Socialist Economic Bulletin

By Tom O’Leary

All good jokes summarise or tell us something new about our society, or the times we live in, or about human nature. There is a very old, and very bad joke (repeated by Margaret Thatcher, among others) that, ‘The problem with socialism is that you run out of other people’s money’. It is a bad joke because it relies on a number of falsehoods.

There never has been a genuinely socialist government in Britain, and the largest and most famous economic crashes in this country have nearly all taken place under Tory or Tory-led governments. These were the depression of the 1930s and Churchill’s return to the gold standard, the Barber boom of the early 1970s, the Lawson boom of late 1980s and the imposition of austerity in 2010. The sole exception to this pattern was the crash under New Labour in 2008, which had adopted the Tory mantras of privatisations, PFI and bank deregulation.

Now, the new Prime Minister has adopted an economic policy he describes as ‘boosterism’. Boris Johnson as PM, or even as an architect of economic policy is itself a joke in poor taste. But the definition of boosterism under Johnson is simply promising anything in order to gain popularity.

This is important to grasp, as Johnson is not simply continuing Cameron/Osborne austerity. First, he has to get elected and is willing to scatter promises to achieve that.

Boris Johnson has form in this area. There is no garden bridge over the Thames, there is no ‘Boris Island’ airport, firefighter numbers were reduced and fire stations closed despite pledges to the contrary, and police cuts were only reversed when it threatened his re-election. The pledges were false, even where significant amounts of public money were spent.

Johnson’s current lies

Boris Johnson has effectively come to office after a coup against the previous Tory leadership. The electorate have not endorsed as Prime Minister, even indirectly, and pollsters have noted that his ‘bounce’ in the polls is far lower than Theresa May’s and is already fading – Labour is once again frequently marginally ahead in national opinion polls.

Under these circumstances, and leading a government which is supported by a bare majority that is the result of bribes to the DUP, Johnson does what comes naturally. He lies. He has promised:

• £1.8 billion for the NHS. This is a tiny amount compared to what the NHS needs and it has emerged since that £1 billion is not new money, and the source of the remainder has yet to be identified
• A total of £6.3 billion (£2.1 billion of which is new money) to prepare for No Deal Brexit, despite claiming it was a ‘million to one chance’ against happening
• 20,000 extra police officers, which is nearly as many as the Tories have cut since 2010, but says nothing about the similar numbers of police community support officers, and police admin staff that have also been cut over the same period
• More prison places and longer sentences, even though there are no new prisons and they would take years to build
• Full-fibre broadband across the country by 2025 – but no plan to achieve it, not even in outline, and no suggestion of the resources it would require
• To ‘level up’ per pupil funding in schools (which is aimed at Tory voters in the shires who complain about the greater funding for inner cities’ schools). The estimated cost for secondary schools alone is just £50 million per annum, a pittance compared the £4.6 to 5 billion needed simply to reverse Tory cuts to schools
• A tax giveaway to the higher paid, raising the higher tax band threshold from £50,000 a year to £80,000 (which benefits someone earning close to £80,000 or more much more than the benefit to those just above £50,000). There is no indication of the cuts elsewhere, to fund this giveaway, or a justification for the higher borrowing it would entail.

Politically, his agenda is aimed squarely at his own base, ‘with law and order’ measures to the forefront. Random stop and search will certainly increase the number of black and Asian boys harassed by police, but will do virtually nothing to halt crime, as Home Office analysis shows.

Boosterism and economic fundamentals

This string of false promises, untrue claims and distortions are widely believed to be associated with a planned general election campaign around the time of the Tories’ central project of a No Deal Brexit. As No Deal itself and the likely plans of a hard right Tory Cabinet represent a double blow to living standards, this will be discussed below.

Yet, even before these two new blows to the economy and living standards, it is important to recall that the British economy is already in a crisis. The main source of this crisis is highlighted in Fig.1 below, reproduced from the Office for national Statistics (ONS). It shows that a weak recovery in business investment following the crisis of 2007 to 2008 has given way to outright stagnation and even decline. The economy has also begun to contract once more in the 2^nd quarter of this year, in the recently-released preliminary data.

Chart 1. UK Business Investment

One way to illustrate how the weakness of business investment has been the main brake on growth and prosperity is by comparison. Fig.2 below shows that business investment has been far weaker than GDP growth since the beginning of the crisis. For illustration, business investment has also been far weaker than the growth in household consumption.

Chart 2. UK Real GDP, Household Consumption and Business Investment from Q4 2007 to Q1 2019

Since real Business Investment peaked in the 4^th quarter of 2007 it has risen by just 3.25% to the 1^st quarter of 2019. This is much weaker even than the growth in real GDP, which has risen cumulatively by 13% over the same period. In addition, it is often incorrectly asserted that the source of the crisis is the absence of ‘demand’, which is primarily Consumption. But real Household Consumption, which is the bulk of domestic demand has largely kept pace with the rise in GDP over the same period, increasing by 12.6%. In simple arithmetical terms, it is shown that the weakness of Business Investment is the main drag on UK growth.

But it is also possible to highlight this point in a more fundamental way. Consumption requires production – for most of us, even the apples we eat don’t just fall from the trees. They are commercially picked, processed, transported and sold by retailers. The main means of sustainably increasing that production is to add to the means of production through net investment, or to increase the number of hours worked.

Fig.3 below shows the growth rate in what the ONS calls the level of the capital stock (the means of production) over time, as well as changes in the net capital stock once the consumption of capital is taken into account. The consumption of capital is simply the capital that is used up in the production process, whether that is a rubber washer, a machine tool or a factory, which are each consumed or depreciated over different time periods.

Chart 3. Percentage change in growth rate of capital stock, net capital stock and capital consumption

The ONS summarises these trends as follows, “The UK’s net capital stock was estimated at £4.6 trillion at the end of 2017, increasing by 1.1% compared with 2016. Prior to the economic downturn, net capital stock increased on average by 2.0% per year, slowing to an average of 1.3% per year since 2010.”

Over the medium-term from 1997 onwards the annual growth rate of the capital stock has slowed from fractionally under 3% to just over 1%. As business is responsible for the bulk of the growth in the capital stock it is this prolonged deceleration in the growth of the means of production of the private sector that is the decisive factor in the medium-term slowdown and stagnation of the economy.

To raise the annual growth rate of the capital stock to 2% would require an additional £46 billion of fixed investment (which would itself need rise over time as this additional new capital itself depreciates).

Of course, set against this fundamental problem Boris Johnson’s ‘pledges’ of tax cuts for the rich and more spending on No Deal are simply another joke in poor taste. Failing to address this problem (unlike Labour, which promises to increase public investment) means that none of Boris Johnson’s pledges can possibly lead to economic growth or rising living standards over the medium-term. That is even without the damage from his central project, No Deal Brexit.

The threat of No Deal

A No Deal Brexit entails the severing of Britain’s close economic relationship with the EU, for the assumed benefits of a closer economic relationship with the US. But this is fool’s gold. In 2016, total UK trade with the EU (goods and services) amounted £554 billion, compared to £166 billion in total trade with the US (source, ONS).

There is no conceivable improvement in the trade relationship with the US that could even compensate for the likely fall in trade with the EU. At the same time, much of the country’s trade with other countries in the rest of the world is currently governed by trade agreements with the EU, and many of those are reluctant to offer the same terms to this country when it leaves.

More importantly, production in many sectors in the UK economy is closely linked through highly intricate supply chains to output in the EU. For many reasons, including geography these cannot be reproduced in supply chains connected with the US. Therefore any sector that has either tariff or non-tariff barriers will be faced with series of painful adjustments, including closure and relocation, with all the consequent loss of jobs.

There is too the obvious negative impact of the terms of any likely trade deal with Trump (and many of his possible successors). These range on everything from environmental standards to workers’ rights to food regulations and the accelerated privatisation of public services, including the NHS. In addition to China, Trump has already imposed tariffs and trade restrictions on neighbouring Mexico and Canada (effectively tearing up NAFTA), as well as India and the EU. This is in addition to the growing list of countries sanctioned for purely political reasons, such as Venezuela, Cuba, Iran, Syria and Russia.

But it is probably an error to assume that this government is even mildly uncomfortable with a US trade agreement that will increase fracking, sell off the NHS, reduce rights at work and allow US agri-business unregulated access to UK markets.

