Longest slump on record – official

.696ZLongest slump on record – officialBy Tom O’Leary

The latest official forecasts for the UK economy show the longest slump on record. But there is official silence on the cause of the crisis, signalling no intention to change course to end it.
Instead, the Office for Budget Responsibility (OBR), the UK Treasury and Chancellor Philip Hammond all hint that slashing growth forecasts over the medium-term is somehow connected to the weakness of productivity growth and this in turn is in vaguely related to the weakness of investment. 

Officially, the weakness of UK productivity growth remains a mystery or a ‘puzzle’. In reality, the UK is just one of the more extreme examples of a phenomenon across the Western economies of weak productivity growth. 

In all cases, the cause is the weakness of Investment which determines weak productivity, and the UK is among the weakest because its investment has been among the weakest. The claim that it is instead caused by ‘measurement problems’ of the service sector or other imponderables is belied by the fact that a large service sector is common to all Western economies, yet the UK has badly lagged behind even the G7 average growth in productivity since the Great Recession. Productivity is weak in the G7 because investment is weak, and both are weaker still in the UK.

UK Great Stagnation

The Great Depression of the 1930s lasted less than 3 years but was only definitively ended by the war boom in 1940, ten years later. The Long Depression at the end of the 19th century lasted 12 years. According to the official OBR forecasts the Great Stagnation in the UK will last at least 17 years, with living standards failing to recover their 2008 level until at least 2025. 

The current crisis is an unprecedented duration of weakness. On reasonable assumptions from the Resolution Foundation, real average earnings will not recovery their 2008 level until 2025. At the same time Government departmental spending will on average have fallen by 16% in real terms between 2010 and 2022. It also forecasts that the current outright decline in living standards will last longer than the fall in the recession, 19 quarters versus 17 quarters. Claims that ‘austerity has ended’ are utterly foolish. 

The consequences of such a prolonged depression will be severe. They are already beginning to accumulate. The OBR forecasts for per capita GDP and especially the level of debt would have been worse, except that longevity is beginning to decline. This is almost unprecedented in an advanced industrialised economy in peacetime. Further deterioration is almost inevitable, at least under current policy.

Einstein’s definition of madness

In the Budget, Hammond did suggest that low productivity was linked to low investment. He went further, “The key to raising the wages of British workers is raising investment – public and private. And Mr Deputy Speaker, we are investing in Britain’s future.”

This should all represent progress. Except the last part of that statement is untrue. The Tory government intends to cut public sector investment further.

The level of public sector net investment reached 3.4% of GDP during the crisis under Labour and was instrumental in supporting a recovery. The Tories slashed public investment to 1.7% of GDP in 2013/14 and has only recovered to 2% since. Hammond intends to cut it close to its low-point in the next Financial Year to just 1.8% of GDP and barely increase it subsequently. See Chart 1 below.

Chart 1. UK Public Sector Net Investment as Percentage of GDP, 2000 to 2023

It is important to recall, Hammond and the official forecasters are close to acknowledging that weak investment causes weak productivity growth, and that this in turn lowers the growth of wages and living standards. But the Tories intend to do nothing to reverse the weakness of investment.

As many analysts have pointed out, the big set-piece of the Budget in tackling the housing crisis will encourage no new home building and simply drive up house prices. This is at a cost of £3.2 billion, when 40,000 new genuinely affordable homes could have been built. The Tories have boosted demand for housing without boosting investment. The textbook response is higher prices (or in this case, softening the possible house price fall).

It is a serious mistake to believe the Tory leadership are stupid. Theirs is not primarily a failure of diagnosis. The intention is not to address a crisis whose proximate cause they accept; the lack of investment.

The intention of the austerity policy is to transfer incomes from poor to rich, from workers to companies. The policy’s ultimate aim is to boost profits. This is why, from the Tories’ perspective, the state cannot interfere in the economy by investing on its own account, as this would remove sections of the economy from private sector profitability altogether. The thrust of policy is the opposite, to privatise as much of the economy as possible. In the footnotes to the OBR documents, it seems as if the government intends to sell off its remaining shares in RBS at a huge loss to the public sector, for precisely this reason. The NHS, education, rail and other sectors are all being opened to the private sector.

Labour’s alternative

Under John McDonnell and Jeremy Corbyn, Labour has entirely the correct framework of borrowing for Investment, not for current or day-to-day spending. The latter can be met and even increased substantially by increased taxation. 

This follows from the fundamentally correct point that only Investment can add to the productive capacity of the economy. Consumption cannot. Therefore only Investment can sustain growth. Borrowing (and incurring debt and debt interest) for spending without a return was a factor in the Western government’s inability to deal with the end of the post-World War II boom in the 1970s. At the same time, Western governments were divesting assets (privatisation) that had been rescued through nationalisation after World War II.

Rather than make the state more responsible for Investment, the Western governments instead chose to slash current spending, led by Thatcher and Reagan. The verdict is clear. In the 38 years since Thatcher first came to office the economy has grown by 126%. The same accumulated change in growth took place in the preceding 26 years. 

Labour’s current economic framework is a sharp break from that past. In effect, to spur recovery, Labour is willing to make inroads into the private sector’s domain by increasing state investment.

However, the question is now posed of what will be the appropriate level of that investment, in light of the official expectations that weak productivity means a permanently lower rate of growth, something more like 1.5% than 2.25%.

One factor in the response is Labour’s own fiscal rules. According to the OBR, at some point in the next few years borrowing for current or day to spending will end, possibly in 2019. Table 1. below shows the forecasts for Public Sector Net Borrowing and Public Sector Net Investment over the next few years.

Table 1. UK Public Sector Net Investment and Net Borrowing, 2016/17 to 2022/23, £bn
Source: OBR

The same trends are shown in Chart 2 below. Pubic Investment is forecast to exceed public borrowing at some point in the next few years.

Chart 2. Public sector net Borrowing & Net Investment, £bn, 2016/17 to 20222/23

Given how realistically downbeat the OBR now is, and assuming unchanged government policy, only an outright recession could push the cross-over point for public investment and borrowing into the very far future. This means day-to-day or current government spending at some point in the next few years will be more than covered by government taxation and other revenues.

A crucial difference is that Labour would maintain and increase government Investment for growth in living standards. The Tory stated plan is to eliminate borrowing altogether.

At the last election, Labour’s costings manifesto outlined £48.6 billion in taxation and other revenue-raising measures. According to the OBR, it will also a have further £21 billion in 2020 in headroom to increase current spending without having to borrow. To address the real damage to public services and pay, as well as to maintain and build political support for a radical government of the left, then most if not all of this £70 billion spending is likely to be needed.

Therefore at some point all of the new government borrowing will be for investment. The Labour fiscal framework already includes a ‘knock-out’ option, where borrowing on all items of government outlays can be increased if interest rates remain close to zero, which provides flexibility in the face of a recession.

But in light of the official acceptance that growth will now be ‘permanently’ lower, at least lower over the foreseeable future there is room for reconsideration of the borrowing targets for investment. The National Investment Bank and Infrastructure Commission should both have as their mission statement the ‘permanent’ raising of the productive capacity of the economy.

This may well require going beyond the current commitment to borrow £25 billion in additional funds over each of the next 10 years to fund investment. Even if the private sector matches this increase, there will still be a requirement for prolonged rate of much higher Investment to return even to the previous growth path.

The Tories are likely to bequeath Labour an exceptionally weak economy. Labour’s fiscal framework already allows the correct focus on government Investment. At the same time, the effects of severe austerity and Labour’s own tax plans already mean there is will soon be plenty of scope to increase government Consumption (current spending) without increasing borrowing. But to deal with the severity of the Great Stagnation under current official forecasts, much greater increased in borrowing for Investment may be needed.

John McDonnell is right, borrowing for investment does pay for itself

By Michael Burke

The manufactured furore surrounding John McDonnell in the wake of the Budget has a clear purpose. It is designed to distract attention from probably the grimmest set of forecasts delivered in a Budget in the modern era and to deflect criticism from the Tory government.

This is not solely an anti-Labour, pro-Tory propaganda campaign. Contrary to widespread assertions, austerity is not coming to an end and is being deepened. Seven years of falling living standards are not over. The Institute for Fiscal Studies (IFS), very far from being a left-wing thinktank, says that living standards will be lower in 2023 than they were in 2008.

This is a doubling down on the failed policy of austerity. It is therefore important for all supporters of austerity to shift attention from the repetition of a policy that has already failed.

Borrowing to invest

The immediate focus of the criticism of Labour plans was the absence of a specified level of interest of government debt arising from Labour’s borrowing. This is perhaps one of the weakest grounds to attack.

This is because Labour’s Fiscal Responsibility Framework is committed to borrowing solely for investment, and balancing current or day-to-day spending on items such as health and education with current revenues which is mainly taxation.

As a result, all of Labour’s borrowing would have a return. The combined effect of borrowing at low interest rates and investing with much higher rates of return is a net boost government finances, which can be used to increase Investment further. The level of government deficits and debt will fall automatically as taxation revenues grow along with increased economic activity.

