Socialist Economic Bulletin

Three charts to explain why most people are getting poorerBy Michael Burke

Most people in Britain are getting poorer. For obvious reasons, the government and supporters of austerity would prefer not to discuss this fact.

Yet in the strained language of the Labour right, there has also been a clamour for Ed Miliband to ‘change the narrative’ on the economy by no longer talking about the cost of living crisis. This is based on the completely false notion that that the economic recovery under way will inevitably produce higher living standards. This fails to understand the content and purpose of current economic policy. It is also based on a refusal to face facts.

Some of the key facts on the cost of living crisis are glaringly obvious. The chart below shows the change in regular average pay as well as the change in total pay including bonuses. Also included is the change in consumer price inflation.

Under four years of the Tory-led Coalition, regular pay has fallen by 5.25%. This real decline in pay is understated in two ways. The first is that the CPI is a narrow measure of prices. In particular it excludes housing costs. Broader measures of inflation have tended to be higher over the last four years. In addition, only the pay of employees is captured by these average wage data. Anyone forced to work in self-employment, casual or other work without a regualr wage is not included in the data. These categories, along with part-time workers, have formed the bulk of the jobs growth over the last period, which has been a key factor in depressing wages generally. A broader, more accuarate picture of average wages would show a picture that is much worse.

It also seems as if the fall in living standards on this measure is unprecedented. The chart below is via Ed Conway, economics editor of Sky TV, who regularly provides very useful economic data. It shows the cumulative fall in real wages over a 5-year period.

This shows real wages contracting by 7.6% over that time period. Real wages have not fallen so sharply since records began in 1864, not even in the Great Depression of the 1930s. As we have already seen, there is also no end in sight. Wages continue to fall behind inflation.

This is the key fact which underpins the ongoing cost of living crisis. But it is not confined to the issue of wages. Of a total British population of 64 million on latest estimates, only 30.6 million are in work. The rest, the majority of the population, are mainly comprised of young people, the elderly, the unemployed and economically inactive. They too have tended to experience a fall in living standards as social security entitlements and public services have been cut. They are often at the sharpest end of the cost of living crisis.

Austerity At Work

An obvious question arises, if the economy is recovering in real terms how is it that real wages have fallen so sharply? The answer is twofold. First, the population is growing, so that GDP per capita remains significantly below its 2008 level, before the recession.

But the content of austerity is to transfer incomes from labour and the poor (such as wages, or the benefits of social security as well as public spending) to capital and the rich (in the form of profits, tax breaks, tax cuts, privatisations, and so on). The aim is not to lead to stagnation, which is a consequence of the investment strike by firms. The aim of austerity policy is to boost the returns to capital. Under conditions of stagnation, this can only be achieved by reducing wages and the transfer payments to workers and the poor.

This can be seen directly even in the form of incomes and prosperity. The chart below is via Chris Williamson, chief economic at economic survey and analysis firm Markit. It shows expectations of household finances over the next 12 months by income bracket. In effect, the higher income households tend to be more optimistic on average about their living standards, while the poorer are more pessimistic. The poor are getting poorer. Among the rich, the lion’s share of the recovery is claimed by the ultra-wealthy, the owners of capital, landlords and so on.

The Tory Party sees no reason to change these trends of the economic policy that led to them. They would carry out more of the same, renewing the austerity offensive that has been soft-pedalled ever since the poll ratings plummeted in 2012.

Labour is currently debating economic policy. Evidently, it would be wholly counterproductive to abandon the focus on the cost of living crisis now, which is already the deepest on record and is continuing. Yet the scale of this crisis also means that any policy is appropriate to the magnitude of the crisis. SEB has previously outlined some of the measures that could be taken. All proposals and policies need to be assessed in light of the extremely grave economic crisis that Labour will inherit in 2015.

Hoarding cash while refusing to investBy Michael Burke

The world’s largest companies are hoarding cash and cutting productive investment at the same time. The Financial Times reports a survey from one leading ratings’ agency, Standard & Poor’s, which shows that the 2,000 largest private firms globally are sitting on a cash mountain of $4.5 trillion, which is approximately double the size of Britain’s annual GDP.

Yet capital expenditure, or ‘capex’ by those firms fell by 1% in 2013 and is projected to fall by 0.5% this year. But this does not presage an upturn. Steeper declines in productive investment are projected by those firms in both 2015 and 2016. Taken together, if these projections materialise the actual and projected falls in capex over the 4 years from 2013 to 2016 will approach the calamitous fall in productive investment seen at the depth of the recession in 2009. This is shown in the FT’s chart below.

SEB has previously argued that companies are not prevented from investing by lack of access to capital or similar factors. They are sitting on a cash mountain. The same is true of British firms. There is plenty of money left, but firms refuse to invest it.

This is because private firms are not concerned with growth, either GDP growth or the growth of their own productive capacity. They are primarily driven by the growth of their own profits, or preserving them. Where that is not possible, where new capex will not meet an expected level of return, no new investments will be made.

The survey findings are reinforced by recent research from investment bank Morgan Stanly, which focused on the US economy. It argued that there were two reasons to expect little improvement in productive investment. One is that the US economy is far below using all the existing manufacturing capacity currently available, so has little need to add new fixed capital. The second reason is that shareholders tend to oppose heavy commitments to new, large-scale investment. Managements that do not invest are rewarded by shareholders, while those that do are punished (lower share ratings, lower financial rewards for managers and ultimately, loss of job if the investment turns sour).

Contrary to mainstream economics, this indicates that the interests of shareholders are not ultimately aligned with those of society as a whole. Instead the interests of shareholders frequently stand opposed to an increase in productive investment, which is the key mechanism for raising productivity and living standards.
Or, as another investment bank shows, the greater the long-run returns to shareholders, the lower the growth rate of GDP, and vice versa. The chart below is from CSFB and has previously been used by SEB. It shows the relationship between average shareholder returns and average GDP growth over a number of countries from 1900 to 2013. GDP growth is strongest where the returns to shareholders are lowest, and vice versa.

This has clear and direct implications for economic policy. The Tory-led government has attempted to encourage private sector investment with a series of inducements, bribes, subsidies, privatisations and so on. But it has not worked.

In the latest GDP data for the 1^st quarter of 2014, business investment in the British economy remains £25bn below its previous peak level in the 1^st quarter of 2008, even though GDP as a whole is £10bn below its previous peak. Total investment, which includes the government and the household sectors is now £49bn below its previous peak. The fall in investment accounts for the stagnation of the British economy and the main investment deficit originates in the business sector. The trend in business investment is shown in the chart below.

A continuation of the same policy is unlikely to yield different results. Instead a radical, reforming Labour government could direct investment itself, using the available resources. Even the current government has recently ‘fined’ Network Rail for to failing to meet its targets and will use the proceeds to upgrade wifi on the rail network, that is to engage in productive investment on a very small scale.

The same logic on a vastly greater scale could be applied to the problems of declining energy capacity and the need to de-carbonise the economy. Fines running into billions could be legally applied to the privatised energy companies if they fail to meet new legislative targets on investment in renewables and energy efficiency. The proceeds can then be used for direct state investment.

These and other methods could be applied to a series of key sectors, banking, energy, transport, health, education, infrastructure and so on. If the private companies still refuse to invest, government can use the fines to invest directly itself. In fact there are any number of methods of achieving the same objective. But, as the surveys and analysis from the financial sector show, the private sector currently has no intention of leading an investment recovery as profits have not yet recovered. So the state must lead an investment recovery.

The levers government can use for investmentBy Michael Burke

At a certain point in the next few months the recession in Britain will officially be over as the real level of GDP will finally exceed its previous peak in the 1^st quarter of 2008. The media coverage will be generally very favourable, in the hope that this will boost the Tory vote and vindicate the austerity policy. In reality it will do neither. The economy was already recovering modestly when the Coalition took office and the austerity policy reversed that upturn. This is the weakest and most drawn out recovery since the 19^th century.

Nor is the hoped-for political impact likely to materialise. One reason why the Tory vote in opinion polls has hit a ceiling fractionally above 30 per cent is precisely because of austerity. The policy is designed to transfer incomes from labour and the poor to capital and the rich. At the same time, the austerity policy of cutting state investment undermines any robust or sustainable recovery. The economy overall continues to stagnate and only a fraction of society feels any benefit from the recovery. During this ‘recovery’ most people’s living standards continue to decline. The political impact is that the Tory Party can shore up its core vote, but not add to it.

It is important to be clear about the task that will face an incoming Labour government. Labour will inherit a crisis, not a recovery. While the economy will soon recover its pre-2008 level, this represents 6 years of lost output. Living standards should have been rising, but they have not because of economic stagnation. Instead, living standards for the overwhelming majority have fallen as a direct result of austerity policies. A continuation of austerity policies after 2015 would produce the same result of economic stagnation and falling living standards for the majority.

Chart 1 below shows the medium-term trend growth for the British economy, and its current performance. The economy is approximately 16% below its previous trend level of growth. There is no evidence to suggest that this gap between previous and actual growth rates will close in the foreseeable future.

This means the poverty created during the slump will become a semi-permanent feature of the British economy. An incoming Labour government would need a radically different policy in order to achieve a very different outcome. It would need to address the cause of the crisis.

