysis in the media. In particular, these facts of economic development again confirm that large parts of the Western financial media is not primarily focussed on accurate economic analysis but on spreading unjustified claims regarding the economic success of the US and unjustified claims regarding ‘economic crisis’ in China.
Two clear conclusions therefore flow from these facts regarding global economic trends in the last year.
  • First given the proven inaccuracy of the Western media the role of independent factual studies by Chinese think tanks and research organisations such as Chongyang Institute for Financial Studies is vital.
  • Second, that the publication of research by Chinese media is crucial for getting accurate data and analysis into the hands of companies and policy makers.
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This is an edited version of an article which originally appeared in Chinese in New Finance.

No ‘Project Fear’- economy is faltering post EU referendum

.430ZNo ‘Project Fear’- economy is faltering post EU referendumBy Tom O’Leary

The UK economy has slowed since the Brexit vote. This is long before Brexit actually takes place, which will cause a further sharp deceleration in the economy and significantly lower living standards.

The latest GDP data have been widely hailed as confounding the authors of Project Fear, including the former Chancellor George Osborne. His talk of an immediate recession on a Leave vote was clearly a foolish exaggeration. By contrast, the Bank of England’s sober assessment focused on the long-term and argued that growth and living standards would be significantly lower as a result of Brexit. The BoE’s assessment may be an under-estimate as it probably takes insufficient account of the depressing effect on investment.

The GDP data show a slowdown. In 2014 GDP grew by 3.1%, which slowed to 2.2% in 2015 and slowed again to 2% in 2016. In the final quarter of 2016 the preliminary estimate is that agriculture, construction and production combined contributed just 0.2% to growth. Instead, the economy is running on services, especially retail sales growth.

As prices are rising, there is a widespread assessment that consumers are spending at a rate far higher than income growth in a pre-emptive move against rising inflation in 2017. If so, consumers are probably right. Chart 1 shows the effect of changes in the value of the pound (using the Bank of England’s Sterling Trade-Weighted Index) on consumer prices. In this chart the consumer price inflation rate is lagged by 18 months, as changes in the value of the currently take their time to work through the economy. The Bank of England’s projection is that Inflation will rise to 2.8%. This would probably mean stagnant or even falling real wages once more. However, the last time the pound fell as sharply as after the Brexit vote, inflation rose to 5%. This would certainly mean sharply falling real wages.

Chart 1. Consumer prices and the pound
 
The rise in prices without a corresponding increase in wages means that the rise in retail sales and more generally in household consumption cannot last. But this is the main prop for the economy currently (Chart 2). 
 
Chart 2. Largest and smallest quarter-on-quarter contributions of industries to headline GDP growth
Source: ONS
There is a widespread misconception that ‘demand’ can lead the economy, by which it is meant that rising Consumption will by itself lift Investment and so lead to rising GDP. The services sector ‘Distribution, hotels and restaurants’ grew by 5.4% in the 4th quarter of 2016 compared to the same period in 2015, while real wages are growing at little more than 1%. If the theory, widely supported by ‘keynesians’ although having little in common with Keynes, that Consumption could lead growth was correct, then this would be a positive development and we should expect growth to accelerate. The opposite is the case. Household savings are falling and growth will slow further. Notions of ‘consumption-led growth’ cannot explain the real world, where Consumption has been growing strongly and GDP growth has been slowing (chart 3).
 
Chart 3. Household Consumption and GDP Growth, Q4 2009 to Q4 2016
 
The previous Tory government introduced a series of measures to boost Consumption, ‘Help to Buy’ schemes and so on as part of its re-election campaign. The sharp slowdown in inflation also allowed real wages to rise very modestly from 2012 onwards. At this point, Consumption began to rise strongly, from around 0.5% annual growth to over 5%. However, GDP has not followed. Over the same period GDP growth has barely changed, rising from 1.5% to just over 2.2%.

Consumption-based services are among some of the lowest productivity sectors of the economy. The much weaker growth of manufacturing and industrial production at the same time means that employment patterns are changing in a negative way. In the 3 months following the referendum manufacturing and construction jobs combined have contracted by 60,000, having expanded by 136,000 in the 12 months prior to the referendum. Crucially, total hours worked for the whole economy have recorded the first fall since the stagnation of 2011.

