Socialist Economic Bulletin

By John Ross

The following article on ‘The New Shape of World Politics – Disorder in the West, Stability in the East’ analyses the reasons for the Trump administration introducing tariffs against China and the background to the recent G7 and Shanghai Cooperation Organisation (SCO) summits. It was originally published in Chinese by Sina Finance Opinion Leaders, therefore some issues specifically affecting China are dealt with in detail. But the most fundamental features analysed regarding the world situation – the consequences of the ‘new mediocre/Great Stagnation’ in the main Western economies, and their geopolitical consequences – of course apply equally to all countries.

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The Trump administration’s imposition of a 25% tariff on $50 billion worth of imports from China [followed now by a threat to impose tariffs on a further $200 billion of imports from China] is an attack on China. But it is simultaneously an attack on the US population – the tariffs will apply downward pressure on US living standards through the increased price of imports and jobs losses due to price increases of components for US production plus the inevitable, already announced, proportionate counter tariffs by China.

The negative effects of such tariffs on the US population can already be seen in the fact that since Trump imposed tariffs on washing machine imports, the average price of laundry equipment including washing machines, has risen by 17% in the US. Price increases for the US population resulting from tariffs against China will, of course, be much widespread and greater than those on a single product such as washing machines.

This US tariff attack on China follows after US imposition of tariffs on steel and aluminium hitting US allies such as the EU, Japan, and Canada. This, and differences on other questions such as sanctions against Iran and the Paris Climate Change Accords, produced sharp disputes at the recent G7 summit in Quebec. The fact that the sharp dispute at the G7 summit took place almost simultaneously with the successful consolidation of the SCO at its own Qingdao summit, with India and Pakistan participating for the first time as full members, showed an increasing trend in world politics – ‘disorder in the West, stability in the East.’

At first sight the Trump administration’s tariffs appear irrational. China, during recent trade negotiations with the US, made reasonable, even generous, proposals to increase US agricultural, energy, manufacturing and other exports to China. China’s trade proposals would have created tens, probably hundreds, of thousands of US jobs and created greater incomes for US farmers. But naturally, China stated that such proposals would be null and void if the US introduced tariffs against China. China’s proposals would, therefore, also have increased the US economic growth rate. Therefore, by proceeding to introduce tariffs, the Trump administration has both foregone the possibility to create many thousands of new jobs in the US, and raise farmers’ incomes – while simultaneously tariffs, by raising prices in the US, will have a net effect of actually losing US jobs.

Nevertheless the US administration’s apparently irrational attacks, not only on China but on the US population and its allies, becomes perfectly comprehensible once it is grasped that the Trump administration in fact cannot significantly accelerate medium/long-term US growth – which, as will be shown, is at present at historically low levels. Therefore, the US form of competition with China cannot be to attempt to substantially accelerate US economic growth, to which no one could object or could prevent, but can only be an attempt to slow down China’s economic development.

The motivation for the apparently irrational actions of the Trump administration therefore becomes entirely clear once the actual factual situation of the US and main Western economies is analysed. The fact that the G7, including the US, is in historic terms is locked in the ‘new mediocre’ also makes clear why there is the strengthening of the trend ‘stability in the East, disorder in the West’.

Disorder in the West

Even before the Trump administration announced its 25% tariff against China the recent outcome of the two almost simultaneous summits involving the most important world leaders, the Shanghai Cooperation Organisation (SCO) in Qingdao and the G7 in Quebec, was intensely revealing in casting a light on world geopolitics and economics. It would be hard to imagine a more contrasting outcome of two major events.

• The SCO summit saw further strengthening of that organisation, with India and Pakistan participating for the first time as full members. The SCO summit was marked by consolidation of cooperation between SCO countries and in particular by discussions between three extremely large states within it – China, India and Russia.
• The G7, in contrast, was marked by a bitter argument and clashes between the other six members and the US.

It is important for understanding the dynamic of world geopolitics to grasp that this dynamic of ‘stability in the east, disorder in the west’ is not rooted in purely temporary factors. Instead, as this article will factually demonstrate, it is rooted in fundamental features of the global economic situation.

Acrimony at the G7

As the SCO summit was extensively covered in China’s media it is superfluous to give a detailed account here. It is sufficient to note that the expansion of the SCO now means its full members account for over 40% of the world’s population and cover the great majority of the Eurasian land mass. With observer states and dialogue partners the SCO includes 45 per cent of the world’s population. The SCO has, therefore, become the world’s largest regional organisation. The economic driving dynamic of the SCO will be analysed below.

The bitter character of the G7 summit was equally extensively covered in the Chinese media. Nevertheless, to avoid any suggest Chinese media may have exaggerated this, it is worth quoting some of the most authoritative Western news organisations.

• Even before the G7 summit began Reuters reported, under the self-explanatory title ‘Trump to leave G7 early, tensions high after “rant” over trade‘: ‘U.S. President Donald Trump and Group of Seven leaders had a bitter exchange over trade tariffs, ratcheting tensions at a summit that he planned to leave early on Saturday… In an “extraordinary” exchange between the leaders on Friday, Trump repeated a list of grievances about U.S. trade, mainly with the European Union and Canada, a French presidency official told reporters. “And so began a long litany of recriminations…” the official said.’
• Following Trump’s departure from the summit: The New York Times noted: ‘President Trump upended two days of global economic diplomacy late Saturday, refusing to sign a joint statement with America’s allies, threatening to escalate his trade war on the country’s neighbours.’
• The Financial Times analysed: ‘Donald Trump capped a fractious meeting with G7 allies by refusing to back a joint statement from the group that had pledged to fight protectionism, blaming “false statements” from Canada’s prime minister Justin Trudeau and ratcheting up tensions on tariffs.’

What, therefore, explains the difference between the sharply contrasting SCO and G7 summits?

Part 1 – Economic Roots of Political Instability in the West

The Great Stagnation

Attempts in sections of the media to present the situation in the Western economies as very favourable has led to a serious inability in such analysis to foresee or explain the clashes which took place at the G7 summit or other features of the geopolitical situation. The reason for this is that factually, far from being favourable, the Western economies are undergoing a ‘new mediocre’, in the words of IMF Managing Director Christine Lagarde – what may be termed historically a ‘Great Stagnation’, in which Western long term economic growth is now astonishingly slower than in the ‘Great Depression’ after 1929.

This historical comparison is shown in Figure 1. This shows the percentage change in GDP for the G7 economies as a whole compared to the peak year of the business cycle preceding the respective economic crisis– i.e. the years are counted after 1929 and after 2007, with in each case the number of years since that peak shown. The data for the period after 1929 is the actual economic results, for the period after 2007 actual factual data is used up to 2017 and the figure for 2018 is the latest IMF projection for this year. The situation for the G7 as a whole is clear:

• By eleven years after the crisis of 1929 the GDP of the G7 economies as a whole was 20.2% higher than in 1929. Considered in more detail, the downturn after 1929 was deeper than after 2007, but recovery was relatively rapid and fast. That is, in a sense, the 1930s is better thought of as the ‘Great Recession’ – i.e. sharp downturn followed by rapid recovery. The reason that the term ‘Great Depression’ is used, is due to the specific situation in the 1930s in the US.
• In contrast, by 11 years after 2007 the GDP of the G7 economies as a whole was only 13.8% above the pre-crisis level – i.e. growth in the G7 as a whole after 2007 was significantly slower than after 1929.

Examining the main G7 economies in detail, and comparing the same number of years after 1929 and after 2007, the last year before the international financial crisis:

• Eleven years after 1929, Japan’s GDP was 64% higher than its pre-crisis peak, whereas in contrast 11 years after 2007 Japan’s GDP was only 13% higher than its 2007 level. Therefore, by eleven years after 1929 Japan’s economic growth was almost five times as fast after 2007.
• By 11 years after 1929 Germany’s GDP was 44% higher than the pre-crisis peak, whereas in contrast 11 years after 2007 Germany’s GDP was only 15% higher than it pre-crisis peak. Therefore, Germany’s economic growth in the 11 years after 1929 was almost three times faster than its economic growth in the eleven years after 2007.
• By 11 years after 1929 UK GDP was 32% above its pre-crisis level, whereas by 11 years after 2007 UK GDP was only 13% above its 2007 level. Therefore, in the 11 years after 1929 UK economic growth was almost two and a half times as fast as after 2007.
• In the 11 years after 1929 Italy’s economy grew by 24%, whereas in the 11 years after 2007 Italy’s economy actually shrank by 4%. Therefore, in the period after 1929 Italy’s economic growth was far faster than in the period after 2007.
• Recovery in the US after 1929 was slower than in the other G7 economies just analysed. It took seven years for US GDP to recover to its 1929 level, and even then, recovery was weaker than in the G7 economies already analysed. Nevertheless, by 11 years after 1929, US GDP was 19.8% above its 1929 level whereas by the end of this year, the same 11 year period after 2007, US GDP will only be 18.3% above its 2007 level. That is, by the end of this year, US economic growth over the 11-year period since 2007 will also be slower than in the 11 years after 1929.

It was this recovery after 1929 of the US and three other major G7 economies – Germany, Japan, and the UK – which, explains why overall G7 growth in the 11 years after 1929 was significantly faster than in the 11 years after 2007. Only in two less important G7 economies, Canada and France, was economic growth in the 11 years after 1929 worse than after 2007 – but the weight of the relatively more minor G7 economies, Canada and France, was quite insufficient to match that of the US, Japan, Germany, the UK and Italy.

Political and geopolitical consequences of the ‘new mediocre’

Once this fact that the main Western economies, the G7, are going through a period in which their growth is slower than after 1929 is clear then the key present features of the geopolitical situation, in particular the ‘disorder’ in the West, become clear. Comparing the geopolitical situations after 1929 and after 2007, then following 1929 the extreme violence of the economic downturn led to extremely rapid political crisis:

• In 1931 Japan began war with China
• In 1931 Britain abandoned the gold standard, destroying the existing international monetary system.
• In 1932 Roosevelt was elected US President to launch the New Deal.
• In 1933 Hitler became Germany’s Chancellor.

But the strong economic upturn after the depth of the post-1929 crisis also meant these regimes, once established, did not face serious domestic political opposition – Japanese militarism was not met with major domestic popular disapproval, Hitler was popular in Germany, the British Conservative governments of the 1930s had some of the highest popular votes in British history, Roosevelt became the longest serving US President.

Therefore, while the 1930s, after recovery from the depth of the economic crash, was a period of great international geopolitical instability the domestic regime in the major countries was rather stable. The exception to this, France, which went through the mass strikes and turmoil of the Popular Front government in 1936, confirmed this rule ‘from the negative’ – France was the one major G7 economy whose economy in the 1930s grew far more slowly than after 2007.

This different pattern of economic development after 2007, compared to that after 1929, explains current geopolitical developments which create the international situation facing the SCO.

Whereas after 1929 very rapid economic downturn led to rapid political crisis the long period of slow growth, the ‘Great Stagnation’/’new mediocre’ after 2007, means that the political instability began slowly and has progressively accumulated.

• In 2010 rising political instability started in developing countries produced the ‘Arab Spring’ and widespread destabilisation in the Middle East.
• In 2012 Le Pen’s National Front achieved electoral breakthrough in France beginning the rise of ‘populist’ movements in advanced countries.
• In September 2015 radical left winger Corbyn was elected leader of the UK Labour Party, while in June 2016 the UK referendum voted for Brexit.
• In 2016 Trump was elected US President against the wishes of the establishment of both Republican and Democratic Parties inaugurating almost continuous clashes in US politics.
• In May 2017 Macron was elected French President against the opposition of both right and left wing traditional political parties.
• In 2017 Merkel suffered a severe electoral setback creating the most difficult period in forming a German government since World War II.
• In June 2018 ‘populist’ parties, the Five Star Movement and The League, formed a government in Italy.

Unstable geopolitical situation on the periphery of the SCO

This destabilisation, in its impact on developing economies, also explains the geopolitical situation surrounding the SCO.

