Socialist Economic Bulletin

The new recession is directly made in Downing Street
By Michael Burke

The final release for UK GDP in the 2^nd quarter of 2012 showed a small upward revision to recorded growth. But this still showed a contraction of 0.4% of GDP for a third consecutive decline. Real GDP is now 1% below the level recorded in the 3^rd quarter of 2011.

Previously SEB has shown that the driving force behind the recession has been the decline in investment (Gross Fixed Capital Formation, GFCF). That remains the case. In aggregate real GDP has declined by £60bn since the peak level of activity in 2008. Investment has contracted by £50bn.

Only the decline in household consumption comes close to making such a negative impact on GDP, falling by £42bn. In contrast the other main categories of GDP have risen. Government current spending has risen by £13bn while net exports have risen by £14bn. The latter is overwhelmingly due to the slump in import demand as exports have risen by less than £3bn over the period. GDP and its main components are shown in Chart 1 below.

The private sector was the source of this decline in investment, as the Labour Budget of 2009/2010 temporarily increased public investment. The incoming Coalition immediately brought that to a halt. What is now striking is that the decline in investment is now led by the contraction in public investment. In fact the whole of the ‘double-dip recession’ of three consecutive quarters of falling GDP is accounted for by the sharp fall in public investment.

This is shown in chart 2 below. This is the same format as the previous chart but it covers the time period from when the Coalition came into office. In addition it separates the two sources of investment, public and private. The data for these are taken from Schedule F of the latest  quarterly national accounts.

Over the period of the Tory led-coalition’s time in office the economy has contracted by £5.6bn. But the main driving force is no longer the investment strike of the private sector. It is the sharp contraction in public investment which has fallen by £11.2bn, almost twice the fall in GDP. Private investment has actually increased by £4bn over the same period.

It is noteworthy that household spending has also fallen by an amount greater than the fall in GDP, down by £8.6bn and reflects the effects of ‘austerity’, the cuts in welfare and other payments, the public sector wage freeze and the decline in real wages because of high inflation. Off-setting these to some extent have been the rise in government current spending and the increase in net exports.

In a very direct sense the latest contraction in the British economy is a function of government policy.

It is a recession made in Downing Street. T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

Improving Yields and Destroying the Environment
By Michael Burke

A short but very interesting item was recently broadcast on Radio 4’s Today programme. A recording of the programme can be replayed here where a summary is also available.

The report highlighted a disaster in the production of corn, wheat and soya beans in the US. This was not because of the widespread recent drought, but an additional man-made disaster which may have longer-lasting impact.

In effect, large US farmers have been encouraged to adopt genetically modified strains of the seed varieties for these different crops. The specific form of GM was resistance to extremely powerful weedkiller, which was then used exhaustively.

But giant ragweeds have developed resistance to that weedkiller just as many campaigners had suggested. Now 2,4-D a new chemical will be deployed that last saw widespread use in the rice fields and jungles of South-East Asia as part of Agent Orange. Formerly, it had been used as in Vietnam part of the campaign to destroy foliage and crops. Now, it will be used in the US to destroy all vegetable life including weeds, except for the seeds once more genetically modified to withstand it.

It seems almost incredible, but the response of vast agrichemical companies like Dow and Monsanto is to develop even more highly resistant seed strains. At the same time, at US insistence, consumers are not allowed to know whether they are purchasing goods made of GM products.

This intensification of both the efforts to increase yields at all costs and the hoodwinking and fraud perpetrated on consumers are likely to intensify in the current crisis. The crisis is characterised by a slump in investment. In effect, firms stop investing when they cannot be sure of making a profit. As a result, measures to increase productivity and schemes that amount to reckless fraud or endangerment (of consumers or the environment) are likely to increase in an effort to increase profits.

Marx put it this way, “If the rate of profit falls, on the one hand we see exertions by capital, in that the individual capitalist drives down the individual value of his own particular commodities below their average social value, by using better methods, etc, and thus makes a surplus profit at the given price; on the other hand we have swindling and general promotion of swindling, through desperate attempts in the way of new methods of production, new capital investment and new adventures, to secure some kind of extra profit, which will be independent of the general average and superior to it”.

Mass unemployment and lower pay are key consequences of the current refusal to invest, but so too are the growth in reckless schemes involving swindling and environmental depredation. T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

Germany’s recovery Is faltering
By Michael Burke

Germany is widely regarded as the motor of the European economy. GDP grew by just 0.3% in the 2^nd quarter of 2012 and is barely 1% higher than a year ago. The German statistical agency Destasis speak of a continuing export-led recovery. But that is not strictly correct. German exports are rising. But because imports are rising faster, net exports have subtracted from growth.
Table 1 below shows the real change in GDP between 2008 when the recession began and the 2^nd quarter of 2012.