 
Chart 4. Total Hours Worked (millions) January 2009 to October 2016
 
In the 12 months prior to the referendum total hours worked grew by 2%. In the 4 months’ data since then total hours have fallen by 0.2%. This should not be exaggerated. But it is widely understood that the crisis of the British economy is primarily expressed as a weakness of investment. This means that it is only possible for GDP to rise if there are more people in the workforce or if they are working longer hours, which is the recent experience. If hours worked stagnate or fall for a significant period, in an environment of weak investment then both GDP and living standards would fall.
Conclusion

It was a foolish exaggeration from the Tory leadership of the Remain campaign to suggest that the UK economy would immediately go into recession with a Leave vote. The negative effects of the Brexit vote provoked a sharp fall in the pound and interest rates were cut. These averted sharp slowdown, but the inflation effect will cut living standards.

The real effects of Brexit will be felt over the medium-term and will naturally be strongest only if and when Britain leaves the Single Market. Even so, it is clear that the economy is already faltering. 2016 GDP growth was weaker than in 2015 and in 2014. The economy is almost wholly reliant on services led by retail sales, which cannot be sustained.

Consumption cannot lead growth. The deepening imbalance in the economy is leading to job losses in manufacturing and construction, where there had been growth prior to the referendum. Worryingly, total hours worked have contracted in the near-term. If this persists in the continued absence of investment growth, a contraction in GDP and living standards would be almost unavoidable.

The Brexit vote is already leading to economic slowdown. Brexit itself will lead to job losses and lower living standards on a large scale.

Trump’s consequences for the US economy explained in 3 charts

.914ZTrump’s consequences for the US economy explained in 3 chartsBy John Ross

There has been much discussion on the likely effect of Trump on the US economy. But some of this discussion fails to distinguish clearly between short term and long term effects of Trump. This can lead to wrong interpretations of events and trends as they unfold. The aim of this article is therefore to set out the fundamental parameters of the US economic situation as it confronts Trump. This can be clearly shown in three charts showing the fundamental features of the US economy which are given below. These show:

  • There should be a short-term acceleration of growth during the early period of the Trump presidency, for the simple statistical reason that in 2016 the US economy was growing significantly below its long-term average. A move of the US economy up towards its long-term average growth rate will therefore create the illusion that the US economy is improving during the early period of Trump’s administration – when it is in reality a predictable statistical effect.
  • Trump, however, cannot accelerate the long-term US growth rate without fundamental changes in the US economy which are very unlikely for reasons analysed below. Therefore, over the long-term Trump will not accelerate US economic growth.

Analysing these most fundamental trends in the US economy also identifies which key US data must be watched carefully to assess the success or failure of Trump’s economic policy in both the short and long term.

The long-term slowing of the US economy

To start with the most fundamental trend of US long term growth, Figure 1 shows US annual average GDP growth using a 20-year moving average to remove all purely short term fluctuations due to business cycles. This data shows clearly the most profound trend in US growth is a half century long economic slowing – the peaks of US growth progressively falling from 4.9% in 1969, to 4.1% in 1978, to 3.5% in 2003, to 2.3% by the latest data for the 3rd quarter of 2016.

Figure 1

image

 The cyclical situation of the US economy

Turning to short term developments, the trend of US growth shown in Figure 1 is a long-term average. This necessarily means that short term economic growth is sometimes above and sometimes below this average. Figure 2 therefore shows the short-term trend in US growth, the economy’s year by year growth rate, compared to the long-term average.

It may be seen from Figure 2 that the US economic growth in the year to the 3rd quarter of 2016 was only 1.7%. That is, the US economy in the recent period leading up to Trump’s election was growing at significantly below its long-term trend. For this reason, purely for statistical reasons, it is probable that the US economy may accelerate in the short term.

As this would coincide with the initial period of Trump’s presidency this would lead to the claim ‘Trump is improving the US economy’. But this is false, such acceleration would be expected purely for statistical reasons.

Figure 2

image

The determinants of US growth

Finally, if the reasons for the US long term economic slowdown are analysed these are simple. The most fundamental of all features of the US economy is that it is a capitalist economy. This means when there is a high rate of capital accumulation the US economy grows rapidly, when there is a low rate of capital accumulation the US grows slowly.