• To the west of the SCO region an arc of military conflicts extends from west and north Africa (Boko Haram in Nigeria, al-Shabab in Somalia, failed state in Libya etc), extending into full scale war in Syria and Iraq, while to the west and north of the Black Sea, in Ukraine, armed conflict broke out after the 2014 coup d’etat and problems of jihadist terrorism continue in parts of the Caucasus.
• In one region of the south SCO war continues in Afghanistan.
• To the east of the SCO region the US continues to attempt to carry out provocative actions in the South China Sea and in the regard to Taiwan Province of China, while making military threats against the DPRK.
• With an impact on the entire global situation, the US has embarked on sanctions against Russia, tariffs against key US allies such as Japan, Canada, Mexio and the EU, sanctions against Iran, and now sanctions against China.

This geopolitical situation, in addition to its economic underpinnings, is worsened by the fact that US foreign policy has deliberately geopolitically embarked in recent decades on a policy in which it is prepared to accept an outcome of ‘failed states’ and the emergence of jihadist terrorist organisations. For example, in Iraq, prior to the US invasion of the country, jihadist terrorist were entirely marginal. After the US invasion, in the form of ISIS, jihadist terrorists controlled large parts of the country – indeed it is striking, and indicative, that at present the only parts of Iraq and Syria in which areas controlled by ISIS continue to exist are those were US forces are dominant. Similarly, in Libya US led NATO forces overthrew Gadhafi to create a ‘failed state’ in which large parts of the county were controlled by jihadist terrorist organisations which export weapons to large parts of Africa.

But as comparison to the 1930s shows, in addition to the impact on developing countries, very slow growth leads to increasing conflict between the advanced economies. Certainly, the present clashes between G7 member states are less than the full-blooded conflicts, culminating in war, between the US, Germany, Japan, the UK, Italy and France in the 1930s. But the increasing clashes between the G7 countries show, in a much milder form, the same trends.

Part 2 – Economic Roots of Consolidation of the SCO

The SCO

The economic contrast in the SCO region to that in the G7 is evident and is shown in Table 1 – this data is not taken from a source controlled by China, but from the projections of the IMF for economic growth in the period 2017-2023.

As may be seen, regarding the three largest G7 economies, which dominate the G7 group:

• The highest total growth in per capita GDP in any G7 country in the period up to 2023 is Germany’s 10.3%, with an annual average growth of 1.7%.
• Total US per capita GDP growth in the same period is projected to be 7.4%, an annual average 1.2% growth.
• Japan’s total per capita GDP growth in this period is projected at 6.4%, an annual average 1.0%.

In contrast:

• China’s total per capita GDP growth is projected at 39.4%, an annual average 5.7%.
• India’s total per capita GDP growth is projected at 46.0%, an annual average 6.5%.
• All SCO economies, except Russia and Kazakhstan, are projected to have faster per capita GDP growth than any G7 economy – and Russia and Kazakhstan are projected to have faster per capita GDD growth than every G7 economy except Germany.

The net result of much faster growth in the SCO region than the G7 is that, even measured at current exchange rates, total GDP growth in the SCO region is projected to be larger than in the G7 in 2017-2023 – $12.2 trillion compared to $11.1 trillion.

But measurement at current exchange rates significantly understates the real expansion of markets for companies in the SCO region compared to the G7. The reason for this is that lower wages in developing economies, not only in production but in distribution and retailing, mean that goods and services can be sold profitably in developing countries at lower prices than in advanced ones. For this reason, current exchange rates understate the size and expansion of developing economies compared to advanced ones.

The branch of economics that deals with this is known as Purchasing Power Parities (PPPs). This analyses the volume of goods and services produced in an economy taking into account the differences in price levels. It is, therefore, a better measure of the increase in volume of production of goods and services than measurement at current exchange rates.

As Table 1 shows, measured in PPPs, the increase in GDP in the SCO region, 23.0 trillion dwarfs that in the G7 at 9.4 trillion.

To complete the picture on the SCO, if SCO official observer states (Afghanistan, Belarus, Iran and Mongolia) and SCO dialogue partners (Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey) are included the difference between the SCO region and the G7 becomes larger. The IMF projects increase in GDP in 2017-2023 in all SCO full members, observers, and dialogue partners at $12.3 trillion compared to $11.0 trillion in the G7. In PPPs the lead of all full members, observers and dialogue partners is 24.1 trillion compared to 9.4 trillion in the G7.

Given this much faster economic growth in almost all SCO members than in the G7, and greater total size of potential economic development in the SCO region than in the G7, it is clear all SCO states have a strong interest in maintaining conditions of geopolitical stability, in order to enjoy the fruits of this economic growth.

South China Sea

To further analyse the reasons for ‘stability in the East’ a second decisive area surrounding China can be analysed – those countries and regions bordering on the South China Sea. This area is of particular importance because deliberate attempts have been made by the US to destabilise this region – the attempt to get the Hague Permanent Court of Arbitration to illegitimately rule on the region, provocative voyages by US warships in the region etc. Sustained attempts by the US to escalate tensions in the South China Sea region to high levels, however, have been unsuccessful.

To understand the economic background to this failure of the US efforts, it is striking that Table 2 shows that the IMF projects that every country or region bordering on the South China Sea will in the next period have a faster growth rate than every G7 economy. In particular between 2017 and 2023, in addition to China, the IMF projects:

• Malaysia’s per capita GDP will grow a total 23.8%, an annual average 3.6%.
• Indonesia’s per capita GDP will grow a total 28.1%, an annual average 4.2%.
• The Philippines per capita GDP will grow a total 32.3%, an annual average 4.8%.
• Vietnam’s per capita GDP will grow a total 38.0%, an annual average 5.5%.

Regarding overall economic potential growth in the region, the South China Sea region does not contain India, which together with China is the world’s most rapidly growing very large economy, but nevertheless the rapid growth of the states in the region means that the economic growth potential of the South China Sea region is essentially equal to that of the G7 measured at current exchange rates and much greater than that of the G7 measured in PPPs. The IMF projects that, measured at current exchange rates in 2017-2023, economic growth in the South China Sea region will be $10.9 trillion compared $11.1 trillion in the G7, while in PPPs the growth of the South China Sea region will be 17.7 trillion compared to 9.4 trillion in the G7.

SCO and the South China Sea region

To analyse the situation in a consolidated way, the SCO and the South China Sea region include China, therefore the combined economic growth of all states in these regions in 2017-2023, as projected by the IMF, is shown in Table 3. As may be seen:

• Even at current exchange rates, considering only full members of the SCO, the economic growth in the combined SCO and South China Sea region is projected, on IMF data, to be significantly greater than that of the G7 – $13.5 trillion compared to $11.1 trillion.

In terms of PPPs the greater growth of the full SCO members and South China Sea region compared to the IMF is overwhelming – 26.8 trillion compared to 9.4 trillion. In summary, in PPPs, the best approximation of the real increase in markets for goods and services, the combined growth of the SCO and G7 regions will be almost three times than of the G7.

Belt and Road Initiative

Finally, in analysing the broader perspective of the Belt and Road Initiative (BRI) a complication is that, unlike the SCO states or the South China Sea region, the area covered by BRI is not officially defined. Furthermore, the BRI has a specific feature that India, for political reasons concerning its border dispute with Pakistan in Kashmir, refuses to officially support the BRI – while in reality India fully participates in, and benefits, from economic development in the BRI region. Therefore, to calculate the economic growth in the Belt and Road initiative, in addition to that of the strictly defined SCO and South China Sea states, it is necessary to make assumptions regarding which other countries to include.

There is no advantage in exaggeration in serious matters, so here only a ‘narrow’ definition of the BRI economic potential will be included. The BRI region will be taken as SCO and South China Sea states plus the other remaining states of the former USSR (excluding the Baltic States) plus Iraq – other Middle Eastern and East European states are highly favourable to BRI but they are not included here. This means for present calculations including in a wider BRI region, in addition to the SCO and South China Sea regions, Turkmenistan, Moldova, Georgia, Ukraine, and Iraq.

Table 3 therefore shows what may be termed both a ‘narrow’ and a ‘wide’ definition of the economic potential in the area surrounding China in comparison to the G7.

• The ‘narrow’ definition of the economic potential in the regions surrounding China may be taken as only full members of the SCO and those states bordering on the South China Sea.
• The ‘broad’ definition of the economic potential in the regions surrounding China may be taken as all full members of the SCO, SCO observer states and SCO dialogue partners, plus states bordering on the South China Sea and BRI states as defined above.

It was seen above that even taking a narrow definition of the economic potential in the states surrounding China this is projected to be greater than the G7 in the period 2017-2023. If a ‘broader’ definition of the BRI is included, then the economic advantage of the region surrounding China, compared to the G7,is evident.

• At current exchange rates, in 2017-2023 the IMF projects the broad economic potential in the BRI region around China at $14.2 compared to $11.1 trillion in the G7.
• In PPPs, which more accurately reflects real sales, the advantage of the region surrounding China is overwhelming compared to the G7 – in PPPs 29.2 trillion compared to 9.4 trillion.

Geopolitical Consequences

The geopolitical conclusions of the economic trends analysed above are clear.

• The G7 is in a situation of the ‘new mediocre’/’Great Stagnation’, in which economic growth is even slower in the period after 1929. This necessarily produces domestic political instability within the G7 states, significant clashes between G7 countries as registered at the Quebec summit, and the development of significant terrorist threats, or even full scale civil war, in developing countries which are highly influenced by economic situation in the G7 – this instability surrounds the SCO region. It also explains the apparently irrational tariffs introduced by the Trump administration against China – the US cannot accelerate its own economy in the medium/long term and therefore for competition it conceives it has to concentrate on slowing China.
• In the SCO and South China Sea regions, in contrast, a high economic growth potential exists compared to the G7. This means that the states in this region have very strong incentive to reject destabilising activities promoted by the US and, instead to concentrate on economic growth.

It is these two different situations, in the areas dominated by the G7 and within the SCO, that produces ‘disorder in the West, stability in the East’. Failure to accurately analyse this situation, in particular the consequences of the ‘new mediocre’ in the G7, led some commentary in China to entirely fail to foresee the outcome of the SCO and G7 summits. The ‘disorder in the West, stability in the East’ is therefore not a purely temporary phenomenon but is based in fundamental economic processes. This same processes explain the introduction by the Trump administration of tariffs against China.

Conclusions

This underlying economic situation, however, does not mean that there are no problems confronting China’s geopolitical policy quite the contrary. But it means the nature of the situation must be understood accurately. In particular, in addition to the immediate problem of US tariffs against China:

• The slow growth in G7 provides a long-term basis for terrorism, failed states, and even full-scale warfare in a number of developing countries dominated by economic trends in the G7. This means the anti-terrorist and security functions of the SCO remain of extreme importance and challenges may be expected in these domains.
• The inability of the G7 economies to overcome the ‘new mediocre’, but a situation where the US retains global military superiority, produces a permanent temptation of the US to resort to military solutions and provocations. For this reason, both military reform in China and security cooperation between SCO members will be of great importance.
• The inability of the US to secure its goals by economic methods means the US will necessarily be tempted to take measures which are short of war against China but are deliberate provocations designed to create geopolitical tensions – for example provocations in the South China Sea, in regard to Taiwan Province of China etc
• While all states in the SCO and South China Sea regions have a strong mutual interest in peaceful economic development and cooperation there will be attempts by forces hostile to China to instead subordinate this to conflicts with China provoked by US neo-con forces – such US forces are particularly active in India and Vietnam. This, therefore, will require ongoing efforts by China’s diplomacy.

The apparently irrational actions by the Trump administration of introducing tariffs against China must therefore be seen as a symptom of the wider economic processes producing ‘stability in the east, disorder in the west’.

The above article was previously published here at Learning from China

Trump’s economic destabilisationBy Tom O’Leary

Leading official forecasters do not expect the main industrialised countries’ growth to accelerate in the next period, and the UK economy is expected to be the weakest of all. This is despite the fact that the growth rate in the world economy since the recession has been extremely modest by historical standards. The Great Recession has been followed in the advanced industrialised economies by the Great Stagnation.