This is an ideologically hard right Tory Cabinet, many of whom, for example have explicitly advocated private health insurance or have financial links to it. Privatisations, fracking, ignoring the catastrophic risk of climate change and reducing workers’ rights can all contribute to an increase in labour exploitation and have the potential to boost profits.

For this government, and a small number of sectors, Trump’s demands can be seen as an opportunity, not a threat. The domestic beneficiaries of No Deal can include hedge funds and other speculative capital, private health insurers, private school owners and managers, frackers, sweatshop employers and landlords, as well as their apologists and PR agents.

For the overwhelming majority of the population a No Deal Brexit would have a very serious negative impact on living standards. It is also true of large sections of British capital. The fall in living standards has already been renewed with the fall in the pound leading to higher inflation and lowering real wages, as well as the job losses which have already begun simply from the threat of No Deal. No Deal will also reverse even the limited contribution to date of addressing the climate crisis.

Conclusion

Boris Johnson’s is a political campaign, where false promises are designed to win an election. They will do nothing to improve the economy or living standards for the vast majority.

Worse, his central project of a No Deal Brexit will deepen the economic crisis, by severing the closely inter-connected production supply chains within the EU. The replacement free trade deal with the US will only exacerbate the crisis and widen it to include policies which will add to the climate crisis, worsen public services and worker’s pay and conditions.

Labour already has the economic weapons to fight Johnson. Its fully-costed programme of measures to begin reversing austerity for the 2017 election amounts to £48.6 billion (pdf). This is massively greater than anything Johnson will ever promise, because it benefits workers and the poor the most. More importantly, as shown above, Johnson has nothing to say about raising the growth rate of the economy and living standards in a sustainable fashion. Labour does, with increased public investment and the National Investment Bank. It is also possible that Labour could build on its own successes of 2017, with additional funding for both, especially as interest rates are so low. But the defeat of No Deal is the next decisive step in Labour’s anti-austerity fight.

By John Ross

The following article was written before the announcement of the latest US GDP figures, which showed the US economy slowing from an annualised 3.1% growth in the 1^st quarter of 2019 to 2.1% in the 2^nd quarter. This new data clearly confirms the analysis in the article. The Chinese version of this article originally appeared in Chinese in China Finance.

The Federal Reserve’s shift towards cutting interest rates

The US Federal Reserve’s sharp turn in summer 2019 towards cutting US interest rates immediately affects China and the global economy via numerous channels. But in addition to short-term effects, the reasons for the Federal Reserve’s policy change casts a clear light on the US economy’s medium- and long-term growth perspectives. Both aspects will affect China-US trade negotiations. This article therefore examines the fundamental growth trends in the US economy leading to the presidential election.

Why did the Federal Reserve make a sharp policy turn?

The Federal Reserve’s summer 2019 shift was an abrupt reversal of the Fed’s previous policy. During 2018 the Fed carried out four interest rate rises, clearly reflecting an estimation that the US economy had strong upward momentum and it was necessary to take prudent steps to head off overheating. Even as late as May 2019 Fed Chairman Powell said weak inflation was transitory – implying there was no reason to cut interest rates.

By June 2019, in contrast, the Federal Reserve press conference was universally interpreted as indicating the Fed would cut rates – the Fed funds futures market pricing in three quarter-point cuts in 2019, including 100% odds for a quarter-point cut this summer. A 0.25% rate cut was duly carried out at the July Fed meeting.

There are two interpretations of this radical policy change. The first is that it was a response to temporary non-fundamental trends in the US economy – short-term effects of the trade war, loss of momentum by US share markets etc. In that case the US economy may be anticipated to rapidly recover from such problems. The second interpretation is that the Fed was responding to much deeper trends slowing the US economy in 2019 – in which case the question becomes how deep is this slowing likely to be?

This difference overlaps with the fact that throughout the recent period two different perspectives for the US economy in 2019-20 have been put forward. The first, that of the Trump administration, argued that due to US tax cuts the US economy would accelerate in 2019. In March 2019, in its official budget forecasts, the administration projected 3.2% US GDP growth in 2019 and 3.1% in 2020 – both faster than 2018’s 2.9% and in line with President Trump’s claim that the US economy would grow at least 3% a year during his presidency.

The second perspective, held by the IMF, the present author, and others, was that the US economy would experience downward pressure in 2019. In that case, of course, the Fed’s policy shift was a response to deeper more powerful trends in the US economy.

Recent negative trends in the US economy

Recent US data is clearly in line with this second perspective. US total industrial production, including oil and gas, stalled after the end of 2018 – by May 2019 it was 0.9% below December 2018’s level. The decline in US manufacturing production, 1.5% in the same period, was sharper. In April 2019 US manufacturing production was 4.8% lower than its level more than 11 years previously in December 2007 – Trump’s policy to strongly revive US manufacturing production had failed.

Taking PMIs, the US Composite PMI was  51.5 in June 2019 – the second lowest since 2016. The US manufacturing PMI in the same month fell to its second lowest level since 2009 – 50.6… By the 1^st quarter of 2019 the annualised growth of US fixed private investment had fallen from 9.9% when Trump was inaugurated to 1.5%.

President Trump demands the Fed cuts interest rates

These negative economic trends, in addition to direct effects, created strong political pressure on the Fed – President Trump launching a public campaign to force the Federal Reserve to cut US interest rates. The reasons for these attacks were clear. Opinion polls for Trump, leading to the official launching of his re-election campaign in June, were unfavourable. Leaks of his internal campaign polling showed the President had for several months been trailing Democrat Joe Biden. Recent polls showed President Trump trailing nine percent behind Democrat Bernie Sanders. Given negative poll ratings the prospects for the US economy in 2019-2020 were crucial for Trump’s re-election chances.

A recession in 2019?

Some major Western analysts believe that US economic slowing was so severe it indicated a US recession – two quarters of negative growth. For example, John Authers, Senior Bloomberg Editor for Markets, analysed under the self-explanatory headline ‘Markets Are Acting Like a Recession Is Unavoidable’:

‘would it be possible to explain what is going on in markets without making reference to the deteriorating U.S.-China trade relations? I am beginning to suspect that it would. Bond markets may be behaving as though they are bracing for something terrible to happen because traders are, indeed, scared that something terrible is going to happen.’

Quantitative analysis, however, indicates that any view the US economy will enter recession in 2019 is exaggerated. US growth in 2018 was 2.9%. Since the immediate aftermath of World War II, the largest deceleration in US GDP in one year compared to the previous one was 2.5% in 2009, under the impact of the international financial crisis.

However, in the 1^st quarter of 2019 US GDP growth was 3.2%. For a recession to occur in 2019, between the 1^stquarter and the 3^rd quarter US GDP growth would have to fall from 3.2% to less than zero in only six months – a slowdown worse than during the greatest economic crisis for 80 years. Such a scale of economic deceleration is not indicated by domestic or international US economic imbalances.

Claims 2019 will see a US recession are therefore exaggerated, but there are clear reasons why the US economy will slow in 2019 and US growth will remain low in the medium/long term. This provides the background to Federal Reserve decisions.

Inaccurate claims by the Trump administration

To analyse accurately US economic dynamics, merely electoral propaganda claims by the Trump administration may be dismissed. Trump has claimed that ‘America’s economy is booming like never before’ but the reality is that under President Trump the US has experienced the slowest peak economic growth during any presidency since World War II. As demonstrating this casts a clear light on fundamental US economic trends, Table 1 shows peak growth under all US Presidents since World War II presented both in the way the US publicises economic growth, one quarter’s growth compared to the previous quarter presented at an annualised rate, and China’s method of comparing a quarter in one year with the same quarter in the previous year. Both show peak economic growth under Trump is lower than under every previous post-World War II US President. Taking 21^st century presidents:

• Using the US method of presenting data, peak growth under Trump of 4.2% was lower than 5.1% under Obama, George W Bush’s 7.0%, or Clinton’s 7.5%.
• Calculated using real year on year growth, 3.2% peak growth under Trump was slower than 3.8% under Obama, 4.3% under George W Bush, and 5.3% under Clinton.