Taken in isolation, Germany’s exports are indeed the single biggest contributor to its growth. But imports have grown at a significantly greater pace – they are up 12.1% over the period, compared to 9.5% for exports. As a result, net exports have subtracted from growth. Both, however, have grown faster than GDP itself, which has risen by 1.7% compared to the peak before the crisis. As a result Germany has become an even more open economy and trade accounts for over 48% of GDP.

The single largest net contributor to Germany’s growth has been household consumption, which more than accounts for the entire rise in GDP. Household consumption has risen by 3.8% since 2008. Increased government spending has also been a significant contributor to growth over the period and has risen even more rapidly – rising by 8.1%. Aside from net exports, investment (GFCF, Gross Fixed Capital Formation) has also been a drag on growth. This is the only component of GDP which is still lower than in 2008 and so is acting as the main brake on recovery.

Trends In Growth

A rise in household consumption is in fact characteristic of all the so-called core countries of the Euro Area. Along with Germany, Austria, Belgium, Finland, France and Luxembourg all have a level of household consumption that is now higher than before the recession, although this trend is by far the most pronounced in Germany. The exception is The Netherlands, where household consumption has fallen.

Turning to the source of this strength in household consumption, Table 2 shows the main categories of GDP alongside the changes in both the Gross Operating Surplus of firms and the Compensation of Employees. Since these latter two are only provided in nominal terms and on a calendar year basis, the entire set of data is presented in the same way to the end of 2011.

The source of the rise in household spending is readily identifiable. The rise in spending of €98bn is almost exactly equal to the rise in the Compensation of Employees of €97bn. It seems likely that this willingness to consume is underpinned by the rise in government spending as well as the fall in the unemployment rate to 6.8 per cent – which is lower than at the onset of the recession.

Germany has therefore experienced a mild recovery based not on export growth but primarily on rising household consumption assisted by rising government spending. While this is a much stronger performance than either Britain or the crisis-hit countries of the Euro Area it is not sustainable over the medium-term and there are already signs that growth is slowing to a crawl. Trends in unemployment, which had supported consumption, have gone into reverse with unemployment rising for 5 straight months.

German Chancellor Merkel recently took half the Cabinet and a host of business leaders to China in order to cement the growing trade relationships between the two countries. Oddly, the overwhelming clamour from Western economists and commentators is that China’s economy should become more like that of Germany, driven primarily by household consumption rather than investment.

Instead, the current trends in the German economy show that it needs to become more like China, where investment plays the leading role in spurring growth. The alternative is for the German future to look more like the recent past of the crisis economies in the Euro Area where slowdown has been followed by stagnation followed by economic contraction. T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

Why More ‘Austerity’ Is On the WayBy Michael Burke
The latest monthly public borrowing data, which show a large deficit in government finances, have widely been hailed as a ‘surprise’. However, SEB has previously pointed out that the deficit has been widening over the prior six months, so that the latest shortfall in government finances is simply the continuation of an established trend.
More fundamentally, it does not require very sophisticated economic analysis to assume that a renewed contraction in the economy will lead to both higher government spending and lower government tax receipts. Despite higher prices, the nominal level of taxation receipts has fallen since the beginning of 2012, and expenditures have risen. At the very least, the borrowing data should put paid to all the chatter that the GDP data showing economic contraction is somehow wrong . Of course, the GDP data is subject to revision, like almost all economic releases including the data on public borrowing. But it is in practice inconceivable that the economy could be expanding while a significant shortfall appears in government finances. In that sense, government borrowing data are some of the most reliable of all, as they represent real expenditure made and income directly received by the government, rather than survey evidence and estimates of activity in the private sector.

International Experience
If there is any genuine ‘surprise’ from the widening in the budget deficit it is a product of an entirely incorrect framework that assumes that the state is an obstacle to economic prosperity and that removing it will boost output. In fact, the performance of the British economy and government finances in response to ‘austerity’ supports the opposite contention; which is that the state should be the leading force in an economy because it is more efficient than the private sector in developing economic growth. Reducing the weight of the state in the economy therefore damages economic activity.
But anyone who has followed the trajectory of the crisis-hit European economies in the recent period would not at all be surprised by the outcome in Britain. In every case where severe ‘austerity’ measures have been put in place, economic activity has contracted. This has also usually been accompanied by no significant improvement in projections for government finances, and in some cases a deterioration. The table below shows the EU Commission estimates and forecasts for the budget deficits in selected EU economies. It should be stressed that these are the EU Commission’s forecasts (in the Spring 2012 Euro Area Economic Forecasts), and have in the past been subject to negative revisions.