Currently, government borrowing over any time period (or debt ‘maturities’ in the jargon) costs less than 2%. This is below the level of inflation, which alone means that the borrowing makes sense. Yet, at the same, the returns to commercial investment are on average around 12%. Any government, or business, which can borrow at such low interest rates for such high investment returns would be foolish to pass up this opportunity. It is reckless and extreme that the Tories have passed up this opportunity.

Of course, no-one can possibly know what the level of interest rates will be in a few years’ time. But the official forecasts from the Office of Budget Responsibility (OBR) suggest only a minimal increase on government borrowing costs (the yields on UK government bonds, or ‘gilts’) over the medium-term.

This is shown in Chart 1 below, with the green line in Chart 3.10 representing the latest forecasts of long-term borrowing costs. These barely move above 2% over the medium-term.

Chart 1. OBR Expectations of UK Interest Rates

In financial markets there is a calculation used to highlight where interest rates are expected to be in a given number of years’ time. Currently, using this calculation of the difference between 10year gilt yields and 20year gilt yields implies a market expectation that in 10 years’ time, 10year interest rates will be 2.3%. None of these forecasts can be relied on for pinpoint accuracy. Instead, they are shown to illustrate the point that it is reasonable to assume that government borrowing costs remain subdued for some time to come.

Rates and growth

The fundamental point is that when economies grow strong and especially when there is a risk of inflation, all long-term interest rates tend to rise. If the economy is performing strongly, then the pressure on Labour to borrow for investment when it comes to office subsides to some extent. But that is not what any serious commentator, the OBR, IFS or Resolution Foundation thinks is likely.

Instead, government interest rates fell sharply in response to the grim Budget outlook. This should be read as a ‘market signal’ that borrowing for investment should increase. Bond markets could absorb a lot more borrowing before gilt yields were pushed back up even to their very low pre-Budget levels.

The commitment of the Fiscal Responsibility Framework means it is easy to gauge whether the borrowing is sustainable. The decisive criteria is whether the return on the borrowing exceeds the cost of borrowing. As noted above, the average commercial return on investment in the UK is around 12%, a large multiple of the current cost of borrowing. Only if the cost of borrowing rose above that level would it become unsustainable. This seems unlikely in the foreseeable future.

In reality, the net returns to government from the same investment as the private sector are actually significantly higher. To take a clear example, a private developer who builds homes might get a return of 10-12%. But the same returns are available to government for the same project, while the cost are lower. This is because in the course of construction, income tax and National Insurance is paid by builders and other workers (and there is a return on their consumption too via VAT). This is a return to government which is simply not available to the private sector.

So, John McDonnell is right, and his critics are wrong. Borrowing for investment not only makes sense, it more than pays for itself.

O Portugal: a esquerda no governo

Por Tom O’leary

A polemica recente sobre a politica económica no Portugal é muito importante porque tem importância para todos os grupos anti austeridades da esquerda. Os grupos da esquerda têm alcançado algo único no período atual, em que o governo do Portugal é o único que opera para terminar a austeridade. Nos termos mais generais, isto é o objetivo para o governo possível de Corbyn na Inglaterra, também deveria ser o objetivo para a esquerda completa da Europa, então precisa de observar o governo do Portugal.

O periodista que e famoso na Inglaterra que se chama Owen Jones começou a polemica com uma afirmação verdadeira que a experiência portuguesa demostra que a austeridade nunca era necessária. As políticas que sustentam o crescimento económico são mais preferidas e também causam uma redução do déficit publico entre outras vantagens. Uma variedade de pessoas criticou Jones incluindo Jolyon Maugham, um comentarista de Twitter que publicou muitos tuítes que apoiam completamente as ações da União Europeia com respeito ao Portugal.

 O tuíte é um modelo de brevidade, contem ao menos três errores em menos de 140 caracteres e, mais importante, os credores do Portugal foram resgatados pela UE, não o país. O governo do Portugal ainda tem as dívidas dessa época que pioraram devida ao programa da austeridade que as acompanharam. Se pode culpar a comissão da União Europeia, o Fundo Monetário Internacional, o Banco Central Europeu, os políticos portugueses (alguns do Partido Socialista que agora estão na coalizão da esquerda), as agências de notação de riscos de crédito, os bancos domésticos e internacionais, e claro, os credores. Como o partido politico da Inglaterra, os ‘Liberal Democrats’, Maugham não só defende a adesão à UE, senão também a austeridade que a UE perpetua.

A recuperação do Portugal não vem por causa da imposição do programa da austeridade, mas apesar das políticas da austeridade. Mas os questiones mais importantes para a esquerda agora são como a recuperação económica pode ser alcançada e pode ser mantida.

O desempenho económico

O FMI prevê um crescimento do PIB real de 2,1% no ano de 2017, o que pode ser a taxa mais forte desde a começa da crise em 2008. Mas a taxa de crescimento foi de 2,8% na primeira metade de 2017 comparada ao mesmo período em 2016, o que ultrapassa a UE ou a média da zona euro. Não há dúvida que o crescimento económico tem acelerado desde a coalizão entre os democratas socais e os partidos extremas da esquerda em 2015 e isto continua.

O crescimento do PIB do Portugal, ano por ano
Fonte: Eurostat

A primeira conclusão deveria ser que a terminação da austeridade não cause desastres. De fato, tem causado um crescimento acelerando e uma redução nos deficits públicos do setor publico. A segunda conclusão é que o governo da esquerda pode terminar austeridade apesar da UE e ainda a zona europa ao menos nas limitas certas.

O crescimento é limitado pela acumulação do capital, que é o crescimento nos meios de produção. Desde a coalizão da esquerda, o nível do investimento (a Formação Brutal de Capital Fixo) subiu 7,7% (dados pelo segundo quarto de 2017 já não é disponível). Durante o mesmo período, PIB real subiu ao menos da metade dessa taxa. Por isso o investimento causou o crescimento económico.

O governo contribuiu ao aumento no investimento, mas a contribuição mais grande proveram do setor privado. Os lucros previstos são o fator principal dos investimentos privados então é provável que as medidas do governo português para aumentar o consumo e o seu incremento modesto dos investimentos causaram o acréscimo dos níveis previstos do lucro. Em breve, as medidas de incentivo têm estimuladas a economia portuguesa.

É mais preferido e mais efetivo que a austeridade, mas não é sustentável para o futuro. O aumento ao consumo não se sustenta por um crescimento dos salários e das rendas. Eurostat reporta que a proporção das poupanças caseiras tem mergulhada. Essas cifras se-pode ver na tabela seguinte.

A proporção das poupanças caseiras, %:
Fonte: Eurostat

Essa redução nas poupanças caseiras e os níveis do consumo atual (causado pelo investimento do setor privado) não são sustentáveis. Os salários reais estão em queda e em certo ponto, sem o crescimento real nos salários e nas rendas, as casas vão limitar seus gastos.

Para sustentar a recuperação económica e aumentar os salários reais, o crescimento do investimento deveria aumentar por maneira sustentável. É improvável que o setor privado vai fornecer o investimento se os gastos dos consumadores fraquejem. Então, o governo tem de procurar maneiras no que pode aumentar o investimento do setor publico.

Sem mais conhecimento da economia portuguesa não é possível para produzir um plano para o investimento do setor publico. Não obstante, há uma variedade das fontes potenciais para fundos que incluem:

  • O numero de corporações que são públicos que podem aumentar seu investimento (usando as reservas ou os empréstimos novos
  • Os pedidos para a comissão europeia para acelerar/aumentar seu programa dos gastos do capital
  • A nova infraestrutura e outros projetos que o Banco Europeu de Investimento custeia
  • Os novos impostos para os super-ricos e as companhias grandes para pagar os investimentos
  • A remoção dos subsídios para os negócios para criar fundos para o investimento public
  • Quando é possível, empréstimos adicionais pelo governo

A escala do investimento que é necessário é muita grande. Em 2000 a Formação Bruta de Capital Fixo como uma proporção do PIB subiu 28%, mas agora representa quase metade dessa. Entretanto todos os passos nesta direção asseguram que a recuperação tem uma base mais sustentável.

O governo português da esquerda demostrou que existe um alternativo à austeridade, mas os incentivos não funcionam de longo prazo. Para sustentar a recuperação e mostrar que o alternativo à austeridade é o investimento, necessita-se os medias mais fortes.


Este artigo é uma modificação do artigo que originalmente apareceu em inglês.

The importance of trade for jobs

By Tom O’Leary

The Brexit negotiations are entering a decisive phase, with leading UK business organisations saying they will not invest and must consider whether they relocate if there is no agreement on a transition phase and there is clear progress on trade talks. For its part the Tory Cabinet is deferring any discussion on its key aims for EU trade talks, despite the pretence it is clamouring for them to begin. Any decision on the desired new relationship with the EU would probably lead to Cabinet splits, so discussion is being avoided.