The fall in investment remains the main brake on recovery, led by the decline in private sector investment. On current estimates, GDP in the 1^st quarter of 2014 was still £10bn below its peak level in the 1^st quarter of 2008, but investment (Gross Fixed Capital Formation, GFCF) remains £50bn below its level at the same time. The slump in investment more than accounts for the current stagnation. The private sector has been unwilling to lead investment higher, so government policy must lead the way.

How to pay for investment?

Since Britain was not a high-investment economy even before the current crisis, £50bn a year in additional investment over the lifetime of the next Parliament is the minimum that would be required to resume trend growth. Replacing lost output and investment would require a further £320bn to avoid the loss incurred in the recession becoming permanent.

These are enormous sums, approaching the level of the bank bailout in 2009. There is no appetite for borrowing on this scale, even though there is clearly a case for some increased government borrowing to fund productive investment, especially when government interest rates remain close to zero in real terms.

Therefore, the bulk of the funds must come from another source. If it were really the case that ‘there is no money left’ then that would be the end of the matter. But it has already been noted that sometime in the near future the economy will recover its pre-crisis peak. Logically, this means there will soon be more money, more resources available than was the case before the recession, not less.

There is money left, it is simply not being invested. There is a yawning gap which has emerged between the level of investment (GFCF) and the level of profits. In 1990 the level of uninvested profits was £73bn. In 2013 it was £307bn. Even if we take profits after the effects of taxes and subsidies, the level of uninvested profits has risen from £5bn to £97bn in 2013. This is because taxes on production have been cut repeatedly over the period. The trend in uninvested profits is shown in Chart 2 below.

What levers for a radical, reforming government?

Since the fall in investment accounts for the continued stagnation of the economy and corporate profits are not being invested at an increasing rate, it follows that any serious discussion on reversing the slump must be focused on the mechanisms for directing those profits towards productive investment.

The key areas for that investment remain home building, infrastrucure, energy, transport and education.
In passing, it should be noted that the uninvested profits themselves have number of different destinations, all of them with negative consequences. The main destinations for uninvested profits include increased executive pay and returns to shareholders in the form of dividend payments and share buybacks, which have all reached record levels. In addition, there is a growing cash mountain held in the bank accounts of British non-financial companies. It remains unused by them (and most is held in accounts yielding little or no interest). But it is used by the banks partly to fund increased speculation in financial assets, including housing, international stock markets and commodities, including foodstuffs.

Levers for investment

I . Using the banks One unintended consequence of the financial crash of 2008 to 2009 was to increase the role of the state in the economy, even, or especially in countries where governments were committed to laissez fare policies. In Britain a very large section of the banking industry remains in public ownership in the form of RBS and Lloyds banks, through the body UKFI. At the same time all banks operating here are subect to licensing, authorisation, regulation and capital requirements from the Bank of England and other public bodies.

Prior to deregulation and Thatcherism, the Bank of England used to engage in ‘credit direction’. This was largely done informally, but in some detail so that banks would be instructed not only as to the amount of credit they should provide to the economy, but to which sectors and in which proportions[i]. The formal powers and associated bodies now are far greater and renewed credit direction actually runs with the grain of current regulation, which favours lending to governments as far safer than lending to corporations.[ii]

The government has a wide array of measures it can use to instruct the banks to provide credit for productive investment. The government could create special vehicles in order to channel that credit, or use existing ones (see below). Where bank executives prove reluctant to follow those instructions, the summary dismissals of Fred Goodwin from RBS and Bob Diamond from Barclays demonstrate the public sector’s power over the banks, if it chooses to exercise it.

II . Transforming existing schemes In the post-World War II period all economic recoveries have been led by government spending. In that sense, this recovery is no exception. The crucial difference is the content of that government intervention, which has increased current spending, but slashed public investment. It has supplemented this with a series of subsidies for investment to the private sector.

These schemes include, funding for lending, help to buy, guaranteed profits for the builders of nuclear power stations and innumerable other schemes. One part of the nuclear guarantee alone may cost government £17.6bn[iii].

Without incurring any additional costs, a reforming government could simply reverse the priorities highlighted by these policies. For example, it could transform the Help to Buy Scheme which boosts house prices but not home building. Instead, it could offer the same £40bn in government guarantees to local authorities to build homes, at no extra cost but from which there would be an additional public sector revenue in the form both of income taxes from newly-employed builders and rental income from public sector tenants, as well as building desperately needed new homes.

The same logic applies to the whole panoply of government schemes. So, the nuclear subsidy should be scrapped and the same subsidy provided to generate renewable energy in which the state has a controlling revenue share.

III. Cutting waste All cash-strapped governments project huge savings from cutting waste which often remain unrealised. This is frequently because the biggest, most wasteful areas of expenditure are sacrosanct and not to be touched.

In Britain one of the biggest areas of wasteful spending is on the Private Finance Initiative and the generalised outsourcing of contracting and supplies by the public sector. Even George Osborne began as a critic of PFI waste and promised to replace it. Instead, in grasping how dependent private sector profits are on this subsidy from taxpayers, the Coalition has maintained PFI and expanded it. In the current and next Financial Year the level of private sector capital spending under the PFI amounts to just £3.3bn, which is only a portion of the total capital cost. Yet the private sector will be receiving £20bn in ongoing current payments over the same two-year period[iv].

This is a colossal waste, amounting to a direct subsidy to the private sector that the public sector could and has done more cheaply. New PFI could be ended, all existing contracts scrutinised for their potential to be rescinded and a new enforcement body established to apply the highest possible service conditions, again with the threat of cancelling contracts.

IV . Cutting Trident and defence spending £100bn could be saved by a decision not to renew the Trident missile system[v]. Clearly, nuclear weapons of mass destruction cannot possibly provide any economic benefit. Trident is not even an independent system, so could only be used under US authorisation and then in all likelihood only as part of a global nuclear conflagration which would have Britain as a prime target.

The notion of Britain ‘punching above its weight’ received an historic reversal with the decision not to bomb Syria. Yet British defence spending remains way above European countries, which have perfectly adequate defence. Cutting British defence spending to their average would release nearly £20bn for alternative purposes.

V. Taxation Government priorities were clear when increasing VAT but cutting corporate taxes, costing the same amount. This was a direct transfer from the poor to capital. Similarly, cutting the 50p tax rate while imposing austerity on the majority was a clear example of the logic of austerity.

Less widely remarked, the government also removed tax incentives for genuine investment while cutting the corporate tax rate. The effect was a higher rate of tax for those that do invest, and a lower one for those who do not, including the banks. All of this was done in the name of stimulating investment, which has not materialised. This is because private investment is driven by the rate of profit. Keeping a larger post-tax share of dwindling profits will not drive up private investment.

These priorities could be reversed at no cost, and no loss of investment. The tax system could be used to improve living standards and boost genuine productive investment while at the same time penalising those firms who refuse to invest but have high dividends, executive pay or share buybacks. Higher taxes on unearned income, speculation and capital gains could be combined with tax breaks for investment and lower taxes on the poor.

VI. Removing private sector subsidies A large number of private sector firms receive government subsidies for running monopoly services that can, and have been performed more efficiently in the public sector. These include, but is not confined to areas such as the railways, utilities such as water, energy, and even NHS procurement and provision.

A consequence of privatising natural monopolies is that the private firms maximise revenues simply by raising prices and cutting costs by reducing the quality of the service. At the same time, successive governments have created a system where public funds are used to subsidise the private sector firms. Removing these subsidies (guaranteed income, inflation-plus price rises, direct grants, and so on) would save both government and service users enormous sums.

The most well-known example is the privatised rail franchises, where the process of renationalising the franchises could be accelerated by a stricter insistence on the terms of the franchise contracts in terms of service, investment, fares, and so on. But a creeping privatisation has been under way for the NHS under successive governments. In 2011/12 the private sector obtained £8.7bn from the NHS for providing services, £8.3bn in secondary care[vi] and £2.8bn in drugs and other procurement for a total of just under £20bn. Detailed data is difficult to obtain, but the level of the private sector take of NHS spending will have risen dramatically under this government[vii].

VII. Renationalisation There are clear benefits in renationalising the privatised companies in terms of the government’s ability to direct investment. Higher levels of investment in turn lead to better services, lower costs and increased or better paid jobs for the workforce.

But there is also a fiscal and strategic economic benefit to renationalisation that meets the objection that a cash-strapped government must have other priorities for its limited resources. The real position is that renationalisation increases government resources and allows them to be directed to boost the economy.

This can be illustrated with the example of Royal Mail. Royal Mail pays a dividend to its private shareholders from the profits it generates and the dividend yield is 3.8% (for every £100 shares owned, the shareholder receives £3.80 each year). This will rise each year if the company grows. But the borrowing cost to the British government when it issues new debt to be repaid in 10 years’ time is currently 2.7%. Buying the entire shares of Royal Mail (renationalisation) would cost the government less in interest than it would be able to receive in dividends from the company itself. It would generate additional resources, which could be used to reduce the deficit, or better still, to increase investment on which there is an even greater return.

