We are currently facing the most prolonged economic crisis in recent history, the most vicious attacks by a government determined to decimate living standards and clamp down even further on trade unions, and the biggest trade union resistance to that for decades. Naturally, each of these three is related.
The government has shown itself to be both intransigent and preparing for the long haul with renewed anti-union legislation. The labour movement is responding in kind and will need to be equally resolute and strategic.
There is no accident about the timing. Tories have long cherished the idea that there should be even greater curbs on trade union activity. But now we are in the middle of a huge strike wave and a prolonged economic crisis.
The anti-union laws already in place in this country are some of the most draconian in any advanced industrialised country. Research from ITUC, the international TUC, shows that this country is among the worst offenders in Europe when it comes to violating trade union rights.
The new additional minimum service level agreements to be imposed across large parts of the public sector are intended to ratchet these up. Notably, the legislation is not designed to have any impact on current disputes. The government clearly intends future fights.
The backdrop is that the British economy is experiencing a “stagflation” crisis, the combination of a stagnating economy and surging prices. In the most recent monthly data, the economy registered zero growth from a year ago, while consumer price inflation remains painfully high at over 10 per cent.
Worse, the current economic crisis is an extension of much longer trends, with no end in sight. Inflation will probably subside to some extent at some point but prices will not fall back. At the same time, British government subsidies and handouts to firms while cutting public spending and investment in real terms are a recipe for prolonged stagnation.
In response to the crisis, the government is trying to shift the burden of it onto the shoulders of workers and the poor. It has been intransigent on pay, interfered to block negotiations, in many cases refused to talk and is clamping down on trade union rights.
It has focused on the sectors the government directly or indirectly controls. It hopes that this will set a “going rate” across the economy well below inflation, for both the private and public sectors.
With this, the government hopes to both lower real wages across the board and keep them there by limiting the effectiveness of trade unions.
While the government is seeking longer-term solutions to the economic mess, so too the labour movement and its allies should examine alternative longer-term strategies, to keep the burden where it belongs, with big corporations, banks and landlords.
To some extent, this is a repetition of history. The inspiration for the current Tory policy stretches back to Margaret Thatcher. Then, as now, there was a string of legislation curbing the rights of workers to form unions or the rights of unions to organise their members for industrial action.
Thatcherism was also a response both to an economic crisis and a wave of trade union militancy which had resisted efforts to impose “pay restraint” which were designed to lower wages in real terms (after inflation).
Thatcherite ideologues claiming success for those policies ignore two key facts. The first is that Thatcherism benefitted from an extraordinary windfall of North Sea oil revenues that amounted to approximately 15 per cent of GDP during her time in office.
Secondly, taken as a whole, the three decades of Thatcherism and its legacy produced significantly lower growth than the three decades that preceded it. In the post-World War II period before Thatcherism, the British economy’s growth rate was about 3 per cent on average. Post-Thatcher it was less than two-thirds of that and has since slipped to below 1 per cent under austerity.
Yet the government is now doubling down on a policy which has failed.
The policy amounts to transferring incomes and wealth from poor to rich and from workers to big business. But the recent experience of the British economy is that this falling labour share of national income has also been accompanied by a private-sector investment strike.
The private sector does not feel compelled to invest if it is able simply to squeeze workers harder.
This is common across the G7 economies. But Britain is the worst example. The British economy lags behind even comparable countries which themselves have experienced a declining rate of investment.
According to the Organisation for Economic Co-operation and Development (OECD) from 1997 and 2017, the proportion of GDP directed towards fixed investment in Britain was the lowest in the OECD as a whole, at 16.7 per cent of GDP. The next lowest are Italy and Greece, both at 19.6 per cent of GDP.
This is a private-sector failure to invest in the means of production. It leads directly to an inability to increase production in any significant way. This in turn has produced economic stagnation.
It would be very difficult for any government to raise living standards and improve public services in these circumstances. But austerity deepens the crisis for the mass of the population while public services are in crisis. Take-home pay and welfare benefits have both been cut in real terms.
This chronic private-sector failure has now become acute. Therefore, the state must take the lead role in reviving the economy through investment while sharing incomes more equitably through redistribution.
The state has no compulsion to distribute returns to shareholders. It can raise its own level of investment and deliver the same effects as falsely promised on behalf of the private sector.
It can also borrow for investment as the private sector does, or should.
But public investment must also be restored. It has amounted to only 1 per cent of GDP for most of the last decade, compared to up to 5 per cent of GDP in the pre-Thatcherism period of much stronger growth.
A bold public investment programme would be a truly green and just transition in energy, transport and housing, with taxes on the banks and big firms to pay for the restoration of public services, a massive increase in publicly owned housing, and renationalised public services.
A key part of the revival of public services must be inflation-plus pay rises to recruit and retain workers. This should also apply to those sectors the government effectively controls, but where the private sector rakes off subsidised profits, such as rail, post and telecommunications.
In addition, existing and planned anti-union legislation should be scrapped, to allow organised workers to bargain collectively for decent settlements.
The government should also outlaw zero-hours contracts and other casualisation measures, and offer those on the minimum wage and benefits something like the pensioners’ triple-lock.
The fight-back against the government has begun and it is determined to block it. Everyone with an interest in opposing austerity and cuts to living standards should also oppose government anti-union legislation.
The Campaign for Trade Union Freedom and Socialist Economic Bulletin have jointly organised a meeting to develop the links between the anti-austerity struggle and the fight for union rights. Join us online on Monday March 27 at 7pm to find out more.
The collapse in rapid succession of Silicon Valley Bank and Signature Bank, the second and third largest bank collapses in U.S. history, fully confirms the extremely damaging character of the U.S. stimulus policies which were launched to attempt to deal with the economic consequences of the Covid pandemic. Indeed, the path from the errors of these stimulus packages to the collapse of the two U.S. banks is a particularly direct one. This therefore reinforces the importance of all circles in China understanding the errors of these policies – this is necessary as, unfortunately, some sections of the media in China have supported the type of erroneous stimulus packages launched in the U.S. and suggested that China should copy them.
A long analysis of the errors of these U.S. stimulus packages was already given in my article “Key lessons from the failure of the U.S. and success of China’s economic stimulus programs” so all the details included there will not be repeated here. This article will just deal with the links between the specific collapse of the U.S. banks and these errors in U.S. economic policy. It will also explain an apparent paradox. Why did these two banks collapse due to their involvement with what are generally regarded as the safest of all financial assets, U.S. Treasury bonds, and one of the riskiest of all financial instruments – crypto currencies?
U.S. propaganda compared to U.S. economic reality
In its recent political propaganda the U.S. has been claiming that its economy was doing well and the stimulus packages it launched during Covid were a big success. President Biden had done press conferences to make such claims. But anyone following money, and not words, knew this was not true. In addition to underlying negative structural trends in the U.S. economy financial markets were also sending out extremely clear signals of economic problems.
The most important of these was what might appear a very technical issue but is in fact deeply significant – so much so that it is well worth non-economists understanding it for reasons that can be explained in a short way. Readers will rapidly find out why this apparently technical issue in fact has extremely strong practical consequences. This issue is the inversion of the U.S. yield curve – that is, the creation of a situation where the interest rates on US long term bonds are lower than short term ones. As shown in Figure 1 this is an extremely rare event, it has only occurred four times in the last forty years, and is one of the clearest and most reliable indicators of serious problems in the U.S. economy.
Figure 1 shows over the long run the relation between U.S. long term, 10 year, and short term, two year, bond interest rates – that is, how much the two interest rates differ. As can be seen almost always U.S. long term interest rates are higher than short term ones. This is logical because the risk of lending money over a long period is greater than over a short period – so a greater reward, a higher interest rate, has to be paid to get someone to lend money for a longer period. But, as can be seen, on four occasions this normal relation has changed and short-term interest rates became higher than long term ones. On each of the three previous occasions this event, the inversion of the yield curve, was followed by very serious problems in the U.S. economy.