But peaks under 21^st century presidents were much lower than under 20^th century post-World War II US presidents. For example, peak growth under Nixon was 11.3% using the US method of presenting data. Peak post-World War II growth was under Truman at 16.7% using the US method of presenting data. Slow peak growth under Trump, of course, helps explain his relatively unfavourable position in opinion polls.

The slowing of the US economy

Turning to fundamental US economic trends, accurately analysing these requires distinguishing short-term business cycle fluctuations from medium/long term economic trends. The most accurate way to do this is to take a medium/long-term moving average of US growth – which eliminates effects of purely short-term fluctuations. Such measures show that taking either a 7, 10- or 20-year moving average gives the same fundamental result that long term US growth is slightly above 2% – a 7 year moving average shows annual average 2.3% GDP growth, a 10 year average shows 2.2%, and a 20 year average shows 2.1%.

Taking the longest-term moving average, 20 years, Figure 1 clearly shows that the fundamental trend of US economic growth in the last 50 years is significant deceleration. Annual average US growth fell from 4.4% in 1969, to 3.5% in 2002, to only 2.1% in 2019. In the last fifty years average annual US growth rate has fallen by more than half, explaining why US growth under Trump is the slowest under any US president since World War II but also showing that the deceleration under Trump is part of a longer-term US slowing.

This decelerating trend also demonstrates that 2.9% growth achieved by Trump in 2018, while slow by historical standards, was above current US annual average growth – with business cycle consequences analysed below.

Why is US slowdown occurring?

Given this long-term US economic slowdown, to understand US economic perspectives it is evidently crucial to analyse why this is occurring.

• One explanation ascribes deceleration merely to specific contingent events – trade wars, European economic slowdown etc. If that is correct action by the US authorities, such as Federal Reserve interest rate cuts, may prevent any slowing and create strong US medium/long term growth.
• The second explanation is that US economic slowing is due to deeper structural features. Indeed, that the US economy in 2018 grew faster than its medium/long term economic potential, and therefore the business cycle upturn in 2018 would be likely to be followed by a business cycle downturn. In that case, measures such as Federal Reserve interest rate cuts might sustain or increase US share prices, but they would be unlikely to halt downward pressures on US economic growth during 2019-2020.

To determine which perspective is correct, it is necessary to analyse the fundamental forces determining US economic dynamics.

Can Trump accelerate the US economy?

To ascertain the reasons for the US economic slowing Table 2 shows all major components of US GDP which are positively correlated with US economic growth during the last fifty years – i.e. factors which, if their structural weight in the US increased, would be expected to be accompanied by higher growth. This shows:

• US government consumption has a positive but negligible correlation with US GDP growth – the highest correlation is 0.09.
• US private inventory accumulation is strongly correlated with economic growth, but this merely reflects their strong correlation with the US business cycle. Private inventories are too small a percentage of US GDP to play a key role in US growth in anything other than the short term – in the 50 years 1968-2018 private inventory accumulation averaged only 0.4% of US GDP.

Leaving aside inventories, in the short term no component of US GDP has a strong correlation with US growth – i.e. in the short-term numerous factors affect US GDP growth with no single one playing a decisive role. Over a one to two-year period the highest correlation is only 0.26.

In the medium and long term, however, a very different picture emerges. There is a very high correlation between both US the percentage of net fixed investment (gross fixed investment minus depreciations) in GDP and net saving with GDP growth. Taking a 10-year period the correlation of the percentage of net fixed investment in US GDP with GDP growth is 0.69 – a very high correlation. Even taking a six-year period the correlation between net fixed investment and US GDP growth is 0.54.

Has Trump provided the basis for a serious US economic acceleration?

Data on the determinants of US growth, therefore, gives a clear picture:

• Medium/long term US growth is primarily determined by net fixed investment. As Qing Yuan’s article in Quishi, ‘Several Issues That Need to be Further Clarified About Sino-US trade Frictions,’ noted regarding the US economy: ‘whether it will continue to prosper depends on the state of capital accumulation,’
• In the short term no single factor is decisive in growth.

The standard caveat that correlation is not the same as causation is irrelevant in the present case – as the high correlation between US economic growth and net fixed investment means that it is impossible to substantially increase US economic growth over the medium/long term without increasing the rate of net fixed investment.

Therefore, data shows that only if President Trump could achieve a structural shift in the US economy to increase its level of net fixed investment could a substantial medium/long term US economic acceleration be achieved. But Figure 2 shows this has not occurred – US net fixed investment has fallen from 11.3% of GDP in 1966 to only 4.8% in 2019. This fall provides no basis for a medium/long term acceleration of the US economy – and this decline in net fixed investment explains the long-term deceleration of the US economy.

The state of the US business cycle

Turning from medium/long term developments to shorter-term perspectives for 2019-2020 the pattern of the US business cycle flowing from these fundamental trends is clear. Medium/long term growth, slightly over 2%, is determined by the US economy’s net fixed investment, with short-term business cycle fluctuations taking place above and below this long-term growth rate due to numerous factors. Figure 3 illustrates this short-term pattern of fluctuations. As shorter term fluctuations are simply oscillations around an average, when US growth is substantially above the average for any significant period it falls back towards the average, and when growth is substantially below the average for any significant period it then rises above the average – this process producing ‘reversion to the mean’.

Trump is experiencing a normal business cycle

These processes determine the short-term shifts in the US economy under Trump. To illustrate this Figure 4 shows year on year changes in US GDP under 21^st century US presidents. This shows both the slower underlying growth of the US economy under Trump which was already analysed and fluctuations in the current business cycle. In the 2^ndquarter of 2016, the US presidential election year, US growth fell to 1.3% – this extremely slow growth significantly contributing to Trump’s election victory. Such growth was far below the long-term US average – the 20-year moving average of annual average US GDP growth in 2016 was 2.4%. As 2016 was an extreme downturn of the US business cycle this was duly followed by a cyclical upturn in 2018. The increase in US growth in 2018 was not a fundamental growth acceleration but a normal cyclical upturn. It may indeed easily be verified that this upturn of the US business cycle under Trump was merely a normal business cycle one. US growth in the 2^nd quarter of 2016 was 1.1% below its long-term average at that time. By the latest available data, for 1^st quarter 2019, US long term growth had fallen to 2.1%. Merely to maintain a constant long-term average, therefore, a fluctuation upward of 1.1% would be expected. The 3.2% US growth in the first quarter of 2019, 1.1% above the US long term growth rate, is therefore exactly what would be expected for the peak of a normal business circle upturn – and did not represent an acceleration of medium/long term growth.

Trump’s response to economic downturn

That 3.2% year on year growth in the 1^st quarter of 2019 indicates the normal expected peak growth in a US business cycle, however, has the conclusion that the beginning of a normal business cycle downturn would be expected – an undesirable development for president Trump given a presidential election in 16 months. The Trump administration will therefore do everything possible to attempt to delay this slowdown. Given that it rejects state intervention in the economy, and is already running a very large budget deficit, the only weapon available to attempt to limit an economic slowdown in the run up to the presidential election is interest rate reductions – hence President Trump’s public demand the Federal Reserve cut interest rates.

The IMF’s projections

It was shown it is unlikely there will be a US recession in 2019 but that, for business cycle reasons, the US economy will slow in 2019. Therefore, by how much will the US economy slow in 2019-2020?

A starting point may be taken as the IMF’s projections in Figure 5, which predict a fall in US growth from 2.9% in 2018 to 2.3% in 2019 and only 1.9% in 2020. This last figure is a whole percentage point below US growth in 2018 and would represent a major economic slowdown. However, this IMF projection looks slightly pessimistic for two reasons. First, it implies that US long term growth slows to only 2.0% by 2020 – there is no indication why this should occur given that US net fixed investment is low but not falling. Second it may be assumed that President Trump will do everything possible to prevent such a sharp slowdown in an election year. For these reasons it would appear reasonable to assume a slightly higher growth figure in 2019, say 2.5% – although the IMF figure is not unreasonable. Either trend, however, indicates that the Trump administration’s claims that US growth will accelerate are false. In summary, the Trump administration will be under downward economic pressure in the period leading to the Presidential election.

Conclusion

The conclusions are therefore clear.

• The US economic upturn in 2018 was merely a normal business cycle and not any fundamental acceleration of the US economy. The long-term growth of the US economy continues to fall gradually.
• As 2018 was merely a normal business cycle upturn it will be followed by a normal business cycle downturn – that is, while not facing a recession in 2019, the Trump administration will be under pressure of a slowing economy in 2019-2020.