Policy Response
The response to economic contraction and renewed widening in government budget deficits in the crisis countries of the EU is also instructive. In none of these cases has there been a reversal of policy, so allowing growth and therefore an improvement in government finances. Greece and Portugal largely had austerity foisted on them by the Troika of the EU, IMF and ECB. Spain, like Britain, initially had a mildly stimulative policy carried out by governments of the left, PSOE and the Labour Party respectively. However, while this partly reversed the slump it was wholly insufficient to provide economic recovery and they then switched to ‘austerity’ policies. This appeared to the electorate like an inconsistent and illogical zigzag on economic policy and ushered in parties of the right even more committed to an attack on the living standards of workers and the poor.
Ireland was a different case, as its ruling circles are wholly committed to the interests of foreign capital and their domestic agents (in this case, the speculators of Allied Irish Bank and its manly foreign bondholders). Therefore, without any external political impositions, the Irish government moved straight to an ‘austerity’ policy of its own. It later fell into the clutches of the Troika simply because this policy had utterly failed. The Troika then loaded the Irish state with even more debt in order to extend the policy.
Britain is unlikely to be any different and ‘austerity’ will be deepened. Reports of the latest deficit widening had headlines such as ‘Surprise deficit raises risk of more austerity , and ‘Tax slump threatens to set off new wave of cuts’ .
Even prior to the UK borrowing data, a series of business calls had been raised for further cuts in welfare payments in order to provide investment subsidies for firms. The Institute of Directors, the CBI and the British Chambers of Commerce have all been plugging deregulation and tax ‘reform’ as well spending cuts. This is actually an agenda for lower employment rights, safety and environmental standards, as well as tax cuts for corporations at the expense of labour and the poor. That is, a deepening of ‘austerity’.

Rationale of Policy
Rhetorically, it is possible to speak of the classic definition of the ‘madness’ of current policy in Einstein’s sense; repeating an experiment and expecting a different outcome. But in truth the dynamic of current policy is not irrational at all. Just as in the rest of Europe, policy is not aimed at restoring growth at all, or even reducing the deficit, despite government claims to the contrary.
In any capitalist economy investment falls not because there is insufficient demand – the 1.8 million households on waiting lists for social housing in England could testify to that. Investment falls because capital cannot be invested for a sufficient profit. In Britain investment (Gross Fixed Capital Formation) began to decline in the 1^st quarter of 2008, one quarter before GDP began to contract. It led the economy into recession and now accounts for 80 per cent of the total loss in output.
The purpose of current ‘austerity’ policy is to restore profits. Seen from the point of view of capital, there are two main current economic problems. The first is to reverse the adverse change in the profit share which takes place during recessions. The second is to create conditions allowing an increase in the profit rate.
1.In a recession the profit share falls. Company A produces goods which it sells for £1mn. It has wage costs of £0.5mn and other variable costs (raw material, energy, etc.) of £0.2mn. The surplus generated is £0.3mn. But in a recession it can only sell goods for £0.8mn as some are left unsold and some others offered at a discount. The costs of raw materials are almost entirely outside their hands. Faced with the same wages and raw material costs, the surplus falls to £0.1mn. This is exactly what has happened in the British economy since 2008. In nominal terms the compensation of employees had risen from £773bn to £816bn. Of course, in real terms, after inflation, there has been a marked decline in wages but in official data the distribution of incomes is presented only in nominal terms. But the gross operating surplus (GOS) of firms (akin to the surplus identified above) has risen from £503bn to just £508bn over the same period. Again, in real terms there has been a marked fall in the surplus. Crucially, the nominal rise in compensation has been greater than the rise in the surplus. Capital’s share in national income has declined as a result.
If Company A can lay off workers or cut overtime and maintain output it will do so in order to restore profits. But the complexity of the production process may not allow a significant reduction in wages with unchanged output. There is also the concern that a rival firm might increase its output and win market share from Company A, or even hire the workers it has trained. Instead, Company A will benefit if government can find a way to cut wages, say, by increasing the numbers of people unemployed in an attempt to force down wages, or cutting non-wage benefits to force those in work to work longer for less.
2.The cause of deep recessions is a decline in investment. Individually, firms are unwilling to resume investment until they can be much more certain of making adequate profits. In aggregate, they hoard capital and refuse to invest it. To make a profit Company A must deploy capital. This is in the form of both its costs of employment, raw materials and other input costs, as well as its costs of plant, machinery and so on. The rate of profit is the surplus extracted as a proportion of this total capital employed.
Frequently, boom precedes recession. This is not become economics is some kind of morality tale about excess, but because the boom includes an unusually high level of investment. In Britain, ‘unusually high’ is still weak by international standards but it meant the level of investment rose by 15 per cent in the four years to 2005, and by the same proportion again in the two years to 2007. This latter increase in the capital stock (plant, machinery, etc) took place while wages were growing but was not accompanied by an equivalent rise in the growth of the surplus. In fact, investment rose at a faster rate than the surplus. Since the profit rate is the ratio of the surplus versus total capital employed (both fixed capital and variable capital) and the surplus rose at a slower rate than investment, it follows that the profit rate fell.
But Company A is operating in a recession and sales are not rising and it cannot do anything about the costs of its plant and equipment. It is also at the mercy of market forces in terms of input costs such as raw materials. To restore the profit rate therefore requires a reduction in wages.
Anything which indirectly supports the level of wages such as benefit entitlements, unionisation, national pay bargaining, employment rights and so, must all come under attack to achieve this. Meanwhile, it will demand from government both that corporate tax rates must be cut and that the government provides work, or at least subsidies to it in order to boost sales and increase retained (after tax)profits.
This is the content of all ‘austerity’ policies. It is why they will continue even while growth is at best stagnant and the deficit rises once more. Policy is not aimed deficit reduction or still less economic well-being via growth. The aim of policy is restore and raise profits. It is why these policies will not only continue but deepen in the face of both economic contraction and a rising deficit.
The alternative remains large-scale state investment which will produce economic recovery. Firms wishing to survive will be obliged to participate in the recovery by investing on their own account, even at the lower profit rate.
Both resisting the impositions of further austerity and demanding the state lead the recovery through investment are the subject of a struggle between classes. Effectively it is a struggle about which major class will be forced to pay for resolving the crisis.