When the yield curve inverted in 1989 this was followed by recession in 1990.
When the yield curve inverted in 2000 this was accompanied by the severe dot com share price collapse and a sharp slowdown in the U.S. economy.
The inversion of the yield curve in 2006 was followed by the collapse of the U.S. sub-prime mortgage market, the 2008 financial crisis, and a severe U.S. economic recession.
What is notable is therefore not only the rareness of this indicator of yield curve inversion but also its reliability – that is, there are no occasions on which the yield curve inverted and this was not followed by a major crisis. It is because it is such a reliable indicator, and because it has always been followed by such severe economic consequences, that it is worth even non-economists paying great attention to this issue.
Therefore, when in July 2022 the U.S. yield curve inverted, this was a very clear signal that serious problems were developing in the U.S. economy. Furthermore, this inversion continued to worsen until it reached a peak of -1.09% on 8 March 2023. This was clearly indicating a serious problem and therefore that all the claims in words that everything in the U.S. economy was doing well were false.
Figure 1
From yield curve inversion to the U.S. banking crisis
The mechanisms that drove this inversion of the yield curve led directly to crises in both the Treasury bond market and in crypto currencies – and through them to the bank collapses.
As was analysed in detail in “Key lessons from the failure of the U.S. and success of China’s economic stimulus programs” in order to attempt to deal with the economic consequences of the Covid pandemic the U.S. launched large purely consumer focussed stimulus programmes. As, by definition, consumption is not an input into production this meant that an enormous boost was being given to the demand side of the U.S. economy, but no direct increase was being given to the economy’s supply side. The result of a huge increase in demand and no increase in supply was inevitable – rapid inflation.
To summarise the trends, which are analysed in detail in the earlier article.
In order to create the consumer stimulus the U.S. government increased its borrowing by an extraordinary 26% of GDP in a single year. Almost all this money was used to stimulate consumption, that is demand, and very little to increase investment, that is supply as well as demand.
Simultaneously the U.S. broad money supply was increased by 26% in a year.
The result was that between the 4th quarter of 2019, that is immediately before the pandemic, to the 4th quarter of 2022, that is the latest available data, U.S. consumption rose by a large $3,769 billion, but U.S. net investment, that is taking into account depreciation, fell by $93 billion. This produced the sharp increase in demand (consumption) with no increase in supply (investment).
As a result, U.S. inflation began to rise rapidly – increasing from 0.1% in May 2020 to 7.5% in January 2022. This timeline showed clearly that inflation was being created by U.S. economic policy and not by the Ukraine war – as that war did not break out until February 2022. U.S. Inflation then reached a peak of 9.1% in June 2022.
Raising interest rates
To attempt to control this inflationary wave the U.S. Federal Reserve then began to rapidly raise interest rates. These interest rate rises were the mechanism that led to the simultaneous crisis in the Treasury Bond markets and that for crypto-currencies – these in turn creating the bank collapses.
As Figure 2 shows, to attempt to control the inflationary wave created by U.S. economic policy, the Federal Reserve began to rapidly raise its interest rate. This increased from 0.25% in February 2022 to 4.75% in February 2023 – a rise of 4.5% in only one year.
Figure 2
With the massive issuing of Treasury Bonds to finance the huge U.S. government borrowing mentioned above, the price of U.S. Treasury bonds began to fall due to a huge increase in their supply. But the interest rate on a bond moves in exactly the opposite direction to its price – that is, as the price of U.S. Treasury bonds fell the interest rate paid on them rose. First, the interest rate on 10 year US Treasury yields began to rise – it had reached its lowest recent point at 0.5% in March 2020. Then the interest rate on two-year Treasury bonds began to rise rapidly, and this was then strongly propelled by the Federal Reserve raising its own interest rate – two-year Treasury Bond yields had reached their lowest recent point at 0.11% in February 2021. In July 2022, as already noted, two year interest rates rose above 10 year interest rates, inverting the yield curve. By 8 March 2023 the interest rate on a 10 year U.S. Treasury bond had risen from 0.5% to 3.98%, and the interest rate on a two year bond from 0.11% t0 5.09% – creating the 1.09% inversion of the yield curve.
Figure 3
The road to the bank collapses
These rises in interest rates then led directly to the bank collapses via two routes.
First, the sharp rise in interest rates on Treasury Bonds, and related financial instruments such as Municipal Bonds, was caused by their fall in price. Such bonds were held by banks as their “safest” assets. But this meant that the safest assets of these banks were falling sharply in value. As a result, if a bank had a large holding of such “safe” bonds its assets could became less than its liabilities – causing the bank to collapse. This was the chief reason for the collapse of SVB. SVB’s market value fell from $6 billion dollars to zero in a week.
Signature Bank was hit by another route – not through exposure to a “safe” asset but to one of the riskiest, that is crypto-currencies. Signature Bank, since 2018, was one of the few banks that accepted deposits of crypto assets. But crypto assets are subject to huge price fluctuations because they are not backed by physical assets – unlike, for example, gold. Rising interest rates already put the price of crypto assets under downward pressure and then they suffered a further deep crisis with the collapse of the FTX crypto exchange, which is at present the subject of a police investigation.
The rising interest rates, which were necessary because of the soaring inflation unleashed by the U.S. stimulus policies, therefore created a crisis in both “safe” and “risky” assets – bringing about the bank collapses.
Consequences for the U.S.
What, therefore, are the consequences and lessons of this latest U.S. financial crisis?
First, of course, it demolishes the propaganda claim by Biden and others that the U.S. economy and financial system was in excellent shape. Those who analysed that the U.S. stimulus packages were destabilising have definitely been proved correct.
Second, claims that since the 2008 financial crisis the stability of the U.S. financial system has been established have been proved to be false. Once again, a financial crisis has been ignited in the core of the U.S. financial system.
Third, while an economy cannot function without Treasury bonds it can perfectly well function without destabilising crypto-currencies and these should be eliminated.
Fourth, it is too early to say just how serious the damage will be to the U.S. financial system. But the collapse of a bank like SVB with over $200 billion in assets, the second largest bank collapse in U.S. history after the 2008 fall of Washington Mutual Bank with $307 billion in assets, is obviously a major financial event. Some of the direct effects can be controlled by U.S. Federal intervention at a cost – deposits at the banks will be guaranteed. The direct knock-on consequences are still not clear – at the time of writing share prices in a series of other U.S. banks were falling sharply.
But even if the direct consequences are dealt with there will also be indirect effects which are much harder to control. In particular the U.S. Federal Reserve will need to consider if its monetary tightening will create instability in the financial system. This is the reason that Goldman Sachs, for example, has speculated that the Federal Reserve will not raise interest rates as expected at its next meeting. Although Goldman Sachs may well be wrong on this specific issue, nevertheless undoubtedly the Federal Reserve will have to act with greater caution – which means that a lower priority will have to be given to raising interest rates, and other measures, to control inflation. And inflation, of course, is one of the most destabilising of all economic processes.
Lessons for China
Finally, there are clear lessons for China. The warnings about the dangers of the type of U.S. stimulus policies made by the present author and others have been entirely confirmed by events. But these damaging policies in the U.S. were rationalised by fundamental errors in economic theory – errors which are unfortunately repeated in sections of China’s media.
The most fundamental of these concerns the role of consumption in the economy – the erroneous idea that consumption is an input into production and can therefore be a contribution to GDP growth. This is false. Consumption, by definition, is not an input into production. Therefore, consumption is only part of the economy’s demand side, it is not part of the economy’s supply side. Investment, in contrast, is not only part of the economy’s demand side it is part of the economy’s supply side.