The World Bank’s latest economic outlook carries the title, ‘The turning of the tide?’ Its central conclusion is that, “global growth is expected to decelerate over the next two years as global slack dissipates, major central banks remove policy accommodation, and the recovery in commodity exporters matures.”

Similarly, the Organisation for Economic Co-operation and Development (OECD) has released its latest forecasts for its member countries, which include the advanced industrialised countries. They are largely aligned to the downbeat estimates of both the World Bank and the IMF.

None of these organisations has an impeccable forecasting record and mostly missed the onset of the Great Recession of 2008 almost entirely. But their errors are generally guided by over-optimism, and the belief in the self-correcting nature of economic imbalances. They are rarely wildly pessimistic. Table 1 below shows the latest OECD forecasts for selected countries or areas.

Capacity constraints

One of the most frequently cited causes of the anticipated slowdown is capacity constraints in the advanced industrialised economies, or as the World Bank puts it, the ‘dissipation of global [productive] slack’. This can take a number of forms. These include a shortage of capital (evidenced by rising bond yields in the US government bond market and elsewhere), a shortage of labour and/or skills (as unemployment rates fall especially in the US and UK, but workforce skills are not rising) or a shortage of available commodities (as shown by rising commodities’ prices).

However, each of these, financial capital, workforce skills and availability of commodities are components of the productive capacity of the economic. The increase or improvement of that productive capacity (‘the development of the productive forces’ in Marx’s terminology) is primarily a function of the level of investment. Availability of capital, workforce skills and access to commodities are important but subordinate factors, and can be increased through the returns on investment.

That investment can be in new fixed investment such as equipment, machinery, IT and so on, or investment in the education and training of the workforce, or in the extraction or creation of new sources of commodities, which in the modern era should increasingly be the development of renewable energy sources. Over-arching all of these is in the increase in the division of labour, or to use Marx’s term, the socialisation of production, which is the most powerful force of all.

It is the failure to invest, primarily a failure of business investment in the advanced industrialised economies which is the source of global capacity constraints. These then become manifest as rising interest rates, or labour and/or skills’ shortages or rising commodities’ prices.

The growth rate of business investment is not accelerating, and in most of the international bodies’ forecasts it is set to slow once more. The trends in OECD business fixed investment (Gross Fixed Capital Formation, GFCF) are shown in Chart 1 below.

The OECD projection of 4.2% growth in GFCF for the OECD as a whole in 2018 would be fractionally the fastest growth on this measure since 2006, but is then forecast to slow once more to 3.9% in 2019. The implication is that this is as good as it gets.

It is important to note that the deceleration in the growth of GFCF preceded the Great Recession. And in the US the contraction in private residential investment began as far back as 2006. Falling investment preceded the decline in GDP as a whole and was the cause of that broader contraction.

Fixed investment is a key determinant of growth for the whole economy. Oddly, this is widely disputed. Yet it is self-evident that goods or services cannot be produced unless there is a prior capacity to produce them. Therefore, unless there is spare capacity (‘global slack’) output of goods and services can only be increased if there is first an increase in productive capacity through investment. Government spending, consumer demand and least of all ‘entrepreneurship’ can create new productive capacity.

The official forecasters’ concern rests on the analysis that spare capacity has been eroded or used up. This becomes decisive if there has also been very limited investment.

Residential investment does not increase the productive capacity of the economy. Housing provides a very important good, but not one which itself can produce other goods. At the same time, measuring Gross Investment does not take account of depreciation and depletion of fixed assets. Therefore, in relation to fixed investment, it is necessary to gauge the change in the Net Capital Stock. Taking these factors into account allows an assessment of the development of the key component of productive capacity.

In the OECD, the growth in the Net Capital Stock is miserably weak. Falling from an annual average growth rate of 3.7% at the turn of the century to hovering around just 1.5% now. This is consistent with the general stagnation of the advanced industrialised countries as a whole.

Signs of stress

The recent gyrations of financial markets, commodities’ markets and in the labour market in some countries should all be seen as indicators of this stress, rather than causes of slowdown.

To take one obvious example, the oil price has risen sharply over the course of the last 12 months before a sudden recent set-back. West-Texas Intermediate was trading at $43/bbl in June last year, and rose to $72/bbl in May this year before pulling back to under $66/bbl. But the oil price by itself has limited impact on world growth as a rise in price tends to redistribute incomes and growth to oil producers from net oil consumers. A fall in the price tends to do the opposite.

More fundamentally, the sharply rising price indicates that a moderate rise in demand associated with modest expansion of the world economy is not being met by rising supply of energy (which should of course come primarily from building renewable energy capacity). Rising prices indicate an inability to meet this demand at current prices (plus some activity by speculators). It remains to be seen whether the recent slippage in the oil price represents a fall in demand, or simply speculators getting out temporarily.

A similar pattern is evident in the US government bond market (or ‘Treasuries’). Yields on 10-year Treasuries rose in the last 12 months to over 3% but have since fallen back below that level. Treasuries yields matter to the world economy. Along with the level of the US Dollar they are the key global financial reserve instruments and a decisive source of the US’s dominance of global financial markets.

The yield on Government bonds also serves as an indicator of the global balance between available savings and investment. As the US is both the world’s dominant financial power and the world’s largest net debtor, any increase in US demand for capital will tend to push up bond yields more generally, not solely in the US. The US became the world’s largest net debtor in the mid-1980s. The deficit has risen steadily ever since and is now just under US$8 trillion, as shown in Chart 3 below.

The increase in demand for capital may be either for Consumption of for Investment. In this case, Trump has slashed business taxes and cut tax rates for the rich. This will increase in the US Federal deficit and will have the effect of pushing up bond yields to attract capital. Of course, if the recipients of Trump’s tax giveaways used those newly available funds to increase investment, or the US Government was itself was significantly increasing its own investment, then the US economy would grow more rapidly. The increase in returns on those investment would exceed the still modest level of Treasuries’ yields. But that is not the case.

In his latest blog Michael Roberts addresses many of these issues and highlights a concern about the shape of the US yield curve, focusing on the yield differential between 1-year and 10-year US Treasuries. Under ‘normal’ conditions the gap between these two should be fairly wide, as there are greater risks (including inflation risks) from lending long-term. Any sharp narrowing of the yield gap means that credit conditions are becoming restrictive and any move into a negative yield gap is usually associated with recession. Currently, this yield gap has been narrowing significantly.

But there is little sign of a dramatic US slowdown, at least for the time being. US GFCF growth was 1.4% in the 1st quarter of this year, just 4.5% higher than a year ago, despite the first flush of the tax cuts. This does not yet suggest any significant acceleration in the pact of US investment, but neither does it represent a slowdown.

Corporate profits are decisive for business investment, so the recent slowdown in profits does not suggest a surge in business investment. Chart 4 shows the growth of US corporate profits since 2014.

At the same time, evidence from producers is that the modest expansion in the US is set to continue for now. That is certainly the message from the positive surveys of purchasing managers in the US. Overall, the US presents a mixed picture. There is no evidence of the much-touted boom. But overall conditions do not point to a marked decline at this point.

The danger of Trump

Instead, there is probably a greater danger to the world economy, and that is the policies of the Trump administration itself.

The global economy is already running into capacity constraints, as noted above. The US, in line with all the other major capital economies has not seen a recovery in investment that would lead to sustainably stronger growth. Conditions in the US economy and in the financial markets are not laying the basis for a boom, although this has been much forecast by mainstream economic commentators. Above all, US corporate profits do not point rapidly rising business investment.

Trump poses a threat to the world economy through increased protectionism, which will be discussed in a follow-up piece. But his domestic policies also pose a threat. In effect he is attempting to by-pass the problems of the US economy, including its low investment and savings rates by sucking in capital from the rest of the world.

When Trump argues that the US is ‘the piggy bank the world is robbing’, he is stating the opposite of the facts. The US deficit on its Current Account was $466 billion in 2017, following a deficit of $452 billion in 2016. The deficit is a deficit in international trade in goods and services. Overwhelmingly this deficit is driven by the lack of competitiveness of the US economy (given its current levels of Consumption and the prevailing exchange rates), shown in Chart 5 below.

The source of deficit is clear by showing the categories of the deficit components, in Table 2 below. The Bureau of Economic Analysis data show that in 2017 exactly half of the total $808 billion US trade deficit was from consumer goods, and cars accounted for another quarter of the total.

All deficits on the current account must be off-set by a matching surplus on the capital account. In effect, the US borrows from overseas or runs down existing overseas assets in order to cover the deficit. The US is forced to continually borrow abroad to meet a lofty level of Consumption that cannot be met by domestic production.

If at the same time the demand for capital rises in the US, interest rates tend to rise to attract capital from overseas. This rising demand for capital can either be for Investment purposes or to finance further increases in Consumption.

Trump’s tax cuts are likely to lead to increased private Consumption. They will certainly lead to a much wider Federal Government deficit. It is the anticipation of this trend which has been mainly responsible for driving US bond yields higher.

But capital flows from the rest of the world can prove disastrous for ‘emerging market’ economies. The 1998 Asian financial crisis was caused by rising long-term US interests, as was the earlier Latin American debt crisis of the 1970s. Given the relative size of their economies, capital flows to fund rising US deficits can be vastly proportionately greater for those countries that the capital is flowing from. It used to be said of the other Western economies that ‘if the US sneezes, they catch a cold’. Now it could be said, for those countries with substantial savings and no controls on capital movements, that if the US sneezes, they can catch pneumonia. Chart 6 below reproduces a chart from the US Federal Reserve on the relationship between US 10-year yields and average yields in ‘emerging markets’.

But the Less Developed Countries are not uniform, and the effects of all changes are registered unevenly. There are already strains appearing in some of those countries, sometimes severe as in the case of Argentina and Turkey. They have both experienced sharp sell-offs in their currencies, and downward pressure on government bond markets. Argentina’s President Macri was a darling of the neoliberal economists’ consensus whose first act was to remove capital controls. Humiliatingly, he has now had to go to the IMF for another onerous bailout.

The IMF, which is dominated by the US, almost always insists on the removal of capital controls on countries seeking funds for a bailout. This directly serves US continuous needs for overseas capital. It is not coincidental.

Other countries are not immune from the current turmoil. There has been intense downward pressure on currencies and/or stock markets leading the central banks to make unwanted rises in interest rates. Brazil, Mexico, South Africa and India have all come under pressure. And with the US Federal Reserve Bank widely expected to raise official rates once more, the pressures may intensify.

The UK is not immune from any of these pressures, along with the other advanced industrialised economies. But it is a special case. As noted previously, it is forecast to be the weakest country within the advanced economies over the next period. It is a distinct case, owing to the particular negative effects of the Brexit vote. But this will be dealt with in a separate piece.

There are strains in the advanced industrialised economies as a whole, including the US. But far greater strains are evident in the Less Developed Countries. Their cause is the same, the effects of the Great Stagnation, driven by the extraordinarily low levels of investment in the advanced industrialised economies. This is primarily the weakness of business investment, combined with a general refusal of governments to fill the gap.

This structural weakness is being exacerbated by the reckless Trump policy of tax cuts for big business and the rich in the US, which is sucking capital from the rest of the world and destabilising it. Trump poses a new threat to global living standards.

An Outbreak of Crass Cross-Party Economics

By Tom O’Leary

The UK economy remains mired in stagnation caused by the crisis of investment. The official forecasts for UK growth point to the weakest expansion in the economy in the modern era, since 1945.

The economic policy of the Labour Party under Jeremy Corbyn and John McDonnell is to increase public investment as a way out of the crisis, which is entirely correct. In addition, there will be increased spending on public services, the NHS, education and so on, financed by increasing taxes on big businesses and the rich. This amounts to reversing the tax give-aways under the Tory policy of austerity, which was fundamentally a transfer of incomes from workers and the poor to big business and the rich and is also entirely appropriate.

