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.392ZWorkers and the poor hammered as Hammond gets UK ‘match-fit’ for Brexit By Tom O’Leary
The economic policy outlined by Chancellor Philip Hammond in the Budget is so extreme that it represents a new fierce attack on living standards for the overwhelming majority. This is despite the fact that there is in total a modest giveaway, or fiscal loosening. This is because it is based on narrow class interests, a very large giveaway for big business and an almost equal series of taxes on workers and cuts in social security.
The character of this Tory attack, and the narrowness of the beneficiaries of the Budget opens a wide political and then economic opportunity for Labour. As a result, it is extremely important to be clear on the fundamental economics behind the Budget.
Hammond has effectively signalled a rise in taxes (National Insurance Contributions, NICs) on the self-employed, to widespread criticism. The self-employed now includes a wide array of social categories, from extremely well-paid professionals, through to what are actually small businesses, to a surge in fake self-employment, where workers are forced off payrolls so that employers can avoid employers’ NICs, statutory sick and maternity pay and other protections. Numerically, it is the latter category which is the largest.
According to the Resolution Foundation, the median average income of the self-employed will rise to £13,200 next year. If so, it will still be less than half the average wage. The Foundation’s support for the change in NICs is entirely misplaced. Those on average wages will be at least £200 a year worse off. Any change to workers’ NICs should focus entirely on the very high paid, or on employers’ NICs.
The reason for this political gamble should be clear. Hammond expects much more fake self-employment over the next period in response to Brexit and his own response of ‘making the UK competitive’. This strategy means turning Britain into a low-tax, low-investment, non-union and low-pay economy and Hammond cannot afford to lose the tax revenues from this growing army of ‘self-employed’. This gamble illustrates the high stakes for the labour movement, for the whole economy and all political actors over the next period.
McDonnell’s correct framework
Hammond and this Tory Government share the main tenets of the reactionary and illogical framework of their predecessors. Hammond aims for a zero public sector deficit. As Government expenditure is comprised of two quite separate categories, public current spending and public investment, so aiming for a balance on the entire budget effectively means refusing to borrow for investment. For a Government fond of individual analogies, it is equivalent to refusing to borrow for a mortgage to buy a house because you have confused it with your credit card bill. Perhaps a closer analogy would be a business that refuses to borrow to grow.
Current Government spending includes all such items as the NHS, the police, all public services, including public sector pay and pensions, and so on. If there is a deficit on current spending it can be brought into balance not by cuts but either by increasing tax or by increasing economic activity which generates tax revenue. As only the latter can sustainable be repeated, the way to raise revenue is by increasing investment. Permanent current budget deficits mean borrowing for consumption when it could be used for investment. As borrowing for consumption cannot sustain growth it simply leads to greater government debt and to a bloated class of ‘investors’, and a finance sector that subsists on the interest payments from that Government borrowing.
By contrast, government investment includes every type of public sector investment, in rail, roads, housing, infrastructure, broadband, and so on. Arguably, spending on education is more appropriate to this category, although not officially classified as such. Investing in these raises output over the long run.
John McDonnell has correctly elaborated a fiscal framework which makes the distinction between current spending balances and borrowing for investment. This is completely different to the Tories, who pursue a deeply reactionary policy of transferring incomes and wealth from workers to business and from poor to rich. This is cloaked in the economic illiteracy of balanced budgets, fixing roofs and gas in the tank.
Labour’s policy is to balance the current spending budget over the business cycle and to increase borrowing for investment. It is based on economic logic not reactionary sound bites, so it has very few serious critics, even from the economic mainstream. This is because the greater the borrowing for, and returns from, public investment, the greater the funds that can subsequently be directed to public services.
The maintenance of the current leadership of the Labour Party is also the only hope of ending austerity, so these questions are of the utmost seriousness.
OBR forecasts surpluses
The Office for Budget Responsibility (OBR) has a poor record on forecasting GDP growth and its components and their effect on the fiscal aggregates. So its forecasts must be treated with caution. However, the startling fact is that the OBR is forecasting a surplus on the current budget well before the end of this Parliament.
In the Tory framework, this is of no account because they aim for a balance on the entire budget, including investment. This has nothing to do with fiscal sustainability. Falling investment (and total investment fell in 2016) increases instability, a propensity to crisis and fiscal receipts based on other factors such as unsustainable consumer spending.
The purpose of the current Tory plan and its predecessors should be clear from the fact that, as taxes have risen for workers and the poor, there have been a series of deep tax cuts for businesses and the rich. The Corporation Tax rate was 28% in 2010 and is set to fall to 17%. This is precisely done to transfer incomes to capital. The claim is that this boosts ‘entrepreneurship’ and business investment. The entrepreneurship is the surge in fake self-employment and as noted business investment fell in 2016.
But a surplus on the current budget matters a great deal in the Labour framework, even if it is only a forecast. The full table from the OBR budget document Economic and Fiscal Outlook is reproduced below. The balance on the public sector current spending is highlighted both in terms of proportion of GDP and in cash terms.
According to the OBR the current budget will be in surplus in the Financial Year prior to the next legally mandated election in 2020. In GDP terms the surplus will by then be 1% of GDP or £21.3 billion. In the following two years it will be 1.3% and 1.6% of GDP respectively, or £29.6 billion and £37.1 billion respectively.
