Socialist Economic Bulletin

Despite Britain’s new Thatcherites, only the state sector has recovered By Michael Burke

The British economy is becoming more dependent on the state. This is revealed in the latest preliminary data for GDP in the 1^st quarter of 2013.

The preliminary data for GDP only provide limited information – it has only a slim table of data in the preliminary release compared to 40 pages of data in the final release. The data is confined to measures of output from the different sectors of the economy. Even so the preliminary release is very revealing.

Taking the starting-point of the recession in the 1^st quarter of 2008, only one sector has increased its output. This is the output of government services. It has contributed 1.4% to GDP growth over that period. The whole economy is still 2.6% below its peak level prior to the recession. Over that time the private sector as a whole has subtracted 4% from GDP. The contributions to GDP growth are shown in Figure 1 below.

The preliminary data itemise ten separate sectors of output. Construction has fallen by nearly 19% in the recession. Manufacturing, which comprises little more than 10% of all output, has fallen by just under 10%. By contrast the sole area of private sector activity which has almost fully recovered is business services and finance. This sector is now just 0.3% below its pre-recession peak. This is shown in Figure 2 below.

The revival in the business and finance sector has only been possible because of the enormous subsidies to it provided by the state. In the most recent public finances data (which is also to the 1^st quarter of 2013) the total cost to the public sector of bailing out the banks has been £1,020bn.

Yet the net return on this subsidy to the private sector has been negative as the banking sector is still smaller than it was before recession. It is arguable that without the state’s support the banking sector would have collapsed entirely. But even on the most favourable comparison from the low-point of the recession the subsidy has been hugely inefficient. A £1,020bn hand-out to the banks has yielded an increase in output over that time of approximately £40bn. It would have been far more efficient if the state had directed its own capital into the production of banking services, via fully nationalised and controlled banks.

This same logic applies to all current government schemes to subsidise the private sector, and any that Labour might be considering. Currently, it is estimated that the government has already provided £43.5bn in various subsidies including the National Infrastructure Plan, the Equity Loan and Help to Buy schemes, the Enterprise Finance Guarantee and the Regional Growth Fund, with nothing to show for it. Far greater sums are in the pipeline, up to £310bn.

The state is generally a far more efficient provider of very large-scale goods and services. But it is not necessary to accept that idea to recognise the fact the currently the private sector is a drain on the finances of the state. State subsidies to the private sector are not working because the private sector’s investment decisions are determined by prospective profits. If profits are not recovering, neither will private investment. As the latest GDP data shows, currently only the state can lead a recovery. T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

.647ZEconomics and the debate on immigration

By Michael Burke

Political parties in Britain have once more begun to talk about immigration, especially in the wake of the Eastleigh by-election. Unfortunately the debate is usually an all-informed one and typically just a cover to introduce racist notions about the impact of immigration. Therefore it is useful to examine some of the more important economic aspects of immigration.

Immigration

There are a number of countries in the world which have a higher per capita GDP than Britain. There are also a number of countries in the world who have a higher proportion of migrants as a proportion of the population. Both those facts are worth stating simply because discussion in Britain often seems to be dominated by the implicit assumption that Britain is both uniquely attractive to migrants and that it alone experiences immigration.

The chart below shows the countries with higher levels of per capita incomes than Britain. It also shows those countries proportion of the population which is migrant, that is not born in the host country. The table below specifies the data shown in the chart.

Chart 1

Table 1

There are 13 countries in the world with a higher per capita income than Britain. Of these, 10 countries have a higher proportion of migrants. Some of these, such as Australia, Switzerland and Luxembourg have very much higher levels of immigration and have a much higher level of incomes.

There are 3 countries which have higher incomes but lower levels of immigration. However, of these 2 countries, Norway and Iceland have higher per capita GDP because they have a very large energy resource that comes pumping out of the ground (oil and geothermal energy). The remaining country is Belgium, whose geographic position means it has an exceptionally high proportion of people who work in Belgium but commute there from other countries.

By contrast, among the 18 OECD countries with a lower per capita income than Britain 12 also have a lower proportion of the population as migrants. The remaining 6 countries are small economies which generally have specific geographic or historical reasons for unusually high levels of immigration, or both. (The exception in this group is France).

Migration is part of growth

According to the IMF the total number of migrants in the world rose from 75 million people in 1965 to 195 million in 2005. Official data shows that most of that is to high income countries, about 80 million and most of the remainder to middle income countries.

The growth in the world’s migrant population is far more rapid than the growth in the total population. Over the same 40-year period to 2005, the world population doubled while the migrant population grew by 3 times.

However, this cross-border migration captures only a fraction of the world’s total migrant population. From a strict economic perspective there is little difference between cross-border migration and internal migration. This is especially the case when internal migration encompasses vast distances and differences of language or dialect.