The potential damage to the economy and living standards can be gauged in terms of jobs. Chart 1 below shows the number of UK jobs that are directly dependent on exports. In OECD jargon, these are the totals of ‘domestic employment in the UK embodied on overseas final demand’.

Chart 1. UK Employment Dependent on Exports, by region
There are 6.6 million UK jobs directly dependent on exports. The total could be far larger including jobs indirectly dependent on exports. OECD member countries account for 4.8 million of the jobs total, non-OECD for the remaining 1.7 million (numbers do not sum due to rounding). This is 2011 data, the most recent available and has probably grown since (for reasons discussed below).

Separately, the EU directly accounts for 2.8 million of the total. As elsewhere, this is only the direct total not including indirectly-supported jobs and has also probably grown since. Furthermore, through the EU the UK currently has some type of ‘free trade’ deal with between 50 and 60 countries. In reality, these deals are for lower tariffs and non-tariff barriers than would otherwise apply through World Trade Organisation rules, without being in the tariff-free regime of the Single Market.

The effect of leaving the EU Single Market would be threefold. First, any new tariffs or non-tariff barriers between the UK and the EU would raise prices of production that would lead to higher prices overall. Producers may try to mitigate these by lowering UK wages and relocating jobs to within the Single Market area. A relatively small increase in these barriers or tariffs may lead to a much larger fall in wages/loss of jobs. A car manufacturer’s profit margin may be, say, 10% but as the tariffs on components range from just under 3% to 10% for complete cars, this would be a large part of total profits, or all of it. The incentive to drive down wages and/or relocate would then be very great.

Secondly, similar considerations would apply to all those countries where the UK currently has a trade deal via its membership of the EU. They too would want to lower costs with lower wages and/or consider relocating. In addition, simple calculations about the respective size of markets may also prompt relocations from the UK to the Single Market area.

Thirdly, these various trade deals usually contain little or nothing at all about trade in services. Services tend to be more thorny issues, not least because freer trade in services means more liberalised immigration regimes, as services are essentially about people (finance, accountancy, law, education, and so on). Yet it is in the services sector where the UK economy has a clear advantage, and currently benefits from the highest level of liberalisation in the Single Market. In 2016, UK exports of services accounted for one quarter of total exports.

Brexiteers argue that the EU is one of the slower-growing regions of the world economy. This is correct. But nothing in Brexit will raise the level of exports or the jobs that depend on them. Table 1 below shows the growth in employment by exports from regions and countries from 1995 to 2011 (the full range of the OECD data).

Table 1. Growth in Employment Dependent on Exports, by Region and Country, 1995 to 2011
Source: Calculated from OECD data
In common with many other countries, the UK has an increasing proportion of jobs which are dependent on exports. This reflects the continuing growth in the international division of labour. This is despite the fact that the UK’s low investment and productivity rates mean that the growth rate of export-dependent jobs is lower than many other industrialised economies.

Total UK direct employment dependent on exports rose from 20.9% in 1995 to 22.5% in 2011. This is a concrete measure of the growth of the international division of labour, or what Marx termed the socialisation of production. In key sectors the change has been dramatic, so that in 1995 roughly half of all employment in the machinery and equipment sectors was dependent on exports, by 2011 it was over 70%. For transport equipment (including cars) employment rose from just under half to more than two-thirds.

Total non-OECD export-related employment has been growing much more strongly than OECD export-related employment. This reflects the much stronger economic growth of the non-OECD economies. In all cases, these data belie the claim that ‘X country is taking our jobs’. The reality is that increasing trade is increasing UK jobs.

The two most important non-OECD countries in terms of creating jobs in the UK are China then India. Within the OECD bloc the US and then the EU itself are the areas creating the greatest number of UK jobs. Within the EU28, Spain has been the most important country for UK job-creation. The UK’s much lower level of competitiveness means it is not gaining German, French and other export-related jobs. Together these four, the US, China, India and the EU are responsible for more than 700,000 new UK jobs in the period 1995-2011, or 60 per cent of total new directly export-related jobs.

In Trumpenomics there is a reactionary idea that freer trade arrangements such as NAFTA have destroyed US jobs. In reality, the US has added about 1 million jobs based on exports to Canada and Mexico since 1995, a year after NAFTA came into force. Unfortunately, this type of crude mercantilism has much wider support than Trump and his delusional supporters. It is expressed as the idea that that the growth in imports exceed the growth in exports, then the decline in net exports is economically detrimental.

But the growth in the international division of labour/socialisation of production represented by rising trade both increases jobs and their productivity, so raising living standards. As Adam Smith pointed out, if coal is produced in Newcastle and then it is used in smelting, the citizens of Newcastle may buy the metal products with the proceeds of their coal production. This is true whether the smelting takes place in Aberdeen or Amsterdam. In either case the smelting operations create jobs in Newcastle.

A withdrawal from the Single Market would go against the tide of economic development and current international practice. It would unilaterally replace a tariff-free regime with new tariffs and non-tariff barriers. It would therefore cost an unknown but large number of UK jobs.

No, Jeremy Corbyn won’t ‘bankrupt the UK economy’

No, Jeremy Corbyn won’t ‘bankrupt the UK economy’ By Tom O’Leary

In a textbook case of political projection, the UK economy continues to stagnate and the response of the Tories and their supporters is to create scare stories about an economic impact of a Corbyn government.

This is clearly a mark of political desperation. Having presided over the longest recorded fall in living standards, the government’s inability to lead an upturn means it is reduced to blaming the last Labour government and the next one for its own failings. Even thoughtful commentators such as Martin Wolf at the FT accuse Corbyn of ‘populism’ and ignoring the realities of a private sector-dominated economy.

But there is a serious point buried deep beneath the Tories’ wild claims. There are always constraints, which cannot be overcome with airy declarations that Labour can just print money. An incoming Labour government under Corbyn will face stiff opposition from its ideological opponents outside the Tory party, including the City of London. The pressures on the Wilson-Callaghan government were so great, even though circumstances were in many ways far more favourable and Labour was attempting only modest reforms, that they eventually capitulated and precipitated an entirely fake ‘IMF crisis’ in 1976 in order to slash public spending.

In the early 1970s the UK was not faced with a crisis of public finances. The real crisis was of profitability and therefore investment. In the current crisis, the public sector deficit as a proportion of GDP has averaged more than double the deficits of the 1970s period.

The real policy target was addressing the real problem; falling profitability. In common with other Western economies in the early 1970s, UK profitability fell, signalling the end of the long post-World War II boom. In the UK, highly unusually the total level or mass of profits fell outright in 1974. Slashing public spending and capping pay was the now-familiar policy adopted in response.

The scare story used then was that the country would be bankrupt if it could not borrow from overseas. A variant on this mechanism was actually used in the EU financial crisis, as the ‘Troika’ of IMF, European Central Bank and EU Commission. In the case of Greece, the Greek bank system was starved of funds by the ECB in order to impose austerity on the government.

The Labour leadership under Corbyn and McDonnell has already set itself a number of useful tools to cope with an economy that will have suffered both sharp recession and prolonged slow growth. In the first instance is borrowing for Investment, which leads to economic growth, while balancing current spending on Consumption, which does not. (Contrary to wild claims, this does not mean adopting austerity but reducing tax giveaways to businesses and the rich). Secondly, a National Investment Bank is an extremely useful vehicle for channelling an increase in public sector investment. Thirdly, through the fiscal responsibility rules it has given itself a ‘knock-out’ clause on current spending too if growth were so slow that interest rates were close to zero. Finally, it has not ruled out Quantitative Easing (money creation) to supplement an investment-led approach to economic recovery.

The charge from the Tories is that all of this is a ‘magic money tree’ fantasy, a variant on the claim that there is ‘no money left’. But this is untrue, and marks an important difference with the 1970s. Chart 1 below shows the ‘Investment Gap’, the difference between the level of investment in the economy and the level of profits. Investment is measured by Gross Fixed Capital Formation and profits measured by the Gross Operating Surplus of firms. Both are in nominal terms.

The Investment Gap. UK Profits versus UK Investment 1948 to 2016

The chart shows that an enormous gap has opened between the level of profits and the level of investment (even the latter is flattered because it included the investment of government and of private households).

The proportion of profit directed towards investment has also fallen dramatically, especially since the early 1970s when it reached its zenith. In fact, for the entire period 1966 to 1976 the level of investment in the economy as a whole exceeded the level of profits. In 1976 itself investment was equivalent to 125% of UK profits. This was particularly boosted by a much higher level of public investment than now. But there is no reason why business investment alone cannot exceed the levels of profits, at least for a period, when borrowing can be used to supplement profits as a source of funding (in anticipation of high profits).

As a result of this investment gap – the gap between profits and investment – there is plenty of money left. The gap between profits and investment in 2016 was £96 billion, equivalent to just under 5% of GDP. If the economic situation continues to deteriorate and Brexit has the anticipated further depressing effect, then these resources will be invaluable.

