Uncategorized

Illusion of the narrowing trade gap
By Tom O’Leary

A recent Times editorial castigated the new International Trade Secretary Liam Fox for his foolish remarks regarding the laziness of British business executives. If The Times is going to criticise every stupid pronouncement by the three new ministers for Brexit, there will be little room for any other comment.

But the editorial also betrayed a lack of knowledge about elementary economics. And, as the assertions made about what prevents Britain being a greater or even an important participant in international trade are widely held, they are worth rebutting. The editorial states that,

“We should…complain about export growth. It is true that too few British companies succeed abroad. This is partly because they struggle to compete with rivals in India and China that spend less on wages. It is partly because companies selling services do not always find willing buyers in those markets. It is furthermore a reflection of lack of ambition.”

So, not laziness, but ‘lack of ambition’ and lower wages in India and China are the sources of British export weakness. This is plain nonsense. 

The chart in Fig.1 below shows the level of total exports to the world from UK and from Europe’s export powerhouse Germany. In the most recent quarter UK exports to the world were valued at US$100bn while German exports were valued at US$326bn. Germany has a population about one quarter again as big as the UK and its economy is approximately 40% larger. Yet German exports are more than 3 times greater than those from the UK. Germany has struggled under the weight of slow global growth. Even so, Germany’s export performances is vastly greater than that of the UK economy, even though Indian and Chinese wages are just as low for German manufacturers as they are for British ones.

A key reason why German exports are more than 3 times greater than UK exports is that the German economy is much more integrated into global supply chains. This also means that Germany’s imports are also far greater than the UK’s. But Germany also provides a much higher level of value added to the imported raw materials and inputs of intermediate and capital goods. By contrast the UK is more usually the final destination of its imports, the final consumer of goods not the final producer of finished goods.

Currency Devaluations

The widely expressed hope is that the devaluation of the pound will lead to a revival of exports. Sterling’s trade-weight currency index (a basket of currencies weighted according to UK trade) has fallen by around 10% since just before the Brexit referendum and has fallen by 18% since mid-November 2015.

Currency devaluations can boost exports. They also raise the price of imports and so lowers the living standards of the population. Viewed domestically, devaluations represent a transfer of incomes from consumers to producers.

Exporters benefit because their key cost is now lower in international terms, wages. Other inputs such as energy and raw material, as well inputs of semi-finished or intermediate goods produced abroad will all eventually rise to adjust to the new exchange rate.

The long run history of the British economy is punctuated by repeated and very sharp devaluations. Yet Britain’s share of world trade has continued to decline and is now a fraction of former competitors such as Germany.

The devaluations are a product of economic weakness driven by underinvestment. UK exporters have not responded to devaluations with increased investment, but have simply temporarily increased profit margins. As competitors continue to invest at a greater rate this cost advantage is eroded and the cycle of declining competitiveness and devaluations sets in once again.

Will this time be different? There is no evidence that it will be. The British Chambers of Commerce is just the latest organisation to forecast reduced business investment in the period ahead. This follows similarly gloomy forecasts from the Bank of England, Markit Purchasing Managers surveys, the Institute of Chartered Accountants in the England and Wales, as well as others.

The structural impediment is that the UK economy is not sufficiently integrated into global supply chains. With a few exceptions, such as aerospace, cars and a small number of others, UK industry is not part of the leading European or global industrial sectors. There is no other route to increasing that participation other than increased trade links with the rest of the world based on significantly increased industrial investment (not increased bluster from the Tory Ministerial Brexiteers).

The latest international trade data showed a narrowing of the trade gap, Fig.3 below. The much-heralded rise in exports in the data, held to vindicate Brexit, is simply an exchange rate illusion. Most trade internationally is conducted in US Dollars. The falling level of the pound against the US Dollar raises the value of exports in Pound terms, which is how the trade data is naturally reported.

But the ONS also reports trade data on a volume basis. In July, following the devaluation the total volume of UK exports fell 0.2% from June and were just 1.1% higher than a year ago. The narrowing of the trade gap arose from a 3.8% fall in import volumes from June, and they were just 1.2% higher than a year ago.

There is no evidence to date that exports will rise on a sustained basis following the devaluation. It is possible that the trade balance will narrow for a period because incomes have fallen on an international purchasing power basis, poorer firms or households cannot afford the same level of imports. The trade gap may narrow, but only because the UK is poorer. Using the weakness of the pound to improve living standards would require an investment-based reindustrialisation strategy.