Statements such as “consumption contributed 75% to GDP growth”, or “consumption contributed 75% to GDP growth and investment 25%” are simply confused and false. The contribution of consumption to production, that is to the economy’s supply side, and therefore to GDP growth, is always precisely zero. The statement that “75% of GDP was consumed and 25% was invested” is correct but the statement “consumption contributed 75% to GDP growth and investment 25%” is false – none of the production was created by consumption. For clarity of thinking statements such as ““consumption contributed 75% to GDP growth” should simply be stopped being made as they create confusion. These issues are all dealt with in more detail in my previous article.
In the U.S. this false concept that consumption was a contribution to GDP growth was used to rationalise and justify a stimulus programme that was entirely based on increasing consumption and did nothing for investment. That is, there was a basic confusion regarding the difference between the demand side of the economy, of which consumption is a part, and the supply, that is the production, side of the economy. The policies resulting from this confusion in turn unleashed an inflationary wave which destabilised the economy and led to the bank collapses.
I know some readers may think that the present author has spent time dealing with what might seem abstract questions of economy theory in articles. But as the bank collapses demonstrate these theoretical issues have extremely powerful and practical consequences. Marxism explains this real situation of the economy extremely clearly. As Marx noted it is production, not consumption or exchange, which is dominant: ‘The result at which we arrive is, not that production, distribution, exchange and consumption are identical, but that they are all elements of a totality, differences within a unity. Production is the dominant moment, both with regard to itself in the contradictory determination of production and with regard to the other moments. The process always starts afresh with production… exchange and consumption cannot be the dominant moments… A definite [mode of] production thus determines a definite [mode of] consumption, distribution, exchange.’[1]
The confusions of “Western”, in fact marginalist, economics in contrast allows the real situation to be obscured leading to such damaging results as the U.S. stimulus packages. To avoid such damaging consequences it is therefore crucial that such confusions do not circulate in China. Keeping the theoretical cupboard in good order is not an abstract but an extremely crucial practical issue – as the damage of the U.S. bank collapses graphically demonstrates.
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[1] Economic Manuscripts of 1857-58 (Vol. Collected Works 28). London: Lawrence and Wishart p36.
Hard up? Who is to blame? The economic consequences of the anti-union laws Online meeting 7pm Monday 27 March
Speakers: ● John Hendy KC, Campaign for Trade Union Freedom ● Diane Abbott MP ● Michael Burke, Socialist Economic Bulletin ● Alex Gordon, President of RMT Union
Chair: Sarah Woolley, General Secretary, Bakers’ Food & Allied Workers’ Union and Co-chair, Campaign for Trade Union Freedom
A joint event by the Campaign for Trade Union Freedom and Socialist Economic Bulletin. Details of this online event can be found on Eventbrite here.
About the Campaign for Trade Union Freedom The Campaign For Trade Union Freedom was established in 2013 following a merger of the Liaison Committee For The Defence Of Trade Unions and the United Campaign To Repeal The Anti Trade Union Laws. The CTUF is a campaigning organisation fighting to defend and enhance trade unionism, oppose all anti-union laws as well as promoting and defending collective bargaining across UK, Europe and the World.
The government is attempting to push through new anti-trade union legislation that could severely limit the right to strike. It is doing this amid the biggest strike wave in this country for a generation.
The backdrop is that the British economy is in a depression. The current economic crisis is the culmination of a prolonged period of low growth and stagnation.
In response to this, the government is attempting two major strategies at once. The first is the attack on pay, focused on the sectors it directly or indirectly controls. The second attack is on the right of workers and their unions to respond to these and future offensives by curbing their right to strike, or to limit the effectiveness of those strikes.
With this double-whammy the government hopes to both lower real wages across the board and to keep them there by limiting the effectiveness of trade unions. It is an attempt to make workers and the poor pay for their crisis. There is also a concerted effort to redirect government revenues, including money raised in taxation away from public services and the poor towards big business and the rich.
Naturally, those in the direct firing line and beyond reject these impositions. More importantly, millions of workers have now taken some form of action against them. On February 1st alone, there were over half a million workers on strike across different sectors. The breadth of the strikes and active support being given means that those involved in these battles goes beyond those on stike and includes the other members of strikers’ households, solidarity activists, and public supporters (such as parents/carers, students, patients and their families, commuters, and so on) who continue to support the strikers.
As the strike wave develops it is natural to seek alternative solutions to the crisis. Instead of workers and the poor shouldering the burden, the policies required should aim for those who caused the crisis to be forced to pay. And, while the government is seeking longer-term solutions to the economic mess, so the working clsas and its allies should examine alternative longer-term strategies, to keep the burden where it belongs, with big corporations, the banks and landlords.
Why now?
This Tory government is not the first to impose legislation curbing the rights of workers to form unions, or the rights of unions to organise their members for industrial action. Between 1980 and 1993 the Tory government passed six anti-major union laws, which all remain in place.
Then, as now this Thatcherite policy was a response both to an economic crisis and a wave of trade union militancy which had resisted efforts to impose ‘pay restraints’ which were designed to lower wages in real terms (after inflation).
When the Tory-led Coalition imposed austerity from 2010 it was a direct and conscious emulation of the Thatcher period.
Thatcherite ideologues argue that Thatcherism was successful in reviving the British economy with an agenda of anti-union laws, crushing the miners’ union, large scale privatisations and deregulation, including the City of London. But they completely ignore two key facts:
Thatcherism benefitted from an extraordinary windfall of North Sea oil revenues that amounted to approximately 15% of GDP during her time in office.
Taken as a whole, the three decades of Thatcherism and its legacy actually produced significantly lower growth than the three decades that preceded it.
This is shown in the three periods below, identifying the post-World War II period, Thatcherism and its legacy and the period since the Global Financial Crisis in 2007 and 2008.
Chart 1. UK Real GDP Growth before Thatcher, under Thatcherism, and since the Global Financial Crisis, %
Source: ONS, author’s calculations
In the 31 years from 1949 to 1979 inclusive, the British economy grew by an annual average 3%. In the 31 years to 2009 real GDP grew by 1.9% annually. In the period since 2009 it has grown by just 0.9% annually on the same basis (as shown in the chart above). Therefore, it is no surprise that repeating Thatcherite policies from 2010 onwards has been a costly and hugely damaging failure.
Having imposed these failed policies from 2010 onwards, the current government is doubling down on the same policies now. The additional factor is a renewed Thatcher-style attack on unions, the right to assemble and the right to strike. The new Minimum Service Levels being imposed are explicitly designed to render strike action in key parts of the public sector almost completely ineffective.
The austerity offensive and the anti-union laws are part of the same package.
Economic explanation of the crisis
As Socialist Economic Bulletin (SEB) has shown previously, there are many facets to this grim economic performance, including the direct effects of the main Thatcherite policies listed above. But in terms of the components of GDP the driving force behind this long-term slowdown is the decline in Investment (referred to as Gross Fixed Capital Formation (GFCF) in the national accounts.).
The British economy lags even comparable countries in the G7 who themselves have experienced a declining rate of investment. This is illustrated in the chart below.
Chart 2. UK Has Persistently Low Investment (GFCF)
In the same analysis from the Organisation for National Statistics (ONS) it is shown that over the entire period from 1997 and 2017, the proportion of GDP directed towards fixed investment is the lowest in the OECD as whole, at 16.7% of GDP. The next lowest are Italy and Greece, both registering 19.6% of GDP. The highest was South Korea almost double at 30.8% of GDP.
This is overwhelmingly a failure of the private sector, which is responsible for the large majority of Investment in the British economy.
This failure to invest in the means of production leads directly to an inability to increase production in any significant way. This in turn has produced economic stagnation. Under any government it would be very difficult to raise living standards and improve public services in these circumstances.
But the policy of successive government has been to deepen the crisis for the mass of the population through an austerity policy which transfers incomes and wealth from workers and the poor to big business and the rich. Public services have not stagnated – they are in crisis. Take home pay for millions of workers has not been stationary, there is a concerted effort to drive pay levels down in real terms. The same is true of social welfare benefits.