The argument that the company sector is too indebted to fund investment is factually incorrect. Company debt has been falling measured as a proportion of GDP, and especially measured against its own profits since 2010. Its interest bill has fallen to £8.5 billion in 2015 from £26.5 billion in 2007 (ONS Blue Book).

Yet if all the Corbyn leadership intended was to introduce further taxes on business or simply expropriate their profits, then the current investment go-slow would rapidly become an all-out investment strike. But that is not the policy. The economic policy also includes significant public sector investment, from which the private sector profits. It is simply that the non-investing, non-productive sectors of the economy will be worse off, while those businesses providing inputs to public sector investment and/or who benefit from it will be winners. If access to overseas markets is not disrupted, this is the basis of a successful reforming economic policy.

What can the left do in government?

By Tom O’Leary

The recent controversy over economic policy in Portugal is very important as it holds extremely valuable lessons for the entire anti-austerity left in Europe as a whole. The left in Portugal has achieved something unique in the current period, operating in government to end austerity. In the broadest sense this is the prospectus for a Corbyn government. It should be for the entire left in Europe. Therefore the entire experience bears close scrutiny.

Owen Jones began the controversy with a simple statement of fact, that the Portuguese experience shows that austerity was not necessary. Policies supporting growth were far preferable, and among other things also led to a reduction in the public sector deficit.    Jones has come under attack from a number of quarters. Jolyon Maugham, a widely followed commentator on twitter led the charge, with a series of tweets in a complete defence of the EU’s actions.

The tweet is a model of brevity, containing at least three errors in less than 140 characters. Most importantly, it was not ‘Portugal’ which was bailed out but its creditors. The government still bears those debts from that period, and these were made worse by the austerity programme that accompanied it. The EU Commission is one of the culprits, along with the IMF, the ECB, local politicians (including those from the Socialist Party which is now leading the current left coalition), as well as the ratings’ agencies, the domestic and international banks and of course the creditors. Like the LibDems, in defending EU membership Maugham goes further and defends EU austerity.

The Portuguese recovery comes despite the imposition of the austerity programme imposed, not because of it. But the most important questions for the left now are how can recovery be achieved, and how can it be sustained.

Economic performance

The IMF is forecasting 2.1% real GDP growth in 2017, which would be the strongest rate of growth since the crisis began in 2008. But the growth rate has been 2.8% in the first half of 2017 compared to the same period in 2016, exceeding the EU or the Euro Area average. There is no doubt that growth is accelerating and has done so since the coalition of the social democrats and far left parties came to office.

Portuguese GDP Growth, % change year-on-year
Source: Eurostat

The first conclusion must be that ending austerity does not lead to disaster. Instead it has led to accelerating growth (and lower public sector deficits). The second conclusion is that it is possible for a left government to end austerity while in the EU and even the Euro Area, at least within certain limits.

The limits on growth are set by the accumulation of capital, the growth in the means of production. Since the left coalition came to office the level of Investment (Gross Fixed Capital Formation) has risen by 7.7% (data for the 2nd quarter of 2017 is not yet available). Over the same period real GDP has grown at less than half that pace. Investment has led growth.

The government has contributed to this rise in Investment, but the bigger contribution has come from the private sector. As anticipated profits are the driver of private investment it is likely that government measures to boost Consumption, combined with its own modest increase in Investment have had the effect of boosting the anticipated level of profits. In short, stimulus measures have kick-started the economy.

This is far preferable and more effective than austerity. But this is not sustainable over the long-term. The boost to Consumption has not been supported by rising incomes and wages. Instead, Eurostat reports that the household savings ratio has slumped. The trend in Portuguese household saving is shown in Table 1 below, along with Eurostat forecasts for 2017 and 2018. (For reference, Eurostat forecasts the UK household savings rate will fall to 3.7% in 2018, versus an EU average of 9.9%).

Table 1. Portuguese Household Savings Ratio, %
Source: Eurostat

This run-down in household savings is unsustainable. Even current levels of Consumption, which have encouraged increased private sector Investment cannot be sustained. Real wages have been falling. At a certain point, without real growth in incomes and wages households will take fright and rein in their spending.

In order to sustain the recovery as a whole and to lift real wages, Investment growth must be sustainably increased. This is unlikely to come from the private sector if consumer spending flags. Therefore government will have to find ways in which it can increase public sector Investment.

Without much more detailed knowledge of the Portuguese economy, it is impossible to provide a blueprint for a public sector-led investment programme. But there are a number of potential sources of funds. These include but are not exhausted by the following:

  • The large number of corporations that remain in public hands increasing their investment (using either reserves, or new borrowing)
  • Requests to the European Commission to accelerate/increase its capital spending programme
  • New infrastructure and other projects funded by the European Investment Bank
  • New taxes on the extremely rich and big companies to fund investment
  • Removal of subsidies to business to free up funds for public investment
  • Additional government borrowing where possible

The scale of the Investment needed is very high. In 2000 GFCF as a proportion of GDP reached 28% and is effectively half that currently. But every significant step in that direction puts the recovery on a more sustainable basis.

The Portuguese left government has indeed shown that there is an alternative to austerity. But stimulus wears out. To sustain the recovery and show that the alternative to austerity is Investment, bolder measures will be needed.

Confronting Venezuela’s real problems, and the slanders against it

The crisis in Venezuelan has been the occasion for all sorts of reactionaries, anti-socialists and supporters of the US to attack the government’s ‘Bolivarian socialist’ experiment.

In general, these attacks completely ignore the achievements of the Chavista movement including the rise in life expectancy, the improvements in health, education, housing and so on. They completely overlook the objective predicament caused by the fall in the oil price (itself a goal of US policy). They also rely primarily on IMF forecasts, which have proven less than accurate.

Furthermore, these attacks attempt the slander that the horrific levels of violence in Venezuela prove the ‘failure of socialism’, when the overwhelming majority of the bombings and murders are conducted by supporters of the opposition in an effort to destabilise the elected presidency. Nearby Honduras has a far higher homicide rates, and this regime was installed by the US!

The current crisis in Venezuelan does not prove the impossibility of achieving socialism. It proves that it is extremely hard to achieve, and will face the utmost opposition from the US and all its allies. As a result, socialists themselves have to be extremely careful to address objectively the real problems of socialism, and not fall back into defeatism, or into wishful thinking about the current failings.

The article below first appeared on SEB in December 2014, written by Michael Burke and is reproduced without alteration. In particular, the outline policy conclusions have even greater force, now that the anticipated crisis of growth and living standards has materialised.

The transformation of Latin America and the Caribbean and its new challenges

The economic growth rate of the Latin American and Caribbean countries as a whole has changed dramatically from the beginning of this century. Living standards have improved after a lost generation from the 1980s onwards. Tens of millions have been lifted out of absolute poverty and many more have seen their lives transformed. It is important both to learn from this process and to understand the threats to it. 
The World Bank offers a variety of measures of real GDP. For a continent such as Latin America it is important to use a single international currency, in this case US Dollars. On this basis, in real terms the growth rate of the entire continental economy accelerated sharply in 2000. In the 20 years from 1980 to 2000 the average annual real growth rate was just 2%. From 2000 to 2013 this has increased to over 3.3% per annum. The change in the trend growth is shown in Fig. 1 below. 

Fig.1 Latin America & Caribbean, Real GDP, US$ 2005

The transformation is even more apparent in per capita terms. As the population grows real GDP needs to grow simply in order to maintain average standards of living. Arithmetically, real GDP growth must exceed the growth of the population if, in practical terms average living standards are to rise. Until the beginning of this century real GDP growth was insufficiently strong and per capita GDP stagnated. Since that time, per capita GDP has grown. This is shown in Fig. 2 below. 

Fig.2 Latin America and the Caribbean, Real Per Capita GDP, US$

Per capita GDP is an average measure. It can disguise both large and growing inequality in incomes, as one class claims most or all of the benefits of growth. But this has not been the case in Latin America in the recent past. Fig. 3 below shows the transformation in the lives of the poorest classes of society – those earning $2 a day or less. In 2002 there were 108 million people in Latin America and the Caribbean subsisting on less than $2 a day. In little more than a decade this total has been more than halved to 53 million people. In total 55 million people or almost 1 in 10 of the entire population has been lifted out of absolute poverty. 

Fig.3 Latin America and the Caribbean, Persons Living on $2 a day, millions

A similar pattern is evident from a range of indicators. The numbers living on less than $4 a day has fallen over the same period from 236 million to 159 million since 2000. This is crucial. The rise to $2 a day means that people can generally expect to eat most days. Above $4 a day people can also begin to move beyond basic necessities and establish at least some quality of life. Most important of all average life expectancy at birth has risen by 3 years, from 71 years to 74 years. This is the most fundamental social indicator of all indicating improvement in living conditions and prosperity and is only possible with a combination of increased access to a range of foodstuffs, improved healthcare and housing. 
There are a large number of indicators of poverty reduction and social progress which point in the same direction, although some important indicators of the position of women have not improved or have even gone backwards. These are significant omissions which need addressing. But taken as a whole the improvement in the economy, the general well-being of the population and its poorest members have also shown remarkably rapid and dramatic improvement since the beginning of this century. 