The purpose of this piece is to examine the economic impact that increased investment, using the latest developments in statistical analysis of the medium-term determinants of growth.

Accounting for growth

As there is widespread confusion on this matter, it is important first to establish what are the factors that determine economic growth. It is widely and incorrectly asserted that these are variously, increasing ‘demand’, increasing the supply of money, increasing Consumption, improved innovation, or rising ‘entrepreneurial activity’. None of these assertions is correct.

The world’s leading expert on productivity growth is Dale Jorgenson. The methodology he and his colleagues have expounded and elaborated in several works has been adopted in growth accounting by the OECD, among others. In ‘Productivity and the World Economy’ (pdf) he writes,

“The contributions of capital and labor inputs have emerged as the predominant sources of economic growth in both advanced and emerging economies. Economic growth depends primarily on investments in human and non-human capital, including investments in both tangible and intangible assets”.

Using the analysis outlined in his work it is possible to identify the impact of ‘investment in human and non-human capital.’

Jorgenson’s research shows that it is the amount of capital and the amount of labour, as well as their quality, that are the decisive factors in growth. This statistical analysis refutes all efforts to portray growth as ‘demand-led’, or ‘aggregate demand-led’, or a function of innovation, or entrepreneurial activity, or other myths.

In Jorgenson’s new book, ‘The World Economy’ (with Fukao and Timmer) he argues that one of its major findings is that, “replication rather than innovation is the major source of growth in the world economy. Replication takes place by adding identical production units with no change in technology. Labor input grows through the addition of new members of the labor force with the same education and experience. Capital input expands by providing new production units with the same collection of plant and equipment. Output expands in proportion with no change in productivity.”

The empirical proof of this analysis can be found through economic history up to and including the current crisis. In 2007 and 2008 the US and then all the leading capitalist economies did not suddenly experience a downturn in demand, or Consumption, or money supply growth, firms did not stop innovating and ‘entrepreneurs’ did not stop trying to make profits.

It should also be added that, among the real factors accounting for growth, the labour force did not stop growing (on the contrary, unemployment surged in many countries) and the education systems did not suddenly deteriorate.

In reality the 2007-2008 recession was caused by a slump in private sector investment and the continued stagnation of the leading economies is a function of the continued weakness of private sector investment. This is illustrated in Chart 1 below.

As Chart 1 shows, there was no crisis of Consumption until well after the Investment slump had already begun. By mid-2007 Investment growth in the G7 had slowed to a crawl and begun to contract a few months later. At that time Consumption continued to grow at its previous pace and did not begin to contract until the second half of 2008. Widespread measures to stimulate Consumption coming out of the crisis have only had a limited effect, largely leading to an increase in household indebtedness. Investment growth has never properly recovered and it is this that accounts for the continued stagnation in the G7 economies.

Accounting for investment

Just as in the G7 as a whole, the UK recession was caused by a slump in private sector investment as shown in Chart2 below.

Despite the fact that Investment is a far smaller component of UK GDP than Consumption, the contraction in Gross Fixed Capital Formation (GFCF) was far greater than the decline in Final Consumption. From the pre-recession peak to the trough at the low-point of the recession Consumption fell by £54.8 billion, while Investment fell by £70.4 billion.

Likewise, although Consumption growth has been exceptionally weak it now stands £136.8 billion above is pre-recession peak, while Investment is just £18.4bn above is pre-recession. Consequently the proportion of the economy directed towards Investment has decline from the pre-recession peak of 17.9% to 17.1% of GDP at the end of 2017. It is this that accounts for the weakness of growth overall and therefore the weakness of the growth in Consumption. This corresponds to the Jorgenson analysis.

From this analysis it follows that the Labour policy of increasing Investment is entirely correct. Furthermore, the policy of only borrowing to increase Investment is also correct. Only Investment to increase the productive capacity of the economy (the increase in the ‘means of production’) can sustainably increase the level of production of that economy.

But what is the likely return on that Investment? Or, put another way, what should be the level of Investment in order to achieve specific policy objectives of increased growth in output?

Here the Jorgenson analysis is indispensable. Its results are available from the Conference Board, which uses the same methods and data.

In the Conference Board Total Economy Database (adjusted version) May 2017, the contributions to UK GDP growth over the medium-term of capital inputs, labour inputs and Total Factor Productivity are shown as follows: Capital 0.9%, Labour 0.7% and TFP 0.2%. UK GDP itself grows by an average of 1.8% per annum over the medium-term (1990 to 2016), the aggregate of those inputs.

Within the category of Labour inputs the contribution of labour quality is a negative, at 0.1% and the total contribution of Labour inputs is entirely a function of the growth on the quantity of labour, +0.8%. Labour quantity can be increased either by increasing the productive workforce or by the existing workforce working longer hours, or some combination of the two. But in either event, the scope for increasing per capita living standards without increasing hours is almost wholly dependent on increases in Capital inputs.

Therefore, any sustainable increase in output per hour worked is overwhelmingly determined by the growth in capital inputs. The Corbyn-McDonnell focus on investment is therefore entirely correct, based on the most sophisticated mainstream economic analysis. (An entirely separate set of policies are needed to address the decline in labour quality inputs identified above, but that is not the subject of this piece).

The return on investment

The Conference Board data also allows an analysis of the return on capital investment which is the addition to the productive capacity of the economy, or the increase in the means of production.

The Incremental Capital-Output Ratio (ICOR) measures the ratio between increased Capital deployed and the resulting change in the annual level of output over the medium-term. From this it is possible to identify two effects. First, it is possible to identify the likely return on a given level of investment (if the ICOR remains unchanged). Secondly, it is possible to identify the required level of investment to achieve a specific level of increased output (again, if the ICOR remains unchanged).

At 2016, the Conference Board 5-year moving average for the UK ICOR is 8.0. This means that an increase in annual output over the medium-term of £1 billion requires an increase in investment of £8 billion. The same ratio applies if the numerator is changed. So, an annual increase in output over the medium-term equivalent to 1% of GDP requires an increase in investment of 8% of GDP.

In the Conference Board Total Economy Database the UK ICOR was not always so high. Prior to the recession that began in 2008, the ICOR fluctuated around 6.0. This would reduce the level of investment required to achieve a given level of increased output, or would increase the level of output arising from a given increase in investment. But it remains to be seen whether there has been a permanent or at least enduring deterioration in the ratio or whether this is a hangover from the slump.

In any event, using the ICOR identified from the Conference Board Database, it is possible to examine the effects of Labour’s commitment to increased public sector investment.

Increased public sector investment

Labour’s economic policy is to borrow only for increased public sector investment. The consequent growth can allow for further increases in investment or increased public spending on services, or some combination of the two.

From the analysis above it is possible to identify the impact of planned investment. Each increase in public sector investment of £8 billion increases the medium-term level of output by £1 billion. Labour’s plan is to increase public sector investment by £25 billion each year compared to current levels. This would directly increase medium-term output by a little over £3 billion each year. There may be indirect or induced positive effects on increasing private sector investment, but these cannot be known or certain in advance.

Over the lifetime of a 5-year parliament the cumulative effect of this increased Investment would be £125 billion. Applying the ICOR ratio of 8.0, this would increase medium-term output by just over £15.6 billion. By using the current level of nominal GDP of a little over £2 trillion (or £2,000 billion), the net effect of Labour’s plans would be to increase GDP over the medium-term by the equivalent of almost 0.8% of GDP.

However, on a reasonable assumption of continued economic growth and therefore expansion in GDP, over the medium term the cumulative effects of investment would be slightly reduced, as GDP will have expanded. So, the effect would be closer to an increase of 0.75% in GDP over a five year period, or 0.15% per annum for the lifetime of the parliament. Using the same ratios, if the policy aim was to achieve a 0.25% increase in GDP per annum this would require the level of planned Investment to rise to £40 billion per annum.

There are two further points worth emphasizing. Up to this point, the subject for discussion has been the medium-term consequences of increased Investment on raising the level of GDP. But the actual expenditure on investment also raises output in the short-run, in the year or years that the Investment is made. The first point is that the immediate effect of increasing public sector investment by £25 billion each year will itself increase GDP by 1.25% each year, in the very short-run. The effect of Labour’s policy will undoubtedly be an important boost to the economy and therefore to living standards.

The second point is that Labour’s economic inheritance will be extremely poor, even on official forecasts. Therefore it may be necessary, within the limits of what is realistically possible to borrow, to increase the planned level of increased public sector investment, simply to stave off a deteriorating economic situation. In that case, further measures may be necessary, not just increased borrowing but also measures to direct investment through existing public sector bodies, the new National Investment Bank and in the private sector itself.

Trump’s tariffs against China are bad news for US farmers, companies and workers!By John Ross

In drawing up its list of tariffs on $50 billion of Chinese products the Trump administration carefully tried to avoid one of the chief bad effects these tariffs will have on the US population by excluding many consumer goods from the list. This was clear proof the administration feared the hostile reaction from US consumers as prices went up on these imported goods in US shops. But by concentrating on trying to lessen the impact on US consumers the Trump administration has necessarily increased the negative effects on US jobs and particularly US manufacturers and farmers.

This has meant it has not really concealed the negative effects on the US economy at all. Therefore, within hours of the US announcement, and even before China’s firm response, even Western commentators were accurately pointing out the main groups within the US itself that would be hit by the tariffs.

It is important to understand not only the impact on China of the Trump proposed tariffs but also the impact in the US. It is therefore worth looking at accurate Western studies of this.

Impact on US manufacturers

David Fickling, writing in Bloomberg, noted the effect of the US tariffs may remove as much as half of the benefit which the Trump administration recently gave to US manufacturing companies via tax cuts. Bloomberg’s headline was clear: ‘Trump Tariffs Stick It to U.S. Manufacturers. Firms might as well give back half of that $26 billion-a-year tax cut they just got.’

Fickling entirely accurately analysed the attempted concealment of the impact of the US actions on the US economy and population: ‘the list [of US tariffs] appears to have been chosen with care. Officials started with all products felt to benefit from Chinese industrial policies, before removing those that were “likely to cause disruptions to the U.S. economy,” those that would hit consumers’ pockets hardest, and those that couldn’t have levies for legal or administrative reasons.

‘The protection of individuals’ wallets is probably the most important part of that… China has a substantial advantage in this trade war in that the majority of its biggest exports to the U.S. are consumer goods whose purchasers tend to be price-sensitive voters. Trade in the opposite direction focuses far more on intermediate products bought by Chinese companies expected to do their bit for Beijing. By sparing consumers, Lighthizer is sending a strong signal he won’t let this fight be lost because of discontent on the home front.

‘That’s why, while hundreds of product lines under tariff code 85 (electrical machinery and equipment and parts thereof) will be subject to a 25 percent impost, subsection 8517 — mobile phones, which constitute about 40 percent of U.S. imports from China for that category — won’t suffer a cent.’

But by exempting many consumer goods, while simultaneously aiming to meet the $50 billion target for sectors hit by tariffs the Trump administration had wanted, the US has been forced to affect a much wider range of non-consumer goods. Again, as the Bloomberg article correctly noted, it is a: ‘fact that the plan will most likely hurt the parts of the economy it purports to help. Another way of looking at the $12.5 billion that will be levied is that it’s essentially the government taking back about half of that roughly $26 billion-a-year tax cut it just delivered to manufacturers.

‘Once you consider the ways domestic suppliers could raise prices in response to the reduced competition from China (as is already happening with steel and aluminum), the cost to end-product manufacturers will probably be higher. Producer prices in the sector are already rising at the fastest pace in almost six years; the squeeze to profits should intensify before it eases.

‘The second point is related. The list at present isn’t written in stone — instead it will be put out to industry consultation for 60 days. That gives manufacturers ample time to make their complaints to Washington, and to get their carve-outs in return. The Trump administration isn’t famed for its resistance to such influence: 195 of the executive branch’s 2,684 appointees are former lobbyists, according to a database by journalism nonprofit ProPublica.