According to China’s National Bureau of Statistics in 2008 there were 285 million internal migrants in China. This is far larger than the world’s total number of cross-border migrants. For the migrants themselves this frequently encompasses far greater geographical distances than is required, say, in intra-Western European migration. This level of migration is certainly the greatest level of internal migration in human history. It is also associated with the greatest rate of growth for any major economy in world history.

In India the level of internal migration is over 300 million people according to UNESCO. India’s medium-term growth rate is below that of China, but both countries have been growing at a rate considerably faster than the high income countries. The rate of internal migration has been a necessary accompaniment to high growth rates.

Correlation does not prove causality. But within the high-income countries higher levels of income are associated with higher levels of migration. Within the middle income countries, higher growth rates are associated with higher levels of internal migration.

Economic development depends on two key factors, the proportion of national income devoted to investment and increasing participation in the division of labour. Migration is a key part of the division of labour, allowing workers to migrate where production (and wages and jobs) are expanding. It also allows production to increase on the basis of employing the most adaptable workers.

Opposition to immigration

The government has recently produced a video to show potential migrants from Romania and Bulgaria that Britain is not a great country to emigrate to. There is a certain logic to this. The only way to stop immigration over the medium-term is to reduce the growth rate of the economy to zero or below. This is the basis for the government’s self-proclaimed success in reducing net migration in the most recent data; by curbing overseas students growth is directly reduced. Of course prolonged economic stagnation would also lead to a more rapid swelling of the 5 million British people who now live overseas.

Immigration of all types provides a substantial net benefit to the British economy, which a Home Office report clearly demonstrates. Growth attracts immigration but is also increased by it. The proportion of workers leaving a country will increases when there is an economic downturn and the proportion of the workforce arriving from overseas will tend to decrease. The reverse is also true: net immigration increases when the economy prospers.

There are a series of reactionary myths about immigration, which are perpetuated in the labour movement by outfits such as ‘Blue Labour’. These tend to focus on the supposedly local or microeconomic effects of immigration, particularly that they drive down wages. These arguments are a rehash of Labour notions which opposed the growth of women in the workforce and even supported restricting their wages relative to men.

Jonathan Portes has done very good work in countering the assertions that immigration drives down wages, even for the very lowest paid workers in Britain. As the Home Office study shows, the average wages for migrant workers in Britain are also about 5% higher than British workers, because on average they are more highly qualified. The relationship between unemployment and immigration is also equally clear; immigration increases while unemployment falls and vice versa.

Chart 2

In reality the debate on immigration in Britain is not about the economic causes and consequences of immigration at all. It is overwhelmingly a ‘debate’ that allows politicians and others to whip up xenophobia and racism, while posing as being concerned about the interests of workers or the poor. The cause of migration is growth, to which migration is a decisive contributor. The consequence is stronger growth. The contrary argument is being raised now as a reactionary diversion from the current economic crisis, and the policies which are responsible for it.

.377ZWhy China can maintain 8% growth

By John Ross

China’s National People’s Congress (NPC) has set a 7.5% official GDP growth target for this year. Lin Yifu, former Senior Vice-President and Chief Economist of the World Bank, and one of China’s most important economists, predicts that China can maintain 8% annual growth for 20 years. A key question is evidently whether such targets are realistic. Can China maintain this type of growth rate?

The immediate negative factors are evident. The international context for China’s economy this year is bad. The Eurozone economy is shrinking, Japan is stagnant and US growth is anemic. A 16% fall in world commodity prices since their peak has led to slower growth in major developing economies such as Brazil.

China’s policy makers initially underestimated the problems in the advanced economies. Adjusted for inflation, imports by developed economies have not regained pre-financial crisis levels. China therefore did not achieve its 2012 target of a 10% trade increase – the ctual rise was 6.2%. The lower 8% trade growth target set for 2013 is more realistic if still challenging. All major motors for growth will therefore have to come from China’s domestic economy.

In terms of strengthening China’s relative international economic position, and maintaining its ranking as the world’s most rapidly growing market, all this makes no difference. China is the world’s most open major economy, so it cannot cut itself off from international trends. China’s growth rate inevitably goes up or down with global economic fluctuations – the constant is that China strongly outperforms these trends.

To give more precise numbers, a rule of thumb of over 20 years, which successfully passed the test of events, is that China grows on average at whatever the advanced economies expand at plus 6% – the greater outperformance during the financial crisis was untypical. Developed economies this year will probably grow at around 1.5-2.0%, implying China will grow at 7.5-8.0% – in line with official forecasts. This is consistent with the official target of doubling the size of China’s economy between 2010 and 2020.

But for estimating expansion of China’s market, and growth of living standards, the absolute rate at which China’s economy develops is obviously key. It is therefore worth looking beyond short term ups and downs to the fundamental factors determining how fast an economy grows. This makes clear why China will achieve its 7.5-8% growth target. It also eliminates ‘manic-depressive’ analyses of China’s economy – periodic oscillating predictions of ‘hard landing’ and ‘rampant growth’ which appear in some parts of the media.