For Labour this surplus would mean that there will be significant additional funds to immediately alleviate and begin to reverse austerity, in addition to its own planned borrowing for investment. Realistically, even with an emergency Budget that would surely be necessary early in the new Parliament in 2020, the following year is when a Labour Government could have a much more significant impact on the direction of the economy and the allocation of public expenditure. In those years the current budget surpluses are forecast to be in the order of £30 billion to £37 billion.
Calculating the effect of policy
The McDonnell framework represents a break from dominant Left thinking in the Western economies and elsewhere, a ‘keynesianism’ which has nothing to do with Keynes. This argues that increased Government spending will increase economic activity on a sustainable basis. In this case by ‘spending’ is meant current spending. Government current spending has risen by £90 billion in nominal terms under the Tories without ever supporting a sustainable recovery. In fact, it is a marker of economic failure, as cuts have simply led to depressed activity, more poverty and upward pressure on tax credits and social security spending. Taxing one average paid worker to subsidise the wages of one poorly paid worker does not lead to growth.
Instead, investment leads growth. It is the most important factor in determining growth after the division of labour/socialisation of production. The effect of investment on raising output is measured as the Incremental Capital Output Ratio (ICOR), which simply measures the ratio of changes in the capital stock and changes in the level of output. The Office for National Statistics’ current estimate of the ICOR is 4. This means that that the capital stock must increase by £4 billion in order to increase output by £1 billion. The return on investment takes place over several following years.
Assuming no change, this means that every £4 billion of increased public sector net investment will yield an additional £1 billion in output, as well a large increase in tax revenues (and reduction in welfare outlays) based on that increase in output. If current ratios are unaltered, then a £4 billion increase in investment will yield a £1 billion increase in GDP and (using UK Treasury analysis) a £750 million improvement in Government finances (comprised of rising revenues and, in a smaller degree lower outlays). This is an annual return on investment directly to the Government of 18.75% per annum for the entire life of the investment. It is about 10 times greater than the Government’s average cost of borrowing. This underpins the mathematical logic of Government borrowing to invest.
However, current ratios are altered. Removing the UK economy from its largest market and replacing that with an unknown series of tariffs and non-tariff barriers will have a wholly detrimental effect.
Yet this will not even primarily be felt in terms of trade, but investment. Investment fell in 2016, which is highly unusual either outside of recessions or as a precursor to them. It was clearly a Brexit effect. Removing the UK from the EU Single Market will depress the level of investment, both domestic and from overseas. It will also reduce the efficiency of that investment, as the UK will be required to pay more for the world’s most advanced capital goods and may even have less access to these in areas such as aerospace, biotech, renewable energy production and storage and so on.
As the OBR has little or no firm information to go on, its lower GDP forecasts after 2017 do not reflect likely Brexit outcomes. They are simply based on an analysis of current trends. Therefore the forecast level of GDP and the improvement in Government finances is likely to be significantly worse.
If the Brexit timetable is accurate, it is planned that the UK will be outside the EU Single Market before the next election. If the OBR is proven right, the current budget will already be in surplus before then too.
But Labour does not have to wait until that time before setting out its alternative. The maximisation of economic growth depends on the accumulation of productive capital through investment. But to be politically sustainable, there must also be easily identifiable improvements in the living standards of the population both through its real incomes and its public services. Therefore, a political judgement is required in the allocation of resources.
Labour can announce now that it would spend, say, £20 billion of the current budget surplus the OBR has forecast in beginning to reverse austerity in key areas such as the NHS, social care, public sector pay and childcare. That can be announced now as a solid commitment for its first year in office, Financial Year 2020/21. A sustained programme of publicity can be used to illustrate how the NHS will improve in each area, or how public sector pay can rise in the first year, and so on.
The remaining £10 billion, of the £30 billion, could be added to Labour’s commitments on investment. Here, it seems that the pledge is to increase public sector investment by a further £25 billion in each year. This could now rise to £35 billion to improve rail, build homes, invest in renewable energy and so on.
This means Labour can promise both to increase current spending, which is what will determine votes and support, as well as increasing investment which will actually sustain recovery. From that, further Government funds can be then allocated to both spending and investment in proportion, based on the 18%-plus returns from investment. In this framework the returns on investment from the previous year can be added to government investment and government consumption.
Labour must also answer a key question that will be posed What if the OBR is wrong, or significantly lowers its forecasts to reflect the deal on exiting the EU as it becomes more apparent? From the point of view of people who believe that Brexit leads to prosperity this is not a major risk. But, if that risk materialises, then Labour must have a plan for that eventuality, and an answer now, otherwise it has no funding basis for its pledges.
The current Labour policy has a ‘knock-out’, where the fiscal rules can be suspended in a crisis, with interest rates at zero as a trigger-point. If it is going to use the OBR forecasts as the basis for pledges, and the forecasts could change very adversely once details of the Brexit terms are known, it needs another ‘knock-out’.
A Brexit/OBR knock-out would maintain the pledges to increase investment and begin to reverse austerity. But, if the forecasts are much worse or the emerging Brexit deal is clearly very adverse, Labour can pledge to meet these by emergency increased borrowing. Labour would also politically need to oppose the Brexit effects by opposing the Brexit deal itself.
The Hammond Budget makes no pretence to deficit reduction. It is simply a transfer of incomes from poor to rich and from workers to business. The attack on the ‘self-employed’, who are mainly now casualised workers, is a high-risk strategy, which reflects the expected growth in casualisation in the post-Brexit economy.
This policy is cloaked with a reactionary determination to balance the entire budget, including even investment. John McDonnell’s framework is borrowing only for investment and balancing the current budget, which is entirely correct. As the OBR is forecasting large surpluses on the current budget balance, these forecast surpluses can be used now to illustrate the benefits of the Labour position of beginning to reverse austerity and increase investment. This is a vote-winning and sustainable combination.