‘Such pushback will probably be to the benefit of a U.S. economy that was doing perfectly well before the current skirmish came along. But it will weaken Washington’s hand in the months ahead. The National Association of Manufacturers is already calling for a trade agreement, rather than the current path toward a conflict.’

Fickling’s overall conclusion was entirely accurate: ‘President Donald Trump must now choose whether his main objective is helping American manufacturers, or sticking it to the Chinese. He can’t have both.’

US farmers protest

In addition to the impact on US manufacturers the Financial Times particularly noted the effect of the US farm sector and the reactions from it: ‘Max Baucus, a former senator from Montana and US ambassador to China who now serves as the co-chairman of the lobby group Farmers for Free Trade, said farmers were being “squeezed from all sides” by the Trump administration’s attack on China.

‘“First, the tariffs the US announced today will make the [agricultural] equipment and inputs they rely on more expensive. Then they will face new tariffs on their exports when China retaliates,” Mr Baucus said. “American farmers are watching this daily trade escalation closely, and they are worried.”

‘US business groups have called for the Trump administration to rethink its plan for tariffs, arguing that while they shared its concerns about China’s intellectual property regime the White House plan amounted to new taxes on US consumers and businesses… “imposing taxes on products used daily by American consumers and job creators is not the way to achieve those ends,” said Myron Brilliant, the head of international affairs at the US Chamber of Commerce.’

The action China has now announced on US soybeans exports will of course tighten that squeeze on US farmers. The Financial Times noted: ‘John Heisdorffer, president of the American Soybean Association, warned that the Chinese tariff would “have a devastating effect on every soybean farmer in America”. He urged Mr Trump to “engage the Chinese in a constructive manner, not a punitive one”.’

The strategic target of the US tariffs

Bloomberg also analysed that the clear aim of the tariffs was to attempt to block China’s advance into more technologically advanced production. It noted “The tariffs may have only a minor economic impact, increasing levies by $12.5 billion on Chinese shipments to the U.S. that reached $506 billion last year, said Shane Oliver, the head of investment strategy at AMP Capital Investors Ltd. in Sydney. That’s an average tariff increase on overall imports from China of just 2.5 percent, he said.” But: ‘In targeting sectors that Beijing is openly trying to promote, the U.S. is signaling that its strategic aim in the current conflict is preventing China from gaining the global technological leadership that it wants.”’

But in attempting to block China’s rise the Trump administration has launched an attack not only on China but on US companies, workers and farmers. The outcome of the situation will be decided by the interaction of both fronts in this battle.

The above article was previously published here on Learning from China.

The worst outlook in the modern eraBy Tom O’Leary

The economic outlook for the UK is the worst it has been in the modern era, the entire post-World War II period. This is not the verdict of some rabidly anti-Tory propaganda. It is based on the UK Treasury’s own forecasts for GDP.

The Treasury’s forecasts for real GDP from 2018 to 2022 are reproduced below, from the Chancellor’s Spring Statement. The average annual GDP growth is forecast to be just 1.4% over the period, and growth will never exceed 1.5%. This compares to 1.7% growth in 2017, which was itself significantly below the long-term average growth rate and the weakest since 2012. According to official forecasts, the best of this recovery is already behind us.

Over the medium-term, this will be the slowest growth rate of any period in the modern era. Chart 2 below shows the growth rate of UK real GDP from 1949 to 2017, plus the 15-year moving average. Using a 15-year moving average has the effect of removing the short-term fluctuations of the business cycle. To date the slowest growth rate on this measure of the 15-year moving average is the current one. The average growth rate over the 15 years to 2017 is just 1.7%.

However, if the Treasury’s forecasts for the next 5 years are included then the 15-year moving average real GDP growth falls to 1.2% by 2022. This is significantly below anything that has been experienced in the modern era. This is shown in Chart 3 below.

1.2% average annual growth is exceptionally low. It is half of what had often previously been cited as the trend growth rate of the UK economy of 2.5%. If these forecasts are approximately accurate, they will have severe negative consequences for living standards and for public finances and public services for many years to come. 

The ‘political centre ground’ will also continue to erode as radical economic and social policies will be sought. The next SEB piece will address the appropriate perspective for ending economic stagnation.

.534ZNavigating a way out of the crisisBy Tom O’Leary

The UK economy is in such a parlous state that the Bank of England is threatening to raise interest rates even though last year’s GDP growth rate was a feeble 1.8% and real wages continue to decline. This is a striking effect of the dearth of investment since the Great Recession.

The Bank’s Governor Mark Carney is concerned about capacity constraints in the economy leading to inflation. This lack of capacity, the weak growth in the means of production, arises because there has been a woeful lack of productive investment from before the recession began in 2008.

The UK economy is actually receiving a lift from the upturn in the world economy, particularly in Europe, but its relative position is declining. In effect, as the world economy is expected to see its best growth rate since 2010, the UK economy is expected to see its worst growth rate since that time.

In the three years from 2017 to 2019, the latest projections from the IMF are that the world economy will accelerate to an average of just over 3.8% real GDP growth. At the same time the UK economy will decelerate to less than half that growth rate, to just under 1.6%. By contrast, the advanced economies as a whole are expected to accelerate to just under 2.3%. The IMF expects that the main driver of world growth will come from what it describes as ‘Emerging market and developing economies’ at just under 4.9% growth, led by India and China.

The IMF has no crystal ball, and frequently makes incorrect forecasts. But the divergence in growth expectations for the UK economy compared with most of the rest of the world is striking. The UK is also one of only two economies it highlights where the IMF has downgraded its growth expectations.

The UK economy is already in poor shape. The advanced economies have been crawling along in growth terms since the crisis began. Using IMF projections for the next two years, these advanced economies will have grown cumulatively by just 17.1% over 12 years. But the UK economy will have grown even more slowly, by just 14.3%. The relative growth rates for the UK and for the advanced economies as a whole are shown in Chart 1 below.

Austerity and the deficit

Even the UK’s sub-standard growth rate does not provide an accurate picture of the bleak outlook for living standards. In addition to the sharp deterioration in public services and social welfare provisions, the labour share of national income has fallen sharply since the imposition of austerity in 2010, as shown in Chart 2 below.

Austerity can be seen as an attempt to drive up the profit share from its low-point of 17.1% in mid-2009, just after the crisis began. The prolonged effort has only been partially successful, as the profit share has increased from its low-point, yet it remains far below its pre-crisis highs at the turn of this century.

But the labour share (in an economy that is barely crawling along) has not recovered from its end-2009 peak. Mathematically, the labour share is an independent variable, not determined by the growth rate of GDP and instead determined by the struggle between workers and bosses over wages, pensions and other entitlements. In reality, the struggle for higher or even constant wages is exceptionally difficult when the economy is not expanding more rapidly.

Real wages are now 3% below their peak level in March 2008, as shown in Chart 3. Nominal wages rose 19.5% over the same period, but the two currency devaluations of the pound, one arising from the recession and the other following the Brexit vote, have more than eroded that rise in cash terms via inflation.

Higher wages, just like improved public services and social provisions are much easier to achieve with higher economic growth. But the widespread expectation is that UK growth will be slowing over the next period. This has negative consequences for living standards in the broadest sense, including real pay, social welfare and public services. The consequence for government finances will also be worse, as tax revenue growth will be curbed and outlays related to poverty and under-employment will be higher.

Therefore, in order to address the crisis in living standards and wages, and to tackle the glaring problems in areas such as housing, the NHS, social security, public sector pay and so on, radical measures will be required at a time when government finances are once more under pressure. 

Even if Carney is proved wrong in his forecasts of the Bank’s own actions, his pronouncements show that the UK economy could become locked in low growth over the very long-term, with every modest upturn met with higher interest rates to choke off the threat of inflation. To be clear, in mainstream economic policy making all types of inflation are allowed, house prices, stocks and bonds, even Bitcoin. But wage inflation is not permissible and it is this ‘threat’ the Bank of England is poised to prevent.

Navigating a way out of the crisis

Since the recession a number of measures have been adopted which have been designed to boost the economy by raising demand (‘Help to Buy’) or by creating money (‘Quantitative Easing’). By themselves, they are unable to sustainably raise the growth rate of an economy which remains in crisis because of weak investment.

The UK economy is experiencing a productivity crisis, which is not a ‘puzzle’ or ‘mystery’ as is widely claimed, but is instead a function of its low rate of investment. The advanced industrialised countries as a whole are also experiencing a productivity crisis, and the UK is simply among the worst because its level of investment is among the worst.

Productivity matters, because without increasing productivity any rise in living standards is dependent on working harder, or longer hours, or labour trying to claim a greater share of national income from capital.

The world’s leading expert on productivity growth is Dale Jorgenson. In ‘Productivity and the World Economy’ (pdf) he writes,

“The contributions of capital and labor inputs have emerged as the predominant sources of economic growth in both advanced and emerging economies. Economic growth depends primarily on investments in human and non-human capital, including investments in both tangible and intangible assets”.

Using the analysis outlined in his work it is possible to identify the impact of ‘investment in human and non-human capital.’

Jorgenson’s research shows that it is the amount of capital and the amount of labour, as well as their quality, that are the decisive factors in growth. This statistical analysis refutes all efforts to portray growth as ‘demand-led’, or ‘aggregate demand-led’, or a function of innovation, or entrepreneurial activity, or other myths.

In Jorgenson’s new book, ‘The World Economy’ (edited with Fukao and Timmer) he argues that one of its major findings is that, “replication rather than innovation is the major source of growth in the world economy. Replication takes place by adding identical production units with no change in technology. Labor input grows through the addition of new members of the labor force with the same education and experience. Capital input expands by providing new production units with the same collection of plant and equipment. Output expands in proportion with no change in productivity.”

Jorgenson also analyses the historical impact of changes in these inputs for total growth in a variety of economies, including lesser economies like the UK. Using these analytical tools, it is possible to outline a projection of growth for the UK economy based on increasing those inputs, capital and labour, in line with the Labour Party’s intention to end austerity and reverse it. In a follow-up piece, that outline will be presented.

By John Ross

On Friday 2 February sharp turmoil, which had been building for some time, shook US financial markets.

• The driving force was the continuing sharp rise in US Treasury Bond yields, that it the interest rate on US Treasuries, which has risen from 1.86% when Trump was elected to 2.84%.  US Treasury rates set the floor for all long term US interest rates and are far more important for US economic trends than the shifts in Federal Reserve interest rates.
• Simultaneously US jobs data was released showing that wages in January had risen by 2.9% compared to a year earlier – seen as an indicator of inflationary pressure in the US.
• Meanwhile commodity prices, as measured by the S&P GSCI index had risen by 10.6% compared to a year earlier – adding to inflationary pressures in the US.
• This helped precipitate a 2.1% fall on 2 February on the S&P500 – the most severe daily decline since Trump was elected.

In summary the US economy was showing clear signs of rising interest rates and rising inflation – producing the market turmoil.

It is important to understand that these trends are not separate. They show that although US economic growth is low by historical standards, with only a  2.5% year on year GDP increase in the year to the 4th quarter of 2017, it is showing signs of overheating:

• Interest rates are the price of capital, and the sharp rise in interest rates shows that the supply of capital in the US is smaller than the demand for it,
• Inflation shows that supply of goods and services, including labour, is smaller than the demand for it.

In summary, despite low growth, the US is showing signs of capacity constraints.

By coincidence on the morning of the same day an article by me analysing the latest US economic data was published. This clearly predicted these trends – although it was of course written before the events on 2 February. This article is published without change below except for an updating of the US bond yields data to the end of 2 February. ​

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The new release of US and EU GDP data for the whole of 2017 allows a factual examination of the latest state of the US economy and constitutes a baseline for assessing the future impact of the Trump tax cuts. This new data confirms the following fundamental features of US economic performance.