The same logic applies to the privatised energy and utility companies, whose dividend yields are all even greater than Royal Mail’s. There is also a strategic imperative. The energy companies have been creaming off profits since they were privatised, and not invested in either additional energy capacity or in renewables and carbon-reduction. Spare energy network capacity was approximately 25% when they were privatised and different estimates now put it at between 4% and 8%. In response to Ed Miliband’s promise of a temporary price freeze, they threatened an all-out investment strike, that they would ‘turn the lights out’. This may happen anyway in the near future, given the decline in network capacity.

This is not a situation any government should allow. Ed Miliband has committed the next Labour government to decarbonising the economy by 2030. Given the resistance of the energy companies to even a modest price freeze, and their complete unwillingness to invest on the scale necessary to meet energy requirements, renationalisation is the only realistic option. Given the huge dividend payments currently made to private shareholders (5.2% for Centrica, 5.3% for SSE) there would be a very large benefit to government finances from their renationalisation.

VIII. Living standards The focus on living standards is the correct one, and led to Labour rising sharply in the polls. Given that living standards for the majority continue to decline, it remains the right theme to focus on.

The simplest way to restore living standards for those in work is to raise the national minimum wage to the level of the living wage, and to strictly enforce it. While boosting the living standards of millions of people, the single biggest beneficiary would be government itself, since the bulk of those in receipt of social security and other government payments are in work, not unemployed. This highlights a general truth, that the interests of a radical reforming government are aligned with those of workers and the poor.

The main objection is that firms find paying the living wage unaffordable. But we have already noted the huge level of uninvested profits, executive pay and returns to shareholders. These can be cut to make it affordable. Where there are genuine cases of small, shoestring firms operating at the margin, there could be some transitional arrangements to help preserve employment. But these would only be temporary measures, and would still oblige all firms to pay the living wage. Otherwise, the effect is to allow inefficient and super-exploitative firms to compete with efficient firms that pay decent wages, embedding the ‘race to the bottom’ in the economy.

IX . Equality A similarly robust policy should be adopted in pursuit of genuine equality. The most scandalous treatment of women has been a hallmark of the austerity drive, with the pay gap widening, reduced employment, greater burdens of childcare and other household burdens, reduced public services, and so on.

Without any cost to government it could strictly enforce equal pay provisions for all firms. Again, government itself would be the largest single beneficiary of this. There is too a recognition that investing in universal childcare provides a wider economic benefit, which naturally has a positive fiscal impact. But a similar approach should also apply to the issues of all social care and reduced public services, where the burden of removing them has fallen mainly on women. The public sector is more efficient provider of these services. If the economy is being boosted by a large-scale investment programme, preventing women from taking their equal place in the workforce on equal terms is a brake on the optimal development of the whole of society and the economy.

A similar approach should inform policies in relation to the equality of black people and ethnic minorities in the economy and wider society. Black youth are living in a different country to their contemporaries, suffering Greek-style levels of unemployment. Combatting unequal pay, and inequality in terms of access to jobs, housing and education need to be central to an economic programme that attempts to utilise all the talents of its citizens. In that light, the perpetual campaign against immigration is wholly counter-productive. The strong growth produced by an investment-based recovery will both attract and require additional immigration to Britain. The alternative is to create a slum which attracts no-one.

The discriminations based on sexual orientation and on disability need to be confronted. Basic human rights are being denied causing untold misery and the whole of society and the economy is poorer as a result.

Conclusion

The 9 points above are not designed to address every possible aspect of the economic and social crisis that will confront a Labour government, and are far from an exhaustive prescription. Instead, they are designed to highlight some of the key steps a radical, reforming government could take to address the scale of the economic crisis that will confront it.

Individually, none of the measures is very radical. All governments used to engage in ‘credit direction’ before the 1970s, windfall taxes were imposed by John Major and the postal system was nationalised by Gladstone. They only seem very radical because the political spectrum has shifted so far in the direction of those who caused the current crisis.

Taken together, these measures would allow the state to lead an investment-based recovery using the main levers that are currently available to it in Britain. That would be a major reform of the British economy and of society. A more enduring transformation would require other levers and a different alignment of social forces to be pulling on them.

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[i] See the paper from Victoria Chick and Sheila Dow, Financial Institutions and the State: A Re-examination (pdf) http://www.postkeynesian.net/downloads/soas12/VC080612.pdf
[ii] Under the Basel III capital adequacy rule for banks, their lending to governments has a zero risk-weighting while lending to companies has a risk weighting (requiring additional capital to be set aside) of 50% (pdf), KPMG, Basel III: Issues and implications, http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/basell-III-issues-implications.pdf This is one of the many reasons banks are generally campaigning against the Basel III regulatory regime.
[iii] FT, UK nuclear deal with EDF could waste £17.6bn, says Brussels http://www.ft.com/cms/s/0/ac6a7924-8a68-11e3-9c29-00144feab7de.html#axzz35Z5HVgFD
[iv] UK Treasury, Private Finance Initiative Projects 2013: Summary data (pdf) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/267590/PU1587_final.pdf
[v] CND, People not Trident (pdf) http://www.cnduk.org/images/stories/briefings/trident/People_Not_Trident_report_CND_Mar14.pdf
[vi] Nuffield Trust: Public and private provision (pdf) http://www.nuffieldtrust.org.uk/sites/files/nuffield/publication/130522_public-payment-and-private-provision.pdf

[vii] FT, Private groups invited to help NHS buy services, February 25, 2014 http://www.ft.com/cms/s/0/bcf1269c-9e1a-11e3-95fe-00144feab7de.html

Economics and the debate on immigration IIBy Michael Burke

The now notorious UKIP poster which suggested the entire population of the EU might come to Britain for work is designed to whip up racism. But it contains two fallacies that are unfortunately shared by many people who are not racists, and are therefore worth rebutting.

Myth 1

The first myth is that Britain is a uniquely attractive place within Europe in terms of pay or workers’ rights, or social security entitlements. The graphic below was produced by the UNITE union in Ireland in their argument for higher pay. But it is such a good graphic it is worth reproducing as it stands.

The compensation for British workers is among the lowest in Western Europe. Britain is not a uniquely attractive destination for economic migration within the EU. Therefore it should come as no surprise that Britain has one of the lower levels of immigration of the Western European economies.

Another graphic, this time from the Huffington Post, illustrates this point very neatly. It shows the level of immigration (the total stock of migrants) as a proportion of the total population. (The data source is also Eurostat).

Myth 2

The second myth is that immigrants ‘take’ jobs or drive down wages. If that were true, then the introduction of the single market in the EU and with it the provision for the freedom of movement of labour would have led to a convergence of both unemployment and pay rates across the EU.

But we have already noted that the highest pay is in many of those countries with the highest levels of immigration. The same can be said of unemployment too. Immigrants have neither increased unemployment nor driven down pay in those countries. In fact, there has been a divergence in rates of pay in the EU over a prolonged period despite increased mobility of labour.

The argument about immigrants ‘taking jobs’ or driving down pay has strong echoes of (male-dominated) labour movement opposition to women’s entry into the workforce. Exactly the same arguments were used. From an economic perspective the country of origin or the gender of the worker is immaterial. What is relevant is the skills and adaptability of the workforce as a whole.

This is because there is not a fixed ‘lump of labour’ in the economy, which immigrants, or women (or young workers) detract from. If there was a fixed amount of available labour no economy would ever be able to grow, even via the birthrate. Instead, economic activity grows and prosperity increases with what Adam Smith identified as the division of labour and what Marxists understand as the socialisation of production.
In the fastest-growing economies of the word, such as China and India, workers frequently migrate internally over vastly greater distances than is required in a move from one small corner of Western Europe to another. Sometimes too, the cultural and even language barriers are also greater.

This migration is a key factor in the growth of all economies. It is primarily responsible for the somewhat better performance of the US economy compared to the EU over a prolonged period. The absence of immigration also partly accounts for Japan’s long-term stagnation.

This is because the movement of labour is a necessary counterpart to the increase in the division of labour, or the socialisation of production. It increases both the size and the capacity of the whole economy. This in turn means that effects of the division of labour are magnified. As a result, immigrants increase jobs as whole. In Britain, 14% of new jobs are created by immigrants (approximately double their proportion of the population).

Consequently, any restrictions on the freedom of movement of labour within Europe will not create jobs but destroy them. They will not underpin pay, but will serve to drive it down. Labour MP Frank Field, who is strongly anti-immigration and in favour of restricting free movement of labour within the EU is explicit on this matter. If migrants are stopped from entering Britain to work, those on benefits can be forced to do the work instead. His anti-immigration agenda has nothing to do with protecting workers rights or pay. It is an agenda which supports the interests of capital, not those of labour.

There are some who mistakenly believe there is a genuine left-wing case for curbing immigration. But this is completely wrong. Immigration is a function of increasing prosperity and tends to reinforce it. The only effective way to reduce immigration in Britain is to lower living standards, reduce real pay and increase poverty. It is Britain’s relative decline in living standards which explains which it has lower immigration than most of Western Europe. There is no genuine left-wing case for reducing immigration.

The alternative is a policy aimed at increasing prosperity which is necessarily accompanied by increased immigration. Prosperity and immigration versus poverty with immigration curbs. That is the real policy choice.