The current infatuation with examining consumption in China’s GDP is misleading in terms of analysing its economic performance. A country’s consumption growth is overwhelmingly determined by its GDP growth – internationally 87% of consumption increase is determined by the latter. If China’s GDP grows rapidly consumption will grow rapidly. If China’s GDP growth slows its consumption, over anything other than the very short term, will be lower than its potential with high GDP growth.

Every economy’s growth, including China’s, is necessarily determined by two key parameters: how much it invests and how efficiently that investment creates growth. Taking the five year average for 2006-2011, the latest internationally comparable data, China’s fixed investment was 43.1% of GDP, and it invested 4.1% of GDP for its economy to grow by a percentage point. Consequently, as a matter of simple arithmetic, China’s economy grew at an annual average 10.5%.

The lower the percentage of GDP invested for any given economic growth the more efficient that investment is. Furthermore, contrary to some myths, China’s investment is extremely efficient by international standards as the Table shows. For example in 2006-2011 China needed to invest 4.1% of GDP to grow by 1% whereas the US invested 24.3% – China’s investment was six times as efficient in generating GDP growth as the US. Even before the international financial crisis the US invested 7.0% of GDP to grow by 1% compared to China’s 3.4%. These key numbers determine how fast China’s economy grows.

Table 1

 

If China’s economy is to slow, as some critics argue, then it is necessary one or both of these key parameters changes. Either China’s percentage of investment in GDP must fall or the efficiency of its investment in generating GDP growth must decline – there are no other choices.

Taking first investment efficiency, the Table shows that almost all economies were negatively affected by the international financial crisis. China was no exception – the percentage of GDP which had to be invested for its economy to grow by a percentage point rising from 3.4% to 4.1%. But this deterioration was less than for most countries – the US figure rose from 7.0% to 24.3%, Germany’s from 8.2% to 18.4%.

China’s investment efficiency would have to fall greatly not to achieve its 7.5% growth target. If China’s recent investment level was maintained then the percentage of GDP it needs to invest to grow by a percentage point would have to rise to over 5.7% before China failed to hit its growth rate target. Maintaining China’s efficiency of investment is therefore a constant challenge for the government, but China has a considerable safety margin in setting its target growth. The government’s entire focus is on maintaining the efficiency of investment, not reducing it.

The other possibility for slowing China’s economy would be a sharp reduction in the percentage of investment in GDP. There are certainly some in China advocating reducing the level of investment in GDP, but not by nearly enough to prevent China hitting its growth targets. At its present level of investment efficiency China’s GDP growth rate falls by 1% for each 4.1% reduction in the percentage of fixed investment in GDP. But in the last 5 years China’s annual GDP growth averaged 10.5%. To reduce China’s GDP growth below 7.5% requires a fall in the percentage of investment of GDP of 10%. No serious figure in China, as opposed to a few Western analysts, advocates this. A fall in investment share of 2-4% of GDP, the type of figure sometimes advocated, would only slow China’s economic growth by 0.5-1.0%.

Therefore international economic headwinds are negative. But in both the efficiency of its investment and the percentage of investment in GDP China has considerable safety margins for achieving its growth targets – unless the administration makes very large errors the growth targets will therefore be met. Indeed, looking at these margins of manoeuvre, Lin Yifu’s 8% is perhaps more realistic that the government’s 7.5% – administrations always like to announce they have exceeded targets.

*   *   *

This article is slightly edited for an international audience from one which originally appeared in Shanghai Daily.

.975ZThe logic of privatisation of the East Coast mainline

By Michael Burke

The Coalition government has announced its intention to privatise the East Coast mainline rail network. The network was nationalised 3 years ago when the previous private operators discontinued their franchise because they could not make a profit.

The re-privatisation of the East Coast mainline highlights a key fallacy of the current government’s failed economic policy. It also sheds light on the role of the state in resolving the current crisis.

Real aims versus stated aims

The stated aim of government policy is to reduce the public sector deficit. George Osborne has swindled and fiddled the figures in a desperate attempt to hide the real position that the deficit is actually rising, including accounting for the assets of the Royal Mail pension fund but not their liabilities, counting government interest paid to the Bank of England as income and withholding payments to international bodies. All of these devices can only massage the deficit temporarily. They cannot produce either growth or, because of that, a lower deficit.

Investment in rail could form an important part of an investment-led recovery, which would also have the effect of reducing the growth in carbon emissions. But private companies struggle because they cannot continually increase profits while very large scale investments are required. They are certainly not in the business of depleting profits further to allow investment. All the large-scale investment in rail projects over the recent past has been led and co-ordinated by government. Returning the East Coast line to the private sector will not produce increased investment.

Privatisation will also undermine the stated objective of debt- and deficit-reduction. In public hands the line has returned £640mn over 3 years to public finances. With current very low returns on capital and low government borrowing rates this represents a very sizeable return. Government propaganda is that ‘we can either invest in rail, or the NHS’. In reality, investment in rail helps to pay for the NHS.