Source of growth

Many Latin American and Caribbean economies are exporters of basic commodities. Like all commodity producers they benefited from the strong rise in global commodity prices in the early years of this century. The increase in commodities’ prices is illustrated in Fig. 4 below, as the commodities’ research Bureau (CRB) aggregates a basket of many of the key commodities’ prices, which doubled in price over the period.

Fig.4 CRB Commodities Index, 1993 to 2012
Source: Reuters/CRB

However the widespread assertion that exports were the sole or even main contributor to regional growth is a misconception. The accurate picture is that the increased export earnings from rising commodities prices were a catalyst for growth in general but that this growth was led by investment. This is shown in Table 1 below which itemises the growth rates for GDP and its components since the beginning of this century.

Table 1. Latin America & the Caribbean, Growth of GDP & Its Components, 2000 to 2016 (Forecasts)
For most of the period 2000 to 2012 exports were one of the weaker components of GDP growth. Over the period as whole they grew more slowly than GDP itself. Furthermore for the entire period exports grew more slowly than imports. As a result net exports actually subtracted from growth.

The leading component of growth was fixed investment. This conforms to economic theory, where the amount of capital deployed and the growth of the workforce and its quality (via training and education) account for the overwhelming bulk of growth. In the most accurate terminology, fixed investment is the accumulation of the productive capacity of any economy. As previously noted, both consumption and living standards improved dramatically over the period. But consumption cannot be an input into growth. If consumption growth exceeds output, it can only be sustained by increased indebtedness which actually leads to lower living standards. The increase in both private and public consumption was only made possible through the sustained increase in fixed investment, which was the strongest component of GDP growth by some distance.

It was only in 2010 and 2011 that exports grew more strongly than GDP. This was a result of global quantitative easing led by the US and the modest recovery in the leading economies which had the effect of driving up global commodities prices even further. But this produced its own negative effect. 2012 was the first year where fixed investment growth lagged GDP growth and the economy has slowed since. As resources are diverted away from investment economic slowdown inevitably follows.

Problems caused by the US

The period 1980 to 2000 was a lost generation for Latin America. The US had overthrown the Allende government in 1973 and held sway over the continent mainly through its alliances with brutal military dictatorships. The revolts against the dictatorships in Nicaragua, El Salvador and Grenada were all blocked or overturned by the US or US-backed forces.

It was this US dominance in the region which paved the way for economic collapse. The US had unilaterally withdrawn from the Bretton Woods currency system in 1971, provoking a global spike in commodities’ prices. It was forced to do so because it was unable to finance both the Viet Nam war and domestic consumption at the prevailing exchange rate. This fall in the US Dollar/rise in commodities’ prices resulted in a huge increase in the Dollar export earnings of the oil producing states, concentrated in the Arab world.

The oil producers, led by Saudi Arabia effectively bailed out the US through a huge inflow of those earnings in the form of ‘petro-Dollars’ into US banks. As well as financing US budget and trade deficits these funds were also used to boost US banks overseas lending, especially in Latin America.

The global downturn of the late 1970s left these borrowers exposed, primarily government borrowers. A full-blown currency, debt and economic crisis was marked by the Mexican government’s debt default in 1982. At US insistence, it was the US banks that were rescued, not the Latin American economies, through the issuance of ‘Brady Bonds, named after the US Treasury Secretary. Debt crises in a host of other countries followed and the resulting debt burden sucked capital from South to North over the following decades and led to economic stagnation and misery.

These gyrations are not solely of historical interest. The role of the US Dollar as the major reserve currency and the denominator for virtually all globally-traded commodities means that significant or abrupt changes in US economic and monetary policy are magnified in commodity-producing and/or debtor economies. Sharp changes in US monetary policy always lead to sharp dislocations in the rest of the world, especially in ‘emerging markets’. As the US is also the world’s largest net debtor economy, it has a constant necessity for inflows of overseas capital. In periods of economic expansion this need increases sharply. Changes in US monetary policy are conditioned by this requirement for capital generated in the rest of the world and so can cause abrupt and hugely dislocating flows of capital in other countries.

This is precisely what has happened in the most recent period. The US Federal Reserve Bank ended its third round of quantitative easing on October 29. This had helped to inflate financial assets included commodities prices from 2010 onwards. Now the US is consciously aiming to drive down key commodities’ prices. The US has agreed with the key oil producer Saudi Arabia that the oil price should fall. On the US side this is an extension of the sanctions against Russia, but it welcomes the collateral damage to countries such as Venezuela, where sanctions are now also threatened.

New challenges

Politics comes before economics. The economic transformation of an entire continent cannot happen randomly. Across the region (with certain exceptions) through decades of upheaval a political leadership has been forged that rejected the dominance of the US and its neoliberal economic policies. The period 2000 to 2002 was marked by the sharp turn of Hugo Chavez’s revolutionary government in Venezuela towards Bolivarian socialism, ending generations of national humiliation. Shortly afterwards the serial humiliations inflicted on Argentina hit a brick wall with its default. Then in 2002 the Lula and the Brazilian Workers’ Party won the Presidential election.

Although they represent different social coalitions their common platform is a desire for economic growth, and the improvement of the living standards of the population, in particular the poorest layers of society. In different ways they draw inspiration from the Cuban revolution and its determined resistance to US rule.

It is important to stress that economic redistribution was an outcome made possible by growth. It was not the driver of it. The principal economic contributor to the economic transformation was the rise in fixed investment. Until 2012 fixed investment was the strongest component of growth and was its leading element. Growing trade, including intra-Latin American trade was a key catalyst for investment-led growth. This in turn allowed the growth of both public and private consumption, which indicates the general rise in living standards.

But the catalyst of rising export revenues has gone into reverse. At the time of writing the CRB Index had fallen to 247, close to levels last seen at the depths of the crisis in 2008. The oil price has fallen below $65/bbl a new 5-year low. This is a direct consequence of changes in US policy. This is in effect a crisis of 2008/2009 proportions for most of the commodity-producing economies, which takes in virtually the entire continent of Latin America and the Caribbean.

The growth of fixed investment has slowed to a crawl, which will prevent any sustainable revival of GDP growth. This is illustrated in Fig.5 below with reference to Brazil, which is by far the largest regional economy and accounts for nearly 40% of the entire continental GDP. This shows Brazilian Gross Fixed Capital Formation (GFCF) as a proportion of GDP, both the total and the specific contribution of the private sector. From 2002 onwards the long-term decline in the investment rate was being reversed. But there has been a renewed decline in 2012 (and other data suggest this has been extended since).

Fig. 5 Brazil GFCF, Total and Private Sector, % of GDP

Capital outflow

There is also a new threat in the form of capital outflow. The US is the dominant financial power in the world and the US Dollar the main currency denominator not only for commodities but also for international debt. Yet the US has a structural capital shortage, as shown by its chronic deficits on the balance of payments. In periods where US capital is seeking to expand, it is obliged to suck in capital from the world. The outflow of capital from ‘emerging market economies’ was recently the subject of a strong warning from the Bank for International Settlements (BIS). This is a specific threat to the Latin American economies.

The BIS data show that Latin America and the Caribbean owe BIS-reporting banks (the banks of all the industrialised economies) a net amount US$1.337 trillion. Of this $565 billion is held in foreign currencies, which is virtually all in US Dollars. The overwhelming bulk of this US Dollar debt is owed by both private sector firms and banks based in the region and is owed to Western banks. US Dollar debt owed by governments is a relatively modest $113 billion.
In addition to the challenge posed by falling commodities’ prices and the need to reverse the sharp slowdown in the growth rate of investment, it is the region’s private sector firms which are the Achilles Heel of the economy.

The regional firms and banks are no longer benefitting from the rise in exports and are primarily responsible for the sharp slowdown in investment. They are also the primary source of capital outflow from the domestic economies, and will in many cases be directly responsible for it. They are likely to come under severe pressure as they absorb the effects of lower exports, slowing domestic economies and rising debt-servicing costs. There is no point in minimising the scale of these difficulties. They amount to a new crisis for the entire region and need a new response.

Responding to the new threats

A revival of growth is vital for a return to rising living standards. Three key steps are required, each of them interrelated. Returning to per capita GDP growth depends first on reviving the growth of fixed investment. Secondly it is necessary to soften the blow of falling export prices by increasing trade diversification. This is both a geographical diversification as well as adopting measures to increase the value created in production by increasing the output of finished goods and manufactures, compared to basic commodities. Thirdly a series of strong defensive measures are needed to insulate the region from the US-driven outflow of capital.

The decline in fixed investment is primarily the responsibility of the private sector. Since private sector investment is determined by the anticipation of profits a spontaneous recovery cannot be relied on, especially in the current conditions. Therefore the state sector must increase its own level of investment. It can do so in a number of ways, including directing domestic banks to increase productive investment by cutting back on speculation or other useless activity. It can regulate the level of private sector firms’ investment by legislation and other means (including in the awarding of government contracts). It can also apply windfall or other confiscatory taxes to fund direct government investment. If the private sector resists any of these measures, all necessary steps can be taken to overcome that resistance, including nationalisation.