No More Austerity – National Demonstration 21 June 2014

Organised by the People’s Assembly Against Austerity

 

No More Austerity – demand the alternative

National demonstration and free festival
Assemble 1pm, BBC HQ, Portland Place (Tube: Oxford Circus)
March to Parliament

Speakers and performers include:

Russell Brand Comedian

Francesca Martinez Comedian

Owen Jones Journalist

Christine Blower  National Union of Teachers

Jeremy Corbyn MP

Sam Fairbairn People’s Assembly

Stephen Morrison Burke National Poetry Slam Champion

Kate Smurthwaite Comedian

Sean Taylor Singer / songwriter

Caroline Lucas MP

Len McCluskey Unite the Union

More to be
announced…

Coaches are being organised from across the country – get in touch with your local People’s Assembly group for transport details: http://www.thepeoplesassembly.org.uk/local-groups

Publicity:
A2 Poster
A3 Poster
A5 leaflet
A5 leaflet (adaptable for local transport)
People’s Assembly newsletter: Demand the alternative – six things you can do today
Order leaflets, posters and stickers
Support from across the movement

Route:

It is the Tories who have a 30% strategyBy Michael Burke

Ed Miliband is accused of having a ‘35% strategy’, meaning that he is banking on doing only just enough to win an overall majority at the next general election. Polling models suggest that 35% would be enough for Labour to achieve an overall majority in Parliamentary seats. This is because the Tory vote is increasingly concentrated, while Labour’s is far more widely spread geographically.

Since Labour’s electoral strategy has not been divulged to SEB, it is idle to speculate on it, although this has not prevented others from doing so. Instead, it is possible to demonstrate that the Tory policy is based on an electoral strategy that is focused on an even narrower section of the electorate. It is the Tories who have a 30% electoral strategy.

The map below (which the present author first saw published by Ian Wright MP) shows the cumulative effect in English constituencies of cuts under the Coalition government during this parliament. The Tory Party is a fringe grouping in Scotland and is headed in that direction in Wales. Despite repeated attempts it has also failed to resurrect Conservative Unionism in Ireland.

The areas in beige have been barely affected by government cuts (although these are averages, there will be many people living in those areas who are badly affected by austerity). The areas in green have experienced no net cuts at all.

By contrast, areas coloured in red have seen a fall in living standards of between 15% and 20%. Those areas coloured deepest red have seen falls of greater than 20% and take in all the large cities, including London.
The economic map almost precisely coincides with the electoral map of Britain. The Economist and others are keen to argue that this is a North-South divide in British politics. To that end, they are obliged to perform some logical contortions. In order to make the main divide in British politics North versus South, The Economist excludes the Midlands from the North and excludes London from the South!

In reality, the Tory Party has been forced out of Ireland, Scotland, the cities, Wales and the North in succession. It is retreating to its birth place and stronghold in the English shires.

The economic response of the Coalition government led by the Tories is to protect and promote those Tory heartlands, as shown in Chart 1 above. SEB has previously shown how a minority of society, the owners of capital and the rich, are benefitting from the ‘recovery’ in which most people’s living standards continue to fall.

Perhaps the most flagrant policy in this regard is Osborne’s ‘Help to Buy Scheme’. The entire policy of increasing demand for housing while doing nothing to increase supply inevitably leads to higher prices. A number of commentators and economists from the Right have attacked the scheme as an absurd policy, designed solely to boost property prices rather than housing availability. It is a ‘help to get re-elected’ scheme. The resulting property price bubble is concentrated in London and the South-East, and even here there is growing resentment at the unaffordability of housing, not a feel-good factor.

Politically and economically, the Tories are pursuing a core vote strategy. This may not amount to much more than 30% at the next general election, and will certainly be less than the 36.9% they received in 2010.
As a result, support for the LibDems has collapsed as this does not at all coincide with the interests of their electoral base, higher-paid workers, professional classes and small business owners.

Labour’s winning electoral strategy should be equally clear and substantially broader. In terms of political geography it should embrace the democratic demands for greater national rights within the British state, as well as finally ending the British presence in Ireland. It needs to have a programme of economic regeneration for the North and the big cities. It should adopt a very large scale programme of council house building with London at its centre-piece. Socially, it needs to be a champion of equality and democracy, tackling the huge inequalities faced by women and tackling the endemic racism of British society, which cannot be done while promising to be tough on immigration.

Above all now, it needs to reverse the policy of austerity which is lowering the living standards of the overwhelming majority and will continue to do so. The Tory policy, of government spending cuts and inducements to the private sector to invest has not worked. A policy of government-led investment is required, combined with other policies that will directly lift standards. The Tory party is pursuing a narrow electoral strategy to shore up its support. Labour can offer something better.

By Michael Burke

A new situation requires a new analysis, and each new factor in the situation requires a specific and concrete analysis, placing it and its weight correctly in the overall situation. 

In world politics, the new situation is that the US was unable to bomb Syria, it finds itself negotiating with, rather than bombing Iran, and its coup in the Ukraine may not be entirely successful in drawing Russia’s neighbour into NATO’s sphere of influence. 

This overturns recent history. The overthrow of the Soviet Union in 1991 was accompanied by the US-led Gulf War. Since that time, the US and its various allies have bombed, invaded or intervened in Somalia (twice), Yugoslavia, Haiti, Afghanistan, the Philippines, Liberia, Iraq, the Maghreb, Yemen, Libya, Pakistan, Libya and South Sudan. The US has also led, organised or outsourced countless other interventions, overthrown governments and destabilised economies in pursuit of its interests. There has also been a series of coups and attempted coups in Latin America with varied success, and the so-called ‘colour revolutions’ in Eastern Europe to install pro-US, pro-NATO governments, as well as the US hijacking of the Arab Spring. 

However, the economic rise of China has warranted a strategic ‘pivot’ towards Asia in an attempt to curb the rise of the only economy that could rival US supremacy in the foreseeable future. Given this absolute priority and the reduced circumstances of the US economy, it has been necessary to suspend new large-scale direct military interventions elsewhere. 

This curb on US power has had immediate and beneficial consequences for humanity. Syria could not be bombed and neither could Iran. In these, Russian opposition to US plans was a key political obstacle, especially as the US wanted to deploy multilateral and multinational forces to do its bidding and needed the imprimatur of the UN Security Council. The US response to this blockage has been to increase pressure on Russia, most dramatically with its ouster of the elected Ukrainian government in a coup and its attempt to breach the country’s agreed neutrality by bringing it into NATO. 

This curb on US power, however limited or temporary, should be welcomed by all socialists, by all democrats and simply by all those who desire peace. Instead, we have the strange spectacle that some on the left have raised the charge that Russia is imperialist, or that China is, or countries such as Brazil, or India or South Africa are‘sub-imperialist’! 

This is not a coincidence. In the US State Department’s frustration it has produced every type of calumny against Putin, including that he is an imperialist[i] and akin to Hitler. Self-styled socialists who simply echo these charges are not highly amenable to logical argument. But it is vital for socialists to understand the nature of imperialism and its current manifestation[ii]. 

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Concrete political aims must be set in concrete circumstances. All things are relative, all things flow and all things change. Lenin, Two Tactics of Social Democracy in the Democratic Revolution 
The most important single work of Marxism on the subject of imperialism is Lenin’s Imperialism the Highest Stage of Capitalism. 

Lenin’s stated aim in writing the work was to demonstrate that the 1914-1918 war was imperialist (that is an annexationist, predatory, war of plunder) on the part of both sides; it was a war for the division of the world, for the partition and repartition of colonies and spheres of influence of finance capital, and so on.

Furthermore, he argued, that the character of the war, its class character, was determined by the position of the ruling classes of the warring countries and of the whole world, as the ruling classes of the belligerent countries had between them annexed almost the entire world. Therefore, he concluded imperialist wars are absolutely inevitable under such an economic system, as long as private property in the means of production exists[iii]. 

However, Lenin was categorical in warning that this was a study of imperialism in a given historical epoch and this was specifically (or concretely) ‘a composite picture of the world capitalist system at the beginning of the twentieth century’. As shown below, he also highlighted how this composite might change, as it was already changing. 

Therefore it completely contravenes Lenin’s injunctions in this and other works, indeed it is completely alien to the method of Marxism, to abstract from his pamphlet one or two important features of imperialism at this point, and use them as a measuring rule for modern imperialism. Imperialism, like all phenomena, must be analysed concretely, and only after taking all the main factors into account, and so establish its laws of motion. 

Changing politics 

Three decisive changes in world politics have occurred since Lenin wrote his great work. As we shall see, the world economy has not stood still either, like all phenomena it too has continued to ‘flow’, in Lenin’s words. 

The first decisive political change was in the contest over who would be the dominant imperialist in the world, which began in 1914 was resolved by 1945. The US had become the single dominant imperialist power and would countenance no serious rivalry from other imperialists. The best they could hope for was to play some subordinate but mutually beneficial role as a junior ally of US imperialism. 