In contrast, the number of billionaires in this country has risen from 17 in 1990 to 177 in 2022, and their aggregate wealth has risen tenfold to over £600 billion. This is almost £10,000 for every person in the country, including children. Within a stagnating economy, an increasing share of the wealth produced is being extracted by big business and the rich.
What is the alternative?
More than four decades of Thatcher-style policies have demonstrated that greater reliance on the private sector cannot even deliver economic growth, let alone greater prosperity for the majority of the people. Therefore, the State must take the lead role in reviving the economy through Investment and in sharing incomes more equitably through redistribution.
The wild excesses of the brief Truss-led government highlighted the idiocy of a policy based on ‘setting the private sector free’. But this was only an extreme example of the failed consensus, which has largely operated untouched under successive governments.
The claim was that, through tax cuts and subsidies, the private sector would unleash a wave of Investment that would spur the economy, lift growth and create plentiful high-paid jobs. This was shown to be painfully untrue.
However it is true that the State, unencumbered by requirement to distribute returns to shareholders, can raise its own level of investment and deliver the same effects as falsely promised on behalf of the private sector.
But the opposite has happened.
Chart 3. UK Public Sector Investment, % GDP
Chart 3 from the OBR (Office of Budget Responsibility) shows the level of actual Net Public Investment (Net Fixed Capital Formation, after depreciation and dilapidation are taken into account), represented by the blue columns. The much higher growth period pre-Thatcherism was also associated with a much higher level of public Investment. It has meandered around 1% of GDP for most of this decade, compared to up to 5% of GDP in periods of much stronger growth.
The focus for a bold Public Investment programme would be a true, green and just transition in energy, transport and housing, taxes on the banks and big firms to pay for the restoration of public services, and a massive increase in publicly-owned housing, and renationalised public services.
A key part of the revival of public services must be inflation-plus pay rises to recruit and retain workers. This should also apply to those sectors the government effectively controls, but where the private sector rakes off subsidised profits, such as rail, post and telecommunications.
For the private sector, the government should stop trying to hold down public sector wages in order to set a ‘going rate’ well below inflation across the economy for all wrokers. In addtion, existing and planned anti-union legislation schould be scrapped, to allow organised workers to bargain collectively for decent settlments. The government should also outlaw zero hours contracts and other casualisation measures, and offer those on the minimum wage and benefits something like the pensioners’ triple-lock.
To enable workers to make their case for fair pay levels, the shackles placed on trade unions need to be removed, which requires the repeal of the previous Tory anti-union laws.
The fight-back against this government has begun and the Tories are determined to block it. Everyone with an interest in opposing austerity and cuts to living standards should also oppose the government’s anti-union legislation.
The clear response from the labour movement and all progressive forces should be the demand for inflation-plus wage increases and for cuts to the military budget – #wagesnotweapons.
The military budget comes first
It is already the case that the British military budget was exempt from the swingeing cuts made in the last Budget in March 2022, by the then Chancellor Sunak. The chart below shows the projected outturn for the defence budget made at that time.
As the chart specifies, this is an increase in real terms (after inflation) from £41 billion to £48 billion. This is a rise of 17% in just 2 years.
The table below shows how the government presented its spending plans at that time. Crucially it shows ‘Total Resource Departmental Expenditure Limits, including ringfenced Covid19 funding’ as £475.8 billion in 2020-21 falling to £465.1bn in 2021-22, and lower every year following.
This is a significant cut in total spending, especially as the population is growing. But these are nominal totals and take. no account of inflation. Given that consumer price inflation was an average of 9.1% of the course of 2022, these departmental spending total represent a real cut of over 12%.
Of course, projections are not the same as outturns. It may well be that many departments were forced to go over their spending limits because of very high inflation over the current financial year. The March Budget this year will provide that detail.
Yet it is clear that the government policy has already been to increase defence spending in real terms, while cutting spending on the NHS, education and other public services on the same basis.
At the same time, a key plank of Wallace’s demand for more money is the fact that inflation was much higher than anticipated. But this is exactly the argument that government ministers use to deny wage increases, that they are unaffordable and will only add to inflation. The hypocrisy is stark.
Britain already has by far the second-largest military spending of the NATO countries, only behind the US. In terms of constant prices and exchange rates, UK military expenditure amounted to $69.4bn in 2021.
This is dwarfed by NATO’s principal military power, the US which spent $725.7 billion on the same basis (all data taken from the NATO secretary-general’s Annual Report 2021 unless otherwise stated).
But the true scale of the outsized nature of the UK defence budget is that the next highest total spending is Germany’s, which is both richer and has a larger population than Britain. The German total was $52.5 billion. Startlingly, the British total expenditure was the same as Germany, Belgium, Denmark and the Czech Republic combined in 2021.
The same pattern is evident using the measure of defence spending as a proportion of GDP. US military was a gargantuan 3.57% of GDP in 2021. But this is far in excess of any other NATO member both in relative and absolute terms.
British military spending was 2.25% of GDP in 2021. Of the other 28 NATO member countries, only two countries spent a greater proportion of GDP on the military budget, Poland and Greece. If the European countries as a whole are grouped together along with Canada (as NATO does for the purposes of its own expenditure analysis) the average expenditure amounts to a much more modest 1.69% of GDP. This implies that the UK budget could be cut by a quarter and still be in line with the Europe/ Canada average level of military spending.
Chart 3. Military spending in UK versus Europe/Canada, 2021, % of GDP
Source: NATO
Cut spending to the EUR/CAN average
The calls for an extra £11 billion for the military should be completely rejected. It is a bad joke to claim public sector workers’ pay rises are unaffordable or inflationary while proposing this enormous extra sum for the military budget.
Scaling back Britain’s military budget is entirely feasible. Funding could be cut by a quarter. This would then bring it into line with the EUR/CAN NATO average.
In the current period the trend in policy making has been in the opposite direction. Ministers claim public sector is unaffordable and inflationary while protecting and promoting the military budget. The population is being asked to make sacrifices for war, in terms of higher energy bills and in reductions to non-military spending. Recently, the Danish government has tried to cut a holiday day ‘to pay for the war effort’. This is an extreme example of a general trend.
The left and progressive forces can turn the tables on this issue. Ordinary people’s interests lie with peace. At the same time, the government is misdirecting public spending including on the military, while public services and public sector workers are starved of funds.
The appropriate response is to cut the military budget, not the public services budgets. Our demands should be no extra military spending, and cut the existing budget to the EUR/CAN level, saving £7 to £8 billion. Pay public sector workers, not arms’ manufacturers. Fund wages not weapons.
When is an essential worker not an essential worker? According to this government and the media that supports it, when they ask for their real take home pay not to be cut. If they do, they are selfish and greedy layabouts led by Marxist extremists.
Of course, this propaganda is simply rubbish. Much more importantly it seems to have little traction with the public, where polls and vox pops tend to show strong and rising support for those taking action. This is almost unprecedented in terms of popular support. The likelihood is that this support arises because so many people are experiencing the effects of the attacks on living standards that they feel they are in the same boat.
It also does not seem to matter much that there is genuine public inconvenience -strikes are not very effective if there is not some disruption. Yet, even though the media have tried their usual campaigns against workers, unions and their leaders, the public is not buying what they are selling.
Unfortunately, current public opinion alone will not determine the outcome of strikes. And this is a government that not only seems intent on defeating the strikes, they also want a once-in-a-generation defeat of the power of organised labour altogether.
Yet the attack itself, from a viciously right-wing government also tells us something about where we stand – and the power of striking workers that worries the Tories and their supporters so much. There is an important lesson for workers, especially those operating in the public sector (like NHS workers, teachers, civil servants, firefighters, lecturers and others) or in sectors where the government is still effectively in charge of the industry and of negotiations (such as post and rail).
