Socialist Economic Bulletin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

‘Free trade’

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

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

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

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

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

Relative strength

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

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

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

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

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

Dealing with Trump

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

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

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

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

Will it work?

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

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

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

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

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

Conclusion

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

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

• The major global economic development in 2016 was a sharp slowing of the US economy – as is shown below;
• Large parts of the financial media failed to analyse this reality of slow US growth and continued to repeat a myth of ‘strong US recovery.’

• What is the real state of the main centres of the world economy – the US, the EU and China?
• Given that accurate analysis of the state of the US economy is extremely important both in itself and for economic policy, why did sections of the financial media continue to publish inaccurate material about the US economy?

• US GDP growth fell from 2.6% in 2015 to only 1.6% in 2016 – that is during 2016 the US economy slowed down by almost 40% from its previous growth year’s rate.
• US per capita GDP growth fell from 1.9% in 2015 to only 0.9% in 2016 – US per capita GDP growth therefore declined to under half of its previous year’s growth rate, and fell to less than an annual 1% which is approaching stagnation.

• China – 6.7%
• EU – 1.9%
• US – 1.6%

 

• First given the proven inaccuracy of the Western media the role of independent factual studies by Chinese think tanks and research organisations such as Chongyang Institute for Financial Studies is vital.
• Second, that the publication of research by Chinese media is crucial for getting accurate data and analysis into the hands of companies and policy makers.

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

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

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

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

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

 

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

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

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

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

The long-term slowing of the US economy

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

 The cyclical situation of the US economy

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

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

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

The determinants of US growth

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

.232ZBritish economic crisis is deepeningBy Tom O’Leary

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

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

.430ZMigrants don’t drive down wages (once more)By Tom O’Leary

A false argument can become an established truth by a process of constant repetition. But it is still false. This is now the main method used in the ongoing debate about the effects of immigration to the UK. One of the key false assertions widely made is that immigrants have driven down wages. 

Chart 1 below is based on a TUC analysis on the effect of the recession on real wages in selected countries. Contrary to Government propaganda, the UK economy is not booming. On some measures it is among the worst-performing countries coming out of the crisis. By contrast, while there are many other advanced industrialised countries that have been badly hit by the crisis, only Greek real wages have fallen as far as those of British wages over the period 2007 to 2015.

Source: TUC

This collapse in UK wages has coincided with the continued growth in net migration to the UK. But coincidence is not even correlation, let alone causality. 

In reality, no-one outside the far right ever dreamt of linking wages to immigration levels until the Tory Government introduced a net migration target in 2011. This was a blatant attempt to distract from its own unpopularity because of its austerity policy. Labour had started to pull ahead of the Tories in the opinion polls for the first time in 4 years (data here). Blaming migrants for low wages, poor public services, the housing crisis and other issues is classic scapegoating.

The assertion that migrants drive down wages rests on general truisms; that migrants are willing to work for lower pay, they undercut wages and so on. If any of this were true, it would be generally true. There cannot be a unique mechanism which only applies to the UK which does not apply to other advanced industrialised countries. Yet this is one of the more obvious ways in which this argument falls down.

In Chart 2 below the total level of migration to the UK and to Germany from 2000 to 2014. It should be noted that over the period 2007 to 2015 German real wages rose by 13.9% while UK real wages fell by 10.4%, as noted in Chart 1 above.

Yet this is almost exactly the period in which migrant inflows to Germany and to the UK diverge dramatically. In effect, just as German real wages were advancing migrant inflows were soaring towards 1.4 million per annum. At the same time, while UK real wages were declining the level of migrant inflows was more or less steady at approximately 500,000 per annum. As a proportion of the total population German migration was also much higher than that of the UK.

If the general proposition were true that migrants drive down wages in advanced industrialised economies, it would be true across those economies. It is patently untrue. German wages rose in real terms while its immigration rate and totals were far higher than that of the UK.

In reality, the German economy is a much more highly productive economy than the UK, about 30% higher. This is based on much greater openness to the world economy and much higher levels of investment over a prolonged period. This allows both higher wages and higher wage growth than the UK. It is the exceptionally low level of UK investment combined with the economy’s long-term structural weaknesses which have caused the depth of the crisis here and the fall in real wages. Migrants have not cut British wages. British bosses have.

.576ZRBS shows left must think for itselfBy Tom O’Leary

Royal Bank of Scotland (RBS) is a publicly-owned bank. The overwhelming majority of its shares are in state hands, 73% of the equity. Yet it was the only major bank to fail outright the recent ‘stress test’ of its balance sheet conducted by the Bank of England. The bank is a basket-case. It is costing all of us money, and yet it could be a key contributor to economic recovery.