The second decisive change took place between in the short period between Lenin’s writing the pamphlet and its later Preface. The Russian Revolution meant that for the first time the working class was able to lay hold of and maintain state power. Since that time, and notwithstanding the overthrow of the Soviet Union, there have been continuously some parts of the globe where the working class holds state power, including Cuba, Viet Nam and Venezuela. Of these workers’ states by far the weightiest in the world economy is China. In all these cases, private property in the means of production is not the dominant form of ownership in the domestic economy. However, all are obliged to operate in a global capitalist system in which imperialism dominates. 

Taking advantage of this contradiction, the third change is that the anti-colonial and national liberation struggles were able to free the great bulk of humanity from burden of direct colonial rule, and in some cases this led ultimately to socialist revolution. 

These three facts, US supremacy within the imperialist bloc, the continuous existence of workers’ states and the wave of direct decolonisation, are entirely new factors. They are decisive in understanding that the main antagonism in the world is no longer inter-imperialist competition (which has certainly not been abolished).

Now, the pre-eminence of the US and the existence of workers’ states with real political and economic weight means that principal contradiction in world politics is between the US and its imperialist allies versus the workers states and the countries oppressed by imperialism (including the semi-colonial world and the remaining colonies). Of these, the biggest, the weightiest threat to US economic interests is the rise of China. 

Changing economics 

In Imperialism the Highest Stage of Capitalism, Lenin sums up the main economic features of imperialism in that period. To some readers these are well-known, but they are worth repeating here. Worth repeating too is his own characterisation of this definition, which is that it was a special stage in the historical development of capitalism (which has continued to develop). 

The five features identified by Lenin are as follows: 
(1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life; 
(2) the merging of bank capital with industrial capital, and the creation, on the basis of this “finance capital”, of a financial oligarchy; 
(3) the export of capital as distinguished from the export of commodities acquires exceptional importance; 
(4) the formation of international monopolist capitalist associations which share the world among themselves, and 
(5) the territorial division of the whole world among the biggest capitalist powers is completed. 

Lenin’s starting-point is the concentration of production into monopolies, which is the basis of imperialism. This concentration is the inevitable outcome of ‘free competition’ between capitalists and has as a result risen exponentially since the pamphlet was written. Concentration means capitalist rivals are eliminated, and so increased profits require expansion overseas. 

The increase in concentration of production and trend towards monopolisation can be illustrated by the fact that the largest companies in the world are now larger than most countries. The tenth largest company in the world has revenues of well over US$200bn, and only 40 countries in the world have a greater level of annual GDP. In Lenin’s time, 44% of all US industrial output was carried out by just 3,000 firms. Now the output of just 130 firms is equivalent to 48% of US GDP[iv]. 

Concentration of production within the imperialist bloc has also increased. The dominance of the US is evident from the fact that it boasts nearly one-third of the leading Fortune 500 global firms, the same as its next three imperialist rivals together. At the turn of the twentieth century US Steel was the largest company in the world, with average net profits of US$34million. This is equivalent just under US$1 billion in today’s terms. In 2013 the most profitable company in the world was Apple, with profits of US$42bn. Aside from the few loss-makers, most companies in the Fortune 500 had profits far in excess of US$1 billion in 2013. 

The role of banks has also increased, but in an even more pronounced way. Lenin uses detailed data to show that the 9 leading banks in Germany held deposits of 10 billion German Marks. Two banks in the US, owned by the plutocrats JP Morgan and Rockefeller had deposits equivalent to 11 billion German Marks. These were equivalent to US$2.4 billion and US$2.6 billion in 1913 exchange rates. In today’s terms these are equivalent to US$56 billion and US$62 billion respectively. In 2013, Germany’s largest bank Deutsche Bank alone had deposits equivalent to US$727 billion. JP Morgan Chase is the biggest bank in the US which in 2013 held deposits of US$ 1,288 billion. At the same time, Lenin identifies the growth in traded securities to the equivalent of 479 billion French Francs. This is the equivalent of US$ 2,700 billion in today’s terms. But this is a fraction of the current level of international claims held by banks in the imperialist centres, of US$32,859 billion[v].

Taken together these data show that the main features identified by Lenin, the concentration of capital and monopoly and the increasing dominance of finance capital have both become more pronounced and more dominant features of imperialism. 

However, value can only be extracted if it is produced. Just as imperialism is a parasitic extension of capitalism, the dominance of finance capital is a parasitic characteristic of imperialism, which leads to its decay. 

Parasitism and decay 

Under a system of super-exploitation, the capitalist has a diminishing incentive to develop the productive forces of the economy as profits can be increased simply by increasing the scope of territory and the number of slaves held by the slave-owners. This was noted by Marx in his analysis of the Southern slave states of America. 

In a different context, imperialism too is a system of super-exploitation, one which attempts to embrace the whole world. Marx had earlier shown that the first imperial power, Britain in Ireland, had benefited from a higher rate of exploitation in its colony, with the imperial power ‘pocketing the excess’ profits even beyond the rate of exploitation in their own domestic market. As the brutality and rapaciousness of the regime increases, so too does its parasitical nature. This leads to decay and its vulnerability to competition from a more vigorous system of production. 

At the beginning of the twentieth century Britain was the premier trading nation in the world, via its empire. However, Lenin points out that Britain’s profits from its foreign and colonial trade was just one-fifth of its profits derived from its overseas financial investments. Britain had already become a ‘rentier state’, primarily living off these investments. 

Britain had run a trade deficit, the value of imports exceeding the value of exports for most of the period from the 1890s to the outbreak of the 1914-18 war[vi]. But the very high level of interest income (or rent) on its overseas possessions meant that the balance on the current account (the combined balance of trade in goods and services plus overseas interest payments) remained in surplus. This overall surplus on the current account ended in the 1930s. Repeated devaluations of the overvalued pound frequently redressed this imbalance by making exports cheaper and increasing the value of overseas interest payments in pound sterling terms. The discovery of North Sea oil also gave a temporary boost, but deficits on the current account have become such a fixed feature of the British economy since that in some official data it is sometimes referred to as the current account deficit, rather than the current account balance. 

The deficit on the current account must have an off-setting item to balance it. This is the capital account, the net flows of capital rather than of interest payments or dividends. When Britain fell into a current account deficit in the 1930s it was obliged to become a net importer of capital to off-set it. 

As noted above, Lenin had identified the export of capital as one of the key features of imperialism at the beginning of the twentieth century. Only the most hide-bound or scholastic reading of Lenin would then argue that in the 1930s Britain passed from being an imperialist nation to an oppressed one. Instead, the parasitism and decay of British imperialism has led it into a new and more decrepit, leech-like phase. Where Britain has trod the United States has followed. 

Capital importers 

The much greater size of the US domestic market, the consequent scope for increasing the division of labour and the greater productivity of its industries all meant the capitalist mode of production retained a degree of vigour there that had long become a distant memory in Britain. This was reinforced by the pre-eminent position of the US following the 1914 to 1945 world wars. 

However the US too has become a net importer of capital over a different timescale. This is shown in Chart 1 below. The US became an importer of capital because the growth of the economy was insufficient to maintain both the growth in living standards of the population and to fund the Viet Nam war. The US became an importer of capital in the course of the Viet Nam war and in order to pay for it. 

Chart 1. US Current Account Balance 1960 to 1980, US$ billions

Source: Federal Reserve Economic Data

The US did not become an economically oppressed nation while it was raining more bombs on Viet Nam, Laos and Cambodia than were dropped in the whole of the Second World War. Instead, imperialism and the dominant imperialist power has entered a new phase, where it sucks in capital from the rest of the world. It does so without in advance being either a net exporter of goods or of capital. 

As Lenin and a host of commentators had shown, in an earlier phase imperialism had been an exporter of capital. By the early 1970s the US (and Britain, long before) had become importers of capital. 

Persistently incurring new net debts will tend to run down any existing net stock of overseas capital. This is precisely what has happened. The US, as well as France and Britain are imperialist powers who own no net overseas assets, that is to say, their overseas debts are greater than their overseas assets. This is shown in Table 1 below. 

Table 1. Net International Investment Position 2012, US$ billions

Source: IMF, International Financial Statistics[vii]

The US is the world’s biggest net overseas debtor. It requires capital inflows to support the living standards of the population while maintaining the same level of military spending as the rest of the top 10 nations put together. These debts in return require interest payments, which in turn piles up further debt. 

Yet the most remarkable feature of the current economic aspects of imperialism is that the US, a country which has no net assets but only net debts, achieves a surplus on its investment income account. The net flows on the investment income account are shown in Table 2 below. 

Table 2. Investment Income Account, Net Flows, 2012, US$ billions

Source: World Bank, Data, Net Primary Income[viii]

Taken together these five imperialist powers have effectively no net overseas assets, as the net assets of Japan and Germany are effectively balanced by the net debts of the US, France and the UK. Yet in 2012 they received a net US$526 billion in net payments of interest and dividends from the rest of the world.

Within this bloc, the US is clearly pre-eminent. It extracted more interest from the rest of the world than Japan, despite having net debts greater than the level of Japan’s net assets. France and the UK were junior partners in this role. By contrast, both Japan and Germany are able to sustain trade surpluses because of accumulated levels of productivity (and in Japan’s case severe restrictions on imports). For them, there is no imperative to engineer investment income surpluses, these are a natural outcome of their trade-driven accumulation of overseas assets. Even so, along with France and the UK, they too play a supporting role in the global system of imperialism and benefit from it. 