There is an old myth that only industrial unions have industrial power. But at the height of the pandemic we learnt something else. This is that workers in areas like health and education have become essential, even indispensable. This is because structurally the economy itself has become more complex and more interdependent, or socialised.
This is why it became obvious that teachers and NHS workers and others were essential at the height of the pandemic. If they are not working, for reasons of health, or health and safety or because they are on strike, then many others cannot work.
One and half million people use NHS services every day. There are also well over six million children aged 5 to 14 years old who are at school every day. By comparison, the undoubted power of the rail unions rests primarily on the fact that there are an average of 2.7 million train journeys per day.
As the Financial Times has recently fretted, if workers in those sectors are not at work, large parts of the rest of the economy start to shut down very rapidly.
The City, big business, and the government have all come to the conclusion that non-industrial workers really are essential. That is why they are prepared to force them into work with new legislation, even while they are not prepared to offer decent wages.
On our side, we should recognise the same truth, that huge numbers of public sector workers and others have great economic power. And we can use it for a just cause, stopping cuts to pay and conditions, against job losses, and to save public services.
This is an expanded version of a piece which first appeared here on the website of the People’s Assembly Against Austerity
This government talks about growth, as Jeremy Hunt recently did, but will only deliver further stagnation and renewed attacks on the living standards of the majority. Any plan for sustainable growth and prosperity must include a radical break from current policies. Yet there is no sign that this Labour leadership is prepared to deliver that.
The 2023 forecasts for the British economy are grim. The latest IMF forecasts have received significant attention, with ministers attempting to rubbish the Fund’s forecasting track record. It is quite true that the IMF’s forecasts are patchy at best. But it actually has an inherent bias towards the US economic model and regularly overstates US GDP growth relative to outcomes. As Britain is the nearest European follower of that US, a smaller upward bias is also evident in its British forecasts too.
The IMF forecasts that the British economy will barely grow at all in 2023 and 2024, and that its performance will be much worse even than Russia’s. Over the medium-term, out to 2027 the IMF expects average growth in the British economy to be less than 1.4% annually.
But ministers should be aware that this gloomy outlook for the British economy is shared by private sector forecasters. Goldman Sachs is one of the latest to weigh in, arguing that a contraction of 1.2% in real GDP this year will be the worst in G10 group of countries, and that it will be followed by a rebound of just 0.9% in 2024. This is only marginally better than their forecasts for Russia, which is at war and suffering under Western sanctions.
In essence, Hunt’s prescription is to try everything to spur growth except what is known to work. Boosterism, unsubstantiated claims and special pleading for business are fantasy economics and will not work. In fact, even Hunt does not seem to believe in them, arguing that he has a ‘framework for growth, not a growth plan’. He has neither.
Only Investment in the means of production allows a sustainable increase in production of goods and services. These are what are required in order to achieve any sustained rise in either growth or prosperity.
The decline in the British economy over several decades has been driven by a decline in the rate of Investment in Gross Fixed Capital Formation (GFCF). To take an obvious contrast, in the 5 years to 1990 GFCF averaged 23.4% of GDP each year and real GDP growth averaged 3.5%. The equivalent data for the latest 5 years, including IMF projections for 2023 is GFCF at 17.25% of GDP and real GDP growth of 0.75% annually.
Investment is decisive. But successive governments over decades have refused to engage in the large-scale public sector Investment that would spur growth and induce the private sector to investment at a greater rate, or a least prevent the decline in Investment that has taken place.
Within that total, the main factor is the weakness of business Investment, which has never properly recovered from the Global Financial Crash in 2007 and 2008. Business Investment was £52.4 billion in 3rd quarter 2022, compared to £50.9 billion in 4th quarter 2007. The economy is on course for a lost generation of Investment, because of a business investment strike by firms based in this country.
However, the absence of a Hunt growth plan (or even the correct framework) does not mean that there is no economic policy. That policy is played out daily in the street and on the news programmes. The government’s plan is drive down wages, increase the rate of exploitation and thereby hope to increase the rate of profit. This is true across the whole economy.
This begins with the mantra that they need to oppose a ‘wage-price spiral’. Nonsense that wage rises cause inflation was completely refuted by Marx 150 years ago, in Value, Price and Profit. Marx argued that there was nothing fixed about either the value of production, or wages, or the relationship between the two. In effect, the level of wages and the level of prices (or the level of real wages, which is the same thing) is set by the class struggle between two major classes and in all its forms.
The blatant hypocrisy of this campaign, which is not gaining traction in the public, is highlighted by a recent report that shareholders’ dividends are rising by 16.5% a year to £84.8bn. Of course, this is a far faster than wages which are falling in real terms. It is also a refutation that wages are driving prices higher (where you would then expect to see falling dividends). It shows the fruits of the efforts of the drive to lower real wages, increased exploitation and boosted profits.
In the drive to lower real pay the government can directly determine the rate of public sector pay. It is clearly also trying to determine the settlements in large parts of the economy which were formerly in the public sector, such as post and the railways. The aim is twofold. First is to drive down pay across the economy as a whole, using the public sector to ‘set the going rate’ for below-inflation wage settlements. Secondly, it is redirect as much of the total social product from labour to capital as possible, in effect driving down real pay and using the savings to fund cuts to corporate taxes.
To this is added draconian legislation in the right to strike, to picket, to assembly and to vote. This is an all-round offensive on the working class and its allies, to curb their economic and political power. It is a fight the government is determined to win, as the ruling class has no other plan to arrest its own decline.
Yet, just as there no crisis that cannot be resolved by loading the burden of it onto the backs of workers and the poor, so too there is no crisis of living standards for workers and the poor that cannot be alleviated (at least temporarily) by making capital pay for the crisis.
So, this is the question posed for the next government, which increasingly looks like it may be a Labour-led one. It was essentially the same question that was posed for the Corbyn-led Labour party in 2017 and 2019.
The question is not, How do we introduce socialism? Socialism requires first the seizure of state power by the working class. This is not on the agenda in Britain in any foreseeable future. Instead, the pertinent question is, What policies are required to reverse the attacks on the living standards of the majority, and to sustain that increase in prosperity?
Some combination of redistribution and Investment-led growth is required to achieve that. That must be the starting-point of any serious discussion on the left on economic policy over the next period. Otherwise the danger lies in reworking the garbage coming from Hunt and others, who have no intention of improving the living standards of the majority.
Part of the false propaganda about the cost of living crisis that we are being subjected to by the government is the line that there are “global headwinds” beyond their control that require the working class to get worse off; possibly indefinitely.
The “headwind” most often identified as causing the increase in the cost of energy is the war in Ukraine.
It is – however – never suggested that a better course for the UK government would be to seek to resolve and deescalate the war – so that people in Ukraine and Donbass can live in peace, and a mutual security arrangement made with Russia; to allow decreases in military spending on both sides which could be spent on solving the problems humanity has rather than adding to them.
This will be even more the case next Winter if there is no end to the war in the meantime, or sanctions are maintained as a form of self-harming pressure in the aftermath. The OECD projects that inflation will slowly subside through 2023 to 2024, but also notes that next Winter is likely to see a further spike in oil and gas prices if the war continues and also if China’s continuing economic growth raises demand for energy. This is very likely, and puts the OECD prediction in question.
In the meantime these “global headwinds”, that the British government blames for high energy prices, seems to affect some countries far more than others, in particular the UK. As we can see from this table, there is a range of annual energy price inflation in Europe that rises from 8% for Spain to over 70% for Italy, with the UK as second worst. These figures can be further investigated and compared with other countries globally here.
See below for this in graphic terms that are easier to see at a glance. The UK energy consumer price inflation rate, in fact, is more than double the OECD average. Spain is in a particular position because it gets 90% of its gas from Algeria and is not connected up to the rest of the EU, but Germany in December 2021 got 32% of its gas from Russia compared to the UK’s 4%, so, why are prices rising so much faster here?