One of the great successes of the period of expansion has been increasing continental economic co-operation through a variety of regional bodies, including Mercosur/Mercosul and ALBA. This helps to break down colonial patterns of development, where nearly all international trade was formerly geared towards exports of basic goods to the US. The deepening of regional ties through increased trade and infrastructure projects can help to soften the blow of falling commodities’ prices. But it is also important to move higher in the value chain of production and away from basic goods. Over the long-term manufacturing has been in decline as a proportion of GDP across the region. Increasing regional value creation requires both development of the economic capacity and access to hi-tech investment products. Here the two key potential allies are the deepening of ties with China and Russia. The former can provide funding for regional infrastructure and both can provide access to hi-tech investment goods, vital to revival of manufacturing and increasing value-added.

The outflow of capital represents an immediate and significant threat to regional prosperity. National savings need to be protected from US predations. Strong counter-measures are required. These may include restrictions on financial trading, capital controls and taking state ownership and control of the banks where necessary, as they facilitate the highly damaging outflow of capital.


Latin America and the Caribbean have seen a remarkable transformation in the most fundamental of living standards of the population in the first decade of this century. The first condition was the forging of a political leadership capable of coming to power and ending US domination.
Economically they were able to achieve this as the commodity-producing economies of the region benefited from the global rise in commodities prices. But this benefit was used to fund investment, which was the leading component of growth. It was the rise in investment which allowed the rise in living standards.

Now commodities’ prices have gone into reverse. Yet it remains the case that only increased investment can lead to increased prosperity. Therefore new radical measures are required in order to fund investment. Continuing the transformation in distribution will require a transformation in production.

This is centred on the direction of private sector firms and banks operating in the region. They have reduced their level of investment in the face of falling commodities prices and a slowing economy. They are also the primary source of the potentially disastrous capital flight from the region, which is being orchestrated by the US to destabilise its enemies and for its own benefit. Only by directing their levels of investment can growth be resumed. In some cases taking ownership of some of these banks and firms can the governments continue with their policies of economic and social transformation.

The ‘Anglo-Saxon’ Political Crisis – from Reagan & Thatcher to Trump & Brexit

By John Ross

Every day the media reports deepening political destabilisation gripping both major ‘Anglo Saxon’ countries – the US and UK. Most important for the world, of course, is US political instability where almost daily crises hit the Trump administration – resignation of the President’s Chief of Staff, sacking of the head of the FBI, public attacks by the President on members of his Cabinet, virulent public and even obscene denunciations by the President’s advisers of each other, numerous Congressional investigations, sensational leaks from inside the national security agencies the FBI and CIA, open campaigns by key mass media such as the New York Times and CNN to remove the President etc. This US domestic political instability is clearly tightly intertwined with crises and developments in world politics – US relations with Russia, US disputes over the Iran nuclear deal, differences over US policy to China etc.

The UK political crisis, with the loss by Theresa May’s government of its parliamentary majority, coming only a year after the economically irrational referendum vote for Brexit and resignation of Prime Minister Cameron, is less globally decisive than US political instability but an important factor in European politics and strikingly confirms the crisis in the main ‘Anglo-Saxon’ countries.
This US/UK political crisis has major lessons. Because these ‘Anglo-Saxon’ countries were the ones in which neo-liberal policies were most famously implemented. The fact that deepening political instability has broken out in the two major countries where neo-liberal policies were inaugurated by their most famous representatives, Reagan and Thatcher, is evidently not accidental. However, while numerous analyses have been made of the economic aspects of neo-liberalism less attention has been paid to the present clear demonstration of its dangerously destabilising political consequences. This article therefore analyses in detail the relation between the economics of neo-liberalism and the deepening US/UK political destabilisation.

But, in addition to analysis of immediate events, it must be borne in mind that the UK and US were successively for two centuries the world’s most powerful economies. Analysing the deepening political crisis in the Anglo-Saxon countries, in its fundamental historical context, therefore also allows a clear understanding of the present dynamics of the global economy and geopolitics – as well as making clear why US domestic instability is inextricably linked with international geopolitical instability.

Historical position of the Anglo-Saxon economies

Starting with the fundamental historical framework, during the two centuries in which the ‘Anglo Saxon’ economies, first the UK and then the US, were the dominant countries in the world economy they both, at the respective peaks of their power, played a decisive global role in stabilizing the world economy through being large scale suppliers of capital for economic development of other economies.

The economic process involved, and its relation to the geopolitical dominance of first the UK and then the US, was simple. Throughout most of this period the UK and US were the world’s most internationally competitive economies. This competitiveness generated large balance of payments surpluses from overseas trade and property incomes. But, in economic terms, a balance of payments surplus necessarily involves an equal export of capital. Therefore, this high competitiveness of the US and UK economies generated balance of payments surpluses, which were used to generate capital exports to other countries, which in turn helped stabilise recipient states and the global economy as a whole. While this essential mechanism was the same in both countries certain specific features of the two economies will now be briefly examined in chronological order.

Pax Britannica

The period of UK global economic dominance in the 19th and early 20th centuries was classically studied in Imlah’s masterpiece Economic Elements in the Pax Britannica. This analysed the way in which throughout most of the 19th century large scale capital exports from the UK stabilised the world economy and geopolitical situation. Imlah’s study was of the detailed economic background to the reality that general conflict between the great European powers, which for most of this period were also the world’s most powerful states, did not occur for almost a century between the end of the Napoleonic Wars in 1815 and the beginning of World War I in 1914. Imlah noted that throughout this century the UK, at that time the world’s most powerful economy, was a large-scale exporter of capital – Figure 1 shows this process and extends the data to the present day.

Figure 1 shows that huge UK export of capital, generated by its balance of payments surpluses, already reached eight percent of GDP by 1870 and by 1913 it was approaching 10% of GDP – to understand the consequences of the trends in this chart, as already noted. it should be appreciated that running a balance of payments surplus is equal to exporting capital.

Figure 1

Imlah noted that massive supply of UK capital to other states, by compensating for shortage of capital in them, stabilised both the individual recipient countries and the world economy. It was for this reason that Imlah termed the 19th century the ‘Pax Britannica’ – supply of capital to the other countries by the world’s most powerful economy of that period stabilised the global situation.This period of avoidance of generalised conflict between the major European powers in 1815-1914 was, of course, used by them to colonise other countries – but that is another issue.

But after 1913, as Figure 1 shows, the economically devastating consequences of World War I for Britain meant that the UK could no longer play its former global stabilising role. By 1928 British export of capital had fallen to 2.6% of GDP. Britain’s ability to stabilise the global economy was then further weakened by the Great Depression – by 1935 UK export of capital was only 0.5% of GDP. During World War II the UK became a massive recipient of capital in aid from abroad – above all from the US.

After World War II UK export of capital resumed, but only at around of one percent of GDP. By this time also the UK had so declined as a percentage of the world economy that its capital exports were too small to play a globally stabilising goal.

Britain moved briefly into balance of payments deficit in the mid-1970s but then from the early 1980s onwards the UK moved into a permanent and worsening balance of payments deficit – this deficit indicating its economy had lost its international competivity. This date of the severe deterioration of Britain’s international competitiveness is of course significant – it was the Thatcher period.

This UK balance of payments deficit from the early 1980s had great domestic economic significance as analysed below. However, in terms of its global consequences by the late 20th/early 21st centuries the UK had lost its position as an economic ‘superpower’. While the UK balance of payments deficit was still internationally significant, being the world’s second largest in dollar terms after the US as shown below, by this time the global role of the UK deficit was very subsidiary compared to the US.

To avoid the UK data being dominated by purely short-term movements, and therefore to allow the trend to be seen clearly, a five-year moving average of the UK balance of payments is shown in Figure 2. As may be seen after 1913 the UK never regained its position as a massive exporter of capital and therefore lost its ability to stabilise the world economy. This role passed to the other great Anglo-Saxon power, the US – which is analysed in the next section.
Figure 2

Rise and decline of the US stabilising role in the world economy

The US became world’s largest economy in approximately the 1880s but there was naturally a time lag before its period of global economic dominance began. In the 19th century the US had been a large-scale capital importer – a major part of which came from the UK. However, by the beginning of the 20th century the US economy’s rising power meant it had become a capital exporter – see Figure 3. The US remained an exporter of capital until the beginning of the 1980s. As the gigantic export of capital by the US during the World Wars, reaching its peak at 7% of GNP, was exceptional a five-year moving average for this data is also shown in Figure 4.

After 1945 the US acquired hegemony among the capitalist economies – completely replacing the UK. US capital exports were important not only in general but also specifically for particular regions and countries US foreign policy wished to stabilise/aid. For example, the US granted massive economic aid to Western Europe after World War II (the Marshall Plan), the US gave large scale aid to key military allies (e.g. Israel), the US subsidised numerous countries in the ‘Third World’ it wished to support US foreign policy, US company investment into numerous economies stabilised recipient states etc.