[* The UK is undergoing a particular period of turmoil in its overseas accounts, associated with the continuing crisis of its banking system and their overseas operations. In the prior year the surplus was $42 billion. But it remains to be seen to what extent the UK can recover this position]. 

Finance Capital 

A capitalist economy is one in which there is generalised commodity production. Money is the universal commodity, standing in for all other commodities in the process of exchange. The control over the direction or allocation of money capital therefore becomes decisive in the development of capitalism itself. The medium for this allocation is the banks[ix]. 

As a result, the degree of concentration of capital and the dominance of monopolies depends on the financial capacity of the banks. The scale of necessary investment requires access to large-scale savings. The elimination of rivals requires financial resources. So, the creation of Ford Motors, Standard Oil and AEG relied on the emergence of JP Morgan, Rockefeller and Deutsche Bank respectively. This control over the allocation capital places the banks in an increasingly dominant position in the capitalist economy. Dominance over the global financial system is the essential condition for dominance over an entire economic system dominated by finance capital. 

As the dominant force in the global financial system, the US directs resources for its own needs. It charges vastly higher rates of interest when it recycles capital overseas than it is willing to pay. This explains how it is possible for the US to draw in interest income when it owns no net assets. At the same time, the US and its junior partners in France and the UK have not grown as rapidly as the world economy over a prolonged period, and yet they are continually able to draw in capital from the rest of the world. This too is only possible because of the US dominance over the global financial system, with Britain and France playing an important subordinate role. 

The US dominates all global transactions through the trading pre-eminence of the US Dollar, which accounts for approximately 85% of all foreign exchange transactions.[x] Firms seeking to raise capital privately are inspected by the US-dominated ratings’ agencies. Governments are frequently obliged to apply to the IMF or World Bank, where the US dominates. The obligatory criteria under which these finances are disbursed, or not, comprises privatisations, reduced government spending, lower living standards and financial ‘liberalisation’. These have the effect of allowing greater access to domestic markets for the imperialist powers, their firms and their banks, and most especially allows access to domestic savings, which are required to fund the external deficits of the US and the other imperialists. It is no accident that the ideology underpinning these criteria is called the ‘Washington Consensus’. It amounts to dominance over the financial system which dominates the world and gives the US privileged access to its resources. 

This is far removed from the era of ‘free trade’, between firms and nations which ended by the turn of the twentieth century. In any event this frequently involved robbing the colonies of goods or raw materials for far below their value, or in many cases simply outright plunder. It is even further removed from the trade of one large country with another, say Brazil with Venezuela or China in Africa. These can be mutually beneficial trading relationships, even while governed by laws of the capitalist market. 

Instead, the parasitic imperialist powers are able to conjure capital and interest from the rest of the world, seemingly out of thin air and on a repeated basis. It is comparable to free trade only in the way that an armed robber is akin to a market stallholder. In both cases money changes hands, but US dominance over the global financial system leaves as little in return as the robber. And this is not a one-off, but it is a continuous flow of capital. 

It is only possible to rob someone repeatedly if a knife is held to their throat. The extraordinary US expenditure on its military and the willingness of its French and British aides de camp to support its military adventures (even their disappointment when the US was obliged to refrain from bombing Syria) is explained by this imperative to plunder the rest of the world. Military dominance and repeated shows of military force are necessary to underpin a system of global financial extortion. 

The negative effects of imperial domination are not most frequently felt through war. This is just the most extreme symptom. Instead, a consequence of the dominance of the US and its interests in global finance is that even any changes in the economic or monetary conditions of the US reverberate globally. Abrupt changes in the US repeatedly manifest themselves as regional or even global crises. This is shown in Chart 2 below. 

Chart 2. US Long-Term Interest Rates and Financial Market Crises

Source: Federal Reserve Economic Data

The chart above shows long-term US interest rates and some of the main financial market crises. The yields on US government debt change if there is an alteration in the balance of supply and demand for capital in the US. This was the case when Reagan came to office and hugely expanded the US budget deficit. It has also been the case with (increasingly modest) economic revivals in 1994, in 1997 and the very mild economic upturn in 2012. In all cases the increased demand for capital in the US led to a rise in US long-term interest rates.

The consequence was that capital flowed out of the semi-colonial world and into the US, leaving the former in crisis. This occurred with the Latin America debt crisis of the early 1980s, the global financial crisis in the early 1990s, the Asian financial crisis of 1997 and 1998. The recent ‘emerging market’ slowdown is only milder to date because the rising demand for capital in the US to fund rising consumption has been extremely modest by historical standards. Yet among the countries most affected by this slowdown include Brazil, Russia, South Africa, Turkey[xi], and so on, precisely those countries which are foolishly described as sub-imperialist, or even in Russia’s case, without the diminishing prefix. It is only those countries who are able impose capital controls that can partly insulate themselves from being a store of savings for the US (and face fierce opposition from the US for doing so). This imperial dependence on capital inflows is the reason that the US, and its proxies like the IMF are so adamant that capital movements be ‘liberalised’. 

In each case after these major crises the subsequent outflow of capital from the semi-colonial countries restored the US domestic balance of supply and demand for savings and so US long-term interest rates declined. But the outflow of capital left devastation in its wake in the semi-colonial countries affected. 

Increased parasitism, further decay 

The impact of US dominance is felt not only in the colonial and semi-colonial countries but also in the subordinate imperialist countries themselves. As noted above, in 1994 there was a global financial crisis provoked by an increased demand for capital in the US which affected all countries unevenly. 

While the UK and France attempt to benefit directly from the dominance of the US and the role of global finance, Japan and Germany remain more closely related to the archetypal imperialist power of the early twentieth century. Highly competitive industries and persistent trade surpluses have previously allowed the build-up of a stock of overseas assets from which German and Japanese imperialism draw interest from the rest of the world. Consequently, they have had less incentive to support domestic finance at the expense of domestic industry. As a result Japan and Germany have much less to gain from the increased dominance of US-led global finance in the worldwide system of imperialism. 

After 1945, the US aim of bolstering capitalist allies as a bulwark against the Soviet Union prioritised the rebuilding of war-ravaged Japan and Germany. This was state intervention to preserve the capitalist system. But it was only after the US had established its supreme dominance over the rest of the world, including the subordination of these other imperialist powers through war. 

The weight of the imperialist economies is not static, either as a group or individually. They have undergone a series of dramatic changes. The only constant is US dominance. Chart 3 below shows the relative weight of these five imperialist economies in the world economy, both individually and as a group. The data is shown in the table below. 

Three distinct dates are chosen. 1913 represents a snapshot of the world economy on the eve of 1914-1918 war. 1951 represents the post-1945 settlement. This is also the highest recorded point of imperialist power on a world scale as accounted for by share of world GDP and is also the highest recorded level for the weight of the US in the global economy. 2008 is the final data available from Maddison before his death, and of course coincides with the onset of the global financial crisis. 

Chart 3

Source: Author’s calculation from Maddison data

The high-point of these imperialist powers in terms of share of world GDP was 1951. There has been a sharp decline since that time (which has almost certainly been deepened by the effects of the crisis). Within that bloc, the US has returned to its former starting point a century ago, whereas most of the other imperialist powers have declined in a more marked way. The UK has experienced the most spectacular fall of all, its weight in the world economy declining by two-thirds in a hundred years. Japan is the partial exception to this rule, having been only on the verge of becoming an imperial power at the beginning of the twentieth century and being utterly devastated by war and nuclear bombing by the early 1950s.

This still left just 9.5% of the world’s population in these 5 countries to enjoy the benefits of one-third of world output in 2008. Within those countries a tiny minority of the population takes the lion’s share. All manner of chauvinist and racist explanations are advanced for this unequal distribution of global income, and the accumulated wealth it brings. But in reality it is only possible if most of the world is dominated by a global system of imperialism, the forcible transfer of incomes and wealth from most of the world to a minority of it. This system includes ideological, legal, institutional, commercial and financial strands. All of these are underpinned by the aggressive exercise of military dominance, led by the US. 

A century ago, Britain had already become a ‘rentier nation’, living off its overseas income. The factual verdict on this strategy in terms of delivering growth is devastating. By contrast, Japan’s post-War success was built on very high levels of investment and favoured nation status in its trade relationships with the US. Japanese investment as a proportion of GDP rose to what was then an unprecedented level of 30% of GDP and in consequence GDP growth accelerated to over 8% per annum. 

However this period is already at an end. The Japanese domestic economy has not been accumulating net new capital for some years and the structural trade surpluses have become deficits. Growth has also stagnated for 25 years and it seems probable that like the US, France and the UK, Japan’s net overseas assets will dwindle towards zero (or below). 

A decisive blow was struck by the US against both Japan and West Germany in the late 1960s. Both countries had been growing more strongly than the US over a considerable period based on much higher levels of investment. Using the pressure of its military relationships, in a series of measures the US forced sharp revaluations of both the Japanese Yen and the Deutsche Mark. It suspended the convertibility of the US Dollar and finally collapsed the entire post-WWII Bretton Woods financial system. In this way it was able to disguise a substantial devaluation of the US Dollar as a widespread but piecemeal revaluation of other major currencies, while its grip on Middle East oil ensured this did not lead to an outright balance of payments crisis in the US. 