Questions and answers: Why investment not cuts is keyThe debate on the alternatives to the current failed economic policy of the government has intensified. The renewed downturn in Europe, a British government Budget whose cut in the 50p tax rate underlined the class interests it represents and the slip back into ‘double-dip’ recession have all heightened interest in alternatives to ‘austerity’.

The investment strike is one the government would do well to bust

Michael Burke has an excellent new post on the Guardian’s Comment is Free examining UK companies failure to invest and therefore why the state must intervene if the economy is to recover.

China’s economy in the last 10 years has seen the fastest growth in per capita GDP in a major economy in human history

By John Ross

In the last 10 years China’s economy has experienced the most rapid growth in per capita GDP in a major economy in human history. In the same period China has seen the most rapid increase in per capita consumption of any major economy. These are the principle findings of my analysis of the last 10 years of China’s economic history. This shows those who claimed China’s economy faced ‘crisis’ had no contact with economic reality. The data is in the tables below and my analysis is here.

The incredible shrinking UK economy – an updateBy John Ross
Earlier this year this blog published an article entitled ‘The Incredible Shrinking UK Economy’. It noted: ‘The magnitude of the blow suffered by the UK economy since the beginning of the financial crisis is very considerably minimized by not presenting it in terms of a common international yardstick. Gauged by decline in GDP, using a common international purchasing measure, dollars, no other economy in the world has shrunk even remotely as much as the UK.’ .
Data at that time was only available up until the end of 2010. Since then the World Bank has updated its data to cover 2011 and the pattern remains the same.
Taking first the situation of the world’s major economies, the G7 and BRICS, this is summarised in Table 1. The comparison made is between the last year before the financial crisis started, 2007, and the last available comprehensive international data – for 2011. As may be seen the $381 billion decline, in current dollar terms, of UK GDP is, without comparison, the worst of any major economy – indeed it is easily the worst in the world. As a percentage of world GDP the UK lost 1.6 percentage points – easily the worst performance of any European economy. The advance of all BRICS economies is also clear from this data.

Taking the situation within Europe this is shown in Table 2. As the UK, Ireland, and Iceland are the three economies which have suffered the biggest losses in GDP in dollars during the financial crisis this table may also be taken to show the ‘sin bin’ of world economic performance. The way in which the UK economy has declined in absolute terms far more than any other European economy is again evident.