It is possible to establish the value of the rail line which is now on the chopping block. That can be done by using Net Present Value (NPV) methods. NPV simply values all investments from the cashflows they generate. £640mn over 3 years is about £215mn each year. Currently the government’s long-term borrowing rate is just under 1.9%. So, what sum of capital would be needed to yield £215mn a year to the government when interest rates are at 1.9%? If the interest rate is 1.9% and the actual return is £215mn, the NPV is £11.3bn (that is, 215 divided by 0.019).

Therefore any sale of the East Coast franchise for less than £11.3bn is very poor value, one which will see the deficit and the debt rise faster than if it were kept in public hands. The government will be lucky to get one-tenth of that value from a private sale. The giveaway has nothing to do with growth or deficit-reduction. It has everything to do with restoring the profits of the private sector, which is the purpose of austerity.

State versus private sector

This highlights a more general point. The East Coast network is worth far less to the private sector than the public sector. It must pay a far higher rate of interest than the government, so the NPV of any major asset is lower to the private sector.

In addition, the private sector must provide a profit to shareholders. These are funds that cannot be used for necessary investment. As a result, under privatisation, the government subsidy to the rail industry (which is almost wholly for capital investment) has actually risen in real terms to £3.9bn last year from £2.75bn in the late 1980s when it was in public hands.

The private sector is unable or unwilling to make the necessary investment in the rail infrastructure. Its overriding objective is to provide a return to shareholders. The greater risks associated with the private sector mean that the state is better placed to make those investments. The real alternative, aside from government propaganda, is that the state has to fund this capital investment in either event. Keeping rail in the public sector, and taking the remainder into public ownership is simply a cheaper and more efficient option.

The same logic also applies to a series of other industries including energy, telecoms and post, house building and large-scale construction, education, and banking.

.407ZThe logic of privatisation of the East Coast mainline

By Michael Burke

The Coalition government has announced its intention to privatise the East Coast mainline rail network. The network was nationalised 3 years ago when the previous private operators discontinued their franchise because they could not make a profit.

The re-privatisation of the East Coast mainline highlights a key fallacy of the current government’s failed economic policy. It also sheds light on the role of the state in resolving the current crisis.

Real aims versus stated aims

The stated aim of government policy is to reduce the public sector deficit. George Osborne has swindled and fiddled the figures in a desperate attempt to hide the real position that the deficit is actually rising, including accounting for the assets of the Royal Mail pension fund but not their liabilities, counting government interest paid to the Bank of England as income and withholding payments to international bodies. All of these devices can only massage the deficit temporarily. They cannot produce either growth or, because of that, a lower deficit.

Investment in rail could form an important part of an investment-led recovery, which would also have the effect of reducing the growth in carbon emissions. But private companies struggle because they cannot continually increase profits while very large scale investments are required. They are certainly not in the business of depleting profits further to allow investment. All the large-scale investment in rail projects over the recent past has been led and co-ordinated by government. Returning the East Coast line to the private sector will not produce increased investment.

Privatisation will also undermine the stated objective of debt- and deficit-reduction. In public hands the line has returned £640mn over 3 years to public finances. With current very low returns on capital and low government borrowing rates this represents a very sizeable return. Government propaganda is that ‘we can either invest in rail, or the NHS’. In reality, investment in rail helps to pay for the NHS.

It is possible to establish the value of the rail line which is now on the chopping block. That can be done by using Net Present Value (NPV) methods. NPV simply values all investments from the cashflows they generate. £640mn over 3 years is about £215mn each year. Currently the government’s long-term borrowing rate is just under 1.9%. So, what sum of capital would be needed to yield £215mn a year to the government when interest rates are at 1.9%? If the interest rate is 1.9% and the actual return is £215mn, the NPV is £11.3bn (that is, 215 divided by 0.019).

Therefore any sale of the East Coast franchise for less than £11.3bn is very poor value, one which will see the deficit and the debt rise faster than if it were kept in public hands. The government will be lucky to get one-tenth of that value from a private sale. The giveaway has nothing to do with growth or deficit-reduction. It has everything to do with restoring the profits of the private sector, which is the purpose of austerity.

State versus private sector

This highlights a more general point. The East Coast network is worth far less to the private sector than the public sector. It must pay a far higher rate of interest than the government, so the NPV of any major asset is lower to the private sector.

In addition, the private sector must provide a profit to shareholders. These are funds that cannot be used for necessary investment. As a result, under privatisation, the government subsidy to the rail industry (which is almost wholly for capital investment) has actually risen in real terms to £3.9bn last year from £2.75bn in the late 1980s when it was in public hands.

The private sector is unable or unwilling to make the necessary investment in the rail infrastructure. Its overriding objective is to provide a return to shareholders. The greater risks associated with the private sector mean that the state is better placed to make those investments. The real alternative, aside from government propaganda, is that the state has to fund this capital investment in either event. Keeping rail in the public sector, and taking the remainder into public ownership is simply a cheaper and more efficient option.