In terms of economic statistics net capital accumulation is equal to net savings. Figure 3 therefore shows the long-term trend in the US savings rate/capital accumulation rate since 1929. The curve of long term development of the US economy can be seen to be clear:

  • During the crisis creating the beginning of the Great Depression in 1929-33 US capital accumulation was negative – that is the US economy was creating no capital. This necessarily produced a deep crisis of the US economy. After this the rate of US savings/capital creation rose, with a powerful acceleration during World War II, to reach a long-term peak as a percentage of the economy in 1965.
  • After 1965 US net savings/capital creation steadily fell as a percentage of GDP until it once again became negative during the ‘Great Recession’ in 2008-2009. This declining trend of US capital creation of course explains the long-term growth slowdown that was shown in Figure 1.

This trend therefore shows the fundamental issue confronting Trump which he would have to overcome to accelerate the long-term growth of the US economy. He would have to increase the percentage of capital creation in the US economy. Without this, while a short-term speed up in the US economy is to be expected for the statistical reasons given earlier, no long term acceleration of US economic growth will take place. Without such a sharp increase in the level of capital accumulation claims by Trump that he will accelerate the US rate of growth are purely ‘hot air’.

Figure 3

image

Summary
It is clear that the first effect of Trump’s policies will not be to increase but to reduce US savings/capital accumulation. This is due to the fact that an economy’s savings are not only household savings but company savings plus household savings plus and government savings – government savings in most economies being negative because the government runs a budget deficit.

Trump has announced policies that will clearly increase the US budget deficit – tax cuts focussed on the rich and increased military spending. This increased budget deficit will necessarily reduce the US savings level.

In the purely short term Trump could lessen the effect of low US savings/capital creation by borrowing from abroad. But historical experience shows that over the medium/long term in major economies it is domestic capital creation which is decisive. Therefore, Trump has so far announced no policies which will increase the long-term US growth rate. Therefore, in summary:

  • A short-term speed up of the US economy is likely for the statistical reasons already given – but does not indicate any increase in long term economic growth.
  • Trump has no put forward policies that will accelerate US long term economic growth.

Finally, these trends show which data must be closely watched to see success or failure in Trumps economic policies. The short term shifts in the growth rate must not be seen in themselves but compared to the long term trend of US growth: the key variable for judging long term US growth is whether the level of capital formation in the US economy is rising or falling.

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This article was originally published in Chinese by New Finance.

John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

The world will be listening to Xi Jinping at Davos

.419ZThe world will be listening to Xi Jinping at DavosBy John Ross

Xi Jinping is the first Chinese president to speak at the Davos World Economic Forum. This visit has attracted even greater international media attention than the normally high levels of interest in a trip by China’s leader. As the Financial Times chief foreign affairs columnist Gideon Rachman put it, “The big star of this year’s forum is certain to be Xi Jinping.”

The reason for this is well understood. China’s unequivocal support for open economies and globalization is now clearly in contrast to the protectionism embraced by U.S. President-elect Trump and that was manifested on a smaller scale in the U.K. Brexit referendum.

In terms of declared positions on globalisation, a definitive turning point has already been made. Every U.S. president since World War II has at least verbally committed to free trade and globalisation. Trump explicitly broke with this historical U.S. position with threats to impose a 35 percent tariff on Mexico, a 45 percent tariff on China, to impose a U.S. “border tax”, to renegotiate the North American Free Trade Agreement (NAFTA), by his pressure for U.S. companies not to invest in Mexico despite it being a NAFTA partner and by his clear overall policy statements. In parallel, while the reality of the Trans Pacific Partnership (TPP) was not a move for freer trade – being in reality an anti-China bloc – nevertheless its unilateral abandonment by Trump made the U.S. appear an unreliable negotiating partner.

Whatever happens in the future, there can never again be 100 percent certainty that the U.S. remains committed to globalisation. This fundamental pillar on which the post-World War II global order was built is no longer solid. It is widely understood that of the world’s two largest economies, only China remains unequivocally committed to globalisation.

This directly and powerfully affects other countries in addition to China – hence the wide international interest in Xi Jinping’s Davos visit. Other countries well understand, both factually and theoretically, the decisive importance of the international trade and globalisation.