Where does this leave the UK in the world rankings of economies? In terms of current dollar exchange rates. as shown in Table 3, the UK has slid from 5th to 7th position under the impact of the international financial crisis – being overtaken by France and Brazil

However, as is well known, current exchange rates substantially understate the size of developing economies compared to calculations in internationally equivalent prices (Parity Purchasing Powers – PPPs). This is particularly strikingly the case for India which at current exchange rates is only ranked 10th but in terms of PPPs in 2011 overtook Japan to rank as the world’s 3rd largest economy . In PPPs the UK has declined from 7th to 9th position – also being overtaken by France and Brazil on this measure.

The data is therefore clear. In terms of its real international position the decline in the position of the UK is by far the worst of any major economy. There is no reason to change the analysis. In terms of international comparisons the UK’s is truly ‘the incredible shrinking economy’

*   *   *
This article originally appeared on the blog Key Trends in Globalisation.

The UK’s budget deficit is rising not fallingBy Michael Burke
The latest public sector borrowing data shows that the UK budget deficit is widening once more. Indeed despite a series of accounting adjustments which obscure the true picture, it is clear that the underlying trend is also towards rising, not falling deficits.

The Office for National Statistics reports that the June public sector borrowing total was £14.4bn, £500 million higher than in the corresponding month in 2011. However monthly data are erratic and subject to significant revision. Taking the data for the first 6 months of this year as a whole is more meaningful and shows that the deficit over that period is £37.3bn.

But this total is flattered by the strange decision relating to the acquisition of the Royal Mail Pension funds ahead of planned privatisation. In effect the government has decided to include the assets of this fund, but not its much greater pension liabilities in its own accounts. This and another smaller transaction lowered government borrowing by £30.3bn. The underlying deficit, excluding these transactions is therefore £67.6bn in the first 6 months of this year.

This compares to a deficit of £60.5bn in the first 6 months of 2011. The deficit is rising, not falling.

Factors Affecting Borrowing

This deterioration in the deficit places British government finances in a growing band of European economies where sharp cuts in government spending are leading to economic contraction, which in turn produces widening deficits.

This should come as no surprise. As the crisis is effectively an investment strike by capital, spending cuts by government will only lead to a further decline in private investment. The reason this logic has taken some time to work through in Britain is due to a number of factors. These are primarily the zig-zag in government policy, which initially saw an very modest increase in government investment under Labour and so produced a reduction in the deficit. This was compounded by the uniquely high level of inflation during the British slump, which eroded the real value of all government spending.

SEB has previously shown that the very moderate increase in government investment from the 2009 Budget under Labour was the catalyst for a modest economic recovery. Because of the increase in government spending (including allowing welfare payments to rise automatically as unemployment and poverty increased) the Treasury forecast that the deficit would rise to £178bn in the following financial year. In the event, the deficit began to decline and was £158bn for the financial year.

In addition, the effects of economic growth are felt on both sides of government accounts. Expenditure is lower than it would have been because more are in work and the benefits’ bill falls. Revenues are higher because incomes, profits and consumption all raise the level of tax revenues.

It is widely known that government policies have led to economic stagnation. Yet it is only now that the deficit has started to rise. The British economy has grown by just 0.5% in the two years since the Coalition came to office. But in nominal terms, before taking account of inflation, the GDP has increased by 6.1%. This surge in inflation during the slump is highly unusual, placing Britain on a par with countries such as Iceland. Britain has an incredible shrinking economy when measured in international currency terms.

Domestically this is reflected in a surge in inflation. While severely denting the purchasing power of all those on fixed or low-growth incomes, the fiscal effect was to increase nominal government revenues by £56bn over the last 2 years. This compares to annualised nominal growth in GDP of £88bn.

The Treasury’s estimate is that every £1 increase in economic activity will lead to a 50p increase in government revenues. In fact the increase over the last two years has been 64p (£56bn of revenues of £88bn increased output). However, government current spending has also risen by £42.3bn over the same period. This is an inevitable consequence of the savings (i.e refusal to invest) by firms.

This points to the essential fallacy of all ‘austerity’ measures, whether from the Coalition’s frontal assault, or the slightly shallower, slower cuts favoured by current Labour policy. Even nominal growth will largely be reflected in increased government revenues. But spending cuts have the effect of weakening economic activity and so drive up government expenditures.

Even in the narrow terms of reducing the deficit, the only effective prescription is growth. The most effective means of promoting growth, as even the cautious 2009 Labour Budget shows, is for the government to increase investment.

What the world economy should learn from China

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0