The abrupt change in policy by the Federal Reserve in summer 2019 was, therefore, not a response to purely peripheral or short-term factors but was a response to deep seated processes slowing the US economy.

This article was previously published on Learning from China.

By Tom O’Leary

The latest surveys from the Purchasing Mangers’ Institute (PMI) show the British economy slowing sharply.

The manufacturing PMI in June fell to 48.0 (from 49.4), the lowest level since February 2013, shown in Chart 1 below.  According to the survey providers IHS Markit, this survey reading is consistent with a contraction in output of 4% from a year ago.

Chart 1. UK Manufacturing PMI Survey, April 2019

This latest downturn in output represents an acceleration of the long-term decline of both manufacturing and industrial production (which includes energy and water supplies). The current reading for the index level of industrial production was 101.4. This is less than 1% higher than when the Tory/LibDem coalition took office in May 2010 and is now 9% lower than the pre-recession peak in May 2007. At the same time, the manufacturing index is now 102 and has recovered by 5.9% since May 2010, but is still 3.6% below its pre-recession peak while the survey evidence from the PMI shows it is heading lower. These medium-term trends are shown in Chart 2 below.

Chart 2. UK Industrial production and Manufacturing Indices, January 2008 to April 2018.

The global context is a negative one. The global manufacturing PMI dived in June to 49.4, the lowest level for 6 years (Chart 3).  Key regional hubs for international production and trade such as South Korea have been badly hit, and the worst-affected country in the June survey was Germany, one of the largest economies most connected to global production chains. Slowing world trade and trade tariffs imposed the US are clearly having a widespread negative impact, with export orders the weakest component of all in the survey.

Chart 3. Global manufacturing PMI June 2019

But the entire British economy is struggling, not just manufacturing.  The June construction PMI plummeted to 43.1 (from 48.6 in May) and the services sector PMI and the services sector PMI slid to 50.2 (from 51), close to stagnation.  All three PMI indices are shown in Chart 4 below.

Chart 4. PMIs for manufacturing, services and construction, June

Construction is the least internationalised of the three sectors, and the least susceptible to changes in international conditions as a result. It is clearly leading the way in the downturn in the British economy. This is a domestic crisis, within a global slowdown.

Clearly, the domestic aspect is Brexit-related.  All three sectors within construction fell, house-building, commercial construction (shops, factories and so on) and civil engineering (public and private infrastructure construction), suggesting the unwillingness to invest is broad-based.

The rising risk of a No Deal outcome will only put further downward pressure on the economy.  Expectations of the next move in official interest rates have done a U-turn as a result, with markets now priced in line with future rate cuts. The National Institute assumes that GDP will have grown by just 0.2% in the 3 months to June.

Perhaps the most startling financial market indicator of the crisis is the fact that the UK government bonds linked to inflation (‘index-linked gilts’) are all offering interest rates lower than minus 2%. This means that the UK government can borrow at negative real interest rates, once CPI inflation is taken into account, for anything between 3 years and 18 years.

But with the two Tory rivals speaking only about tax cuts for businesses and the rich, only a Labour government would be willing to take advantage of this opportunity to increase borrowing for investment.

By John Ross

US share markets rose sharply on news of the announcement that Presidents Xi and Trump would meet at the G20 summit – as the Financial Times simply summarised it ‘Trump plan to meet Xi on trade sends US equities sharply higher’. This was a welcome piece of goods news for President Trump after a period during which he had been receiving bad news both on the opinion polls for his re-election and for the US economy. Naturally there are many aspects of the planned meeting that only those involved in the negotiations will know, but it is worth noting the objective pressures which are now bearing down on Trump.

Negative polls for Trump at the beginning of the Presidential election campaign

The first, and probably most important pressure on President Trump, was that opinion polls leading to the official launch of his re-election campaign on 18 June had been unfavourable for several months. Days before his official relaunch event his campaign dismissed three of his five polling advisers after leaks of internal polling showed the president had been trailing former Democrat Vice President Joe Biden in key states which would decide the outcome of the 2020 election – for example in Minnesota Trump trailed Biden 40% to 54% and in Michigan by 40% to 53%. Analysing 17 states, polling taken in March showed Trump trailing Biden by double digits in key swing states such as Wisconsin, Pennsylvania, Florida and Michigan. More recent polls on 9-12 June, released by Fox News, a strongly pro-Trump TV channel, showed Trump nationally trailing nine percent behind Democrat Bernie Sanders (40% to 49%) and ten percent behind Biden (39% to 49%).

In summary as the Presidential election campaign was launched Trump was trailing badly behind Democratic rivals. In that political situation, evidently, the prospects for the US economy in 2019-2020 were crucial for Trump.

Prospects for the US economy in 2019-2020

Regarding these economic prospects for the US in 2019-2020 two substantially different perspectives for the US economy in 2019-20 had been put forward. The first, that of the Trump administration itself, echoed by some media in China, argued that due to the US tax cuts, or other reasons, the US economy would speed up in 2019 – which would evidently be good political news for Trump. In March 2019, in its official budget forecasts, the Trump administration projected 3.2% GDP growth in 2019 and 3.1% in 2020 – both faster than the 2.9% in 2018 and in line with President Trump’s claim that the US economy would grow at least 3% a year during his presidency.

The second perspective, held by the IMF, the present author, and others, was that the US economy would experience downward pressure in 2019 – not that there would be a recession but that the US economy would slow. The most recent US economic data has clearly confirmed this latter perspective.

US total industrial production, including the oil and gas sector, had stalled since the end of 2018 – by May US total industrial production was 0.9% lower than in December 2018. The decline in US manufacturing production, 1.5% in the same period, was sharper. In May 2019 US manufacturing production was still 4.8% lower than its level more than 11 years previously in December 2007 – the Trump policy to attempt to strongly revive US manufacturing production had been a failure.

In terms of Purchasing Managers Indexes (PMI), the US Composite PMI stood at 50.9 in May 2019 sharply down from 53.0 in April and the weakest expansion in the private sector since May 2016. The US manufacturing PMI in the same month fell to its lowest level since 2009 – a manufacturing PMI of 50.5 vs 52.6 in April, while the services PMI slowed to a 39-month low – at 50.9 at vs 53 in April.

US jobs data showed the same slowing trend. In May the US added only 75,000 non-farm payroll jobs compared to 224,000 in April and an average 144,000 in the three previous months.

Analysts who believe there will be a recession

Some important Western and US analysts believed that this slowing was so severe it indicated the US would enter a recession – that is at least two quarters of negative growth. For example, John Authers, Senior Bloomberg Editor for Markets and former Chief Markets Commentator for the Financial Times, made the following analysis on 18 June under the self-explanatory headline ‘Markets Are Acting Like a Recession Is Unavoidable’ with the subheading ‘It’s not just the bond market that’s signalling a severe economic slowdown.’

‘Would it be possible to explain what is going on in markets without making reference to the deteriorating U.S.-China trade relations? I am beginning to suspect that it would. Bond markets may be behaving as though they are bracing for something terrible to happen because traders are, indeed, scared that something terrible is going to happen.

‘Exhibit A is the Federal Reserve Bank of New York’s Empire State Manufacturing Index that was released Monday. It was terrible, showing the biggest monthly decline since the last recession…  it doesn’t drop this low for long without presaging a true recession to come.

‘Conditions for the U.S. trucking industry, often regarded as a leading indicator for manufacturing, look no better…. the FTR Trucking Conditions Index… combines several different factors about demand for trucking. Figures below zero show a risk of contraction.

‘Industrial metals provide another strong market-based recession indicator. The Bloomberg Industrial Metals Subindex suggests that the optimism on growth that accompanied the first year of the Trump administration has dissipated.

‘Looking at the U.S. stock market, we see the type of relative performance that would be expected in the run-up to a recession, even if the overall market continues to show robust performance…  Investors tend not to buy utilities on the scale that we have seen lately unless they are pessimistic. There are technical factors in the bond market that have driven the current deflation scare, but there do appear to be a number of factors pointing toward an economic slowdown.’

A slowdown not a recession

The analysis of the present author is that the view that the US economy will move into recession this year are exaggerated, for reasons which are analysed at length in my book ‘Don’t Misunderstand China’s Economy’.