But the OBR could be wrong, especially as it cannot now take into account the effect of any Brexit terms deal. Labour could adopt an OBR/Brexit ‘knock-out’ on its spending and borrowing plans. If the forecast or the reality deteriorates sharply it would not change those plans but would temporarily increase borrowing to cover both. This would also require politically opposing any Brexit deal which led to such a negative outcome.
.009ZBritain isn’t booming. It’s in a crisisBy Tom O’Leary
The latest UK GDP data confirm that the British economy remains in a crisis. As government spokespersons never tire of telling us the opposite, and are dutifully echoed by the majority of the media, then it is important to set out the factual case on the economy and to explain where the discrepancy between rhetoric and reality arises.
Once the factual analysis is made the following points are clearly established:
- The UK remains in a crisis
- On key measures of the living standards of the population, the UK is in the worst position of all the advanced industrialised economies
- Fundamental economic factors mean that this crisis is set to deepen
- The project of austerity will be resumed with a vengeance in response to Brexit
.507ZThere is no ‘People’s Brexit’By Tom O’Leary
The certainty that Brexit will push living standards lower is not really a forecast- it is already happening. Fundamental economic forces mean that Brexit can only have a negative outcome.
Immediately following the referendum the pound fell sharply and has more or less stayed at that lower level since. The 13% decline means that CPI inflation is moving remorselessly higher and will continue to do so. Higher inflation means lower wages and incomes in real terms.
People are already worse off, and Brexit has not even begun. On the current timetable negotiations are supposed to be concluded in early 2019. Only at that point will the massive disruption caused by Brexit really begin to take effect.
We will see then whether all the car makers stay, or if the Government has to bribe them with our money to stay. In either event we will be worse off. There should be no silly crowing about the probably departure of the banks either. Most workers in finance are not paid much more than average wages (and 165,000 of them are in unions). In all industries where there is deep connection to the EU there are likely to be job losses or contraction, whether these are complex supply chains, key export markets or simply the dependence on the free movement of labour (such as the NHS, hotels, agriculture).
The Government has prioritised reducing immigration over increasing prosperity. This too will make us worse off. Migrants are disproportionately workers. Two thirds of EU migrant population are in work, while less than half the UK population is, as they are in school, college or have retired. Reducing them will lower output and output per capita. We will pay the price in terms of lower tax revenues and even worse public services.
There is no socialist or even ‘people’s Brexit’. Everyone operating in the UK will still be subject to the laws of the market. The problem will be that the market will suddenly be much smaller and less productive than the EU Single Market the UK has been participating in for the last 25 years. If the Tories continue to get their way, there will also be a stripping away of the workers’ environmental and consumer rights that were instituted under the EU’s ‘Social Chapter’. These have long been a Tory target for abolition in the UK. Post-Brexit, the economy will be operating behind a series of tariff and non-tariff barriers as others protect their markets. All of these will make the economy less competitive and will increase costs.
Of course, the pound could depreciate sharply again to offset these disadvantages, but this would lower living standards and real incomes even further. If currency devaluations alone were the answer then Britain would be an earthly paradise. In 1940 there were 5 US Dollars to the pound. Now there are 1.25. Over the same period the relative size of the UK in the world economy has shrunk dramatically in real terms, to less than one-third its proportion of world GDP, 2.3% now versus 7.3% in 1940.
There is a widespread notion on the right that Brexit will lead to ‘taking back control’ of the economy. Unfortunately, this is also shared by important sections of the left. It is a delusion. The 1930s saw a whole series of countries taking back control, in what might be called an early anti-globalisation movement. Although the authors of these policies are now widely and rightly derided their arguments will actually be very familiar.
It was said that other countries were taking our jobs, they are dumping their output on us causing our industries to fail and that those industries need protecting and government support, or state aid. Once we have done that, then we would be able to trade freely with the whole world. Of course, the more virulent version also included vile invective against foreigners, immigrants, Jews, gay men and others. When the economic policies went spectacularly wrong, the racist invective became policy.
The reason these policies failed spectacularly should be clear. Behind the protective barriers, costs rise, potential markets are closed off (especially as they respond with barriers of their own), industry becomes less not more productive, profits decline and workers are laid off. The economic crisis that ensued was finally resolved only by general rearmament.
What Adam Smith called the division of labour and Marx called the socialisation of production is actually the most powerful economic force of all. Ever since some of us made the spears and others went hunting with them, we have all collectively benefited from the socialisation of production. Statistically, a key measure of this socialisation are inputs and these grow faster than GDP itself.
If a country cuts itself off from world markets, or simply erects barriers between itself and the world then it diminishes its own participation in the international division of labour, the international socialisation of production. Now, instead of being part of an intricate supply chain making cars, there are tariffs and other barriers which increase the cost of production. The UK becomes a less efficient place to make cars and production shifts at some point to the larger market where there are fewer or no barriers. Or pharmaceutical companies importing inputs (biochemical products, electron microscopes, processing equipment, and so on) find they now come with the additional costs of tariffs.
As a result of all this, investment is likely to be diverted to the bigger market, the market not burdened with tariffs. This is where the investment returns will be greater. Investment is the second most powerful determinant of growth, after the socialisation of production.
The UK will experience lower investment and even that investment will become less efficient, as access to the most technologically developed investment goods becomes more expensive. The UK economy will become a low investment centre of low-cost, low-value added production and wages and living standards will reflect that. So too will public services.