Factually, numerous studies demonstrate the positive correlation of an economy’s international openness and its development speed. Growing internationalisation by almost all countries was a decisive trend during the long period of relative global international economic stability and growth after World War II – a marked contrast to 1929-39 global economic fragmentation, marked by the infamous U.S. Smoot-Hawley protectionist tariff, which led to the greatest economic crisis in modern history.

Clear theoretical understanding of economic openness’s advantages has existed for over two hundred years. The first sentence of the founding work of modern economics, Adam Smith’s The Wealth of Nations, is, “The greatest improvement in the productive powers of labour… have been the effect of the division of labour.” But division of labour in a modern economy has reached a point where it is necessarily international in scale. International supply chains, which alone ensure the cost efficiency of modern production, flow from the reality that different countries have different advantages in different parts of production. Attempts to create self-contained national economies necessarily make economies less efficient. Therefore, every strategy of “import substitution” or attempt to create an efficient national self-contained economy necessarily fails.

U.S. protectionism’s negative effects, with its inevitable international reciprocal retaliation, would hit even the U.S., the world’s largest economy – increasing prices of imported goods for consumers and costs for U.S. producers while restricting export markets. Even for the U.S., three quarters of the world market in economic terms and 95 percent of the world’s customers in population terms lie outside its borders. A protectionist U.S. economy cannot match the advantages of orientation to a global economy.

But for Germany, 95 percent of its potential market is outside its borders, for Brazil 97 percent, for Australia 98 percent, for Thailand over 99 percent. Protectionism would be more damaging for them than the U.S. Such countries therefore applaud Xi Jinping’s unequivocal defence of globalisation – not because of deference to China, but out of national self-interest because globalisation really is “win-win.”

Sometimes in the media there is loose talk of a “rise of protectionism and populism.” But this imprecise expression conceals a precise reality. In some European countries, there certainly is an increase in support for protectionist populist parties – for example, in France Marine Le Pen’s National Front or the Alternative in Germany. But these are minority parties who are not in power and who in most cases have no realistic prospect whatsoever of forming governments. Only in the Anglo-Saxon economies have protectionist forces actually come to office or been able to determine government policy.

The overwhelming majority of countries, including traditionally firm U.S. allies such as Germany or Australia, have expressed opposition to Trump’s protectionist policies. When Germany’s Chancellor Merkel recently said, “We see protectionist tendencies,” she was naturally discreet enough not to mention the U.S. But most people were well aware that the U.S. was included in the countries she was speaking of. A large majority of other countries listening will strongly agree either publicly or silently with Xi Jinping’s clear statements in support of open economies and globalisation at Davos.

Maintaining an internationally open economy is vital not only for governments but for the world’s population. Globalisation has brought immense benefits to the majority of the world’s people, strongly confirming economic theory. Certainly, socialist countries were most able to take advantage of globalisation’s benefits. The world’s four fastest growing economies in the last 30 years have been socialist – China, Laos and Vietnam, together with a Cambodia whose economic policies are decisively influenced by China. China experienced the world’s most rapid rise in living standards. Eighty-three percent of the people in the world lifted out of internationally defined poverty were in China, and a further 2 percent were in Vietnam – only 15 percent were in capitalist countries.

But while socialist countries made the most efficient use of globalisation, other countries also strongly benefitted. India under Modi has consciously moved closer to China’s economic model, and India is now the world’s other major rapidly growing economy. Several African countries, basing themselves on globalisation, have achieved growth rates of 6-8 percent a year.

Certainly the political crisis in the Anglo-Saxon countries, which has produced support for the protectionist dead ends, was created by a failure to improve their population’s living standards. U.S. median household incomes are lower than 16 years ago, U.S. inequality has soared. In the U.K., real incomes in the last eight years experienced their most prolonged decline for a century. But this was not inherent in globalisation, as demonstrated by the dramatic improvements achieved by most countries, but a result of the specifically neo-liberal paths launched by Reagan and Thatcher. It is for this reason, not globalisation, that a protectionist political dead end has become strongest in the Anglo-Saxon economies.

China’s support of globalisation, symbolised in Xi Jinping’s Davos visit, corresponds to China’s national self-interest. But it also corresponds to the national self-interest of other countries and peoples. Mutual self-interest is the firmest of all foundations for cooperation.