US growth in 2018 was 2.9% – at the peak of the upswing of a business cycle. It would be an extraordinarily sharp decline, approaching the scale of the international financial crisis of 2008, for the US to fall from the peak of a business cycle to a recession in a single year. Conditions for such a repeat of the greatest financial crisis for 80 years, since the Great Depression, are not indicated at present. Instead a slowdown of the US economy, not an actual recession, will occur in 2019. The IMF itself projects a fall in US growth from 2.9% in 2018 to 2.3% in 2019 – I would estimate that growth could be slightly higher, but the IMF figure is not unreasonable. But what such a trend indicates is that the Trump administration’s claims that US growth would accelerate are false. Instead growth in 2019 would fall. And growth in 2020 would be lower than in 2019 – a serious issue for Trump as 2020 is an election year.

Certainly, information which leaked on the same day that the Xi Jinping – Trump summit was announced indicated clearly the Trump administration felt seriously concerned about the state of the US economy. It was leaked to Bloomberg that, in an unprecedented move, the Trump administration had explored if it was possible legally to dismiss their own appointed Chair of the US Federal Reserve Jerome Powell – who had only take up office in February 2018.  This was immediately understood to indicate that the Trump administration feared the downward pressure on the US economy.

It is important not to exaggerate. It is still 17 months to the US presidential election. This means the bad polling numbers for Trump can still be overcome – but they are clearly a negative for him. While some US analysts project a recession in 2019, for the reasons given here it is much more likely that the US economy will slow in 2019 rather than a recession occur – although if the economy slows significantly in 2019 a recession in 2020 is entirely not impossible, which would clearly be ultra-negative for Trump. But even without an actual recession what this combination of bad polling numbers and economic deceleration does produce is clearly pressure on the Trump administration.

This is not the only factor in the situation, but it is clearly part of the background to the Xi-Trump summit at the G20.

Author’s Note: This article was finished before it was made public that the US side requested the phone call with China which led to agreement on the Xi Jinping-Trump summit. This information is in line with the analysis in the article.

*   *   *

This article was previously published at Learning From China, and originally appeared in Chinese at Guancha.cn.

By Tom O’Leary

The changes to public finances following 9 years of austerity are very significant, and deserve greater attention as they were the purported reason for the attack on the living standards of workers and the poor. The changes also highlight both the superiority of Corbyn’s fiscal policy and the scope to immediately begin its implementation. The beginning of the end of austerity ‘only’ requires the election of a Corbyn-led Labour government.

The cloak of austerity

The hue and cry over the state of public finances at the outset of the economic crisis in 2008 was always a cloak for a transfer of incomes from workers and the poor to big business and the rich. The real content of austerity was an offensive to boost profits at the expense of both wages and the necessary funding for public services.

Like monetarism and ‘shadowing the DeutscheMark’ before it, austerity was a government-led project on behalf of the entire ruling class that was meant to restore profitability by increasing the rate of exploitation.  The rate of exploitation is here meant in the Marxist sense, the ratio between the proportion of total output that are retained by labour and proportion claimed by capital. In mainstream economics this is referred to as ‘share of national income’, but total incomes are equal to total production in aggregate.

As in the previous cases noted above, a spurious reason (inflation, currency stability, public finances) was offered to mask the real content of the project. In all cases, the social surplus generated through taxation was redistributed in favour of business through lower corporate taxes and away from public services and the funding of social security. There was a public sector pay freeze and an outright cut in welfare entitlements.  

The project has only had limited success. Fig.1 below shows the rate of return on capital employed by UK companies, a key component of profitability. This was initially boosted after austerity policies were imposed. But those policies were eased a little in the run-up to the 2015 general election to help engineer a Tory victory, and the boost to profits has dissipated ever since, even as austerity policies continued. The clear implication is that austerity policies will be extended unless and until there is a full-scale recovery in profitability, and that they are now highly unpopular.

Chart 1. Rates of Return on Capital Employed by UK Companies

Public finances now

Yet there has been a significant change in public finances since austerity was first imposed in June 2010 in the Tory/LibDem Coalition emergency budget. As the latest Financial Year (FY) has recently ended, it is possible to make very direct comparisons. The key aspects of this significant change include:

• Public sector net borrowing (excluding the bank bailout) in FY2018/19 has fallen to £23.5 billion, compared to £136.5 billion in FY2010/11
• This is a fall in public borrowing from 8.4% of GDP to 1.1% of GDP over that period
• Within that total borrowing, the public sector current budget balance  (excluding the bank bailout) has switched from a deficit of £90.7bn to a surplus of more than £19 billion in the latest Financial Year
• Crucially public sector net investment is virtually unchanged in nominal terms, at £45.7 billion in FY 2010/11 to £43.3 billion in FY 2018/19. But this represents a significant fall in net public sector investment from 2.8% of GDP to 2.0% of GDP.

Naturally, Tory ministers and their supporters in the media would suggest that this demonstrates the ‘success’ of austerity and continue to claim it was unavoidable. This nonsense is not widely aired currently, because of the deep unpopularity of austerity.

The project has been an attempt to resolve the capitalist crisis by shifting the burden of it onto the workers and poor.  But, while they have suffered badly and living standards have fallen outright, a resolution of the crisis still seems a distant prospect.

This attack on workers and the poor is shown in the public finances themselves.  Fig.2 below reproduces the chart from the Office for Budget Responsibility (OBR) showing total government receipts and spending as a proportion of GDP.  In 2010, public sector current receipts have risen from 35% of GDP to 36.9% of GDP while total managed expenditure has fallen from 44.9% to 38% of GDP.

Chart 2. Total government receipts and spending

From 2010 public sector receipts have seen their slowest rise in the entire period since World War II. This reflects repeated tax cuts for business and the highest earners, as well as the general stagnation of the economy. At the same time total managed expenditure has seen fallen sharply, only less sharp than the introduction of ‘monetarism’ first by Denis Healey and then taken up with a vengeance by Margaret Thatcher.

Also from 2010, public sector investment has been cut even more severely, falling outright in real terms from £60 billion in Financial Year 2009/10 to £42.5 billion in FY2018/19. This is shown in Fig.3 below.

Chart 3. Real Public sector finances, receipts, expenditure and net investment, £ billion

It is important to note that the rate of inflation has been very high over the period, as repeated falls in the value of the pound have pushed import prices higher. The total rise in prices over the period from when austerity was first implemented (June 2010) has been just under 20% (using the CPI measure). 

This has produced an improvement in government finances in two ways. First, VAT receipts, which account for one-fifth of all government tax revenues have risen as a result of these price increases.  Secondly, the government freeze on public sector pay has produced an extraordinary ‘windfall’, by cutting public sector workers’ pay very sharply in real terms. Of course, in the opposite direction government procurement costs will also have been increased by the surges in inflation over the period.

Corbyn/McDonnell fiscal framework

The British economy clearly remains in a crisis, and is stagnating. A radical change in policy is therefore imperative.

John McDonnell has set out an entirely new fiscal framework for Labour, which is far superior to Labour’s post-World War II policy of ‘keynesian’ demand management.  That policy collapsed with the end of the long post-war boom in the 1970s. Subsequent attempts to recreate it by low interest rates and high government borrowing for Consumption from the turn of this century laid the basis for the banking crash and recession in 2007/08.

Instead, Labour’s fiscal credibility rule (pdf) aims to balance spending and receipts on the current budget, and borrow only for Investment. As Investment is the most important factor in generating economic expansion, this is a decisive shift. It allows Labour to borrow in the most effective way to raise living standards sustainably over the long-term. Enduring rises in prosperity, which are or should be the ultimate aim of all progressive or socialist economic policy are not sustainable unless preceded by an increase in the productive capacity of the economy through Investment.

This important change in Labour’s policy was initially attacked by those wedded to the old, failed ‘keynesian’ framework on the ridiculous grounds that Corbyn and McDonnell were intending to implement austerity.  In fact, Labour’s 2017 election manifesto was accompanied by a separate document itemising a costed commitment (pdf) to increase spending by £48.6 billion. This represents a 5.8% increase over current total government current spending, or approximately 5.3% over projected total current spending by the time of a 2022 general election. The commitments are funded through taxes on big business, tax evaders and the very highest earners. This is not austerity, but the beginning of reversing it.