If I cut my daily calorie intake in half, I cannot say what my weight will be in three months’ time, but it will be lower. Forecasting a disastrous Brexit is not project fear. It is a certainty. It is fundamental economics.
A slightly amended version of this piece first appeared in the latest issue of Labour Briefing (Co-operative).
.790ZThe alternative to the EU Single Market is TrumpBy Tom O’Leary
Once Britain leaves the EU Single Market the sole realistic alternative will be to do a trade deal with Trump. This will be far worse than the current Single Market and will also be far worse than the TTIP (Transatlantic Trade and Investment Partnership) which was formulated under Obama.
The limits on trade are ultimately set by the extent of the world market. Although world trade grows over time and tends to grow more rapidly than world output, the scope for trade is itself limited by the size of the world market. Like any country, the UK cannot trade with Mars, or imaginary countries or under imaginary conditions. It can only trade within the boundaries of the world economy. If the UK leaves the EU Single Market it really only has one other option to partially replace the trade that will be lost. The real choice is not between the Single Market and ‘prosperity on the open seas’ as many Brexit supporters seem to believe. The actual choice is between the EU Single Market and Trump’s America.
The reason the choice is so stark is purely factual. The world has three continental-sized economies, the EU, the US and China. In strictly cash terms they together account for 61% of the world economy. It is not possible to maximise the prosperity of any economy by focusing on the remainder of the world economy. The next largest economy in cash terms is Japan, which accounts for less than 6% of world GDP, and this share is declining.
If Purchasing Power Parities (PPPs, which adjust for distortions created by exchange rates) are used, the EU, US and China still account for half the world economy, 49.8% of GDP using World Bank data. The next largest economy behind these three is India, and is half their size in PPP terms. Table 1 below shows the relative size of the world’s leading economies, and includes the UK economy for reference.
The pursuit of ‘free trade’ deals is a mirage. Currently, the world economy does not operate a free trade system. It is not feasible that it will in the near future, although fundamental forces push in that direction over the longer run. Instead, countries operate behind a system of tariff barriers on goods and services and impose restrictions (non-tariff barriers) on goods and services. Almost all ‘free trade agreements’ are in reality agreements to reduce these tariffs and barriers, not to eliminate them.
This is not the same within economies, which generally operate with far fewer barriers and tariffs. This is true within the US economy, as well as China and the EU, as each of them operate their own ‘single market’ (as does the UK). It is this closer approximation to free trade that the UK is leaving.
It is not possible to construct a single significant trade deal which would allow the same level of unfettered or relatively free trade as currently exists within the EU Single Market. This is especially true given that the parties to a trade agreement operate different currencies. Trade and other barriers remain in place in part to offset the possibility of a sharp currency devaluation by one side, which undermines the competitive position of the other.
Most single markets operate with one main currency. The UK had a highly unusual and privileged position within the EU in being allowed to have freedom for the currency to fluctuate while being in the EU Single Market. Partly as a result of this freedom, the UK has actually been a greater beneficiary since the creation of the Single Market than the rest of the EU (as shown in Chart 1 below).
Table 2 below shows the UK and EU per capita GDP from 2003 to 2015. For comparison the US and China are also shown. The UK performed significantly better than the EU and marginally better than the US on this measure, although of course they all performed much worse than China.
It is also completely impossible to construct a series of trade arrangements which allow the degree of free trade equivalent to the free movement of goods, capital, firms and labour in the EU. This is because each country’s trade priorities and interests are different. Every trade deal done affects other potential trade deal.
So, where the US might insist on free trade in most agricultural goods which would devastate farming in this country, India would insist on protecting its farmers from British and American competition. India would therefore be unable to conclude a UK trade deal including agriculture and the British approach would to be to limit freer trade in another sector reciprocally. In fact concluding any serious trade deal with India or other countries will be difficult unless the UK changes its attitude to immigration. Theresa May returned from her much-vaunted trade trip to India with virtually nothing, as she refused to allow more Indian immigration, business and student visas.
Therefore, the deal that will be struck with Trump will be decisive. It will also reflect the relative economic interests of the US and the UK. It will not reflect any ideological commitment to free trade. It is clear that Trump has no such commitment.
The terms of negotiations between the UK and US will reflect the real relationship of forces between the two economies. The US economy is approximately 6.5 times greater than the UK economy. But this is not the sole measure of the UK’s relative weakness. There are only two economies in the world larger than the US, which are China and the EU. The UK is leaving the EU and is prevented from allying with China in trade and investment terms because it is hamstrung by its own backward ideology. It has only one choice when the EU is rejected.
By contrast, for the Trump negotiators, there are ten economies in the world whose GDP is greater than or more or less equal to that of the UK (on a PPP basis). It will be the UK which is desperate for a deal, not Trump.
Dealing with Trump
Trump is not a neo-liberal, but a protectionist. He does not favour tearing down all protective walls and barriers in the manner of the ‘Washington Consensus’, which has dominated official policy making for more than 35 years. Trump has issued a series of threats regarding new US tariffs and has suggested that China, Germany and Japan be declared ‘currency manipulators’. Under US law this would allow the imposition of trade tariffs and sanctions on the targeted countries.
This list is not accidental. The three countries have the largest external surpluses (current account surpluses) in the world, while the US is the world’s largest deficit country in cash terms. The US requires capital inflows to fund its deficit and these are the countries which can provide those flows from their own resources. If, as seems likely, Trump will cut taxes for business and the rich and may also increase spending on the military then the external deficits will widen and US dependence on those inflows will only increase.