As with the UK during the ‘Pax Britannica’, from World War II until the 1980s the US could use large scale capital exports to maintain the stability of global order in which it was the dominant economy. These capital exports, in turn, were made possible by the US balance of payment surplus – reflecting the US’s high degree of international competitiveness.

However, Figure 3 shows that from the early 1980s a fundamental change took place. The US moved from balance of payment surplus into balance of payments deficit – that is the high international competitiveness of the US had disappeared. From a balance of payments surplus in 1980 the US had moved to a deficit of 2.8% of GDP by 1988 – an annual deficit of over $400 billion in today’s prices.

The date of this sharp decline in US international competitiveness is of course significant as it is the period in which Reagan was president. It is equally extremely striking that the US moved into balance of payments deficit, that is the international competitiveness of its economy declined, at exact the same time as the UK – in the 1980s. The leaders of the US and UK during this fundamental decline in economic competitiveness being, of course, Reagan and Thatcher.

This worsening of the international competitive position of the US and UK would necessarily lead to deterioration of their domestic and global positions – the trends which are analysed below are merely the precise mechanisms by which the deteriorating international competitive positions of the US and UK worked themselves out. The present political destabilisation of the US and UK will be seen to be an inevitable consequence of these fundamental economic processes.

Figure 3
Figure 4

The Anglo-Saxon economic ‘black hole’

The net effect of the huge decline in US and the UK international competitiveness under Reagan and Thatcher, with both the US and UK moving into large balance of payments deficits, was that the major Anglo-Saxon economies became a type of global economic ‘black hole’. This may be seen clearly in Figure 5 which shows the 10 economies in the world with the largest balance of payments deficits in 2016. No other country even comes close to the $481 billion balance of payments deficit of the US or the $116 billion deficit of the UK.

This movement of the ‘Anglo-Saxon’ economies from balance of payments surplus to balance of payments deficit, that is from being suppliers of capital to requiring large amounts of capital from the rest of the world, necessarily changed their entire role in the world economy. From the UK and US position in the 19th and most of the 20th centuries, of being large scale suppliers of capital to the rest of the global economy, the US and UK by becoming dependent on capital from other countries reversed their role to becoming a ‘black hole’ in the world economy. From being globally stabilising exporters of capital the US and UK became dependent on capital from other countries. This meant that the US and UK have been transformed from stabilisers of other countries’ economies to destabilising the world economy.

As the impact of the US under Reagan was globally most important this will be concentrated on. But it will be seen that Thatcherism was simply a small scale variant of Reaganism – naturally with certain specific national features.

Figure 5

Decline of US international competitiveness

Analysing first the international dimension of the US economy, It was already noted above that the Reagan period witnessed a radical decline in US international competitiveness. As shown in greater detail in Figure 6, prior to Reagan winning the presidency in 1980 the US balance of payments, the key indicator of the US economy’s competitiveness, had remained essentially in balance despite the negative impact of the international oil price rise in 1973 – the largest US balance of payments deficit was 0.7% of GDP in 1977. In contrast, following Reagan’s election the US balance of payments deteriorated sharply – i.e. the US economy suffered from rapidly declining international competitiveness. By 1987, Reagan’s penultimate year in office, the US balance of payments deficit reached 3.3% of GDP – showing unprecedented post-World War II worsening US competitiveness. Overall in the period from 1980, the last year before Reagan came to office, and 1988, his last year in office, the US balance of payments deteriorated from a surplus of 0.1% of GDP to a deficit of 2.3% of GDP – a worsening of 2.4% of GDP, or almost $450 billion at today’s prices.

This sharp decline in US international competitiveness under Reagan, and the creation of a large US trade/balance of payments defict, necessarily had major consequences for the domestic economic structure of the US and US political stability which logically culminated in the Trump period. As a higher proportion of US goods were imported, due to the widening balance of payments deficit, jobs were lost in the US in industries which had previously produced for the home market those products which were now imported. This created the beginning of the notorious phenomenon of the US ‘rust belt’ – whole regions of the country characterised by shut down industries and unemployment. These ‘rust belt’ regions voted for Trump in 2016. However, before analysing these political consequences, a decisive feature of the Reagan period, in addition to loss of international competitiveness, will be examined – Reagan’s commencement of the massive build up of US debt.
Figure 6

Reagan and the accumulation of US debt

The declining international competitiveness of the US economy illustrated in Figure 6 shows that from Reagan onwards the US became increasingly dependent on inflows of capital from abroad – i.e. on external sources of capital. Figure 7 however shows that Reagan also simultaneously commenced large scale US domestic borrowing and debt build up .

US state debt sharply increased from 38% of GDP when Reagan became president to 60% of GDP when he left office. While in mere words Reagan talked about ‘small government’ in reality a policy of high state spending, focussed on the military, was carried out which could only be financed by debt. In summary, the area in which the Reagan showed real economic skill was large scale borrowing and debt accumulation.

Once again Reagan created a policy framework which was then followed by most subsequent US presidents. Initially Clinton, reversing Reagan’s policy, reduced US state debt to 50% of GDP, but George W Bush rapidly restored US state debt to Reagan’s levels – state debt reaching 61% of GDP by 2007 as shown in Figure 7. With the beginning of the international financial crisis US state debt then rose rapidly further – reaching 99% of GDP in the 1st quarter of 2017.

This data therefore shows clearly that large scale build-up of US state debt was begun under Reagan, not simply during the international financial crisis – although the latter of course augmented US state debt further.

Figure 7

Rising US household debt

Alongside this large-scale US state borrowing the Reagan period saw a rise in US household debt – which increased from 47% of GDP in 1981 to 57% in 1988 (see Figure 8). Once again Reagan began a process which successor US presidents continued. Under Clinton, while state debt fell as a percentage of GDP, household debt continued to rise. This process continued under George W Bush – household debt reaching 98% of US GDP by 2008.

Such a large-scale build-up of US household debt was clearly unsustainable – US households were spending beyond their real incomes. The violent consequences of the international financial crisis therefore necessarily forced a sharp reduction in US household debt, with it falling from 98% of GDP in 2008 to 78% in the 1st quarter of 2017. This greatly exacerbated the fall in US living standards from levels which had been temporarily sustained by the large-scale debt increase under Reagan and his successors. This in turn necessarily destabilised US politics.

Figure 8

Overall rise in US debt

In summary, the overall consequences of the process inaugurated by Reagan was therefore a huge build-up of total US debt, which rose from 135% of GDP in 1980 to 188% in 1988. to 250% by 2009 – see Figure 9. The process unleashed by Reagan’s military spending, continued on the state side by the military expenditure of George W Bush, and on the household side under both Clinton and Bush, might therefore be likened to a huge ‘credit card binge’. While the huge bill on the credit card is being run up the card owner feels good as they are spending a lot! But when the credit card debt necessarily has to be paid the owner feels the deeply damaging effects.

The repayment became due with the international financial crisis. With the beginning of this crisis US state debt dramatically rose from 62% of GDP in 2007 to 101% of GDP by 2015, but simultaneously with this explosion of state debt the economic consequences for the population was extremely severe. Not only did US median incomes fall below 2009 levels, as analysed below, but US households were forced to run down debt by almost 19% of GDP.. With this combination of a fall in household incomes and the necessity of households running down debts accumulated from Reagan onwards, the deep economic and social discontent of the US population shown in the 2016 US elections was inevitable.

Figure 9

Trends in US income inequality

Turning to other features, Reagan inaugurated a massive increase in US inequality, and a falling share of total incomes received by the great majority of the US population – the consequences of which culminated in current US political instability.

Table 1 below shows the percentages of US total incomes received by different levels of US income groups. As it will be seen that a clear change took place in 1980 the changes are shown in two periods – 1967-1980 and 1980-2015.

Analysing first the richest and poorest groups, from 1967-1980 the share of total incomes received by the 20% of American households with the lowest incomes rose marginally from 4.0% to 4.2%. The percentage of total income received by the top 5% fell from 17.2% – 16.5%. A small but definite evening out of the most extreme US income differences was therefore occurring in 1967-1980.

After 1980 this trend radically reversed. The share of incomes of the bottom 20% of US households fell from 4.2% to 3.1%. Simultaneously the share of incomes of the top 5% of US households rose by an extremely sharp 5.6% – from 16.5% to 22.1%. Furthermore, the share of total incomes in every income group in the bottom 80% of the US population declined – the total fall for 80% of the population being an extremely severe 7.1%, from 55.9% to 48.8%.

In monetary terms, the total income of the top 20% of US households in 2015 was $5.1 trillion while that of the entire bottom 80% was only $4.9 trillion. The total income of the top 5% of the US population in 2015 of $2.2 trillion was over seven times that of the bottom 20% of the US population of $0.3 trillion.

In summary, if from 1967-80 there had been some evening out of the most extreme US income inequalities, after 1980 there was instead a massive increase in the share of incomes of the top 5% of the population with and a simultaneous severe loss of the share of incomes of 80% of the population.