Crucially, the fiscal framework allows for an increase in borrowing for Investment.  Investment increases the productive capacity of the economy and is defined (in government terms) as providing a financial return on government outlays.  In Labour’s plans, the average annual outlay for this increased Investment is £25 billion per annum, which is equivalent to approximately 1.2% of GDP.  This is in addition to the level of Investment inherited from the Tory government.  As noted above, the average private return on capital is currently approximately 12.5%. There is no reason why public sector returns on capital Investment should not be as least as great.

To be clear, this is not the introduction of socialism, or anything resembling it. But is a series of significant reforms which are feasible and will improve the lives of millions of workers. It runs counter to the entire project of the British ruling class, and so will face extremely determined and powerful opposition.

The new situation

But there are two important developments which have changed backgrounds for the application of this correct fiscal approach.

The first is the state of public finances themselves. As noted above, the balance on current spending has swung into a surplus. Secondly, at the same time, the economic outlook is increasingly gloomy.

This is not simply a short-term or Brexit-related development, although it is clear that firms have been stockpiling produce and cutting Investment over the course of several months.  Instead, it is the slowdown in the world economy, the deceleration in business investment throughout the advanced industrialised economies and the fact that the British economy will suffer prolonged damage from Brexit which together offer a very negative outlook.

Fig.4 below reproduces a chart from the Office for National Statistics (ONS) showing the level of real business investment since the recession began. Business investment has contracted throughout the whole of 2018 and seems set to deteriorate sharply, based on survey evidence. In total, business investment is less than 6% higher than prior to its recession high-point in the 2^nd quarter of 2008. On current trends there is a risk that the modest rise in business investment since the recession will dissipate altogether.

This combination of factors provides both a threat as well as an opportunity. Clearly, if profits have not recovered, austerity will be resumed.  But the state of public sector finances means that there is also increased scope for an incoming Labour government to tackle the crisis. The surplus on the current budget for the FY just ended was over £19 billion. The OBR (which admittedly has a poor forecasting record) assumes the surplus on this measure will widen to £77 billion in FY2021/22, the last possible year for a general election.

Certainly, some of this surplus could be used to supplement the £48.6 billion in taxation revenues that Labour intends to spend to reverse austerity.  But not all of it should be.  Because Investment creates new means of production, the higher the sustainable level of funds allocated to Investment, the greater the growth in the means of production and in living standards that will follow.

Of course, no-one in the Labour leadership or elsewhere can know precisely how the economy will fare over the next period, nor how the new Tory leader may change either government current spending or government net Investment before then.  So, any commitments must take account of that uncertainty. But the existence of the surplus on the current budget means that increased commitments are possible without increased borrowing, while still meeting the fiscal rule.

Given its decisive role in creating new productive capacity of the economy, optimising the level of Investment should be the first priority. Taking the lower sum of approximately £20 billion in surplus of the current budget balance, this should be reallocated between current and Investment outlays for an incoming Labour government. In the current framework, the approximate ratio between increased current spending (£49 billion) and increased Investment (£25 billion annually) is 2:1. Using this as ceiling, a rule could be introduced that the ratio of additional spending between the current budget and Investment goes no higher than this.  So, of the latest current budget surplus of over £19 billion, a minimum of £6.5 billion (one-third of the total) should be allocated to additional Investment.

At the same time, the Tory government continues to cut net public Investment.  This is part of the austerity offensive, which includes removing the state from any part of the economy that could be conducted by the private sector, even at much greater cost.  On Labour’s current plans, the additional £25 billion in net investment is in addition to the current government’s £43 billion Investment for a total of £68 billion. This is currently equivalent to approximately 3.4% of GDP. This is the same as at the outset of and in response to the financial crisis in 2007 and 2008.

As the Tories may well cut net public Investment even further, as a safeguard Labour could also commit that its total commitment will not fall below 3.4% of GDP.

In summary, austerity will continue while the recovery in profits remains elusive. What is required is a government with entirely different priorities, ending austerity and raising living standards by a combination of increased taxation and borrowing for Investment. That means a Corbyn-led government. 

The current state of public finances also means that Labour’s plans can be applied in new circumstances, as the current budget is now in surplus. Without any additional increase in public borrowing, the current budget surplus can be used both to take further steps in reversing austerity and in raising the level of Investment. 

By Fiona Edwards

Jair Bolsonaro’s administration has wasted little time in advancing its project of systematically destroying the role of the state in Brazil’s economy. Bolsonaro’s radical neo-liberal offensive simultaneously encompasses drastic attacks on the economic and social rights of Brazil’s working class in addition to threatening the long term economic and social development of the country. Bolsonaro is effectively auctioning off Brazil’s future for the benefit of US capital and its allies.

The neo-liberal offensive is taking place on several fronts and includes a drastic attack on pensions, a huge programme of privatisation and the undermining of the technological development of Brazil’s economy.

Bolsonaro’s administration has embraced the era of ‘permanent austerity’ which was institutionalised by his predecessor Michael Temer who presided over Brazil from 2016-2018 following a coup that removed Workers Party (PT) President Dilma Rousseff.

Temer introduced a new ‘expenditure ceiling’ in December 2016 through a Constitutional Amendment which mandates a zero real growth rule for federal primary expenditures for the next 20 years. Temer’s harsh austerity programme made him extremely unpopular – his approval rating by the end of his Presidency was just 4% – and has left Brazil’s economy essentially stagnant, with growth of only 1% in 2017 and 1.1% in 2018 according to the World Bank.

Bolsonaro is attempting to deepen, accelerate and intensify the austerity offensive in Brazil. The project has been very bluntly described by Bolsonaro’s Minister of the Economy, Paulo Guedes, who said that he intends to “sell everything.”

Guedes has assembled a team which includes fellow University of Chicago trained economists and that is determined to systematically dismantle the state’s role in Brazil’s economy with a massive programme of privatisation and an almighty assault on the living standards of the overwhelming majority of the population.

A defining feature of Bolsonaro’s neo-liberal offensive includes the selling off of strategically important assets and industries that are crucial to Brazil’s future development to US corporations, in violation of Brazil’s national interests.

From the point of view of developing Brazil’s economy and raising the living standards of the population, Bolsonaro’s neo-liberal offensive is the exact opposite of what is required.

Bolsonaro’s drastic attack on pensions

The centrepiece of Bolsonaro’s neo-liberal offensive is a dramatic, vicious and politically unpopular attack on pensions.

Under Bolsonaro’s plan, which is currently under discussion in Brazil’s Congress, workers would lose $261 billion over the next 10 year as a result of their pension benefits being slashed and a drastic increase in the age of retirement. Under the current system men and women can claim pension benefits after 30-to-35 years of contributions respectively, which allows many to retire in their mid-50s. The proposal Bolsonaro has put to Congress would increase the minimum retirement age for both public and private sector workers to 65 for men and 62 for women.

Bolsonaro needs to persuade 308 out of 513 members of Brazil’s politically splintered lower house of Congress to vote for his Pensions Bill in order to get it passed. The unpopularity of the attack – a recent opinion poll from DataFolha showed that 51% of Brazilians are against the pensions ‘reform’ – and the resolute opposition from Brazil’s Workers Party (PT), other left wing political parties and the trade unions makes it difficult for Bolsonaro to win the necessary support in Congress to pass his proposals.

On Monday 15 April 2019, the Workers Party (PT) led the opposition political parties in the lower House in winning a majority to delay the pensions ‘reform’. Bolsonaro needs an additional 140 votes to push through his attack on pensions which would require him to build a coalition with the Brazilian Social Democracy Party and the Democratic Movement Party.

A recent article in the New York Times assesses the outlook of the Pensions Bill passing as “growing dimmer” and reports that “hearings on pension changes have devolved into shouting matches, frustrating proponents inside and outside the government, and leading even former allies to speak of Mr. Bolsonaro with open contempt.”

Bolsonaro’s team are proposing to launch a massive attack on healthcare and education should the attack on pensions fail to attract the support necessary to pass through Congress. The “Plan B” proposes to remove the constitutional guarantees which are currently in place for the funding for health and education and has been put forward alongside the Pensions Bill so that it can be used as a bargaining chip.