The effect was not to increase US growth but to slow both the Japanese and German economies for a generation, just as it had used the combination of its military and financial muscle to devastating effect against France and the UK during the Suez crisis in 1956. The US later repeated this feat particularly in relation to Japan, by redirecting Japanese capital towards the US arms race to bankrupt the Soviet Union in the 1980s. The most important outcome was the overthrow of the Soviet Union and its reduction to the status of a semi-colonial country, primarily producing raw materials for the (US-dominated) international markets. A side-effect was to foster the collapse of Japanese growth into stagnation, which has been unaltered since 1990. 
Inter-imperialist rivalry has not been abolished. But the US has used a combination of its financial and military dominance to ensure its own dominance within the imperialist bloc, even as that bloc has been in relative decline. 

Conclusion 

The concentration of capital and the dominance of finance capital have both become more pronounced features of global capitalism in the current phase of imperialism. 

Simultaneously, the decayed and parasitical ‘rentier nation’ that Britain had already become over a century ago is now the norm for the imperialist countries as a whole and for its dominant country, the United States. 
Like an ancient despot, the US and its allies draw in tribute from the rest of the world in the form of a continuous inflow of capital. There is even a substantial net inflow of interest income, even though they possess no net overseas assets, only liabilities. 

The main mechanism for this worldwide extortion is the US dominance over the global financial system, which is itself the dominant sector of capitalism. This is only possible because it is underpinned by the vast military resources of the US, which are far greater than all its major rivals combined, and which it exercises repeatedly and brutally.

Like Britain before it, the US has become a ‘rentier nation’, whose main overseas income is derived from the exaction of interest and other payments rather than net trade. But this has entered a new phase, where the tribute of interest income continues to flow even though there are no assets on which it is based. Without any net overseas assets, this is only possible because of its status as imperial power. Imperialism is a global system of super-exploitation, directed by control over finance capital and supported by military dominance. The sole imperial super-power is the US, supported by its allies. 

Because imperialism has entered a more decrepit phase does not make it more benign. On the contrary. The US relentlessly seeks to extend its interlocking systems of military alliances, trade treaties and financial predominance because it is in relative decline. The vampire always seeks fresh blood. 

Using ‘imperialism’ as a term of abuse, or even as a synonym for a large trading nation, albeit one possessing nuclear weapons, is to rob it of all scientific value. The fact that US imperialism can occasionally be challenged or stymied by some combination of semi-colonial countries and worker’s states acting in concert does not alter the essential meaning. Instead, these challenges are a reflection of the relative economic decline of the imperialist powers in general combined with a growing and related war-weariness on the part of the population. The US insistence on its own supremacy within the imperialist bloc has only exacerbated that collective decline, while preserving its own dominant status. 

Rather than echo the frustrations of the US State Department, socialists and communists welcome the current impotence of the US, for however long it lasts and however limited it is. In 1997 a triumphalist US imperialism set out its bold plan to brook no global or regional opposition and to be able to fight two major wars simultaneously[xii]. In 2013 the US and its allies were unable to begin bombing Syria. 

Imperialism is the enemy of all humanity and its set-backs or defeats are a cause for celebration as they represent an advance for all humankind and the struggle for socialism. 

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[i] This is not new. At the outbreak of war in 1914, most leaders of the Socialist Parties in Europe promptly discovered that their real enemy was the same as the one identified by their own bourgeoisie. 
“The scientific concept of imperialism, moreover, is reduced to a sort of term of abuse applied to the immediate competitors, rivals and opponents of the two imperialists mentioned, each of whom holds exactly the same class position as his rivals and opponents! This is not at all surprising in this day of words forgotten, principles lost, philosophies overthrown, and resolutions and solemn promises discarded.” 
Lenin, preface to Bukharin’s ‘Imperialism and the World Economy’,https://www.marxists.org/archive/lenin/works/1915/dec/00.htm 

[ii] As the US became free to engage in increased military adventures with the collapse of the Soviet Union, there arose a concerted effort to disguise this by arguing that ‘imperialism’ was a diffuse and unspecific phenomenon. Hardt and Negri led the way in ‘Empire’arguing that ‘imperialism has no address.’ Imperialism is a global system of exploitation, but it has a sole superpower protagonist which is headquartered in Washington DC. 

[iii] This essay cannot possibly do justice to the scope of Lenin’s work, which relied on exhaustive and voluminous research in a host of languages. The notebooks for his pamphlet encompass hundreds of works, in Volume 39 of his Collected Workshttps://www.marxists.org/archive/lenin/works/cw/volume39.htm . However, with access to modern and publicly available databases it is possible to analyse some of the most important features identified by him and to update them in light of factually altered conditions. This can be done without the volume of work that Lenin was obliged to do, and should be done by socialists seeking to understand the development of capitalism. 

[iv] The Fortune 500 list of leading global firms contains 130 from the US http://money.cnn.com/magazines/fortune/global500/2013/full_list/ In 2013 their combined revenues was equivalent to just under $16 trillion, approximately the same as US GDP. 

[v] Bank for International Settlements, BIS Quarterly Review, Q3 2013 https://www.bis.org/publ/qtrpdf/r_qs1403.pdf 

[vi] Bank of England, Three centuries of economic datahttp://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100403.pdf There is an accompany dataset which shows the trade deficit from 1891 to 1906, followed by a trade surplus until the outbreak of the war. Dataset can be accessed here 
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/threecenturiesofdata.xls

[vii] IMF, http://elibrary-data.imf.org/public/FrameReport.aspx?v=3&c=20840396 

[viii] World Bank,http://data.worldbank.org/indicator/BN.GSR.FCTY.CD 

[ix] Lenin drew on Hilferding’s ‘Finance Capital’http://www.marxists.org/archive/hilferding/1910/finkap/ which analysed the dominance of finance capital beginning with the role of money which ‘stands in the place of’ all other commodities. 

[x] BIS, Annual Foreign Exchange Survey, Reuters reporthttp://www.reuters.com/article/2013/09/05/bis-survey-volumes-idUSL6N0GZ34R20130905 

[xi] Financial Times, Emerging Market: Fears of Contagionhttp://www.ft.com/cms/s/0/b201ae8e-89a5-11e3-8829-00144feab7de.html 


[xii] Project for the new American Century,http://en.wikipedia.org/wiki/Project_for_the_New_American_Century#End_of_the_organization

Trying to learn from what worksBy Michael Burke

Facts can be a very severe judge. Either economic structures, the models used to explain them and economic policies work, or they don’t. The factual verdict alone can determine who was right, what was successful, what economic system works best.

The chart below is reproduced from The Economist. It shows the change in the IMF’s own estimates and forecasts of the level of US and Chinese GDP. Previously the IMF’s projections were that China would surpass the US as the world’s largest economy in 2019. Its revised estimates are that this will now occur at the end of this year. From 2015 onwards, when anyone refers to the world’s largest economy this will be China, not the US.

By any standards, this is a momentous econmic event. The leading position in the world economy does not change with great frequency. The US surpassed China’s GDP at some time around 1890, having already overtaken Britain in in 1872. (The Financial Times is incorrect to place this earlier data as the key turning-point- it seems to have ignored China altogether).

In this sense the current reversal is a return to the norm. China’s economy, with a population of 1.3 billion people should be larger than the US. At the same, this higher population level means that per capita GDP is still much below countries like Britain or the US, although this gap too is narrowing rapdly.

As a result, it would be foolish to argue Britain should ‘copy’ China. Different geographies, different relationships with the world economy, different histories and different levels of current economic development would make that an impossibility.

But the Chinese economy has delivered exceptionally strong growth, and grown much more rapidly than the Westen economies over a very prolonged period. In 30 years of the process of reform and opening up from 1978 to 2008 it has raised average living standards from the British level of the 15^th century to the same as Britain in 1948. No doubt the advance since 2008 has been equally impressive (probably to something like the early 1960s in Britain).

Larry Elliott in The Guardian points out that Chinese per capita incomes are still way below those of the US. This is true. But the divergence in these trends is also marked. The population of the US has been growing more rapidly than China, while the US economy has been growing much more slowly. This had led to two effects. The first is that in the same 40-year period Chinese per capita GDP has gone from being approximately 5 per cent of the US level to over 20 per cent by 2008.

The second effect is that the growth in population is only a small fraction of the overall contribution to Chinese growth and is a very large contribution to US growth. This is shown in the Table below.

The result is that Chinese GDP has been growing by over 5% more than the US over a prolonged period and that Chinese per capita GDP has been growing by over 5.5% more than the US. This growth gap increased during the slump but was resumed again in 2013, when Chinese GDP grow by 7.4% and the US grew by 2.3%.

Mathematically, the effect of compounding is anything that grows annually by 5% will double in size every 15 years. On relative terms, if the current growth gap were maintained the Chinese economy would be double the size of the US economy by not later than 2030. Living standards will catch up later, only because the starting-point is lower.