The UK got just 4% of its gas supply from Russia before the war, whereas Italy got 40%, which was average for the EU. At present the UK imports 50% of its gas, mostly by pipeline from Europe, but increasingly in the form of LNG, which arrives by ship from the USA, Qatar. This will increase quite quickly as North Sea production runs down; which could hit zero by 2030. It is already down to a third of what it was in 2000.
As the price of gas is set globally, regardless of where it is produced, enhanced domestic supply would have practically no impact on prices; which disposes of another myth used to try to drum up support for more North Sea gas fields or fracking. Local supply is not cheaper.
The price of gas also fixes the price of electricity, even when generated by far cheaper renewables. This is because the sources with the lowest marginal costs will be on stream all the time. This will be renewables because, once the turbines are up or the panels in place, there is no charge for the wind or sun, whereas fossil fuel plants have to pay for burning their fuel. But, although capacity is rising sharply, with six times as much as in 2010, we do not yet have enough renewable capacity to cover most of the demand most of the time. So, more expensive sources have to be brought online to fill the gaps. As the price in every half hour period is set by the marginal cost of the last generating unit to be turned off to meet demand – which is invariably a gas power plant with high marginal costs – that keeps the cost of electricity that high regardless of how it is generated. A different method of pricing to take account of the lower costs of renewables, could reduce prices and would be facilitated by public ownership of power generation.
The dizzyingly high level of energy price inflation in the UK is down to government policy choices.
As the OECD points out: “The untargeted Energy Price Guarantee announced in September 2022 by the government will increase pressure on already high inflation in the short term, requiring monetary policy to tighten more and raising debt service costs. Better targeting of measures to cushion the impact of high energy prices would lower the budgetary cost, better-preserve incentives to save energy, and reduce the pressure on demand at a time of high inflation.”
The energy price guarantee amounts to a subsidy paid to energy suppliers to avoid taxing the windfall profits of the energy producers. With these companies netting £170 billion in profits, a serious windfall tax at 100% on these, with no loopholes encouraging suicidal fossil fuel exploration, could more than meet the cost of the existing cap – £39 billion up to April 2023. If done preemptively it would cut that cost out of the inflation rate. A choice not to do this indicates that the government wants inflation to bite into the incomes of the working class as a means of levering resources up towards profits.
A better targeted measure that would meet social need and cut inflation is the TUC’s proposals for a fairer energy system which would:
Take the Big 5 energy retailers and other failing retailers into public ownership, at a similar cost (under £2.85bn) to what Government already spent on keeping failed energy supplier Bulb in business;
Task publicly-owned energy providers with offering a social tariff capped at 5% of income for low-income households;
Recognise that energy is a common good: restructure tariffs to provide all households with an initial free energy allowance, and increase the cost per unit for high-consumption households.
This would:
Protect all low-income households with fairer bills and a social tariff
Deliver lower bills and a faster climate transition through the rapid rollout of fully-funded home energy efficiency retrofits
Ensure that energy is a public good and that energy retail is both democratically accountable and transparent
The collapse of the Truss and Kwarteng economic project was one of the most swift and spectacular in modern history, which has left its mark in terms of inflation, interest rates on government debt and perhaps most of all on the private pensions sector, which was caught out by speculative investments that went badly wrong.
Given the far-reaching consequences of the failed experiment, the Truss/Kwarteng period has been strangely under-analysed. Perhaps this is because leading figures on the economic right were implicated in the debacle, such as Patrick Minford and various acolytes in the City.
But one central aspect of the policy, known by its supporters as ‘deficit-financing’ is also widely advocated on the left, and is a mainstay of ‘keyenesian’ economic thinking. In fact, it was this central part of the policy which was the immediate cause of the spectacular blow-up. As a result, it is worth examining in some detail.
The long tail of ‘deficit-financing’
‘Deficit-financing’ is actually government borrowing to fund Consumption. Almost no serious economist of any school believes there is any rational basis for concern about borrowing for Investment.
As long as the average returns on Investment exceed the average rate of interest on government debt, Investment returns will be positive and the economy will benefit. In addition, government has a very significant advantage over the private sector as a proportion of all Investment outlays will be returned in the form of taxes (income tax, National Insurance, VAT and other revenues).
In contrast, government borrowing to fund Consumption was the norm across the advanced industrialised countries in the period after World War II. This was billed as ‘demand management’, where governments believed they could manage the cyclical turns in the economy by raising/lowering their level of borrowing and so adjust the level of total Consumption in the economy. It did not prevent steady economic slowdown and occasional crises over that period.
At the beginning of the 1980s the Reagan/Thatcher offensive included efforts to cut government Consumption. Although the rhetoric against the previous consensus was severe, along with the effects on some components of government Consumption, the attempts to curb either total Government Consumption or public sector deficits met with only patchy success. On the political right, the Reagan/Thatcher ideology has remained largely dominant.
However, much of the Western political left, seeing the effects on public services or unemployment from the attempts to curb government spending, have tended to hanker after a return to the post-War consensus. The left has favoured government Consumption, or ‘deficit-financing’ as a result. Furthermore, some on the left have even tended to judge government policy favourably if the deficit is rising, and unfavourably if they are falling.
Apart from not producing prosperity, the left supporting government Consumption and rising deficits is very strange for another reason. The level of government borrowing is actually a key prop for the financial sector, a large part of whose income is interest payments on government debt. Persistent government borrowing for Consumption has allowed the finance sector to become bloated in many leading economies, not least in Britain.
Borrowing and prosperity
The increase in the productive capacity of an economy is the prerequisite for sustainable growth in prosperity. Without increasing the amount of labour in the economy, the productive capacity must be increased by Investment. Aside from labour inputs, Investment is the single main determinant of growth and prosperity.
In contrast, Consumption is not an input to growth and its growth will not cause greater prosperity. The post-World War II consensus and much of the Western left still labours under the illusion that the opposite is the case. This can be demonstrated in a real world experiment.
At almost the same time as the Reagan/Thatcher offensive in the leading Western economies there was also adopted the ‘reform and opening up’ process in China. As a result, we now have a global economic experiment lasting more than 4 decades on whether growth in prosperity is Consumption-led or Investment-led.
Charts 1 & 2. Average real wage index for the G20 Advanced & Emerging economies, 2008 to 2022,
Source: ILO
Here, real wages can be taken as a proxy for general prosperity, including the capacity for growth in household Consumption (comparable data for total government Consumption is not available across countries).
What is clear is that the growth of real wages in the G20 advanced economies has been extremely weak ever since the global financial crisis. No country in that group has reached 25% real wage growth. The US has achieved just 11% real wage growth over that period and is currently falling. In Japan, Britain and Italy real wages have actually fallen outright over that period.
There is a very different pattern in the emerging G20 economies. Indonesia, Russia, Turkey and India all have real wage growth above the best performer among the advanced economies, South Korea. And all of them are vastly outpaced by China, where real wages have risen by 1.6 times over that period.
At the same time, it is widely known that China has a significantly higher proportion of GDP devoted to Investment than the leading Western economies. It is frequently attacked in the Western financial press for its ‘excessive investment’. In fact, this is the official US position over many years, with the US Council on Foreign Relations arguing that not only China’s Investment but also its savings are too high!
However, it has already been noted that China’s wage growth is far in excess of the wage growth in the G20 advanced economies. Yet it can also be shown, so too is China’s Investment rate far higher. This is shown in Chart 3, below.
Chart 3. Gross Fixed Capital Formation, % GDP, in China and the G7 economies
Source: World Bank
Over the period shown, there is a general downward trend in the proportion of GDP devoted to Investment (Gross Fixed Capital Formation, GFCF) across the G7 economies. This was accompanied by the significant deceleration in the GDP growth of these economies over the same period, which is still taking place.
Lower Investment as a proportion of GDP accompanied by lower GDP growth is not coincidental. Bearing in mind that net Investment adds to the productive capacity of the economy (the ‘means of production’) it is entirely logical.