• In 2017, for the second year in a row, the US was the slowest growing of the major economic centres – behind not only China but also the EU.
• In the last quarter of 2017 the US continued to undergo a purely normal business cycle upturn from its extremely bad performance in 2016
• There was no sign of an improvement in the fundamental economic structure of the US economy that would permit significantly accelerated growth in the medium/long-term.
• Therefore, the perspective is that the US will undergo a cyclical upturn in 2018 before encountering capacity constraints that will again slow its economy in 2019-2020 – the symptoms of these capacity constrains are likely to be increasing interest rates and rising inflation.

This situation of the US economy has significant implications for US-China relations. In particular, as the US is unable to speed up its medium/long term growth, those forces in the US seeking to engage in ‘zero-sum game’ competition with China can only achieve their goal of improving the position of the US relative to China by trying to slow China’s economy.

These implications will be considered in the conclusion of the article. However, first, using the approach of ‘seek truth from facts’ the latest data on the US economy will be examined.

US was again the most slowly growing major economic centre​

The new data shows that for the second year in succession the US was the world’s most slowly growing major economic centre – see Figure 1:

• In 2016 US economic growth was 1.5%, EU growth 2.0%, and China’s growth 6.7%
• In 2017 US economic growth was 2.3%, EU growth 2.5% and China’s growth 6.9%

This data shows that the claim in sections of the Chinese media that in the last two years the US was undergoing ‘dynamic growth’ was entirely false, the opposite of the truth. Bluntly it was in the category of ‘fake news’.

In addition to the data for the whole of 2017, in the year to the 4th quarter of 2017 the US was still the slowest growing major economic centre – US growth was 2.5%, EU growth 2.6%, and China’s growth 6.8%.

Although the facts of US poor economic performance in 2017 and 2016 are therefore clear this clearly poses a question. To what degree will the US improve this performance? This in turn requires examining both the position of the US in the present business cycle and the medium/long term determinants of the US economic performance.

Figure 1

Position of the US business cycle

In order to separate purely cyclical short-term movements from medium/long term fundamental trends in the US it should be noted that the medium/long term growth of the US economy is one of the world’s most predictable. Analysing the latest data, which go up to the 4th quarter of 2017, Table 1 shows that the three-year moving average of US annual GDP growth is 2.1%, the five-year moving average is 2.3%, the seven-year average is 2.1%, and the 20 year average is 2.2%. Only the 10-year moving average shows a significantly lower average – due to the great impact of the post-2007 ‘Great Recession’. Given that medium and long-term trends closely coincide the US fundamental medium/long term growth rate may therefore be taken as slightly above 2%.

Table 1

This consistent US medium/long term growth rate also makes it relatively easy to assess the short-term position of the US in the current business cycle. The key features of the latest data, for US economic performance in the final quarter of 2017, are given in Figure 2. This shows that US year on year economic growth in the last quarter of 2017 was 2.5%. This represents an upturn from the very depressed US growth during 2016 – which reached a low point of 1.2% growth in the 2nd quarter of 2016.

To accurately analyse this data, it should be noted that confusion is sometimes created in the media by the fact that the US and China present their quarterly GDP data in different ways. China emphasises the comparison of a quarter with the same period in the previous year. The US highlights the growth from one quarter to the next and annualises this rate. But the US method has the disadvantage that because quarters have different economic characteristics (due to the different number of working days due to holidays, weather effects etc) this method relies on the seasonal adjustment being accurate. But it is well known that the US seasonal adjustment is not accurate – it habitually produces low growth figures for the first quarter and correspondingly high figures in other quarters. It is therefore strongly preferable to use China’s method which, because it compares the same quarters in successive years, does not require any seasonal adjustment and therefore gives true year on year growth figures. All data in this article is therefore for this actual year on year growth.

In addition to showing 2.5% year on year growth for the latest quarter, Figure 2 shows that US annual average GDP growth was below its long-term average of 2.2% for six quarters from the 4th quarter of 2015 to the 1st quarter of 2017. Therefore, merely to maintain the US average growth rate of 2.2%, US growth would be expected to be above its 2.2% average growth rate for a significant period after the beginning of 2017. Figure 2 shows this is occurring, with US growth in the third quarter of 2017 being 2.3% and in the last quarter of 2017 reaching 2.5%. Therefore, the acceleration of US growth in the last quarter of 2017 was a normal business cycle development and did not reflect an acceleration in US medium/long- term growth.

More precisely, given the prolonged (6 quarters) period centring on 2016 when US growth was below its long-term average, this also means that purely for normal business cycle reasons it would be anticipated that for most of 2018 US GDP growth would be above its long-term average of 2.2%. This may allow US growth to overtake that of the EU, but not of course to overtake China. But there is as yet no indication that the US economy will achieve sustained growth of more than three percent growth rate claimed by Trump’s Treasury Secretary Cohn who stated to CNBC in justifying the tax cut that: ‘We think we can pay for the entire tax cut through growth over the cycle… Our plan was based on a 3 percent GDP growth. We think we can now be substantially above 3 percent GDP growth.’

It should be noted that Cohn’s claim is that three percent growth can be achieved over a business cycle – which would indeed be a substantial increase in US medium/long term growth. It is not at all the same as the US achieving three percent growth in a particular quarter or quarters – which has occurred previously and is entirely compatible with the maintenance of the current US medium/long term growth rate of just above 2.2%.
​
There is, of course, even less evidence that the US economy will achieve 6% growth as claimed by President Trump in his December press conference with Japanese prime minister Abe.

In order to asses the realistic growth rate for the US it is now necessary to analyse the fundamental determinants of US medium/long-term growth.

Figure 2

No basic acceleration in US long term growth

The most fundamental trend in US long term growth is the progressive slowing of the US economy which has been taking place for over 50 years. Figure 3 shows that, taking a 20-year moving average, to remove all short-term effects of business cycles, the US economy has progressively decelerated from 4.4% annual growth in 1969, to 4.1% in 1978, to 3.5% in 2002, to 2.2% in the 4th quarter of 2017. The fact that the US economy has been slowing for over 50 years shows that this process is determined by extremely powerful and long-term forces which will, therefore, be extremely difficult to reverse. The nature of these trends is analysed below – the latest US data, however, clearly shows no acceleration in long-term US growth which remains at 2.2%.

Figure 3

US medium-term growth

Turning from long-term to US medium-term growth, this necessarily shows greater fluctuations than US long term growth – as medium term growth rate is affected by business cycles. It is therefore useful, in analysing such cyclical fluctuations, to consider not only the average trend but also to make a comparison of successive peaks and troughs of business cycles. To illustrate these a five-year moving average for US growth is shown in Figure 4 and a three-year average is shown in Figure 5.

• Taking a five-year average, and considering the maximum growth rate in business cycles, the US economy slowed from 5.5% in 1968, to 5.0% in 1987, to 4.5% in 2000, to 3.0% in 2006, to 2.3% in the 4th quarter of 2017.
• Taking a three-year average, the US economy slowed from 5.9% in 1985, to 4.7% in 1999, to 3.7% in 2006, to 2.1% in the 4th quarter of 2017.

Therefore, the long-term tendency of the US economy to slow down is again clear. The trend of the peak growth rates in US business cycles falling over time is precisely in line with the long-term slowing of the US economy.

Figure 4

Figure 5

The chief factors in US medium/long term growth 

Having shown the factual trends in US economic growth it is then necessary analyse what produces them. My article ‘Trump’s Tax Cut – Short Term Gain, Long Term Pain for the US Economy‘ analysed in detail that statistically the strongest factor determining US medium/long term growth is US net fixed investment (i.e. US gross fixed capital formation minus capital depreciation). Table 2 updates the data regarding this given in the earlier article to now include 2017.

As may be seen, over the short-term there is no strong correlation between US GDP growth and the percentage of net fixed investment in US GDP – the R squared correlation for 1 year is only 0.21. Indeed, as ‘Trump’s Tax Cut – Short Term Gain, Long Term Pain for the US Economy’ showed in detail, there is no structural factor in the US economy which is strongly correlated with US growth in the purely short term. That is, put in other terms, numerous factors (position of the economy in the business cycle, trade, situation of the global economy, weather etc) determine short term US growth.

However, as medium and long-term periods are considered, the correlation of US GDP growth with the percentage of net fixed investment in US GDP becomes stronger and stronger. Already over a five-year period the level of net fixed investment in US GDP explains the majority of US GDP growth, and over an eight-year period the R squared  correlation is 0.71 – extremely strong.

It is unnecessary for present purposes to establish the direction of causality in this relation. The extremely strong correlation between US GDP growth and the percentage of net fixed investment in US GDP simply means that over the medium/long term it is not possible for the US economy to acclerate without the percentage of US net fixed investment in GDP increasing. This equally means that analysing the percentage of US net fixed investment in US GDP allows the potential for the US to accelerate its  medium/long term growth to be determined. This also means that to assess Trump’s possibility to increase US medium/long term growth it is necessary to analyse trends in US fixed investment.

Table 2

US net fixed investment

Turning to analysis of these factual trends, Figure 6 illustrates the percentage of net fixed investment in US GDP – showing the extremely sharp fall in this which has occurred. This fall corresponds to the long-term slowdown in US growth already analysed.

To be precise, taking peak levels in business cycles:

• In 1966, in the middle of the long-post World War II boom, US net fixed investment was 11.3% of US GDP;
• In 1978 US net fixed investment was 10.5% of US GDP;
• In 1984 US net fixed investment was 9.2% of US GDP;
• In 1999 US net fixed investment was 8.3% of US GDP;
• In 2006 US net fixed investment was 7.9% of US GDP;
• In the 4th quarter of 2017 US net fixed investment was 4.2% of US GDP.

It is therefore clear that while there has been some recovery of US net fixed investment since the extreme depth of the international financial crisis, US net fixed capital formation remains not only far below post war peak rates but even well below pre-international financial crisis levels. Due to this very strong medium/long term correlation between US net fixed investment and US GDP growth US economic growth cannot accelerate over the medium/long term without an increase if the percentage of US net fixed investment in GDP. Furthermore, it is clear that no such increase in the percentage of US fixed investment in GDP has taken place. Therefore, there is at present no basis for an acceleration in US medium/long term GDP growth.

Figure 6

Economic conclusions

In summary, the conclusions which follow from the latest US GDP data are clear:

• Nothing has yet occurred which would indicate or permit an acceleration in medium/long term US growth from its present level of slightly above two percent.
• The US is undergoing a normal cyclical recovery after its extremely poor performance of only 1.5% growth in 2016. Furthermore, in order to maintain the US long-term average growth rate, and counterbalance an extremely poor performance in 2016 and only slightly above average growth of 2.3% in 2017 as a whole, US GDP growth in 2018 would be expected to be above its long-term average – the effect of the Trump tax cut would be expected to sustain this short term increase. This trend however would not, unless the level of growth reached was extremely high, represent a break with the medium/long term slow growth of the US economy.

It is of course important to follow and check these trends factually given the importance of the US for the global economy and for China. Given the determinants of US economic performance over the medium/long term it follows that, in addition to factually registering US growth, it is necessary to regularly analyse the percentage of net fixed investment in US GDP in order to see if any new conditions for an acceleration of US medium-long term growth is occurring – so far it has not.

It should also be noted that the Trump tax cut, because it is not matched by government spending reductions, will sharply increase the US budget deficit and therefore, other things remaining equal, it will reduce US domestic savings, and therefore reduce the domestic US capacity to finance investment.

The following dynamic should therefore be anticipated in the US economy, which China’s policy needs to take into account:

• In 2018 continued cyclical upturn in the US economy.
• Due to the factors that would permit an upturn in US medium/long term growth not being present this cyclical upturn in 2018 will not turn into a much stronger upturn in 2019-2020 but on the contrary medium/long term factors slowing US growth may reduce growth from its likely 2018 level.
• As the problem in the US economy is lack of net fixed investment, that is in expansion of the US capital stock, the  form of these factors slowing the US economy after its 2018 recovery are likely to be symptoms of capacity constraints and overheating – i.e. increases in US interest rates and in inflation. This upturn in US interest rates is already clear, with the yield (interest rate) on US 10-year Treasury Bonds rising significantly from 1.86% when Trump was elected to reach 2.84% on 2 February.