The same logic also applies to a series of other industries including energy, telecoms and post, house building and large-scale construction, education, and banking.

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

.834ZyesThe Tories will get 29.8% of the vote at the next General Election – here is whyBy John Ross

A lot of purely short term reasons and ‘lessons’ of the Eastleigh by-election are being drawn. None of these are of particular importance. The key reality is that crushing defeat of the Tories is simply part of the trend of Tory electoral  decline which I have analysed many times since I published Thatcher and Friends in 1983. This also enables it to be predicted that the Tory Party will get 30.3% of the vote at the next general election. This aim of this article is to explain why.

The continuing decline of the Tory vote from 1931 to 2010 is shown in Figure 1. This demonstrates that while there have been short term oscillations from election to election, which help produce individual Tory victories or defeats, the steady downward trend of support for the Conservative Party is evident. In 1983 when I first showed this it was greeted with widespread scepticism. But 30 years later the continuation of this Tory decline is evident.

Typically the Conservative vote, each time the party won a general election, was lower than at the one it won previously, and each time it lost an election its vote fell to a lower level than the previous defeat.

The result of the Tories at the 2010 election, at 36.1% of the vote, is 5.8% below the level they received the last time they were the largest party. In victories the Conservative vote has fallen progressively from its highest ever level, of 60.7% in 1931, to its post-World War II peak of 49.6% in 1955, to 41.9% the last time it won a majority of seats in an election in 1992.

The decline in the Tory vote can be calculated from a rather simple arithmetic formula. The Tory vote declines at 0.2% a year between defeats and by 0.26% a year between victories. There is a swing factor of slightly under 5% between defeat and victory. That is if the Tories won they would get 34.8% of the vote and if they lose they will get 30.3% of the vote.
John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

.089ZA falling pound will lower the living standards of workers and the poorBy Michael Burke

The British pound has begun to fall once more on the international currency markets. It may be further helped on its way by the loss of the AAA credit rating. This will have important domestic economic consequences.
 
The currency is also being talked down by a number of officials, effectively including both the current governor of the Bank of England and his appointed successor. Their hope is that a weaker pound will boost Britain’s woeful export performance, and perhaps lead to a revival of business investment in the export-oriented sectors of the economy.

A policy of failure

One key problem in pursuing this policy is that it has already happened in the recent past and failed. Between 2008 and 2009 the pound fell by approximately 30% against the US Dollar. Against a basket of currencies (represented by the Sterling Trade-Weighted Index) it fell by over 25%.

This was effectively a significant devaluation of the pound. Yet even in nominal Sterling terms, exports barely grew. Britain’s share of world export markets actually fell, from 3.5% in 2008 to 3.2% in 2012, continuing a long-term trend.

The effect of the devaluation was to push up the Sterling value of imports. This, combined with Coalition measures such as the increase in VAT and higher charges for transport and domestic fuel bills, pushed inflation higher.
 
Britain was the only major industrialised economy that experienced ‘stagflation’ during the crisis – that is a simultaneous economic decline or stagnation along with accelerating inflation. Using a common measure such as US Dollars for international comparison, the UK became an incredible shrinking economy, the biggest absolute decline of any major economy. Real wages and incomes also shrank dramatically, as the effect of wage freezes and welfare cuts were magnified by sharply rising prices.
 
This ought to be a lesson for all those who argue that a simple exit from the Euro and large devaluation is the remedy for the crisis-hit countries of the EU. Britain is outside the EU and experienced a large devaluation. The sole consequence was higher inflation and lower real incomes.
 
One of the reasons why membership of the Euro remains so popular even in the crisis-hit countries is that repeated devaluations punctuated the preceding decades of those economies- and failed to raise relative living standards.

Currencies and competitiveness 

Currency exchange rates are simply relative prices so that devaluation can reduce the relative price of the same or similar good. But the effects of global competition mean that an improvement in relative price competitiveness will not last if investment levels fail to match competitors.
 
This relative underinvestment is the key structural failing of the British economy. According to recent data from the Office for National Statistics productivity is 16% below the rest of the G7 and has fallen relatively by 10% during the crisis.
 
This has resulted in a structural deficit on the external accounts. The deficit on the current account, which is equivalent to the British economy’s borrowing from the rest of the world, has widened to 3.7% of GDP in the first three quarters of 2012, compared to zero in the depth of the recession.
 
Borrowing is either conducted for consumption or for investment. But as SEB has repeatedly argued, British investment has slumped. It is now just 14% of GDP. This is the cause of the slump in relative productivity, even compared to the rest of the G7, all of which have lower investment now than before the crisis in 2008.
As investment has already fallen therefore the current account deficit can only be corrected by a relative decline in consumption. This runs entirely contrary to the argument for increased consumption to resolve the crisis. But we have already seen that real wages have fallen during the crisis. This has reduced the consumption of most workers and the poor.

Who will pay for investment? 