Germany is a long-standing ally of the US. Japan is too and actually adopts a wholly subservient role to the US. Japanese Prime Minister Abe caused embarrassment and outrage at home when he suggested Japanese investment could create 700,000 US jobs even while Japan itself is stagnating. Japan outdoes the obsequiousness even of the UK’s ‘special relationship’.
Yet Germany and Japan get the same initial treatment as China, who members of the Trump Administration openly describe as an enemy. The UK should also therefore expect the tactics of bullying and threats to be deployed in promoting US economic interests in any trade deal. There is already one trade deal crafted, the Transatlantic Trade and Investment Partnership (TTIP). But, despite the acceptance of US negligible environmental and consumer standards, and the legally privileged role for multi-national companies, and the inevitable assault on public services like the NHS, Trump has binned the TTIP because it did not promote US business interests sufficiently. Trump does not do ‘quid pro quo’. There are only winners and losers in his deals, and it is absolute certain that the UK will not be the winner. Any deal eventually struck will be worse than TTIP.
Will it work?
Because something is objectionable it does not mean it cannot happen, or that it cannot endure for a period. The question must be posed, would a trade deal with Trump work? Would a central trade deal with the US supplemented by less comprehensive deals with other countries compensate for the lost trade with the EU?
Of course, it is impossible to know now the precise level of tariffs and non-tariff barriers that will be imposed on the UK outside the Single Market, although if Theresa May’s Hard Brexit is not opposed the terms are likely to be very onerous. But the sheer volume of the respective UK trade ties to the EU and to the US make it impossible that increased trade with the latter could off-set a significant decline in the former. The total volume of UK-EU trade in goods and services in 2016 was £385 billion. The equivalent volume for UK-US trade was £84 billion. These proportions mean that even a small proportionate fall in EU trade would require a significant rise in US trade volumes simply to stand still.
Here it is important to point out an important fallacy which focuses on trade balances rather than trade volumes. It is an error made by Trump himself, but unfortunately is widely echoed in broader economic commentary, and lends his bombast credence. Trump argues that US industry is being ‘killed’ by cheap Mexican labour and cites in evidence the wide trade gap with Mexico since the introduction of the North America Free Trade Agreement (NAFTA).
NAFTA was introduced in 1994. Since that time the level of US exports to Mexico have increased by 413%. Imports have grown by 591% and the US trade balance has switched from a $5 billion surplus to $58 billion deficit. In the Keynesian system of GDP accounting net exports are now a negative. But the idea that the increase in exports to Mexico, and the jobs that depend on them makes the US worse off is ludicrous. The US is a significant beneficiary from NAFTA in much higher exports as well as much cheaper imports.
In reality the generalised trade deficits of the US, like the UK, arise because it is uncompetitive. The US is uncompetitive because it invests too little to sustain both the prevailing level of the currency’s exchange rate and trade balances or surpluses. It runs trade deficits with virtually every other country on the planet, including countries where wages are higher, such as Germany. One measure of the US lack of competitiveness is that the US even runs a trade deficit with the UK, and is the only large economy to do so. Only a sharp increase in the rate of investment, probably combined with a large currency devaluation could reduce the chronic US trade deficits. Trump may consider the latter at least, but a falling US Dollar would undermine efforts to get overseas investors to increase their funding of growing US deficits.
The only realistic alternative to membership of the Single Market is for the UK to do a trade deal with the US. Trump’s version of ‘making America great again’ is to make other countries worse off. The UK will be obliged to take whatever deal is offered, which is likely to be worse than the TTIP. Any new deal is unlikely to compensate for the lost trade with the EU and will come at a significant price, in terms of workers’ rights, environmental protections, consumer safeguards and the privatisation of UK public services. This will all be a direct consequence of Brexit.
.093Z2016’s economic data shows the claim of US ‘strong economic recovery’ was a mythBy John Ross
- The major global economic development in 2016 was a sharp slowing of the US economy – as is shown below;
- Large parts of the financial media failed to analyse this reality of slow US growth and continued to repeat a myth of ‘strong US recovery.’
- What is the real state of the main centres of the world economy – the US, the EU and China?
- Given that accurate analysis of the state of the US economy is extremely important both in itself and for economic policy, why did sections of the financial media continue to publish inaccurate material about the US economy?
- US GDP growth fell from 2.6% in 2015 to only 1.6% in 2016 – that is during 2016 the US economy slowed down by almost 40% from its previous growth year’s rate.
- US per capita GDP growth fell from 1.9% in 2015 to only 0.9% in 2016 – US per capita GDP growth therefore declined to under half of its previous year’s growth rate, and fell to less than an annual 1% which is approaching stagnation.
- China – 6.7%
- EU – 1.9%
- US – 1.6%
That is the actual trends in the world economy were the exact opposite of those being claimed in Bloomberg and other sections of the Western media.
- First given the proven inaccuracy of the Western media the role of independent factual studies by Chinese think tanks and research organisations such as Chongyang Institute for Financial Studies is vital.
- Second, that the publication of research by Chinese media is crucial for getting accurate data and analysis into the hands of companies and policy makers.
.430ZNo ‘Project Fear’- economy is faltering post EU referendumBy Tom O’Leary
The UK economy has slowed since the Brexit vote. This is long before Brexit actually takes place, which will cause a further sharp deceleration in the economy and significantly lower living standards.