It would seem foolish to wait until China has achieved living standards comparable to the richest countries in the world before recognising that something could be learnt from its continuous growth.

This is especially pertinent in Britain. The relative decline of the British economy has taken place over such a prolonged period, and had been so pronounced that there is an entire cottage industry devoted to discussing it. A Google search for ‘book + British economic decline’ yields an enormous number of results.

Yet the reality of Britain’s spectacular economic decline barely registers in public debate about the British economy.Currently a short-lived and debt-driven rise in consumption has been enough for public commentary to become dominated by claims about the strongest recovery in the G7. This is despite the fact that this is the weakest British recovery on record, and (except Italy) all the rest of the G7 have recovered more strongly than Britain.

In reality, economic analysis has mainly become a branch of commentary on the electoral fortunes of the Tory Party. It is no accident that both the electoral support for the Tory Party and the British economy have been in relative decline since the beginning of the 1950s.

By contrast, anyone wishing to produce policies that would improve British economic performance should study what has been happening in China for decades. There are a number of factors but the key driving force behind continued Chinese growth and improving living standards and British stagnation and relative decline is the proportion of GDP directed to investment. This is illustrated starkly in the chart below from the Office of National Statistics. This shows the proportion of GDP devoted to investment is selected major economies.

Britain has had the lowest share of GDP directed towards investment for many decades and it has been on a downward trend since the late 1980s. The Chinese ‘reform and opening up’ process began with exceptionally high levels of investment as a proportion of GDP and this has been on a rising trend. Although other factors are important, this is the main driving force behind the differential in growth and the change in living standards.

There is nothing inevitable about learning from the successes of others. It is quite possible to continue to muddle along with stagnation and decline for a very prolonged period. But ignoring reality cannot change it.
The facts are that China is an astonishing economic success, and Britain has experienced one of the most spectacular relative declines in economic history. Learning from the Chinese experience, and applying its lessons to the specific conditions of other national economies will be an important contribution to economic policy around the world in the decades to come.

If this is a recovery, why are we getting poorer?By Michael Burke

At a certain point this year GDP will finally recover its pre-recession peak, 6 years or more after the recession. This will be the longest British slump in living memory and the most severe downturn since the Great Depression.

The government and supporters of austerity are keen to emphasise the fact that the economy is growing. The latest piece of supportive commentary comes from the IMF, which is projecting 2.9% GDP growth for the British economy in 2014, the fastest growth projected for any G7 economy.

Politically this is entirely understandable. Yet the problem remains that support for the Tory Party continues to flat-line at around the low 30s as a per cent of the opinion polls. Economically this reflects two different forces at work in the economy.

The economy is expanding at a very moderate pace, especially in light of the depth of its previous slump. But the majority of the population are continuing to experience a decline in living standards. Logically, it follows that as total output is growing, a minority must be experiencing a rise in living standards.

This is exactly what is happening currently. This widespread disaffection with or hostility to the government is fuelled by the general decline in living standards. The minority bedrock of support for the Tory party currently is cemented by a rise in living standards for a certain proportion of the population.

The chart below (Figure 1) shows the level of per capita GDP and Real Adjusted Household Disposable Income (RAHDI). RAHDI takes into account all the income of households, interest, rent, and social security as well as wages, after inflation and direct taxes are deducted. It is adjusted for the change (reduction) in public services.

While GDP per person peaked at just under £25,500 in 2007, RAHDI continued to grow and even in 2010 it was still above the 2007 level. That is, wages and benefits grew a little in the first part of the recession and taxes did not increase. The effect of the austerity policy is to push down both wages and social security entitlements so RAHDI fell continuously from 2010 onwards and it fell again in 2013.

Yet the ONS also reports that real household wealth has risen by £1,560 billion between 2007 and 2012, reflecting the rise in financial assets such as stock markets as well as the rise in home prices. This is an increase in financial wealth equivalent to one year’s GDP in Britain in the space of just 5 years. A further rise seems certain to have taken place in 2013.

This increase in financial wealth (shown in Figure 2 below) has occurred at the same time as living standards for the majority have fallen, as measured by RAHDI. The dual effect is a function of government policy in which VAT has risen, public services have been cut and public sector pay and pensions been cut in real terms, while the corporation tax rate has fallen from 28% to 20% and there are innumerable schemes to subsidise consumption, most notoriously ‘Help to Buy’ which has fuelled a further overheating of house prices. Only owners of two or more homes have any direct interest in rising house prices.

Figure 2. Real Household Wealth (2010 prices), 1997 – 2012 (Source: ONS)

While this situation has highly negative and potentially dangerous economic consequences, the current dynamic in the British economy does serve to illustrate an important point about economic theory, with immediate and significant consequences for the incoming Labour government.

There is no such thing as ‘consumption-led economic growth’. Economic growth is a function of the amount and quality of the capital and labour deployed, as well as some contribution from technological change (‘Total Factor Productivity’). As consumption is not an input to growth, it cannot ‘lead’ it.

Most of the population is currently experiencing falling living standards while GDP is edging higher. This is because the main component of growth is consumption. This is shown in Figure 3 below.

In the latest data for the 4^th quarter of 2013 GDP is still just over £22bn below its pre-recession peak. The only major expenditure component of GDP which is still significantly lower is investment (Gross Fixed Capital Formation). Investment is nearly £51bn lower. By contrast, government spending and net exports are both higher than when the recession began and household consumption is just under £7bn below the pre-recession peak. Consumption, including consumption by government has recovered. Household consumption by itself will recover at some point in 2014.

This also explains why the current dynamic in the economy cannot be sustained. The accumulation of debts to finance consumption cannot continue indefinitely. The debt will be regarded as unsustainable either by the borrower (currently households) or by the lender (banks or their credit card companies).

At the same time, the continued shortfall in investment means the capacity of the economy is barely growing at all. Unless the capacity of the economy increases, that is the productive forces of the economy are developed, then there can be no increase in living standards.

In Figure 4 below the contribution of private non-financial firms (PNFCs) to the development of the economy’s productive capacity is shown. The red line shows their level of investment (GFCF). The blue line shows their level of capital consumption, which is used up in the production process, through consumption of machinery or equipment, wear and tear and dilapidation. The net contribution is the difference between these two, which could also be regarded as the Net Fixed Capital Formation (NFCF), after taking account of capital consumption.

So, in nominal terms the PNFCs net addition to productive capacity was just over £29bn in 1997. On this measure, Net Fixed Capital Formation rose to just under £43bn in 2008. It fell by more than half to £21bn in 2009. But it has continued to decline and fell to a new low of just £14.7bn in 2013. This is less than 1% of GDP.

The ideology that private sector will deliver prosperity is evidently false. The policy of government ‘getting out of the way’ of the private sector is manifestly a failure. Cutting corporate taxes and attempting to finance them by government spending cuts (or increased VAT) has simply led to a debt-fuelled upturn and a net decrease in firms’ investment. The increased reliance on consumption and decreasing role of investment is making most of the population poorer.

To prevent absolute declines in GDP in the near future, net investment (NFCF) must rise. That requires an outright increase in investment. Yet the private sector is clearly unwilling to do this. Therefore only the state can play the leading role in providing the necessary investment that can alone lead to prosperity.

Investment not TridentBy Michael Burke

The Campaign for Nuclear Disarmament has produced a new pamphlet, People Not Trident. It argues against the colossal waste of funding needed to a replace the Trident nuclear weapons system. It makes the case that the £100bn saved could be used to invest in a whole host of sectors, housing, education, international development, the switch to renewable energy, and so on.

The full pamphlet can be downloaded here (pdf).

Almost no area of government spending has been spared from the axe of austerity. Housing, health, education and social security payments have all been cut. Pay and pensions, public sector jobs, even support for people with disabilities have all been hit.

Yet the one important exception to this is the government’s commitment to the replacement of the Trident nuclear weapons system. Yet the total cost of replacing Trident amounts to £100 billion.

To put this in context, £100bn on replacing Trident is approximately equivalent to a full year’s public sector deficit, on current performance.

In the most recent Financial Year the underlying deficit[i] was £110bn. Yet the proposal is to spend £100bn on replacing Trident – almost exactly equivalent to a single year’s budget deficit. This is despite the fact that the stated aim of the Coalition has been to reduce that deficit.

A wide variety of organisations, campaign groups and activists (including the current author) have contributed to the pamphlet to show what could be done with all, or even a fraction of the £100bn that would be wasted on replacing a weapons system of mass destruction,.

Crucially, investment in all these areas has a beneficial spin-off on output in other sectors, on prosperity and on jobs. In the jargon these are known as the ‘multiplier effects’. By contrast, Trident and its possible successor has none of these effects. The economic effect of nuclear weapons systems is a fraction of the initial outlay. This is because immensely high-tech equipment such as this can only be used in the event of global nuclear conflagration. It cannot be used to improve economic activity.

Only a government which wanted to intimidate the rest of the world would waste £100bn in replacing an unaffordable nuclear weapons system. A government committed primarily to the well-being of its citizens would not even consider it.

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[i] These data are for underlying deficit. In line with Office for National Accounts practice they exclude two important accounting items; changes to the treatment of the Royal Mail Pension Fund and the impact of the purchase of UK government securities by the Bank of England