Fortunately, there is an alternative method of reducing aggregate consumption in order to boost investment. Alongside workers’ wages and investment Marx argued that consumption was divided into necessary consumption and the consumption of luxuries. In this category may be included all items not essential to sustaining well-being, but also all items which have no production capacity. The most important of these is expenditure on armaments.
 
At £777bn the accumulated stock of profits held in cash at British banks is already a multiple of the funds required to restore all the output lost in the recession. At the same time dividend payouts to shareholders are at a record high approaching £79bn in 2012. Managerial and other bonuses (including in the City) are climbing once more. Economically, the renewal of Trident is a huge waste of resources, up to £100bn, as are increased military interventions, with lethal consequences.
 
From these multiple sources there is more than sufficient capital to increase investment and reduce consumption without in any way hurting the real incomes of workers and the poor. On the contrary, improving their living standards is both essential to and the ultimate purpose of socialist economic policy.
The obstacles to this solution are political and social. The purpose of capitalism is to preserve and expand capital, hence its name. Any policy which infringes on, let alone overturns the absolute prerogatives of capital will be resisted fiercely.
 
Instead what is currently on offer is a continuation of the long relative decline of the British economy. To alter fundamentally that path of decline would require a redirection of wasteful spending and idling capital towards investment. Instead, what is planned is a further erosion of the real incomes and consumption of workers and the poor. From that, there may eventually be some modest increase in investment. The decline of Sterling, and the inflationary effect it will produce is part of that project.

.525ZBribing the private sector to invest isn’t workingBy Michael Burke

The government’s flagship scheme for promoting investment in infrastructure has been branded a failure. A report in The Times[i] quotes speakers for both the Engineering Employers Federation and the Confederation of British Industry as saying that the scheme is ‘disappointing’ and ‘more needs to be done’.

In July 2012 the government announced the scheme, saying that it would use its balance sheet to support infrastructure investment as the means to revive the economy. Bond holders are willing to lend money to the government but less willing to lend to private capitalists. The government’s scheme was supposed to use this advantage to offer guarantees to the private sector so that they would invest in infrastructure projects. These are increasingly and correctly regarded as a key mechanism to boost growth and employment and to address the British economy’s creaking infrastructure.

However, it is reported that only one project has been agreed, the extension to the Northern Line tube in London, which would have gone ahead without the UK Guarantee.

The government’s inability to promote private infrastructure spending occurs as its own investment continues to be cut. According to the Office for Budget Responsibility, government investment will be cut by nearly 30% in total under current government plans. These may alter in the next Budget in March.

Investment driven by profits

The failure of the government’s policy to deliver any new infrastructure spending is because of an insistence on the failed neoliberal model of the economy. One of the many central and incorrect tenets of neoliberalism is that all ‘economic agents’ are essentially the same. Those economic agents are private firms which maximise revenues and private individuals who maximise their own well-being. Form this is it is argued that government stands in the way of this series of rational choices, by taxing and spending incomes that firms and individuals could better choose how to spend themselves.

This is a concocted world which bears little relationship to reality. Neither firms nor individuals operate in a world of perfect knowledge to inform their expenditure, economies of scale often mean that government can purchase the same goods or services in bulk much cheaper (education, health, transport, banking, etc.) than private firms or individuals can. For large infrastructure projects it is often the case that only government can borrow funds sufficiently cheaply for large-scale investment.

But perhaps the biggest fallacy of all in the neoliberal model is the one in the sphere where it claims the greatest authority, which is the factors governing the behaviour of private firms. Firms don’t seek to maximise revenue at all, as the neoliberals claim. They seek to maximise capital, which normally means to maximise profits. And they don’t face a multitude of competitors each seeking to compete by allocating investment more productively than the next. In the most decisive areas of the economy, banking, cars, aviation, large scale housing, energy production, and so on there are just a handful of firms. They are oligopolies. This means that frequently the way to maximise profits is to increase prices, sometimes reducing supply to do so.

The housing crisis

To take just one example, there is a structural shortage of at least 2 million homes in England and Wales alone, comprised of the numbers of households on waiting lists for housing (1.7 million) and others in grossly substandard accommodation. Yet there were just over 100,000 new homes built in the latest 12 month period. This is slightly less than the growth in the number of households, meaning that the housing shortage is increasing.

Yet the Financial Times recently reports that UK housebuilders are enjoying a ‘state-backed boom’[ii]. The boom is in the share price of the stock market-listed housebuilding firms, up 46% in the last 6 months, based on an unprecedented rise in profits.

These profits arise because the term ‘housebuilder’ is a misnomer. Housing starts are at record lows but, Barratt (one of the biggest firms) has been buying land at its fastest rate ever. These firms are in reality land buyers, who have an incentive in hoarding land, which continues to rise in price and in restricting the supply of new housing for the same reason. According to Noble Francis, economics director and the Construction Products Association, ‘The major housebuilders are not going to double the number of units they build because it’s not in their interest’.