For many years the left has called for the nationalisation of the banks. This happened as a result of the financial crisis. But with very few exceptions the left had very little to say about what the public sector could do with its newly-acquired and deeply damaged assets. That was an error. Now that the left leads the Labour party and could be in position to lead the next government, it should use every lever at its disposal to produce an investment-led recovery. RBS should be seen as one of those levers.

Financial snapshot

The financial position of RBS is deteriorating, highlighted by the Bank’s stress tests. The stress tests themselves have four fundamental elements, related to the earlier global financial crisis. In the Bank’s stress scenario, world GDP falls by the same amount as in the global financial crisis and UK GDP falls by a lesser amount. But UK unemployment rises more than previously and UK property prices fall by a significantly greater amount. The stress test assumptions compared to the global crisis are shown in Chart 1 below.

This is a startling outcome, which completely belies the idea that banks can be insulated against shocks simply by increasing their spare or cushion Tier 1 capital. These are economic shocks outlined by the Bank of England, with perhaps severe financial consequences. The answer lies in economic policy, and its financial implementation.

RBS has become a more risky bank since the crisis, not a less risky one under its private sector management even while it has been in public ownership and its Tier 1 capital ratio has risen. This is because it has increased its dependence on lending to the housing market. Between 2010 and 2015 RBS increased mortgage loans on its balance sheet from £90.6 billion to £104.8 billion, and the proportion of its total balance sheet from 83.6% to 86.4% of the total.

This completely lop-sided dependence on mortgages means that any projected decline in house prices has an even greater damaging effect on RBS’s balance sheet than previously. RBS has in effect been cutting its lending to the productive sectors of the economy from already abysmally low levels. Business loans now account for just 4.4% of the total RBS balance sheet.

Of course, if private sector businesses are unwilling or unable to borrow for productive investment then it would be foolish for RBS or any bank to chase business by offering uncommercial business lending. But thankfully, even in the UK, there are large parts of the economy which are in public sector hands and which could easily increase their productive borrowing for investment. 

These include local authorities and universities. There is too still a host of companies in public sector hands. Local authorities own, or have significant holdings in a series transport networks, bus services, rail networks and even airports. In addition, they could all usefully increase and upgrade local authority housing. Universities own research facilities and share in science parks which can be expanded. They own publishing enterprises, which could be upgraded and digitised. Large scale companies remain in public hands, from broadcasting companies, to research facilities, the NHS, the Post Office, water companies, network rail and air traffic control. 

All of these could be expanded with investment and in the process would increase the level of productivity and prosperity for the economy as a whole. The publicly-owned National Grid could undertake its own large scale investment in renewable energy projects. The return on them would be on average very high, and RBS itself would be rebalanced away from the housing market.

The Tory government has presided over the longest fall in living standards in the UK on record. It has produced the Brexit car crash simply in order to manage its own internal divisions. It is utterly incapable of lifting the economy out of its morass. Inevitably, it has no idea how to lead RBS out of its crisis. The only reason a fire sale has not been conducted is that outstanding legal cases, primarily in the US, mean that some parts of RBS are still burning.

Labour cannot take its lead from the Tories on any of these issues. One of the most difficult tasks in politics is to arrive at an objective perspective on key issues, overcoming the weight of prejudice fostered by the enemies of workers and the poor. But RBS is a practical example of how the left must learn to think for itself, and use every lever at its disposal to deliver an investment-led recovery.

.030ZyesAutumn Statement shows Brexit makes us poorerBy Tom O’Leary

The ever-optimistic Office for Budget Responsibility (OBR) has come under sustained fire from the Brexiteers for its gloomy prognosis and forecasts for the Autumn Statement. This criticism is entirely misplaced. The OBR has underestimated the negative impact of Brexit.

The OBR has loyally served successive Tory or Tory-led administrations having been created by them in 2010 and has routinely forecast much stronger growth than has occurred, along with rising living standards that have failed to materialise. However, what the OBR cannot do is ignore economic reality. Its forecast weaker growth over the next two years, that is before Brexit is enacted, chimes with almost all private forecasts. The Brexiteers want to shoot the messenger, who brings news of the downturn they have created.

The OBR repeatedly emphasised that it cannot make any substantive forecasts about the Brexit period itself as the government would not provide any information on the post-Brexit economic regime, not even in the widest parameters. Instead, the OBR focused on the immediate negative impact of the Brexit vote and the deterioration of the economic outlook, and even assumed a resumption of slower but steady growth from 2019 onwards. Give the disruption that is currently scheduled for 2019 when the UK is scheduled to leave the EU, this seems implausible.