The latest GDP data have been widely hailed as confounding the authors of Project Fear, including the former Chancellor George Osborne. His talk of an immediate recession on a Leave vote was clearly a foolish exaggeration. By contrast, the Bank of England’s sober assessment focused on the long-term and argued that growth and living standards would be significantly lower as a result of Brexit. The BoE’s assessment may be an under-estimate as it probably takes insufficient account of the depressing effect on investment.
The GDP data show a slowdown. In 2014 GDP grew by 3.1%, which slowed to 2.2% in 2015 and slowed again to 2% in 2016. In the final quarter of 2016 the preliminary estimate is that agriculture, construction and production combined contributed just 0.2% to growth. Instead, the economy is running on services, especially retail sales growth.
As prices are rising, there is a widespread assessment that consumers are spending at a rate far higher than income growth in a pre-emptive move against rising inflation in 2017. If so, consumers are probably right. Chart 1 shows the effect of changes in the value of the pound (using the Bank of England’s Sterling Trade-Weighted Index) on consumer prices. In this chart the consumer price inflation rate is lagged by 18 months, as changes in the value of the currently take their time to work through the economy. The Bank of England’s projection is that Inflation will rise to 2.8%. This would probably mean stagnant or even falling real wages once more. However, the last time the pound fell as sharply as after the Brexit vote, inflation rose to 5%. This would certainly mean sharply falling real wages.
Consumption-based services are among some of the lowest productivity sectors of the economy. The much weaker growth of manufacturing and industrial production at the same time means that employment patterns are changing in a negative way. In the 3 months following the referendum manufacturing and construction jobs combined have contracted by 60,000, having expanded by 136,000 in the 12 months prior to the referendum. Crucially, total hours worked for the whole economy have recorded the first fall since the stagnation of 2011.
It was a foolish exaggeration from the Tory leadership of the Remain campaign to suggest that the UK economy would immediately go into recession with a Leave vote. The negative effects of the Brexit vote provoked a sharp fall in the pound and interest rates were cut. These averted sharp slowdown, but the inflation effect will cut living standards.
The real effects of Brexit will be felt over the medium-term and will naturally be strongest only if and when Britain leaves the Single Market. Even so, it is clear that the economy is already faltering. 2016 GDP growth was weaker than in 2015 and in 2014. The economy is almost wholly reliant on services led by retail sales, which cannot be sustained.
Consumption cannot lead growth. The deepening imbalance in the economy is leading to job losses in manufacturing and construction, where there had been growth prior to the referendum. Worryingly, total hours worked have contracted in the near-term. If this persists in the continued absence of investment growth, a contraction in GDP and living standards would be almost unavoidable.
The Brexit vote is already leading to economic slowdown. Brexit itself will lead to job losses and lower living standards on a large scale.
.914ZTrump’s consequences for the US economy explained in 3 chartsBy John Ross
There has been much discussion on the likely effect of Trump on the US economy. But some of this discussion fails to distinguish clearly between short term and long term effects of Trump. This can lead to wrong interpretations of events and trends as they unfold. The aim of this article is therefore to set out the fundamental parameters of the US economic situation as it confronts Trump. This can be clearly shown in three charts showing the fundamental features of the US economy which are given below. These show:
- There should be a short-term acceleration of growth during the early period of the Trump presidency, for the simple statistical reason that in 2016 the US economy was growing significantly below its long-term average. A move of the US economy up towards its long-term average growth rate will therefore create the illusion that the US economy is improving during the early period of Trump’s administration – when it is in reality a predictable statistical effect.
- Trump, however, cannot accelerate the long-term US growth rate without fundamental changes in the US economy which are very unlikely for reasons analysed below. Therefore, over the long-term Trump will not accelerate US economic growth.
Analysing these most fundamental trends in the US economy also identifies which key US data must be watched carefully to assess the success or failure of Trump’s economic policy in both the short and long term.
The long-term slowing of the US economy
To start with the most fundamental trend of US long term growth, Figure 1 shows US annual average GDP growth using a 20-year moving average to remove all purely short term fluctuations due to business cycles. This data shows clearly the most profound trend in US growth is a half century long economic slowing – the peaks of US growth progressively falling from 4.9% in 1969, to 4.1% in 1978, to 3.5% in 2003, to 2.3% by the latest data for the 3rd quarter of 2016.
The cyclical situation of the US economy
Turning to short term developments, the trend of US growth shown in Figure 1 is a long-term average. This necessarily means that short term economic growth is sometimes above and sometimes below this average. Figure 2 therefore shows the short-term trend in US growth, the economy’s year by year growth rate, compared to the long-term average.
It may be seen from Figure 2 that the US economic growth in the year to the 3rd quarter of 2016 was only 1.7%. That is, the US economy in the recent period leading up to Trump’s election was growing at significantly below its long-term trend. For this reason, purely for statistical reasons, it is probable that the US economy may accelerate in the short term.
As this would coincide with the initial period of Trump’s presidency this would lead to the claim ‘Trump is improving the US economy’. But this is false, such acceleration would be expected purely for statistical reasons.
The determinants of US growth
Finally, if the reasons for the US long term economic slowdown are analysed these are simple. The most fundamental of all features of the US economy is that it is a capitalist economy. This means when there is a high rate of capital accumulation the US economy grows rapidly, when there is a low rate of capital accumulation the US grows slowly.