Government subsidies for mortgages simply operate as a price-support mechanism for the housebuilders. This is a ‘state-backed boom’ for capitalists, not for house building.

Dividends versus investment

Just as the large housebuilders have no interest in increasing the number of houses they build as they seek to maximise profits, not revenues, so capitalist firms in general have no incentive to produce without the expectation of profits. Not all firms are as fortunate as the housbuilders to be oligopolistic suppliers to a market where there is already a structural shortage. As a result, the profits of most firms have not risen in the same way.

The chart below shows the gross operating surplus of firms (green line, left-hand scale). The gross operating surplus is often described as the profit share of national income and is similar to the Marxist category of surplus value. The chart also shows the level of investment by firms (gross fixed capital formation, blue line right-hand scale) and the level of dividend payments to shareholders (red line, right-hand scale). Together, these two form the overwhelming bulk of the distribution of the surplus. The other main category is interest payments, which have fallen sharply as both interest rates and debt levels have fallen.

In effect, firms can either invest profits or distribute to them in the form of dividends to shareholders. Nominal profits have only just recovered, to £68.2bn in the 3^rd quarter of 2012 from £66.6bn in the 1^st quarter of 2008. But investment has fallen to £29.8bn, from £33bn. At the same time corporate dividends have increased sharply, from £21.5bn to £25bn.

If we compare the respective low-points for the gross operating surplus, investment and dividends the picture is even more stark. On this measure, the surplus has increased by £11.1bn from its recessionary trough, but investment has increased by just £3.6bn. The bulk of the surplus has gone to shareholders, with dividends increasing by £7.4bn.

Because the increase in the profit share has been minimal, the willingness of firms to invest has been minimal. The purpose of capitalism is to maximise capital which requires generating profits. In the chart above the official measure of the profit rate is shown. Although this official measure from the Office of National Statistics has some shortcomings, these do not invalidate the overall trend described in the data. This shows that the profit rate has recovered from its lows, but is very far from a full recovery. This meagre increase in both the profit share and the profit rate explains the unwillingness of capitalist firms to invest.

However, unwillingness to invest is not the same as inability. British firms’ refusal to invest and increased payouts to shareholders have also been accompanied by an increase in their net savings as shown in the chart below. In a vigorous capitalist economy where firms borrow to invest. It is a measure of the decrepit nature of British capitalism that over the 25 years, borrowing has been unusual, and corporate savings have been the norm.

As a result of this prolonged bout of savings, the cash balances of British non-financial firms have reached record proportions. At the end of December 2012 there were £777bn in sterling short-term deposits held in UK banks, not including deposits by other banks or public sector bodies. The bulk of these are deposits by firms who are simply hoarding cash.

It is frequently argued that nothing can be done with this cash pile, as it belongs to the private sector. But we are also told the George Osborne has directed that RBS pay its LIBOR scandal-related fines from bonuses. This is simply because a further round of bank bonuses would be massively unpopular.

It is therefore absolutely clear that the government’s 83% stake in RBS means that it can direct bank policy if it chooses. Instead of failed bribes to the private sector to invest, the government could simply direct RBS to lend the funds to the necessary infrastructure projects required to boost growth and jobs. It could lend to local authorities to build council houses and so on. Given that every bank operating in Britain can only do so with the support of a government guarantee for deposits, liquidity support from the Bank of England and other measures. If the government insisted, they would all have to increase lending.

The state can do this because unlike the private sector, it can invest without the requirement to generate profits for shareholders. The policy of bribing the private sector to invest has already failed.

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[i] ‘Scheme is no guarantee of reviving the economy’, The Times (£), February 4, http://www.thetimes.co.uk/tto/business/economics/article3676984.ece
[ii] ‘Housebuilders enjoy state-backed boom’, Financial Times (£), January 22, http://www.ft.com/cms/s/0/38a7e488-64ab-11e2-934b-00144feab49a.html#axzz2K8MyzDaq

.579ZGDP Data Shows Britain Is the Weakest of All the Large Economies
By Michael Burke

Britain is only the second large economy to report GDP data for the final quarter of 2012. It showed a contraction of 0.3%. China has already reported its GDP, which accelerated in the 4^th quarter – Chinese GDP being 7.9% higher compared to a year ago. In stark contrast there has been no growth in the British economy over the same period, with GDP unchanged from the 4^th quarter of 2011.
Other leading economies will report the final quarter growth of 2012 by the end of this month. In terms of Purchasing Power Parities (PPPs), the UK economy produces slightly over US$2 trillion. The table below shows economy in relation to other economies of a similar size or greater. The data is based on the most recent OECD estimates of constant PPPs at 2005 prices.