Yet at the same time, the trend in China has been in the opposite direction, with all the positive consequences for growth and prosperity that should be widely known. Naturally, as the proportion of GDP devoted to Investment in China has risen, the proportion of China’s GDP devoted to Consumption has necessarily fallen.
This apparent paradox, rising wages and Consumption taking place while Consumption falls as a proportion of GDP raises crucial questions of both economic theory and policy. In fact, there is no paradox.
The crucial point is that proportions are not the same as growth rates. Consumption and prosperity have grown at extraordinarily impressive rates in China because an increasing proportion of the economy is devoted to Investment. This rising proportion of the economy for Investment means a greater increase in the means of production, which allows the greater production of goods and services both for Consumption and for re-Investment.
Naturally, under certain specific and limited circumstances stimulating Consumption can induce growth, if it supports a rise in Investment. This might include examples where consumers had lost confidence because of some shock, and required a catalyst to Consume more or save less. But these incidents are time limited and based on a certain set of conjunctural circumstances. Consumption cannot drive growth because it is not an input to it. All strategies based on the assumption that it can have tended to result in failure.
The effectiveness and sustainability of all borrowing, whether for government, business or households is determined by these fundamental points. If borrowing is conducted for Consumption (from which, by definition there is no monetary return) it cannot be sustainable. If borrowing is conducted for Investment, as long as the return on Investment exceeds the cost of borrowing, then it will be effective and sustainable.
Under those circumstances there should the greatest optimal amount of borrowing, in order to maximise the rate of Investment growth, and ultimately maximise the growth in prosperity.
For government, Consumption, or current spending should be financed by taxation. In advanced industrialised economies it will be generally the case that good levels of public services generally need high levels of taxation.
Three different increases in the public sector deficit
There are three recent examples of deficit-financing, government borrowing for Consumption, from which there can be drawn important lessons.
In the current period, the pandemic and the Western governments’ disastrous response to it has produced a challenge to the Reagan/Thatcher ideology. The lockdown policies were too negligently porous to prevent the spread of the virus. As a result they were also extremely damaging economically. This was lethally damaging to public health and highly negative to economic activity.
A combined public health and economic crisis ensued. Western governments have been focused on the economic crisis.
One immediate consequence of this failed pandemic policy was to produce an extraordinary increase on Government Consumption spending. This was supposed to deal with some of the health consequences of the pandemic, to bail out firms and to boost Consumption in specific sectors (from hospitality, to restaurants, to housing, to car production and other areas). As we will see, the policies adopted were very far from a success.
In the US, this huge boost to Government current spending during the pandemic was repeated shortly afterwards, in order to boost the economy coming out of lockdown. These huge increases in US Government Consumption are shown in the chart below.
Chart 4. US Federal Government Spending, US$bn
Source: FRED
In the 4 years prior to the pandemic US Federal Government Consumption rose gently from $4trillion to $4.8 trillion. In the following year it surged to $9.8 trillion and is now rising once more, well above the pre-pandemic trend.
It should be noted that there was no comparable increase in Government Investment in any of the G20 advanced economies.
For opponents of all government spending, whether Consumption or Investment, the Truss/Kwarteng experiment seemed to demonstrate that, in an era of free-flowing capital the bond markets will not allow a surge in government spending. Instead, this Reagan/Thatcher argument runs, they will punish profligate governments by refusing to buy the debt and/or demanding much higher interest rates to hold that debt. But this was not the US experience during its twin Consumption and borrowing binges related to the pandemic.
This is shown in Chart 5 below. In fact, there were two very distinct responses in financial market, and movements in government bond yield in opposite directions.
Chart 5. US-10 year Treasuries’ yields, %
Source: FT
The surge in borrowing began in the 1st quarter 2020. However, the first response of US Treasuries’ yields was to fall, not to rise. Two years later, in January 2022 they were still no higher than they had been prior to the pandemic, as shown in the chart above. Over that period, given the emergency nature of the borrowing to prop up the business sector and the absence of viable alternatives, bond yields had not risen.
It was only in the 2nd quarter of 2022, as it became clear that the increase in Government Consumption was not a one-off that yields on US government debt began to rise sharply. This took yields up from 1.5% to 3.5%. Yet these seemingly small numbers, when combined with the total level of government borrowing, represent a huge drain on resources.
The Congressional Budget Office (CBO) estimates that the net effect of increased debt and higher interest rates would drive up net interest costs from well under 10% of Federal government revenues to over 40%. As noted previously, the rise in interest payments in this way naturally supports the growth of the finance sector at the expense of the productive economy. Even the US government eventually found that there was not an unlimited capacity to borrow to finance Consumption.
Closer to the present period, Liz Truss’s premiership became one of the shortest in British history because it was directly brought down by global financial markets’ reaction to her own economic policy. The policy was also a version of ‘deficit-financing’. It may have been modelled on the recent experience in the US. However, this type of increased Government Consumption was not in the form of public services, but on tax giveaways to big business and the rich amounting to £75 billion.
It is widely understood that there was a significant and negative market reaction to that policy. While the currency initially plummeted, it has since recovered after Truss and Kwarteng were both displaced.
Chart 6. UK-10 year Government Bond yields, %
Source: FT
The reaction of the bond market to the British deficit-financing experiment was also swift and brutal. The rout in the bond market was only halted with the ousting of both Truss and Kwarteng, and the equally swift pronouncement from their appointed successor Sunak that he would cancel this deficit-financing (which is sometimes called ‘tax spend’, meaning tax giveaways).
In these two transatlantic experiences, the rise in yields in the US and Britain appear to be rather similar. Both jumped from about 1% to about 3.5%. But this actually masks a very different reaction in the bond markets.
First, the rise in US Federal government spending continues (not least after the military Budget was increased by 8% to $858 billion for 2023). The British government was very rapidly obliged to drop its planned increase in spending/tax giveaways entirely.
Secondly, the relative sums involved are qualitatively different. An increase in the budget deficit of £75 billion is equivalent to approximately 3% of British GDP. In the US, the cumulative rise in Federal Government Consumption Expenditures over the previous trend now amounts to $16.6 trillion (author’s calculations) between 1st quarter 2020 and 3rd quarter 2022. This is approximately equivalent to 66% of current US GDP.
The US government can get away with a certain level of deficit-financing in the current period, although it pays a significant price for that in the form of much higher debt interest payments. The British government, seeking to do a much more modest version of the same policy found it could not do anything at all, with the negative financial market reaction doing away with both the policy and its parliamentary architects.
Conclusion
Investment in the productive capacity is the main determinant of economic growth, so borrowing for Investment is sustainable and is generally required in order to achieve growth (unless Investment can be financed from own resources).
Consumption is not an input to growth. So, borrowing for Consumption will not lead to increased growth and is therefore not sustainable.
The US and other Western economies have allowed a significant rise in the proportion of the economy devoted to Consumption. This has led to weak growth in the economy and in measures of prosperity such as wages over the medium-term. By contrast, China has had much stronger growth based on increasing Investment as a proportion of the economy. This in turn has enabled strong economic growth, as well as growth in real wages and in prosperity.
The policy of deficit-financing, or increasing borrowing to finance Government Consumption, in the Western economies has not led to improved growth over the long run. In the recent period, Western governments borrowed to save the economy form the effects of their lockdown policies in the pandemic. There was no negative impact on government borrowing costs in response.
However, there was a costly negative response when the US repeated the borrowing, and interest payments will now consume a greater part of government revenues as government borrowing costs have risen.
Even so, is the current era this type of deficit-financing is only open to the US because of the role of the US Dollar which continues to dominate global capital flows. This includes global bond portfolios. In a certain sense, many investors are compelled to buy US government debt, although they may demand a higher interest for doing so.
This is not an option that is available at all to other countries, such as Britain, whose currencies do not play that role, who have very few forced buyers and who have removed all capital controls.