It is for this reason Xi Jinping’s visit to Davos has attracted such intense international interest.

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This article originally appeared at China.org.cn.John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

British economic crisis is deepening

.232ZBritish economic crisis is deepeningBy Tom O’Leary

2017 has begun with some upbeat economic survey evidence although the majority of economic forecasters are cautious about whether this will be sustained. Leading stock market are also at or close to all-time highs. The reality is that the UK economic outlook is deteriorating. This will have both important economic and political effects over the course of the year.

Chart 1 below shows the nominal growth rate of profits for UK companies, quarter-on-quarter. Profits (more accurately the gross operating surplus) of firms have fallen marginally before inflation is taken into account. Once the effect of price rises is included, the fall in profits becomes more substantial.

Chart 1. Quarterly growth of UK companies, quarter-on-quarter
Source: ONS
 
Quarterly growth rates can be misleading, in part because they also reflect the impact of immediately preceding growth rates. If these were substantial, as in Q1 2016, then the effect is to depress subsequent quarterly growth. In a less erratic measure, the moving average of the last 5 quarters year-on-year growth rate in profits is 0.8%. This is extremely weak, and turns negative in real terms, once inflation is taken into account. It is much weaker than the long-run average growth in profits for the UK economy, which has effectively been slowing down since the early 1970s, with cyclical fluctuations.
 
Chart 2. UK companies’ year-on-year growth rate of profits, 1956 to 2016
Source: ONS
 
Profits matter. The creation of surplus value and accumulation as profit is the motor force of any capitalist economy. While every individual firm will continue to seek to maximise profits, if the total accumulation of profits is close to zero, then firms as a whole will primarily seek to maintain their capital rather than to expand it. Capital preservation is the priority.

This is exactly what has happened in the recent period. Firms have stopped investing, and are generally content to hire workers only as an alternative to capital investment or where they can enforce limited hours, low pay, zero hours or other increases in exploitation. In each of the first 3 quarters of 2016 the total level of business investment was below the equivalent period in 2015. In the quarter to October there was no growth in employment, while full-time employment fell by 50,000, made up by a similar rise in part-time work.

These trends represent the acceleration of longer-term tendencies in the UK economy. Chart 3 below shows the contribution of the different sectors of the UK economy to the total accumulation of the capital stock. From 1997 to 2015 UK companies increased their net capital stock by less than 1.5% per annum.

 
Chart 3. Net capital stock growth 1997 to 2015
Source: ONS
In absolute terms the company sector increased its capital stock by £390 billion over the period. But the combined increase in the capital stock from the household and government sectors significantly exceeds this total, rising by a combined £600 billion! The UK has not been able to rely on the private business sector to lead productive investment for a long time.

But this long-term trend has become more pronounced since the crisis. Private companies’ net capital stock has risen by little more than 1% on average per year since 2007. This profit-induced weakness of business investment is the primary cause of the Great Stagnation in the UK and in other advanced industrialised economies since the crisis.

Brexit effect

Since the Brexit vote profits have declined outright and so has business investment. Manufacturing has declined by 1% since June and industrial production has fallen by 2%. The trade gap has widened by £8 billion compared to the same period in 2015, an increase of almost 20%. The forecasts of sunny uplands by the Brexiteers are purely delusional.

There are many single markets in the world. The British economy is itself one, with minor exceptions there are common laws, freedom of movement for goods, capital firms and people, and a unitary currency and fiscal policy. The benefit of the EU Single Market in the making is that it is one of the world’s three largest single markets, alongside China and the US. This provides a powerful magnet for capital seeking profits. 

Of course it is possible for small amounts of capital to make very large profits investing in a small market, such as the UK would become with Brexit. But it is impossible for a large mass of capital to make large returns in a small market. And Britain needs large capital inflows simply in order to finance its external deficits.

British firms are struggling to realise profits. Ever since the crisis their level of investment has been abysmally low. This deepened the long-run negative trends in the UK economy. These have become sharply worse since the June 23 referendum. In any Brexit scenario, the less the access to the EU Single Market, the lower the attractiveness of the UK to international capital. Without a dramatic change in Brexit policy, there is little reason for optimism about UK economic prospects in 2017.