In terms of economic statistics net capital accumulation is equal to net savings. Figure 3 therefore shows the long-term trend in the US savings rate/capital accumulation rate since 1929. The curve of long term development of the US economy can be seen to be clear:
- During the crisis creating the beginning of the Great Depression in 1929-33 US capital accumulation was negative – that is the US economy was creating no capital. This necessarily produced a deep crisis of the US economy. After this the rate of US savings/capital creation rose, with a powerful acceleration during World War II, to reach a long-term peak as a percentage of the economy in 1965.
- After 1965 US net savings/capital creation steadily fell as a percentage of GDP until it once again became negative during the ‘Great Recession’ in 2008-2009. This declining trend of US capital creation of course explains the long-term growth slowdown that was shown in Figure 1.
This trend therefore shows the fundamental issue confronting Trump which he would have to overcome to accelerate the long-term growth of the US economy. He would have to increase the percentage of capital creation in the US economy. Without this, while a short-term speed up in the US economy is to be expected for the statistical reasons given earlier, no long term acceleration of US economic growth will take place. Without such a sharp increase in the level of capital accumulation claims by Trump that he will accelerate the US rate of growth are purely ‘hot air’.
It is clear that the first effect of Trump’s policies will not be to increase but to reduce US savings/capital accumulation. This is due to the fact that an economy’s savings are not only household savings but company savings plus household savings plus and government savings – government savings in most economies being negative because the government runs a budget deficit.
Trump has announced policies that will clearly increase the US budget deficit – tax cuts focussed on the rich and increased military spending. This increased budget deficit will necessarily reduce the US savings level.
In the purely short term Trump could lessen the effect of low US savings/capital creation by borrowing from abroad. But historical experience shows that over the medium/long term in major economies it is domestic capital creation which is decisive. Therefore, Trump has so far announced no policies which will increase the long-term US growth rate. Therefore, in summary:
- A short-term speed up of the US economy is likely for the statistical reasons already given – but does not indicate any increase in long term economic growth.
- Trump has no put forward policies that will accelerate US long term economic growth.
Finally, these trends show which data must be closely watched to see success or failure in Trumps economic policies. The short term shifts in the growth rate must not be seen in themselves but compared to the long term trend of US growth: the key variable for judging long term US growth is whether the level of capital formation in the US economy is rising or falling.
.419ZThe world will be listening to Xi Jinping at DavosBy John Ross
Xi Jinping is the first Chinese president to speak at the Davos World Economic Forum. This visit has attracted even greater international media attention than the normally high levels of interest in a trip by China’s leader. As the Financial Times chief foreign affairs columnist Gideon Rachman put it, “The big star of this year’s forum is certain to be Xi Jinping.”
The reason for this is well understood. China’s unequivocal support for open economies and globalization is now clearly in contrast to the protectionism embraced by U.S. President-elect Trump and that was manifested on a smaller scale in the U.K. Brexit referendum.
In terms of declared positions on globalisation, a definitive turning point has already been made. Every U.S. president since World War II has at least verbally committed to free trade and globalisation. Trump explicitly broke with this historical U.S. position with threats to impose a 35 percent tariff on Mexico, a 45 percent tariff on China, to impose a U.S. “border tax”, to renegotiate the North American Free Trade Agreement (NAFTA), by his pressure for U.S. companies not to invest in Mexico despite it being a NAFTA partner and by his clear overall policy statements. In parallel, while the reality of the Trans Pacific Partnership (TPP) was not a move for freer trade – being in reality an anti-China bloc – nevertheless its unilateral abandonment by Trump made the U.S. appear an unreliable negotiating partner.
Whatever happens in the future, there can never again be 100 percent certainty that the U.S. remains committed to globalisation. This fundamental pillar on which the post-World War II global order was built is no longer solid. It is widely understood that of the world’s two largest economies, only China remains unequivocally committed to globalisation.
This directly and powerfully affects other countries in addition to China – hence the wide international interest in Xi Jinping’s Davos visit. Other countries well understand, both factually and theoretically, the decisive importance of the international trade and globalisation.
Factually, numerous studies demonstrate the positive correlation of an economy’s international openness and its development speed. Growing internationalisation by almost all countries was a decisive trend during the long period of relative global international economic stability and growth after World War II – a marked contrast to 1929-39 global economic fragmentation, marked by the infamous U.S. Smoot-Hawley protectionist tariff, which led to the greatest economic crisis in modern history.
Clear theoretical understanding of economic openness’s advantages has existed for over two hundred years. The first sentence of the founding work of modern economics, Adam Smith’s The Wealth of Nations, is, “The greatest improvement in the productive powers of labour… have been the effect of the division of labour.” But division of labour in a modern economy has reached a point where it is necessarily international in scale. International supply chains, which alone ensure the cost efficiency of modern production, flow from the reality that different countries have different advantages in different parts of production. Attempts to create self-contained national economies necessarily make economies less efficient. Therefore, every strategy of “import substitution” or attempt to create an efficient national self-contained economy necessarily fails.
U.S. protectionism’s negative effects, with its inevitable international reciprocal retaliation, would hit even the U.S., the world’s largest economy – increasing prices of imported goods for consumers and costs for U.S. producers while restricting export markets. Even for the U.S., three quarters of the world market in economic terms and 95 percent of the world’s customers in population terms lie outside its borders. A protectionist U.S. economy cannot match the advantages of orientation to a global economy.
But for Germany, 95 percent of its potential market is outside its borders, for Brazil 97 percent, for Australia 98 percent, for Thailand over 99 percent. Protectionism would be more damaging for them than the U.S. Such countries therefore applaud Xi Jinping’s unequivocal defence of globalisation – not because of deference to China, but out of national self-interest because globalisation really is “win-win.”