This is a key lesson for the Western left. It cannot advance on economic policy by clinging to the failed nostrums of the post-World War II consensus. In particular, borrowing for Consumption is counter-productive in terms of growth and prosperity. Therefore it cannot at all be used to transform the economy to operate in the interests of working people and the poor. Consumption must be financed from taxation, heavy taxation if appropriate.
Growth and prosperity are determined by Investment. Therefore ,borrowing should in general be reserved for Investment, which should be utilised to the maximum sustainable capacity to optimise growth. This in turn leads to growth in prosperity, Consumption and wages.
The Covid-19 crisis is not over. Over 400,000 people a day globally are contracting the virus and about 1,500 a day are dying, according to the ‘Our World in Data’ website which uses John Hopkins University data.
Naturally, for countries and governments which claim to have defeated the virus these terrible data represent a very uncomfortable truth. This fiction is quite widespread but throughout the pandemic has largely been most widely circulated in the richest countries grouped in the G7.
The reason for this was relatively straight forward. Quite contrary to most medical and social practice over several hundred years, civilisation has demanded that the source of a pandemic must be identified and everything possible be done to contain and remove it. In pre-Enlightenment Europe, for example, there are famous cases of whole villages sacrificing themselves to the bubonic plague in order to prevent its further spread.
This precedent was overturned quite early on in the pandemic in the G7 countries (with the partial exception of Japan). Instead, the authorities at various times but in a co-ordinated manner decided that the economic price of combating this virus was too high, and the interests of business must come before the health of the population. The policy was summed by Dominic Cummings, then an aide to Boris Johnson, who quoted the former Prime Minister as saying the policy was to “protect the economy, and if that means some pensioners die, too bad.”
Johnson claims he did not use those words. But it rapidly became clear that in the richest Western countries, this became the practical content of government policy, and was implemented by numerous agencies.
According to John Hopkins University data the Covid-19 global death toll now stands at over 6.6 million. But the recorded death toll in the G7 is now well over 1.6 million. This is despite the fact that the G7 accounts for less than 10% of the world’s population. Yet it also accounts for just under one quarter of the world’s total Covid-19 deaths.
A similar pattern is evident in terms of cases, where the G7 accounts 247 million of the world’s recorded cases of 638 million. The G7 accounts for more than 3 in 8 of the world’s recorded cases despite representing less than 1 in 10 of the world’s population.
It is possible that a similar pattern can be seen in relation to Long Covid, although the data in this category is less reliable than others. All of these much worse public health outcomes, it should be noted, is despite the advantages of greater access to vaccines, better underlying health of the population and greater access to advanced medical care.
In Britain, 2 million adults report the continuing effects of Long Covid, which is 5% of the adult population. This in turn is contributing to a persistent health crisis, which in turn is hobbling the health services and the economy. Chronic underfunding of the NHS plays a significant role too. But on the key measure of waiting times for elective care, the number of people waiting for care has surged from 4.24 million pre-pandemic to 7.07 million in September 2022.
One factor here will be the impact of the virus on the NHS workforce itself, which was sent into battle without the proper personal protective equipment, which had serious and even lethal consequences for their health. NHS staff will be among those disproportionately effected by Long Covid, as they were for infections.
The other factor was that partial lockdowns, which were prolonged but lax, meant that needed healthcare was postponed while the many different variants were allowed to spread and mutate.
Taken together, the G7 governments’ approach (with the partial exception of Japan) was a public health catastrophe, one which has not ended. Life expectancy is now falling in the US, with ethnic minorities hid hardest. A similar pattern is seen in Britain. This reverses decades of progress on the most fundamental measures of the well-being of the population as a whole.
This is because the priority was the economy. But the economic impact too has been barely short of catastrophic, with analyses now commonplace that the recovery from the effects of the pandemic will be some years in the distance.
The South-East Asian Exception
There is an objection to the John Hopkins data, even though it remains the most authoritative. It is said that the richest countries are accurately reporting their cases and deaths, whereas poorer ones are not.
If this is true at all, it is only by degree. For example the British authorities have given up on reporting cases almost entirely. But the partial exception of Japan invalidates any claims that the G7 data is so skewed as to invalidate all comparisons.
Japan is also a member of the G7. But in mid-January of this year Japan had by far the lowest level of per capita cases and deaths. At that time Britain was the worst in the G7 on both measures. Cases were over 14 times higher on a per capita basis than in Japan and over 18 times higher in terms of deaths.
This was part of a general pattern in South East Asia at the time. It is possible that the recent experience of SARS in the region had generally made the regions’ populations more cautious, more compliant with anti-Covid measures and more likely to wear masks.
However, the same G7 countries that had allowed their own population to die in great numbers had already begun an anti-Zero Covid campaign on the familiar grounds that it was bad for trade and for business. That campaign was gradually and lethally successful. The virus spread rapidly across the region and Japan itself moved up to 6th in the G7 league table of cases.
Of the largest economies now only China maintains a Zero Covid policy. Despite persistent campaigns urging abandoning the policy, China has had far better outcomes both in relation to public health and to economic growth.
Economy unprotected
In broad outline, the mainstream neoliberal view of the economy is that wealth is created by entrepreneurs and that the main role of the mass population is to perform the tasks set by these entrepreneurs, and to consume the goods and services that are produced as a result.
This inverts reality. The main factor driving the economy is labour, and, aside from adding more labour, growth is mainly dependent on the expansion of the means of production through Investment.
The wrong framework contributed decisively to the catastrophic outcomes both in terms of public health and economic well-being. As labour is the decisive input to the economy, protecting the population’s health is a decisive element in maintain economic output and well-being. All misguided attempts to kickstart the economy through increasing Consumption have been damagingly counter-productive.
In Britain Rishi Sunak initiated the policy of ‘eat out to help out’, in effect government subsiding restaurants by paying people to eat in them. Academics at Warwick University found that the government spent £500 million on the scheme, with limited economic impact but causing ‘somewhere between 8% and 17% of all new Covid clusters’ in the summer of 2020.
Not only did these policies fail, they contributed to the long-term ‘scarring’ of the economy in two ways. As already noted, promoting consumption in the middle of a pandemic simply contributed to its growth and all the negative long-term consequences that followed. Secondly, the recklessly negligent approach has not only had long-term health consequences but also damaging economic outcomes too.
According the G7 governments the pandemic has essentially been over since the end of 2021. This is false, but provides a baseline for assessing the economic outlook. According to the IMF, the US will have the weakest real GDP growth in the G7 in 2022, at 1.6%. Both the OECD and IMF agree that 2023 will be worse, with the best growth in the G7 being Japan’s, which in 2023 is expected only to equal US growth this year. Following one of the sharpest (if shortest) recessions on record, this is a miserable performance.
Two charts on growth in 2022 and 2023
Source: House of Commons Library
There is no economic rebound in the G7, and nothing like a ‘boom’. Everywhere is stagnation or slump.
One factor in the economic weakness is simply the absence of workers. In the US, the Brookings Institution estimates there are up 4.1 million workers who have dropped out of the labour force due to Covid. In Britain, ONS data show that the long-term downtrend in the numbers of people off work due long-term sickness abruptly reversed at start of the pandemic and the total is now over 2.5 million people, a record high. At the same time, job vacancy numbers are also close to a record high of 1.25 million.
As labour-power is the decisive factor in production, any significant reduction in the supply of labour will have serious negative effects. This is what happened as a result of the virus and the disastrous response to it.
Conclusion
The clamour to prioritise the economy ahead of public health showed a callous disregard for human life and well-being. It was not accidental that it was led by the richest countries.
However, their failure of basic morality was accompanied by dangerous misconceptions about how their own economies work, clouded by self-interest. Together this has become a twofold attack on the bulk of the population, in terms of public health and economic prosperity. It is not a model that should ever be emulated or repeated.
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