Worse outlook because of Brexit

The most important OBR forecast changes are shown in Table 1 below (taken from Table 1.1 of the OBR’s November 2016 Economic and Fiscal Outlook). GDP growth falls by a cumulative 1.1%. Household consumption is down by 1.8%. Crucially business investment falls by 12.75%. In terms of living standards average earnings fall by a cumulative 2.8%.

Source: OBR

Not all of this deterioration is due to Brexit. The OBR specifies that around 60% of it is. In the OBR’s ‘counterfactual’ scenario, as if there had been no referendum, shows that 61.25% of the deterioration by the end of this parliament is due to Brexit (Table 1.4 of the OBR document). 

The remainder is the customary downward revision to forecasts as the OBR’s rose-tinted view gives way to reality. But this can hardly provide much comfort to the Brexiteers on the right or left. The OBR has only really taken account of the turmoil of the next two years and its previous track record suggests the forecasts will be markedly lower over time.

It is clear from Table 1 above that the biggest single casualty over the next few years is business investment. This is entirely predictable and predicted. As the level of investment is in part determined by the scope of the market, the UK’s withdrawal from the world’s largest market will inevitably deter investment. Contrary to government propaganda and much easily-led commentary, there will be no attempt to replace this new slump in business investment with increased public sector investment, as shown in Chart 1 below. Contrary to Tory propaganda there is no ‘National Productivity Investment Fund of £23 billion’, it is simply the relabelling of existing government spending on road, rail, housing and so on.

Brexit may have been sold as an opportunity to ‘get our country back’, but no vote can overcome the forces of global capitalism, or abolish the laws of economics. Irrespective of the ideas those who supported Brexit, the effect of the vote is to prolong the longest period of falling real wages in recorded UK history, as shown in Chart 2. Real wages had been falling since the end of 2014, when they were 5.7% below where they were when Labour lost office in 2010. But Brexit postpones the wage recovery primarily through flat wages and higher prices, so that they are not now officially forecast to recover until Q3 2019. This lost decade in wages is prolonged by Brexit.

Overall the crisis of the British economy is demonstrated by the change in Consumption and Investment since the beginning of the crisis. The OBR has forecast the outturn for the remainder of this year. The changes in Consumption and Investment are shown in Chart 3 below. The change in aggregate Consumption since the beginning of the crisis has been just over £135 billion, led by rising private Consumption. The cumulative rise in Investment is just £0.8 billion, effectively zero.

It is this rise in Consumption without any rise in Investment to sustain it which has led to enormous overseas borrowings to cover the current account deficit. Consuming without Investment is also responsible for flat or falling living standards for the overwhelming majority.

Economic objectives

As noted above, the OBR sought but was not given any meaningful advice from the government about its aims in the Brexit negotiations, or what policy outcome it expected. Instead it was given two statements by Theresa May. Below is a key section from the statements they were given.

Theresa May said, “I want it to give British companies the maximum freedom to trade and operate in the Single Market and let European businesses do the same here. But let me be clear. We are not leaving the European Union only to give up control of immigration again.”

The OBR requested guidance on economic policy. What it got was bombast on immigration. This must be assumed to override economic policy, or supersede it.

Yet the OBR is clear, the objective of reducing immigration will itself reduce both growth and living standards for all. There are 70 references to migration in the OBR document. It states that potential growth will be 2.4% because of lower net migration by 2021. To be absolutely clear, this is not simply an effect which reduces GDP, it also reduces living standards for the entire population, measured as per capita GDP. The OBR states, “On a per capita basis, cumulative growth would have been 0.3 percentage points higher because net migration adds proportionately more to the working-age population than to the total population, thereby boosting the employment rate too” (p.45).

It should be the goal of all economic policy to maximise the greatest sustainable increase in the living standards of the population. The Brexit vote and the Brexit government have overturned that strategic aim, replacing it with immigration-reduction. Chancellor Philip Hammond told the Tory party conference that ‘no-one voted to be poorer’. Yet his own government acts as if they did. It is what they will deliver.

The reason the Cabinet Brexiteers are in uproar is that their reactionary fantasies cannot survive contact with the real world. Even the perennial optimists at the OBR must be attacked. But this is in the nature of Brexit, a reactionary project propelled by distortions and outright lies. Because Brexit erects barriers between the UK economy and the world’s biggest market, living standards will be much lower than otherwise. Curbing immigration will compound this effect.

Of course, it is quite possible for political movements and even nations to sustain themselves on reactionary fantasies for a whole period. But they tend not to survive contact with the outside world. The Autumn Statement is probably just a small foretaste of what is to come as the Brexit fantasy meets reality.