The ‘Golden Age’ and the Public Sector Deficit

The ‘Golden Age’ and the Public Sector Deficit

‘No harm from Brexit vote’ is fantasy island politicsBy Tom O’Leary
There is a concerted propaganda effort claiming that there has been no damage to the economy arising from the Brexit vote. This is being mounted not just by newspapers who supported Leave, such as the Daily Telegraph but it also includes sections of the left, the minority who also supported leaving the EU such as Larry Elliott in the Guardian.

The reality is that living standards have already fallen as a result of the Brexit vote, before the negotiations attempting to achieve it have even begun. The international purchasing power of the UK economy fell immediately as the pound depreciated sharply again in the early hours of June 24 although it had already fallen in the run-up to the referendum. The Sterling Trade-Weighted Index, the Bank of England’s measure of the value of the currency adjusted for the UK’s trade patterns has fallen by over 20% since July 2015. It stood at 78.0248 on August 18, which is also 12.5% below its level on June 23.
This falling in purchasing power is first most obviously reflected in higher prices. This has all happened before. The pound fell by 44% in the year to December 2008 that year. Consumer price inflation rose sharply subsequently, peaking at 5.2% year-on-year price rises in September 2011. Alone of the all the crisis-hit countries in Europe the UK economy experienced inflation even during a slump. This was a key contributor the fall in real wages that the TUC has noted. UK real wages fell by 10.5% from 2007 to 2015, a fall equalled only by Greece. A smaller, less pronounced rise in prices should now be expected in the period ahead, with a similarly more modest fall in real wages.

yesData shows China’s ‘socialist development model’ outperformed all capitalist development strategies

• undertook massive and conscious programmes deliberately aimed at eradicating poverty – these are to be completed in the 13^th Five Year Plan by 2020 by lifting the remaining 70 million people out of poverty;
• China deliberately promotes development through urbanisation as a way of moving the population into higher productivity economic sectors;
• China deliberately sought to narrow the income gap between rural and urban areas;
• China does not rely exclusively on ‘the market’ but deliberately uses state infrastructure spending to raise the economic level of its less developed inland provinces;
• legally China guaranteed private property but a key economic role was assigned to the state sector,
• politically China was socialist.

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

Data shows China’s ‘socialist development model’ outperformed all capitalist development strategies

• undertook massive and conscious programmes deliberately aimed at eradicating poverty – these are to be completed in the 13^th Five Year Plan by 2020 by lifting the remaining 70 million people out of poverty;
• China deliberately promotes development through urbanisation as a way of moving the population into higher productivity economic sectors;
• China deliberately sought to narrow the income gap between rural and urban areas;
• China does not rely exclusively on ‘the market’ but deliberately uses state infrastructure spending to raise the economic level of its less developed inland provinces;
• legally China guaranteed private property but a key economic role was assigned to the state sector,
• politically China was socialist.

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

China’s economy growing 5 times as fast as US’By John Ross

During the last year some international financial media, with Bloomberg playing a particularly active role, attempted to present a picture of the world economy that the U.S. is growing strongly while the rest of the world, including China, is relatively weak. Publication of new U.S. GDP data confirms the truth is the exact opposite: The U.S. economy has slowed drastically with China growing far more rapidly than the U.S. Indeed, the U.S. in the last year has grown more slowly even than the EU.

Total GDP growth

The wise Chinese dictum says “seek truth from facts.” To establish the facts regarding the global economy, Figure 1 therefore shows the last year’s growth, up to the latest available data, in the three largest centers of the world economy – the U.S., China and the EU. The pattern is unequivocal. In the year to the 2nd quarter of 2016 China’s economy grew by 6.7 percent, the EU by 1.8 percent and the U.S. by 1.2 percent. The U.S. is therefore the most slowly growing major part of the world economy. Making a bilateral comparison, China’s economy grew more than five times as fast as the U.S.’ during the last year.

These three major economic centers together account for 61 percent of the world’s GDP at market exchange rates. No other economies have remotely the same impact on the global economy. Therefore, there is no doubt that in the last year it is the U.S. which has been the biggest drag on the world economy.

Figure 1

Per capita GDP growth

The situation in terms of per capita GDP growth shows an even more dramatic advantage for China. Population growth in China and the U.S. is rather stable – at 0.5 percent a year in China and 0.8 percent in the U.S. China’s and America’s per capita GDP growth in the year to the 2nd quarter of 2016 is therefore easily calculated – 6.2 percent in China and 0.4 percent in the U.S.

An element of uncertainty, however, exists regarding the EU’s population due to the refugee influx. Two estimates for the EU population are therefore used for calculation. One (“EU low population”) assumes there has been an influx of 1 million refugees over and above the EU’s 2015 0.3 percent population growth. The second (“EU high population”) assumes a refugee influx of 2 million.