Figure 7

Geopolitical conclusions

Finally, while the focus of this article is economic, it is clear certain geopolitical conclusions flow from these factual trends in the US economy.

• The inability of the US, with its present level of net fixed investment, to increase its medium/long term economic growth means that those in the US who advocate a ‘zero-sum game’ approach to US-China relations (‘neo-cons’ and ‘economic nationalists’) cannot achieve their goal of strengthening the position of the US compared to China by fundamentally accelerating the US economy. Their only practical policy option, therefore, is to attempt to slow China’s economy. This may possibly not be clear during 2018, when the US is undergoing a normal cyclical upturn, but it will become clear later as medium/long term US growth fails to accelerate.
• The reduction in US domestic saving caused by the current tax cut means that US sources of financing fixed investment, other things remaining equal, will be reduced. This will increase pressures on the US to attempt to maintain its level of fixed investment through increased foreign borrowing – as in principle US fixed investment can be financed from foreign as well as domestic sources. However, as the US current account of the balance of payments is necessarily equal to US capital inflows with the sign reversed, this means that if the US undertakes increased foreign borrowing its balance of payments deficit will increase – which goes in the direct opposite direction to Trump’s pledge to reduce the US trade deficit.
• If, however, the US does not engage in extra foreign borrowing then the reduction in US domestic saving which will result from the Trump tax cut would put downward pressure on US fixed investment – making it more difficult to achieve the US goal of increasing its medium/long term growth rate.
• Therefore, given the US tax cut, the US is faced either with the choice of increasing foreign borrowing, which would go against President Trump’s pledge to reduce the US trade deficit, or to reject increased foreign borrowing – in which case, because of the reduction in US domestic savings due to the tax cut, downward pressure on US fixed investment would be created. This would, in turn, put downward pressure on US economic growth.

The consequences of this is that given the tax cut will be seen, after the normal cyclical recovery in 2018, not to achieve its goal of boosting US growth this is likely to lead to US neo-cons/economic nationalists falsely accusing other countries of creating the problems which have prevented US medium/long term growth accelerating. This may lead to such forces increasing their pressure for protectionist measures in the US.

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This article was previously published on Learning from China and  originally published in Chinese at Sina Finance Opinion Leaders.

By Kerry Abel

2018 represents 100 years of women’s suffrage, with 6th February marking the hundredth anniversary of the Representation of the Peoples Act.

A rallying cry of the Suffragettes was Deeds Not Words. We have a government which pays lip service to women’s rights, their oppression and their representation. But these are only words.

A century on we should analyse the actual real situation women face and our achievements.

Equal pay

The struggle for equal pay for work of equal value is also a struggle against poverty. Those at the bottom of the pay scales at most workplaces are women. Even accounting for class and race differences women end up worse off – working class women are paid less than working class men; black women are paid less than black men; university educated women are paid less than university educated men and so on.

The UK median gender pay gap is currently 18.4% for all employees and 9.1% for full-time workers. Despite the 1970 Equal Pay Act making the practice of paying men and women differently for the same work unlawful, the biggest single piece of legislation to narrow the gender pay gap was the introduction of the National Minimum Wage (NMW) in 1997.

Parliamentary analysis shows the following:

“Research from the Low Pay Commission shows that the gender pay gap among the lowest paid fell from 12.9% when the NMW was introduced in 1998 to 5.5% in 2014. Analysis by the Fawcett Society in 2014 found that raising the NMW from £6.60 per hour to the Living Wage of £7.65 nationally, and £8.80 in London, would immediately reduce the gender pay gap by 0.8%. According to JRF, the cost of every part of the UK public sector becoming an accredited Living Wage employer, and including contracted out services within this, would be an estimated £1.3bn.”

Women benefit disproportionately from minimum wage laws precisely because they are disproportionately low-paid. It also highlights the virtual absence of mechanisms to enforce equal pay. Recent efforts by the government to encourage employers to address their gender pay problems are making a stuttering start. Gender pay reporting legislation requires employers with 250 or more employees to publish statutory calculations every year showing how large the pay gap is between their male and female employees. The website has been open for submissions for almost a year and so far, only 6% of organisations have sent in their data.

The data is now public. Organisations where the pay gap goes against women include Npower (19%), Cooperative Bank (30.3%), EasyJet (51.7%) and Phase Eight (64.8%).

Easyjet’s accompanying report demonstrates a tone-deaf understanding of the situation. ‘Pilots are predominantly male and their higher salaries, relative to other employees, significantly increases the average male pay at easyJet’. Just 6% of its UK pilots — a role which pays £92,400 a year on average — are women, whereas 69% of lower-paid cabin crew are women, with an average annual salary of £24,800. There is no explanation of how EasyJet have attempted to challenge this state of affairs.

Most of the big-name companies represented in the 500 reports insist that men and women are paid equally when in the same role and argue that it is an imbalance of women in lower-paying roles that skews the gender pay gap results.

The Financial Times (FT) highlights companies that are producing statistical data that appear to be improbable, like companies with a 0% difference and companies that have altered their data more than once. Unnamed ‘pay consultants’ have suggested that in digging up the data, employers have discovered they might be inadvertently breaking the law. The FT appears to be preparing the ground for no action on gender pay because the statistics are too difficult to collect.

A separate FT article in January noted that the ‘threats’ of sanctions and enforcements by the government are not enforceable, this time quoting employment specialist law firm Blake Morgan. There is currently a consultation out about what the sanctions should be, which was a criticism raised by trade unions before the scheme was introduced.

It is true that there is no short-term fix, and an attempt to name and shame has many flaws, but it is becoming clear that excuses are being lined up and that this scheme will be ineffectual. The pay discrimination is so widespread and so extreme that naming and shaming cannot be a solution. There are simply too many companies practising huge pay discrimination. They can hide in the crowd.

In the meantime, Carrie Gracie has highlighted yet again BBC gender pay inequality and a hot mike recording of John Humphreys and Jon Sopel complaining about her was leaked. An anonymous article by ‘BBC Women’ published on Comment is Free emphasises the fear that women feel speaking out and relates the lack of discussion to gaslighting, making women in the BBC feel that they are creating a problem not the other way around. The discussion between John and Jon and the reaction from the BBC seems to confirm that. Conditions at the BBC are simply the most public aspect of a near-universal problem.

#MeToo

The growing #MeToo movement – started in Hollywood in response to some truly shocking revelations about sexual harassment, notably by Harvey Weinstein – is calling ‘Time’s Up’ on silence.

The recently launched Time’s Up campaign, publicised largely by social media is currently a collection of 300 Hollywood women who have established a $13 million legal defence fund to provide support for women and men who’ve experienced sexual harassment or abuse in the workplace. This is a struggle against silencing women through non-disclosure agreements and the Time’s Up statement specifically acknowledges lower paid working women from other industries in their statement.

This movement to call out injustice faced by women is spreading and the collective approach is welcome. Because women really are on the frontline of poverty and the government policy of austerity.

Burden of austerity

Not only do women receive lower wages, they also disproportionately work in the parts of the economy that is being cut hardest, the public sector pay freezes and cuts have seen women disproportionately lost their jobs or forced go part time since 2010. That impact is still being felt a decade on from the Great Recession.

In addition, because public sector services are being closed down or reduced, the burden to perform these tasks – childcare, caring for elderly or disabled relatives has fallen to women as the traditional care givers, but also because they are being shut out of work, under paid and under employed. This triple-whammy effect is what is meant by the statistic that 86% of the cuts have fallen on the shoulders of women.

Some of the more excruciating examples of the cuts to social care come from women subjected to domestic violence who are falling through the cracks. Two women a week in England and Wales are killed by their partners/ex-partners. Yet across the country women’s refuge budgets have been slashed by nearly a quarter over the past seven years. Three quarters councils in England have reduced the amount spent on refuges since 2010. The system is at breaking point.

Worse – refuges who have won bids are reporting that they have not received the funds 8 months later, forcing one shelter to put its entire staff on notice out of fear of imminent closure. There are so many shocking highlights of how these cuts have hollowed out services – a month after Grenfell a ceiling of a refuge in the same borough collapsed and in a report by Women’s Aid, they announced that 78 women and 78 children were turned away from refuges in a single day in 2016.

The Tories announced £100million funding for services until 2020, with half allocated to local authorities in the form of ring-fenced grants. But this doesn’t have to be spent just on refuges – also homeless people, drug addicts or older people. This is miserably low amount given the scale of the problems.

Little known public proposals by the government plan to remove refuges and other short term supported housing from the welfare system, which could leave vulnerable women fleeing abusive partners unable to pay for their accommodation using housing benefit, the last guaranteed source of income available to refuges. On average, housing benefit makes up 53% of refuge funding.

Summary

In order to analyse how far women have come in a hundred years, we can’t look at the successful outliers who have done well, we should look at those who are at the very bottom and evaluate how far the positive changes made by women have affected all women.

The challenges that were faced by the Suffragettes in the early twentieth century for equal pay, better working conditions, housing, health and control over their bodies are still largely our unfinished business.

Even if the media are not watching and it is difficult to simply be believed, it is important to remember that women’s lives are deeply affected by the impact of austerity and should be central to challenging it, because the silent majority is building and those standing in our way will be on the wrong side of history.

By John Ross

• The determinants of US economic growth in the medium/long term,
• The short-term position of the US economy in the current business cycle

Analysing these factors, the impact of the Trump tax cut on the US economy is clear:

• In the short term the US economy is recovering in its current business cycle from its extremely bad economic performance in 2016, of only 1.5% growth, and the Trump tax cut is likely to boost this upswing
• The tax cut will increase the US budget deficit, and therefore reduce the level of total US savings, thereby reducing US medium/long term growth – unless the US embarks on large scale foreign borrowing, which would directly contradict Trump’s aim of reducing the US balance of payments deficit.

• in the short term no single fundamental structural factor, except accumulation of inventories, is strongly correlated with US economic growth – and inventory accumulation is a passive factor merely reflecting the acceleration and deceleration of US growth. Leaving aside inventories, over a 1-year period the strongest correlation of a structural factor in US GDP with US growth is the percentage of net investment in US GDP, but this only accounts for 25% of US growth in a one-year period – a weak correlation. In summary, in the purely short term numerous factors – the situation in the business cycle, international trade, even the weather – can significantly affect US growth.
• However, in the medium/long term there is an extremely strong correlation between structural elements of US GDP and US growth – the strongest positive correlations are shown shaded in grey in Table 1. The strongest correlation can be seen to be that between the percentage of US net fixed investment in the US economy, i.e. gross investment minus capital depreciation, with US GDP growth. This correlation accounts for the majority, 54%, of US growth over a five-year period and over a seven-year period US this correlation accounts for 72% of US growth – an extremely strong correlation.

The short-term position of the US business cycle

Analysing first short-term trends in the US economy this is greatly simplified by the fact that US medium/long term growth rate is among the world’s most predictable. Table 1 shows that over a 5-year period US annual average growth is 2.2%, over a 7-year period 2.1%, and over a 20-year period 2.2%. Only a 10-year period shows significantly different growth, at 1.4%, and this is simply a statistical effect of the huge impact of the international financial crisis of 2008. Given all these measures coincide therefore, annual average US GDP growth over the medium/long term may be taken as slightly above 2%. Given this stable medium/long term growth rate short term US business cycle trends simply show oscillations above and below this medium/long term average.

Table 2

Turning to the present situation of short-term shifts in the US business cycle, Figure 1 confirms that US economic growth in 2016 was extremely slow – only 1.5% for the year as a whole and falling to 1.2% in the second quarter. Given that the US growth rate in 2016 was substantially below its medium/long term average of slightly above 2%, a recovery of US growth was to be expected in 2017 for purely statistical reasons. This has duly occurred, with US year on year growth in the 3rd quarter of 2017 being 2.3% – marginally above the long-term US average.