Sometimes in the media there is loose talk of a “rise of protectionism and populism.” But this imprecise expression conceals a precise reality. In some European countries, there certainly is an increase in support for protectionist populist parties – for example, in France Marine Le Pen’s National Front or the Alternative in Germany. But these are minority parties who are not in power and who in most cases have no realistic prospect whatsoever of forming governments. Only in the Anglo-Saxon economies have protectionist forces actually come to office or been able to determine government policy.
The overwhelming majority of countries, including traditionally firm U.S. allies such as Germany or Australia, have expressed opposition to Trump’s protectionist policies. When Germany’s Chancellor Merkel recently said, “We see protectionist tendencies,” she was naturally discreet enough not to mention the U.S. But most people were well aware that the U.S. was included in the countries she was speaking of. A large majority of other countries listening will strongly agree either publicly or silently with Xi Jinping’s clear statements in support of open economies and globalisation at Davos.
Maintaining an internationally open economy is vital not only for governments but for the world’s population. Globalisation has brought immense benefits to the majority of the world’s people, strongly confirming economic theory. Certainly, socialist countries were most able to take advantage of globalisation’s benefits. The world’s four fastest growing economies in the last 30 years have been socialist – China, Laos and Vietnam, together with a Cambodia whose economic policies are decisively influenced by China. China experienced the world’s most rapid rise in living standards. Eighty-three percent of the people in the world lifted out of internationally defined poverty were in China, and a further 2 percent were in Vietnam – only 15 percent were in capitalist countries.
But while socialist countries made the most efficient use of globalisation, other countries also strongly benefitted. India under Modi has consciously moved closer to China’s economic model, and India is now the world’s other major rapidly growing economy. Several African countries, basing themselves on globalisation, have achieved growth rates of 6-8 percent a year.
Certainly the political crisis in the Anglo-Saxon countries, which has produced support for the protectionist dead ends, was created by a failure to improve their population’s living standards. U.S. median household incomes are lower than 16 years ago, U.S. inequality has soared. In the U.K., real incomes in the last eight years experienced their most prolonged decline for a century. But this was not inherent in globalisation, as demonstrated by the dramatic improvements achieved by most countries, but a result of the specifically neo-liberal paths launched by Reagan and Thatcher. It is for this reason, not globalisation, that a protectionist political dead end has become strongest in the Anglo-Saxon economies.
China’s support of globalisation, symbolised in Xi Jinping’s Davos visit, corresponds to China’s national self-interest. But it also corresponds to the national self-interest of other countries and peoples. Mutual self-interest is the firmest of all foundations for cooperation.
It is for this reason Xi Jinping’s visit to Davos has attracted such intense international interest.
This article originally appeared at China.org.cn.John Rosshttps://email@example.com
.232ZBritish economic crisis is deepeningBy Tom O’Leary
2017 has begun with some upbeat economic survey evidence although the majority of economic forecasters are cautious about whether this will be sustained. Leading stock market are also at or close to all-time highs. The reality is that the UK economic outlook is deteriorating. This will have both important economic and political effects over the course of the year.
Chart 1 below shows the nominal growth rate of profits for UK companies, quarter-on-quarter. Profits (more accurately the gross operating surplus) of firms have fallen marginally before inflation is taken into account. Once the effect of price rises is included, the fall in profits becomes more substantial.
This is exactly what has happened in the recent period. Firms have stopped investing, and are generally content to hire workers only as an alternative to capital investment or where they can enforce limited hours, low pay, zero hours or other increases in exploitation. In each of the first 3 quarters of 2016 the total level of business investment was below the equivalent period in 2015. In the quarter to October there was no growth in employment, while full-time employment fell by 50,000, made up by a similar rise in part-time work.
These trends represent the acceleration of longer-term tendencies in the UK economy. Chart 3 below shows the contribution of the different sectors of the UK economy to the total accumulation of the capital stock. From 1997 to 2015 UK companies increased their net capital stock by less than 1.5% per annum.
But this long-term trend has become more pronounced since the crisis. Private companies’ net capital stock has risen by little more than 1% on average per year since 2007. This profit-induced weakness of business investment is the primary cause of the Great Stagnation in the UK and in other advanced industrialised economies since the crisis.
Since the Brexit vote profits have declined outright and so has business investment. Manufacturing has declined by 1% since June and industrial production has fallen by 2%. The trade gap has widened by £8 billion compared to the same period in 2015, an increase of almost 20%. The forecasts of sunny uplands by the Brexiteers are purely delusional.
There are many single markets in the world. The British economy is itself one, with minor exceptions there are common laws, freedom of movement for goods, capital firms and people, and a unitary currency and fiscal policy. The benefit of the EU Single Market in the making is that it is one of the world’s three largest single markets, alongside China and the US. This provides a powerful magnet for capital seeking profits.
Of course it is possible for small amounts of capital to make very large profits investing in a small market, such as the UK would become with Brexit. But it is impossible for a large mass of capital to make large returns in a small market. And Britain needs large capital inflows simply in order to finance its external deficits.
British firms are struggling to realise profits. Ever since the crisis their level of investment has been abysmally low. This deepened the long-run negative trends in the UK economy. These have become sharply worse since the June 23 referendum. In any Brexit scenario, the less the access to the EU Single Market, the lower the attractiveness of the UK to international capital. Without a dramatic change in Brexit policy, there is little reason for optimism about UK economic prospects in 2017.