These assumptions regarding the EU population naturally affect its own per capita GDP growth rate – producing rates of increase of per capita GDP of 1.4 percent or 1.2 percent depending on which population assumption is made. But either assumption confirms the EU’s superior per capita growth rate compared with the U.S. – in either case the EU’s per capita GDP growth rate is much higher than the 0.4 percent in the U.S.

It is also clear that U.S. per capita GDP growth, at only 0.4 percent, was extremely stagnant. During the last year, EU per capita growth was approximately three times as fast as the U.S. But China’s per capita GDP growth entirely outperformed both. China’s per capita GDP growth was more than 14 times as fast as the U.S.!

Figure 2

U.S. economic deceleration

It may be argued against these factual trends that future revisions to the U.S. may raise its estimated growth rate. This is a factual question which requires watching future data releases – it is also possible future data will revise U.S. growth downwards. U.S. GDP growth is sufficiently close to the EU’s, with a 0.6 percent gap, that is not impossible that U.S. GDP growth will be seen to be faster than the EU – although of course U.S. GDP growth will remain far slower than China. However, it may easily be demonstrated that huge revisions of the U.S. data would be required to alter the pattern that it is the U.S. economic slowing which has been the main cause of the downward trend in world economic growth.

To demonstrate this, Figure 3 shows year on year growth in China, the EU and U.S. for successive quarters since the beginning of 2015. The changes over that period are clear. The EU has maintained relatively consistent GDP growth of 1.8 percent. China’s GDP has slowed slightly from 7.0 percent to 6.7 percent. U.S. GDP growth however fell sharply from 3.3 percent to 1.2 percent.

Compared to the beginning of 2015, EU GDP growth has not fallen at all, China’s declined by a mild 0.3 percent but the U.S. decelerated by 2.1 percent. By far the most severe slowdown in the world economy has therefore been in the U.S. Only huge, and therefore highly implausible, revisions in U.S. data would be required to alter this pattern.

Figure 3

Conclusion

What therefore is the conclusion of the examination of the actual factual trends in the world economy?

· China continues to be by far the most rapidly growing of the major international economic centers. China’s total GDP in the last year grew over five times as fast as the U.S., and China’s per capita GDP growth was over 14 times as fast as the U.S.

· The chief cause of the slowing of the world economy in the last year is the slowdown in the U.S.

· The EU and above all China have outgrown the U.S. in terms of total GDP increase.

· U.S. per capita GDP growth, 0.4 percent on the latest data, is extremely slow.

· During the last year China and the EU have undergone either no or only mild economic slowdown while the U.S. has suffered a severe economic deceleration.

The factual situation of the world economy is therefore that not only has China been growing far more rapidly than the U.S. but even the EU has been growing more rapidly than the U.S.

Gross inaccuracy in international financial media regarding China is not unusual – they have, of course, been regularly predicting the “collapse of China” and a “China hard landing” for several decades. But the picture presented that the pattern of growth of the global economy has been strong growth in the U.S. and weak growth in China is therefore entirely false – it was the U.S. which showed to the weakest growth. Titles from Bloomberg this year such as “Fed Leaves China Only Tough Choices,” “Why China’s Economy Will Be So Hard to Fix,” and “Soros Says China’s Hard Landing Will Deepen the Rout in Stocks,” coupled with claims of the strong performance of the U.S. economy, are shown by the data to be simply inaccurate.

But international and Chinese companies, as well as the Chinese authorities, require strictly objective information – not claims which are the opposite of the facts. Perhaps the wise Chinese dictum should be modified to read “seek truth from facts – not from Bloomberg.”

The above article is reprinted from China.org.cn

A reply to Richard Murphy

1. Any deficit is comprised of two components, expenditure and receipts. A commitment to eliminating the deficit says nothing at all about the level of expenditure alone. Deficits can be eliminated by increasing revenues, either through rising economic activity or (something Murphy ought to know about) tax reform to ensure lower tax evasion.
2. The deficit on the Government’s current account is caused by economic weakness, primarily the weakness of private sector investment. Cuts to Government investment simply deepen this crisis. Therefore any increase in Government investment is expressed first as an increase in economic activity. This in turn is felt as an improvement in Government revenues, as tax rises and Government outlays on poverty fall. This is because the returns on an increase in Government investment come not to the investment account but to the current, or day to day spending. 