Where the comparable data is available for these economies to the 3^rd quarter of 2013, the British economy has the weakest economy growth over the period. Only the performance of the Euro Area economy was worse, contacting 0.6% from a year ago compared to zero growth in Britain.
Since the global crisis in 2008 the Chinese, Indian and Brazilian economies have all recovered the output lost in the recession and have grown further. GDP in China, India and Brazil is now more than 40%, 30% and 10% higher than at the outset of the crisis respectively.
Growth in the other large economies has been slower. The Russian economy has also fully recovered and has grown by a little over 3% since the crisis began. The chart below shows the weaker growth economies since the crisis began at the beginning of 2009. Only the US and German economies have fully recovered at all, a recovery of just 2% above the pre-recession peak. The French economy is still 0.8% below its peak while both the Euro Area and Japanese economies are 2.4% below their peak before the recession began. The performance of the British economy is the worst of all these economies, being 3% below the prior peak. These comparative data do not include the contraction of the British economy in the 4^th quarter GDP.

In terms of broad categories of output, the weakness in the British economy is concentrated in manufacturing and construction as the chart below from the Office for national Statistics shows. In fact, even within the services sectors, only two categories of services are higher now than where they were in 2008. These are business and financial services and government services. The former represents the commitment of the government to supporting the finance sector, while the latter represents its inability to cut the total of current government spending while poverty is increasing. This is a broad-based failure of the economy and of economic policy.

The fall in investment Gross Fixed Capital Formation (GFCF) is the main brake on the recovery output in the OECD countries since the crisis began. In Britain the shortfall (before the 4^th quarter data) accounts for more than the entirety of the slump. Among the weaker large economies identified above, Britain has the weakest level of investment since the crisis, down 20.1% since the crisis. Even the crisis-torn Euro Area as a whole is not as weak, down 17.8% although some countries within the Euro Area are much weaker than Britain.

Whatever the outcome of the data for the final quarter of 2012 for the other large economies, to date the British economy has been the weakest of all the large economies. This is driven by the weakness of investment, which accounts for the whole of the slump and which is also the weakest of all those major economies.

.117ZProductivity Crisis in the British Economy

By Michael Burke

The Office for National Statistics reports that productivity has fallen again the 3^rd quarter of 2012, the fifth consecutive quarterly decline in productivity.

Figure 1

The fall in productivity is a function of rising hours worked and stagnant output. In the last 5 quarters output as risen by just 0.6% while hours worked have risen by 3.4%. Falling productivity is extremely unusual coming out of recession, as firms usually begin increasing output long before they increase hiring or hours. It has sparked a widespread debate on the ‘baffling productivity puzzle’. On this measure, this is the worst performance of all recessions since the 1990s.

Figure 2

A trend fall in productivity would have very serious negative consequences for long-term growth prospects. While the effect of austerity policies is to transfer incomes from labour and the poor to capital and the rich, a decline in output per hours worked would reduce the overall level of national income, or require an increase in hours worked simply to avoid economic contraction.

But the decline in productivity may be less mysterious than is widely suggested. George Osborne promised to preside over a ‘march of the makers’ but as Fig.2 below shows services output has been a gently rising incline. It is manufacturing output that has fallen.

Figure 3

Productivity, in terms of output per hour worked is significantly higher in the manufacturing and production sectors than in the services sector. The decline in manufacturing output would tend to lower the total productivity of the whole economy. In addition, energy extraction has a far higher productivity rate than manufacturing or the economy as whole, 12 times greater. Energy extraction has fallen by 7.9% over the last 5 quarters.

However manufacturing has been in a long-term decline. Even when all components of production are taken together, manufacturing, energy, utilities and construction account for less than 23% of all output in the British economy. The relative fall in manufacturing output cannot account for the fall in productivity for economy as whole.

Hoarding Capital

SEB has consistently argued that the source of the current crisis is the investment ‘strike’ by firms. The refusal of firms to invest accounts for the entirety of the fall in output since the recession. But this has a corollary, which points to how the crisis might be resolved. Firms have been hoarding capital, not investing. This increase in the savings of the corporate sector could provide the resources to fund an increase in investment.

In a normally functioning market economy private firms borrow to invest. But hoarding capital means the corporate sector has reduced its borrowing and increased its net savings. The chart in Fig.4 below shows the net savings of the non-financial corporate sectors, that is firms except banks and financial institutions. The corporate sector has been saving throughout the crisis. In fact, this saving is the counterpart of the refusal to invest is the cause of the crisis.

Figure 4

The ONS reports that one-third of all private sector firms are maintaining higher levels of employment than they needed in order to meet production. Firms who refuse to invest are holding onto to workers in expectation of an upturn, although employment is increasingly part-time and casualised. Real wages have also fallen continuously since 2008. Labour is becoming cheaper and more instantaneously disposable.

Reducing the outlays on employment, by firing workers or placing them on short-time is clearly easier and less risky than reversing an outlay on major capital investment. Firms can also fund higher levels of net employment because of capital-hoarding. But clearly this is not sustainable and firms’ savings may already be falling. Without a sustained upturn in output, the risk must be that unemployment will rise sharply or that real wages and full-time employment will fall further. The fall in productivity highlights the central importance of the investment strike.