The Trump tax cut is therefore being injected into an economy which is already recovering from its cyclical downturn in 2016. As the Trump tax cut is not accompanied by any equivalent reduction in US government spending it will therefore significantly increase the US budget deficit – estimates of the final effect of this are that the US budget deficit will increase by at least $1 trillion. A tax reduction which increases the budget deficit, that is which increases US government borrowing, may well increase a short-term recovery which is already occurring.

However, this increased budget deficit, other things being equal, will reduce US total savings – i.e. the sum of household, company and government savings. In the purely short term this fall in the US savings rate will not reduce US growth because, as was already shown, in the short term, i.e. one or two years, net saving and net investment are not closely correlated with US economic growth. Therefore, in the short term, the effect of extra spending arising from increased government borrowing, i.e. extra money flowing to corporations and consumers, may well lead to extra spending boosting already recovering US growth. For this reason, as already noted, in the short term, in 2018, the combination of the cyclical recovery and tax cuts is likely to lead to increase ‘short term gain’.

Figure 1

The medium/long term

However, in the medium/long term, as already noted, key structural features of the US economy, in particular net fixed investment, are extremely highly correlated with US growth. This, therefore, means that over the medium/long term analysing the trend in US net fixed investment gives an extremely clear guide to US economic growth performance.

Necessarily the effect of a greater US budget deficit is to reduce US total savings – other things being equal. As Figure 2 shows the US already passed into almost permanent US budget deficit and government borrowing from the late 1960s onwards – with only a short period of budget surpluses under Clinton. By 2017, although it had recovered from the depths of the international financial crisis, US government borrowing was still 4.0% of GDP even before the Trump tax cut kicks in.

Figure 2

The household and company sectors

In theory, as US total saving is the sum of government, household and company saving, increases in US household and/or company savings could offset a fall in total US saving caused by an increased budget deficit – for example theoretically companies and households benefitting from the tax cut would save their extra income. However, Figure 3 shows, however, that no increase in these other potential sources of US savings was in practice sufficient to overcome the effect of increased US government borrowing resulting from US Federal budget deficits. The result of substantially increased US government borrowing, not offset by trends in the household or company sectors, was therefore to produce a sustained fall in US total savings – that is in US capital creation. US net savings, which had been 13.1% of US Gross National Income (GNI) in the late 1960s, by 2017 had fallen to 1.7% of GNI.

Figure 3

Saving and investment

Turning to the relation between US savings/capital creation and the key chief structural determinant of US economic growth, net fixed investment, it should be recalled that total investment is necessarily equal to total savings. Investment may, however, be financed by either US sources or by borrowing from abroad. Therefore, a reduction in US savings, caused by an increase in the budget deficit due to the tax cuts, necessarily means that US total investment must fall unless an equal foreign source of savings can be found.

US presidents from Reagan to Obama were indeed prepared to use foreign borrowing to offset the decline in US savings – as Figure 4 shows. In the 3rd quarter of 1979, shortly before Regan came to office, the US was actually a net international lender of 1.0% of GNI. However, under Reagan the US embarked on massive international borrowing, this reaching a peak of 3.3% of GNI during his presidency. After a brief decline under George H W Bush, US foreign borrowing then expanded further under Clinton and George W Bush – reaching a peak of 6.1% of GNI in 2005. The shock of the international financial crisis then forced a reduction in US international borrowing, but it still stood at 2.6% of GNI in 2017.

Figure 4

Nevertheless. despite this very large increase in US foreign borrowing Figure 5 shows that this insufficient to entirely offset the decline in US savings and maintain the previous US level of net fixed investment. US net fixed investment fell from 10.5% of GDP in 1978, shortly before Reagan came to office, to a low of 1.7% of GDP in 2010 immediately following the onset of the international financial crisis. US net fixed investment has since recovered to 3.9% of GDP but this remains far below its previous peak level.

Given the extremely strong correlation between US net fixed investment and US economic growth which was already analysed this sharp fall of US net fixed investment necessarily greatly reduces US economic growth.

Figure 5

The slowdown in US growth

Given the close correlation of US net fixed investment with the US growth rate, the necessary result of this sharp fall in US net fixed investment was therefore also a progressive slowdown in the US economy shown in Figure 6.

Taking a 20-year moving average, to eliminate any short-term effects of business cycles, US annual average economic growth has fallen from 4.4% in 1969, to 4.1% in 1978, to 3.5% in 2003, to 2.2% in 2017. The extremely close correlation of the percentage of US net fixed investment in GDP with the US medium/long term growth rates already analysed means that the Trump administration cannot significantly accelerate US economic growth without increasing the percentage of net fixed investment in US GDP.

Figure 6

The choices facing Trump

The fundamental determinants of US economic growth therefore clearly show the choices facing the Trump administration which result from the tax cut.

By carrying out a tax cut unaccompanied by any government expenditure reductions the Trump administrations is lowering the level of US domestic savings. This in turn necessarily means a reduction in US investment unless an alternative source of savings can be found.

As previously analysed previous US presidents from Reagan to Obama partially offset this decline in US savings by large scale foreign borrowing. But this large scale foreign borrowing necessarily has consequences for the US balance of payments and therefore for Trump’s pledge to reduce the US trade deficit.

• The current account of every country’s balance of payments is necessarily equal to the capital account of the balance of payments with the sign reversed – i.e. an increase in foreign borrowing must necessarily be accompanied by an exactly equivalent worsening of the current account balance of payments. Whereas previous US Presidents were prepared to accept a deterioration in the US balance of trade as the necessary price to pay for large scale foreign borrowing Trump made it a central pledge to reduce the US trade deficit – the chief component of the US balance of payments deficit. But it is arithmetically impossible for there to be an increase in US foreign borrowing without there being a worsening in the US balance of payments deficit – that is, in practice, without there being a worsening of the US trade deficit. The Trump administration is therefore faced with only one of two choices:
• If Trump sticks to the target of reducing the US trade deficit then the US cannot undertake significantly increased foreign borrowing, net fixed investment will therefore remain low, and US economic growth cannot significantly increase in the medium/long term.

If the US increases foreign borrowing, in order to increase the level of US investment, then this will necessarily mean an increase in the US balance of payments deficit – and therefore the Trump administration will be forced to abandon its central pledge of reducing the US trade deficit.

Contradictions of Trump’s policy

It is therefore clear that by its tax cut the Trump administration therefore places itself in an internally contradictory position in which it is impossible to simultaneously meet two of its stated goals:

• If the US does not increase foreign borrowing it cannot increase its level of fixed investment and therefore the US cannot significantly increase its growth rate – which was one of Trump’s key campaign pledges.
• If the US does significantly increase foreign borrowing, in order to increase its level of fixed investment and therefore increase its medium/long term growth rate, the Trump administration cannot achieve its goal of reducing the US balance of payments deficit – on the contrary the US balance of payments deficit will increase.

If it should be argued that the Trump administration can find a way out of this contradiction by, for example, increasing the level of Innovation in the US economy this, unfortunately, rests on a misunderstanding. First, the close correlation between US net fixed investment and US economic growth shows that other factors are not powerful enough to compensate for a lack of net fixed investment. Second, the factual data shows that while a combination of innovation and fixed investment is extremely powerful in raising US productivity and growth, innovation unaccompanied by fixed investment does not significantly raise US productivity – for a detailed analysis of the US factual data see “Reality & myth of the US ‘internet revolution’”

Other analyses

While the above analysis is made in terms of analysing the fundamental determinants of US growth it is also worth considering other analyses.

The IMF arrives at a fundamentally similar analysis to the above in its latest international projections – predicting a short-term increase in US growth in 2017-2018 but without any medium/long term increase in the US growth rate. Figure 7 shows more precisely that the IMF projects US 2.2% GDP growth in 2017, and 2.3% in 2018, before a decline to 1.9% in 2019, 1.8% in 2020, and 1.7% in 2021 and 2022. Overall the IMF projects annual average US growth in 2016-2022 of 1.9% – which is actually marginally below the average annual medium/long term US growth rate of slightly above 2%. Given the stability of US medium/long term growth, therefore, while the present author would agree with the IMF’s projected general pattern for the US economy, i.e. higher growth in 2017-2018 followed by a slowdown, he considers that US growth will possibly be slightly higher than the 1.9% annual average indicated by the IMF.

Gavyn Davies, former chief economist of Goldman Sachs, who runs one of the world’s most sophisticated ‘now casting models’, similarly concludes that while the pattern of faster US growth in 2017-2018 followed by slowdown is correct he predicts average US growth remaining just above 2%.

Figure 7

Lawrence Summers former US Treasury secretary has the same analysis. He characterises the increase in US growth in 2017-2018 as a ‘sugar high’ – the equivalent of the purely temporary short-term boost in human energy caused by taking a large dose of sugar. His analysis, given the self-explanatory title the: ‘US economy faces a painful comedown from its “sugar high”’ is that: ‘The tax-cut legislation now in committee on Capitol Hill exacerbates every important problem it claims to address, most importantly by leaving the federal government with an entirely inadequate revenue base. The bipartisan Simpson-Bowles budget commission concluded that the federal government needed a revenue base equal to 21 per cent of gross domestic product. In contrast, the tax cut legislation now under consideration would leave the federal government with a revenue basis of 17 per cent of GDP — a difference that works out to $1tn a year within the budget window.

‘This will further starve already inadequate levels of public investment in infrastructure, human capital and science. It will probably mean further cuts in safety net programmes, causing more people to fall behind. And because it will also mean higher deficits and capital costs, it will probably crowd out as much private investment as it stimulates.’

Politics

Finally, while the focus of this article is the economic prospects for the US, it is worth noting certain key US domestic and geopolitical trends which follow from this.

Under normal circumstances it would be expected that the relatively more rapid growth of the US economy to be expected in 2017-2018 would lead to favourable approval ratings for a US President. However, in addition to other purely political factors, opinion polls in the US show strong popular disapproval of the proposed tax cuts due to their being considered to be particularly favourable to the rich – polls show up to 58% of the US population disapproving of the tax proposals with only 37% approval. Overall a survey of US opinion polls on 16 December found 58% of US voters disapproving of Trump’s record as President and only 36% approving. It remains to be seen if the economic recovery likely to continue in 2018 will increase President Trump’s approval rating before the fact that the US medium/long term growth rate has not accelerated becomes clear. However, it is clear that a situation of continuing low US medium/long term growth will continue the present situation of instability in US domestic politics.

The reduction of the US savings level due to the increased budget deficit due to the tax cuts also has geopolitical implications. If the Trump administration turns to large scale foreign borrowing to try to increase US investment levels, and therefore accelerate growth, this will necessarily lead to a larger trade deficit. As this would clearly be contrary to one of Trump’s central campaign pledges it will lead to temptations to blame other countries for what are in fact difficulties created by the consequences of the tax cut – China may be a target of this. If, however, the US does not turn to foreign borrowing to boost investment and growth levels then US economic growth will not increase – which may also lead to seeking foreign scapegoats. In summary, the fact that the tax cut will not produce a significant acceleration in US growth, other than in the purely short term recovery in 2017-2018, may increase the temptation of the US to inaccurately blame other countries for what are in fact self-created economic problems exacerbated by the increase in the budget deficit.

Conclusion

In conclusion, the consequences of the US tax cut are therefore clear. They may be easily understood both in terms of the economic fundamentals considered and by those of other analysts including the IMF. The tax cut, by increasing the US budget deficit, will produce a ‘short term gain and long-term pain’, a ‘sugar high’ to use the term of Lawrence Summers. It will further boost a US recovery which is already taking place for statistical reasons in 2017-2018 but at the expense of undermining the US savings level and therefore the ability of the US economy to finance the investment which the data shows to be crucial for any significant increase in the US growth rate.

China’s economic policy, and that of other countries, must therefore be prepared both for the ‘short term gain’ of the US tax cut of 2017-2018 and for the ‘long term pain’, that is the low average US growth rate, that will be caused by the increase in the US budget deficit.

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This article previously was published at Learning from China and originally appeared in Chinese at Sina Finance Opinion Leaders.