Radical privatisation agenda

Whilst Bolsonaro’s administration has disappointed US capital with its failure to launch a quick, successful, striking attack on pensions, it has succeeded in advancing an aggressive privatisation agenda.

In January, Bolsonaro’s Minister of Infrastructure Tarcisio Gomes de Freitas declared that the new government intended to privatise or liquidate about 100 state-owned companies during 2019, including the privatisation of key infrastructure such as railroads, ports and airports. The head of Brazil’s new Privatisation Secretariat, Salim Mattar, announced that Bolsonaro’s administration planned to raise $20 billion from the sale of state shares in public companies in 2019 alone.

Paulo Guedes reported on the progress of the Brazilian government’s privatisation programme at a recent conference in New York, stating that privatisation proceeds so far this year had reached £12 billion and expressed confidence that the goal of raising $20 billion from the sale of public assets this year will be exceeded by 40%. He also stated that the government intends to accelerate the pace of privatisation over Bolsonaro’s four year term.

In March 12 regional airports were sold off and now the Brazilian government are preparing to sell off a further 22 other airports later this year.

Crucially, Bolsonaro’s team plans to diminish Brazil’s biggest state company, the oil giant Petrobras. Salim Mattar, the leader of Brazil’s Privatisation Secretariat, announced that the Brazilian government wanted Petrobras to sell most of its 36 subsidiaries within four years in addition to privatising the Brazil state-owned power company Electrobras.

Guedes has appointed a fellow University of Chicago alumni, economist Roberto Castello Branco who is a fierce critic of state intervention in the economy and a consistent advocate of the complete privatisation of state-owned companies, to run Petrobras.

From the moment he was appointed Branco has made it clear he intends to push forward a “divestment plan” which will entail the sale of mature oil fields in addition to opening the refining sector, which Petrobras currently has a monopoly over, to the benefit of multinational corporations. Branco considers it “inconceivable” that one state-owned company has 98% of the country’s refining capacity and declared that monopolies are “absurd.” Jose Maria Rangel of the Single Federation of Petroleum Workers (FUP) has criticised Branco’s plans, stating “Petrobras is going to move to sell its refineries and fields, moving forward to reduce our company to serve international capital.”

In April 2019 the Brazilian government announced that Petrobras intends to start selling 50% of its refining capacity in June 2019, which is equivalent to 1.1 million barrels of oil per day. Such a move would severely diminish Petrobras.

The Bolsonaro administration is also undermining Brazil’s state banks in order to diminish the role of state investment in the economy. The main target is Brazil’s National Bank for Economic and Social Development (BNDES), the largest development lender in the Americas which under the Workers Party financed projects in many Latin American and African countries. Bolsonaro opposes BNDES’ practice of lending money at low interest rates to build “national champion” companies which was done under the left wing Workers Party governments from 2003 to 2016. BNDES is currently in the process of reducing its stake in the state-controlled oil company Petrobras.

Undermining the technological advancement of Brazil’s economy

Another feature of Bolsonaro’s neo-liberal agenda is to undermine Brazilian science and national technological development.

A crucial decision was made by the Brazilian government in February 2019 to approve the sale of the majority of Embraer’s commercial division to the US corporation Boeing. Embraer is a huge Brazilian aerospace company which is the third largest producer of civil aircraft after Boeing and Airbus. 80% of Embraer’s profitable commercial division is being sold-off to Boeing.

This decision means that Brazil is losing its only large, high-tech, profitable company, which will have a negative impact on the development of new strategic projects.

Manuela D’Avila, the left’s Vice President Candidate in the Brazilian elections of 2018, and member of the Communist Party of Brazil has outlined the significance of the sale of Embraer in undermining Brazil’s development:

“When Embraer was founded during the end of the 1960s, it overcame the disbelief that Brazil could make planes that could fly the entire world. This is now a reality. Today, Embraer is a private, open capital company that is strategic to Brazil in terms of innovation, economics and national defense.

“Due to the strategic nature of Embraer, the Brazilian government – which is a shareholder in the company – has a special type of stock, called a golden share, which gives it veto power and the final word over negotiations that are considered strategic, so that it can avoid allowing international transactions like this to damage our national interests.

“It is an initiative of national betrayal. The main impact of the possible sale of Embraer, is loss of intelligence and restrictions on the nation’s technological development.

“However, the debate over Embraer is opportune because it reminds us of what we want to be as a nation. Do we want to be a nation that produces knowledge and products of aggregated value or one that merely exports commodities?”

In addition to selling off the majority of Brazil’s most successful high-tech company, Bolsonaro’s government has also announced that it has frozen 42% of the budget for the country’s Science and Communications Ministry. This freeze will further undermine Brazil’s scientific and technological development. The Brazilian Science Academy and five other scientific societies have condemned the decision stating, “it will take many decades to rebuild the country’s science and innovation capacity” unless this decision is reversed.

Bolsonaro’s rising unpopularity

Bolsonaro already has the worst approval rating of any elected President by this point in their first term since democracy was restored in the 1980s. 30% of the population regard Bolsonaro as “bad or awful”, 33% have a neutral view and 32% believe he is “great or good.” On the day of his inauguration on 1 January Bolsonaro’s approval rating was 49%. However, there remains some illusions in optimism for Bolsonaro’s Presidency – with 59% believing that his government will be “great or good.”

New economic data shows that unemployment is rising in Bolsonaro’s Brazil – it increased from 11.6% in November 2018 to 12.4% in February 2019. Meanwhile the Central Bank has released data indicating that GDP fell by 0.73% in February of this year, compared to the previous month.

The clear priority of the Bolsonaro administration is to pursue an aggressive neo-liberal agenda to maximise profits for US capital and its allies in Brazil whatever the costs to Brazil’s overall development or the living standards of the population. Such an agenda, which is against the interests of the overwhelming majority of the Brazilian population, is unlikely to improve Bolsonaro’s approval ratings as it involves such a tremendous attack on Brazil’s population.

The exact opposite approach to Bolsonaro’s neo-liberal offensive is required to develop Brazil’s economy, improve living standards and advance social progress for the majority of Brazilians. Increasing state investment to build “national champion” companies, using state banks as a channel to promote public investment and building rather than selling off high technology companies is a path to Brazilian development and independence. Bolsonaro’s approach is a path to dependency and subordination to the US.

This article was originally published here on Eyes on Latin America

Why China maintained its strong economic growth

• The overwhelming cause of the slowing of China’s economy is a fall in capital/investment creation. This is shown in growth accounting by the fact that almost nine tenths of the decline in GDP growth is due to a fall in capital inputs. In national accounts data it is confirmed by the extraordinarily high correlation between net fixed investment and GDP growth of 0.81, of a correlation between gross saving and GDP growth of 0.87, and a correlation between net saving and GDP growth is 0.91 – all extraordinarily high figures.
• Demographic trends will reduce labour inputs, slowing the economy, but this effect only accounts for a small part of economic deceleration – macro-economic data shows that increased labour inputs created only a small part of China’s growth, while growth accounting shows a fall in labour inputs accounts for only about one tenth of the slowing of China’s economy.
• Growth accounting data shows that China’s TFP growth is high in terms of international comparisons – meaning it is very unlikely that China’s GDP growth can be accelerated by an increase in TFP, but that measures will have to be taken to ensure China’s TFP growth does not fall.

It is necessary to be aware of the full scale of this negative supply side shock in terms of capital creation. The decline in China’s net fixed capital investment is 9% of GDP on World Bank data. Even if the statistics on capital depreciation merit further evaluation, given their extremely high level by international standards, even measures of gross savings, which do not rely on calculation of depreciation, has fallen by 5.0% of GDP. Either figure is a severe negative supply side shock – confirming the growth accounting data which shows a sharp fall in capital inputs.

To return to the beginning of this article, the focus here is on medium/long term factors in China’s economic development. This is not contradictory to a shorter-term emphasis on demand management or supply side measures already taken to close excess capacity. However, to note again, measures affecting the demand side of the economy must necessarily operate through their impact on the supply side i.e. to produce changes in economic growth demand must create changes in labour inputs, capital inputs or TFP. Changes in demand which do not affect the supply side inputs may produce inflation or deflation, but do not produce changes in economic growth.