To illustrate this point, the Joseph Rowntree Foundation recently issued a report showing household poverty creates a cost to public sector current spending, the biggest cost of all falling on the NHS. The estimated cost is £78billion per annum, almost exactly the same as the total level of the public sector deficit. Put another way, eliminating poverty would eliminate the deficit.

But eliminating poverty cannot be achieved by increasing NHS spending (Government Consumption). Poverty could be eliminated by a very substantial increase in investment, led by public investment. This should create high wage, high skill jobs. It reduces the Government’s outlays on poverty and increases the Government’s tax revenues. This is what McDonnell means by eliminating the deficit on current spending. It is not cuts, but investment.

Economic Howlers

All of this passes Murphy by. Instead, he argues that the Government should be the ‘borrower of last resort’, but actually means that the Government should always run a current budget deficit. Otherwise, ‘cash is withdrawn from the economy’, by which he probably means that the private sector as whole will be obliged to reduce its net surplus.

Currently all three components of the private sector are running a surplus, the household sector (which should have net savings but has to deplete these because of the crisis), the company sector (whose large surplus consists of uninvested profits) and the overseas sector (composed of foreign investors who have been lending to the UK at a record rate, but may choose not to at any point).

These are the counterparts of the Government deficit. But no progressive, or Keynesian economist, or any socialist, would regard either an investment strike and profit hoarding by UK companies as a positive, or increasing indebtedness to overseas speculators as a welcome development. Yet these are the counterparts of permanent public sector current deficits, which Richard Murphy advocates.

But he also goes much further in an attempt to theorise his hostility to Corbyn/McDonnell and their economic framework. In a follow-up piece he argues that there is an identity between Government Investment on the one hand and Savings plus Imports on the other, and that Government Investment has no impact on Consumption at all (!):

‘In other words what the identity suggests has happened: what has been considered to be desirable investment has not lead to a growth in net consumption, which is what maters to most people. That’s not to say that there has been no growth, but most people have not benefited.’

This is an economic howler, which would produce a Fail for an Economics A Level student. Investment, Savings, Taxes and GDP, etc. are not fixed amounts. The factor which increases the aggregate total is Investment. Increased Consumption requires first increased Investment. Under Murphynomics the Industrial Revolution was a waste of time. Government should have increased borrowing to buy more gruel instead.

Consumption versus Investment

Keynes, unlike the self-styled ‘keynesians’, was very clear that the decisive factor in economic growth is investment. Against his critics, he argued that this was the central theme of his ‘General Theory’. This is an important point of agreement with Marxists and indeed most rational economic schools. Marxists are in favour of the development of the productive capacity of the economy (the ‘productive forces’). Keynes, in seeking to regulate the level of investment in order to prevent slumps accepted the need for a ‘somewhat greater socialisation of the investment function’. By contrast the ‘keynesians’, like Osborne seek to regulate the consumption function, and let big business and the banks determine the level of investment in the economy. It is their non-investment which is responsible for the current crisis.

Murphy charges McDonnell of seeking no fundamental change in the economy. Like virtually all of his charges this is posted to the wrong address. It should be a self-criticism of the ‘keynesians’. British post-WWII relative and spectacular economic decline was accompanied by and in part a product of ‘keynesian’ demand management and permanent deficits on the Government’s current account. This is the status quo.

A key reason why the current leadership of the Labour Party is so vilified is precisely because its domestic agenda breaks with that status quo. A very large increase in Government Investment would entail in Keynes’ term, some increase in the socialisation of the investment function. In Marxist terms the state would increase its ownership of the means of production. This is desirable for economic and democratic reasons, and is something which has been fought against by every British Government after Attlee.

Richard Murphy has betrayed his own lack of economic understanding with his misjudged attacks. But if others can learn from his mistakes, clarity can come from confusion.

The Corbyn Government and the private sectorBy Tom O’Leary
There has been a furious and ill-informed reaction to comments by Jeremy Corbyn and John McDonnell regarding the pharmaceuticals industry. This follows a renunciation of Corbynomics by the well-known blogger Richard Murphy. Both cases illustrate widespread confusion on the left and on the centre of British politics about the economy and its driving forces. Confusion is never helpful, and may be highly damaging and so it should be ended.

The central problems of British politics are that the Tory Party believes it understands the fundamentals of economic policy and that many on the Labour side share this high opinion the Tories hold of themselves. The fact is that the Tory Party has been in office for the overwhelming majority of the last 150 years in which time Britain has experienced a continuous relative economic decline without precedent in the modern era.