The consequences of this factual situation of the weight of factors in China’s economic development for economic policy are clear. As for reasons already stated TFP will be at best neutral, and demographic trends will be moderately negative, the only key input which can positively influence China’s growth rate is the level of capital inputs. This means that policies which affect capital inputs into China’s economy, that is investment, can have a powerful effect in lowering, sustaining or raising China’s economic growth rate.

This quantitative situation therefore also necessarily determines the practical efficacy of measures designed to limit China’s economic slowdown and/or to carry out any economic stimulus.

• Measures to maintain or increase market efficiency are important to try to sustain China’s rate of TFP growth but they not quantitatively able to prevent an economic slowdown – for the reasons given it is extremely improbable China could increase its level of TFP growth given its present high level. Furthermore, a strategy, which is sometimes proposed that China should allow its economy to slow but increase its TFP growth will not work for the quantitative reasons outlined – TFP growth is pro-cyclical and therefore a slowdown in economic growth will lead to a slowing of the TFP growth.
• Demand side measures to increase consumption will only be successful, for the reasons already outlined, if they produce changes on the supply side – that is, primarily if they affect capital inputs.
• Measures to cut company taxation are useful in maintaining employment and other goals but for the quantitative reasons analysed above they will only translate into faster economic growth if they lead to an increase in capital inputs – that is investment.
• In summary, given the quantitative situation analysed with demography/labour inputs and TFP, only measures which directly increase capital inputs, that is either state or private investment, will be significantly beneficial to the economic growth rate.

Practical application of policy will necessarily confirm the trends analysed. While measures such as increases in the retirement/pension age, and increases in training and education, may decrease the negative effect of demographic changes no significant body of opinion believes that a significant increase in China’s growth rate can take place due to an increase in labour inputs. There are those who argue that China’s growth could be increased due to an increase in TFP, but for the quantitative reasons given this will not be successful. For quantitative reasons the only method that will stabilise/increase growth will be an increase in capital inputs.

Postscript

This article was written to analyse in detail the slowing of China’s economy in the latter part of 2018. But its conclusion, that it is the level of investment which controls the rate of growth of China’s economy, applies equally to the good results for the first quarter of 2019. The fall in investment in 2018 led to economic slowing, the rise in investment in the first quarter of 2019 led to stabilisation in GDP growth and acceleration in other economic measures. Therefore, from both angles the data fully factually confirms that it is fixed investment which is the most powerful factor affecting China’s speed of economic development.

Appendix

This appendix is intended for economic specialists – non-specialists should know that it does not add to the main conclusions of the article. It merely indicates further substantiating evidence and explanations regarding the points in the article.

First regarding growth accounting, it is important to note the official improvements in the methods of measuring economic growth and its causes which have been formally adopted by the UN, OECD, and other statistical agencies – it is a serious problem in some literature in China that methods of measuring economic growth and its causes which are no longer accepted are used. The reasons for these changes in the official methods of calculating economic growth and its causes are analysed in detail in 为何联合国、经合组织与美国正式改变其经济增长成因测算方法？ (The Copernican Revolution in Analysis of Economic Growth is Very Significant for China). But the clearest fundamental error which had to be corrected compared to former methods of analysing the causes of economic growth was that these did not calculate changes in the quality of capital and labour inputs. This meant in the case of labour, for example, that one hour of work by a South Korean peasant in 1953, who may have been illiterate, was calculated as equivalent to 1 hour of work by a South Korean engineering PhD, and very rapidly depreciating assets such as ICT equipment were not treated differently from assets which depreciated over very long periods of time. These errors are corrected in the new internationally approved methods of calculating the causes of economic growth by:

1. Calculating separately labour quantity (the number of hours worked) from labour quality (the skill, educational etc qualification of labour);
2. Using the category of ‘capital services’ to measure the contribution of different types of capital investments (in the OECD methodology eight categories of capital assets are used ‘computer hardware, telecommunications equipment, transport equipment, other machinery and equipment and weapons systems, non-residential construction, computer software and databases, research and development and other intellectual property products.’

In this article data calculated according to these new and approved methods of calculation are used. Regarding the correlation of GDP growth and TFP growth the correlations for single years was shown in the article. However, it is useful and important to show that the same correlation exists over not merely the short but the medium term. Figure 18 therefore shows a three-year moving average for the correlation of TFP and GDP growth and Figure 19 shows a five-year moving average. The three-year correlation is 0.81 and the five-year correlation is also 0.81. Both correlations are extremely high. The caveat that correlation does not establish causation is irrelevant as this extremely high correlation shows that it is not possible to increase China’s TFP growth while reducing China’s rate of GDP growth – that is a strategy of ‘lower GDP growth and higher TFP growth’ will not work.

By Ken Livingstone

We are quickly running out of time to make the necessary steps required to prevent global warming exceeding the critical point of a 1.5 degree celsius rise. The International Panel on Climate Change has argued we have just over a decade to take the decisive action to reduce the amount of carbon in the atmosphere. We face a direct existential threat if we do not rapidly switch from fossil fuels by 2020, and a failure to do so will mean runaway climate change.

Already we are seeing record-breaking temperatures, extreme heatwaves, storms, floods, and wildfires leaving a trail of death and devastation. As the UN’s Antonio Guterres has said, scientists have warned about global warming for decades, but “far too many leaders have refused to listen [and] far too few have acted with the vision that science demands.”

When it comes to having both the vision and policies needed to address these severe dangers, it is only voices from the left that can put forward the radical changes to the economy needed, and it is the globally resurgent extremeright that is instead forming an international axis of climate change denial. Specifically, Donald Trump’s administration is continuing to undermine the Paris Climate Agreement and has made clear that the US will withdraw from it when the rules allow him to do so in 2020.

He is joined in this by the far-right president of Brazil Jair Bolsonaro, who has issued an executive order to facilitate the acceleration of deforestation in order to open up the Amazon rainforest for further exploitation by agribusiness, mining and construction companies. This move could destroy the ‘lungs of the planet’ by reducing the planet’s ability to absorb and store carbon.

While Bolsonaro and Trump claim these devastating policies are in the economic interests of their countries and populations, in reality they only advance short-term profits for a tiny elite. In the medium to long term they will have a devastating impact on the living standards of the overwhelming majority, especially the poorest, who are impacted by climate change the most.

This reactionary agenda faces stiff resistance from climate justice campaigners. Importantly we are also starting to see the seeds sown of an international political movement demanding a new, socially and environmentally sustainable model of political economy.

This movement understands that we need a fundamental transformation away from neo-liberalism, and that it is impossible to tackle climate change without simultaneously reducing inequality, and vice versa.

In the belly of the beast itself, the Green New Deal resolution put before the US Congress by Alexandria Ocasia-Cortez coherently melds action to tackle climate change with measures to counteract the obscene inequality and wage stagnation that has built up over decades of neo-liberalism.

The resolution starts with the Intergovernmental Panel on Climate Change’s conclusion that the only science-based target to tackle the climate crisis is to constrain a global average temperature rise below 1.5 degrees. But it also takes as its evidential starting point “hourly wages overall stagnating since the 1970s… the third worst level of socio-economic mobility in the developed world before the Great Recession…[and] the greatest income inequality since the 1920s”, including a specific focus on the racial and gender wealth divide.

To overcome this, it advocates the US government launches at least a trillion dollars in state investment to eliminate fossil fuels and switch to 100% renewable energy in the next decade, which would inevitably boost growth and create quality jobs.

Labour’s proposed green jobs revolution, creating hundreds of thousands of jobs and recently elaborated by Rebecca Long-Bailey, also shows that Jeremy Corbyn-led Labour is a central part of this international movement for change.

As Rebecca said, “We believe that together we can transform the UK through a green jobs revolution, tackling the environmental crisis in a way that brings hope and prosperity back to parts of the UK that have been held back for too long.”

After decades of neo-liberalism, our economy is structurally weak and deeply unequal. Whole communities have been de-industrialised, insecure and low paid work has soared, our infrastructure is underinvested and crumbling, and our society’s fabric is being pulled apart by austerity. In direct contrast to this failed approach, Labour’s green jobs revolution can improve the living standards of millions.

Jeremy Corbyn understands that only a total transformation of the failed neo-liberal model can change this, protecting both people and planet. This not only offers hope for a better life here, but is also part of a new international alternative to ensure humanity has a future.

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The above article was previously published here by Labour Briefing.