The Tory notion, that as business runs the economy then whatever business wants must be good for the economy, has been maintained throughout this decline and is even used as a justification for it. It is claimed that alternative policies would have been worse despite the mass of evidence provided by other countries who have experienced an enormous advance in their relative economic weight in the world economy over the same period. In economics, the Tories forget nothing and have learned nothing. It is not possible to offer economic solutions to the current crisis by mimicking them, as many in the Parliamentary Labour Party wish to do.

Corbynomics in government

The purpose of a political party is not to strike a pose or make propaganda but to wield power in support of the interests it serves. Jeremy Corbyn and John McDonnell reject the failed Tory nostrums of austerity, under-investment and chronic decline. In the economic sphere their aim is to achieve office in order to boost the living standards of the population, address key threats such as climate change and inequality and to ensure that the overwhelming majority of the population enjoy a far greater share of the wealth they create.

The context for this programme is that the private sector is the dominant component of the economy in Britain and will be for the foreseeable future. But the foolish Tory/Labour right notion that everything the private sector wants should be delivered is blatantly false in the era of the Panama Papers, Mike Ashley and Philip Green.

Instead a sober assessment is required of the strengths and failings of the private sector and government intervention should obviously be designed to strengthen the former and correct the latter. Overall, the current crisis was caused by the failure of the private sector to invest and has been extended by their continued refusal to organise an investment recovery.

There is a list of industries in Britain that have completely failed to deliver the necessary level of investment. There is a homebuilders’ sector which builds no homes, an energy sector which is keener on pollution through fracking than investing in renewables and which has led to power shortages being officially predicted this winter, and a set of railway companies which couldn’t run a whelk stall despite receiving a bigger government subsidy than British Rail. Crucially, Britain now has the highest level of charges for higher education in the world and yet a below-average attainment of a Master’s degree or above in the OECD.

The essential approach to these industries is that the private sector has failed to invest so that the public sector must. In some cases this means (re)nationalisation. But in all cases it means that the public sector regulates the level of investment at a much higher level and that the benefits or returns on this investment must also accrue to the public sector in order to be sustainable. This means the government or local authorities and others building homes. It means the state investing in renewable energy and energy storage and levying the energy sector companies to contribute to that. It means taking over the train operating companies and boosting investment via Network Rail. In education it means scrapping fees and raising the universities’ budgets so that they can increase their level of R&D and investment.

There is a separate category of profitable industries, many of whom employ large and well-paid workforces. These include banking and financial services, the military sector and pharma. There are others. Even here spectacular failure is possible so that nationalisation is unavoidable, such as Lloyds and RBS banks or potentially a large chunk of Rolls Royce. But in all cases the role of a radical government of the left is to harness those industries for productive use. This includes directing them towards useful new activities and ending subsidies and tax breaks for useless or harmful activities, using public purchasing, tax changes, regulatory measures and legislation to promote useful investment and deter damaging activities. To take just one very simple example, George Osborne cut tax credits for business investment in 2011 to in order to fund a cut in the rate of Corporation Tax. This is a net benefit to companies that do not invest at the expense of those who do, and should of course be reversed.

Harnessing these industries for productive use means banking becomes a channel for investment not speculation, the defence industry shifts into civilian use technologies such as industrial hardware, scientific research, civilian marine, aerospace and satellite production and so on. For pharma this means shifting R&D from ultra-expensive questionable palliative and non-essential drugs towards effective generic drugs and drugs to tackle the big global killers, malaria, heart disease, HIV/AIDs and so on which are currently neglected. In this way pharma is subordinated to the NHS and global health needs. For each of these industries there will also be strong benefits through government increasing its own funding for investment.

A third group of industries are mainly in the retail or service sectors, everything from real estate activity, to the leisure industries to personal services such hairdressing and high street shops. This group also increasingly includes functions such as social care and others formerly carried out by the public sector which have been outsourced to the private sector. Many, not all, of these are low-paid jobs. The role of government is to ensure that they are properly regulated, both in terms of staff and in terms of their customers. The National Minimum Wage, the fight for pay and job equality for women, black people and others and all forms of worker protection should be rigorously enforced across all sectors, but these are the sectors which include the most egregious employer offenders. Childcare needs to be placed on a well-funded collective enterprise, not a ramshackle and over-priced home industry as is currently the case.

Across all sectors the principles are to use whatever is the most effective lever to increase the level of the investment in the economy and ensure that the benefits of that are shared more equally among the overwhelming majority of the population. People’s Quantitative Easing, a National Investment Bank and regional offshoots, increased borrowing for investment all means to achieve that end. The state must aim to regulate the level of investment in the economy and that level must be much higher than currently. This is the road out of the crisis.