Table 1

US median incomes

Finally, the trends after the international financial crisis undoubtedly exacerbated the trends in US inequality already established under Reagan. As Figure 10 shows US median household incomes by 2015 were still below the level of 16 years previously in 1999. At the trough of incomes in the Great Recession, in 2012, US median household incomes were more than 9% below their 1999 peak level. The US population had therefore suffered more than a decade and a half serious fall in incomes – which would produce deep political discontent and anger in any country.
Figure 10

Summary of US trends

The Reagan period was therefore characterised by the following features:
  • A major fall in the international competitiveness of the US economy;
  • The US economy losing its previous position as a large-scale exporter of capital and it becoming dependent on imports of capital;
  • A very sharp increase in US state debt;·
  • An increase in US household debt,
  • Sharply increasing inequality
These fundamental trends established under Reagan were continued by his successors.
Data confirms that Thatcherism was essentially a smaller scale version of Reaganism – naturally with certain specific national features.
  • The first fundamental parallel between Thatcherism and Reaganism was the sharp deterioration in the UK’s international competitiveness under Thatcher. This was already shown in Figure 1 above. The UK moved from a balance of payments surplus of 0.6% of GDP in 1978, the year before Thatcher came to office, to a deficit of 3.6% of GDP in 1990, the year she left office. Therefore, under Thatcher the UK balance of payments deteriorated by 4.2% of GDP. This worsening of UK international competitiveness under Thatcher was consequently even worse than the US under Reagan – the UK’s balance of payments situation deteriorating by 4.2% of GDP compared to 2.4% for the US.
  • This rapid deterioration of the UK’s international competitiveness under Thatcher, the increasing proportion of products which were imported, necessarily produced the same phenomenon as the growth of the ‘rust belt’ under Reagan. In the case of the UK it was the north of England that suffered massive unemployment and closure of industries. The political destabilisation and anger produced by this began the process leading to these regions voting in favour of the economically irrational policy of Brexit as a protest.
  • UK unemployment rose dramatically under Thatcher – increasing from 6% when Thatcher came to office to 12% by the mid-1980s. Under the impact of rising unemployment and regressive tax changes introduced by Thatcher UK inequality rose rapidly. The Gini coefficient went from 0.25 in 1979 to 0.34 in 1990. Under Thatcher, as under Reagan, a massive increase in proportion of income going to the better off occurred. The real income of the bottom 10% of the population fell by 2.4 per cent, so the poor were worse off in 1990 than in 1979, while the income of the top 10% of the population rose by 48%. As a result, the number of those living in poverty under Thatcher rose sharply. Taking a standard UK measure of poverty, those with incomes below 60% of median incomes before housing costs, in 1979, 13.4% of the population were in this category while by 1990 this had almost doubled to 22.2%.
Thatcher enjoyed one major advantage compared to Reagan. In the 1980s, due to the discovery of North Sea Oil, the UK became a massive oil exporter. This economic windfall, due to geography not economic innovation, became even more valuable after the huge international oil price increase of 1979. The great tax revenues from oil and gas meant that Thatcher was able to avoid the large-scale build-up of state debt which occurred under Reagan. But, as can be seen from the increasing UK balance of payments deficit in this period, despite the enormous economic windfall from North Sea oil and gas this was not used to improve the competitiveness of the UK economy – on the contrary the international competitiveness of the UK economy substantially worsened under Thatcher.
With the worsening of the competitiveness of the UK economy which had begun under Thatcher, and which continued to worsen after her, Thatcher’s successors were not able to avoid a huge debt build up. Therefore, with a certain delay, the Reagan pattern of not only worsening international competitiveness and sharply rising inequality but also a huge build up of debt was replicated in the UK – making the parallel of the economic courses launched by Reagan and Thatcher complete.
In summary, the Thatcher period, as with the Reagan period, saw:
  • a massive deterioration in UK international competitiveness, and in consequence an increasing dependence of the UK economy on capital from abroad;
  • an extremely rapid rise in inequality.
Destabilisation of US & UK domestic politics
Having analysed the key trends under Reagan and Thatcher it is abundantly clear why their policies led directly to the domestic political instability which is currently gripping the US and UK.
  • The drastic loss of international competitiveness of both the US and UK economies under Reagan and Thatcher led necessarily to elimination of jobs in industries which had previously supplied the domestic market as imports replaced domestically produced products. This culminated in the creation of the ‘rust belt’ in the US, which voted for Trump in 2016, and economic depression in the North of England – which voted for Brexit in 2016.
  • Inequality rose dramatically under both Reagan and Thatcher, inaugurating the trend which has deepened further since.
  • Reagan immediately launched a course of massive build-up of US private and state debt and, with a certain delay, a huge debt build-up also developed in the UK.
Global destabilisation
Finally, it should be noted that in one sense Reagan and Thatcher merit being considered as fundamental turning points – in the sense that they inaugurated policies which their successors continued. The deterioration of US and UK international competitiveness which began under Reagan and Thatcher became worse under their successors. While Reagan took the US balance of payments from surplus to a maximum balance of payments deficit of 3.4% of GDP, George W Bush took the US to a maximum deficit of 6.3% of GDP. The massive US debt build-up which began under Reagan became worse in the private sector under Clinton, and worse in both private and state sectors under George W Bush. The simultaneous accumulation of state and private debt which the UK had been able to avoid under Thatcher, due to revenue from North Sea Oil, became dramatic under Blair and his successors.
The inevitable result of this domestic and international destabilisation launched by Reagan was the 2008 international financial crisis – as both US reliance on foreign sources of capital and the build up of US personal debt had become unsustainable. The resulting international financial crisis forced retrenchment on the US both internationally and domestically:
  • The US balance of payments deficit contracted from 4.3% of GDP in the last quarter of 2007 to 2.4% of GDP in the 2nd quarter of 2009 – while in the 1st quarter of 2017, the latest available data, the US balance of payments deficit was 2.5% of GDP.
  • US total debt stopped rising after it reached 250% of GDP in the 3rd quarter of 2009 – but the financial resources available to US households sharply contracted with debt falling from 98% of GDP at the beginning of 2008 to 78% of GDP by the 1st quarter of 2017.
This forced retrenchment of the US of course produced the deepest US recession since the Great Depression – and shook the entire global economy in the international financial crisis.
Geopolitical and domestic political destabilisation
The international financial crisis in turn destabilised not only US/UK domestic politics but the entire international situation. The course of increasing international political instability after 2008 is extremely clear:
  • In 2010 the Arab Spring and the generalised destabilisation of the Middle East began;
  • Following the collapse of Gaddafi’s Libyan regime in 2011 ‘jihadists’ were powerfully reinforced in West Africa;
  • In 2012 the electoral breakthrough of Marine in Le Pen in France began the rise of ‘populist’ movements in advanced countries;
  • In June 2016 the UK voted for Brexit;
  • In November 2016 Trump was elected US President, against the opposition of the establishment of both Republican and Democratic Parties, inaugurating almost continual severe political clashes in US politics;
  • In May 2017 Macron was elected French President against the opposition of both right and left wing traditional political parties, and then Macron proceeded to crushingly defeat the traditional French parties in the legislative elections,
  • In June 2017 Theresa May lost her Parliamentary majority in UK general election.
In short, the course embarked on by Reagan and Thatcher culminated in the destabilisation of not only domestic but international politics. This is of course why US the domestic political turmoil around Trump has been intertwined with international geopolitical destabilisation.
Why the delay in destabilisation?
Finally, the economic policies of Reagan and Thatcher clearly explain why the temporary ‘feel good factor’ while they were in office was replaced by deepening economic and political destabilisation ever since. As noted above Reagan and Thatcher may be compared to drunken ‘credit card bingers’. While the spending spree on credit goes on the drunk feels good because of all the things they are buying on debt but while simultaneously the strength of their business, their international competitiveness, is weakened by excessive consumption. But the drunk then feels terrible when they suffer first the hangover and then the extraordinary financial hardship involved in repaying the massive debts that have been run up – and when this has to be done under conditions in which their business is now far less internationally competitive than it was previously.
The world is still paying a terrible price for the drunken credit card binge of Reagan and Thatcher and the global financial ‘black hole’ it created in the Anglo-Saxon economies. The deep political instability now wracking the US and UK is the indelible legacy of Reagan and Thatcher.
Numerous correct economic critiques of neo-liberalism have been published, including in China – and therefore these analyse why China must avoid its damaging consequences. But another dimension is that the deepening political destabilisation playing out in the US and the UK, the historic homes of neo-liberalism, also gives another warning of why neo-liberalism is so dangerous and damaging. China and other countries must also clearly avoid the damaging political consequences of neo-liberalism.
* * *
This article was previously published on Key Trends in Globalisation and originally in Chinese at Guancha.cn on 8 August 2017. For an international audience a few references to purely domestic Chinese issues have been omitted.

Why the UK can’t be Singapore

By Tom O’Leary

Recent discussion on the Tories’ Brexit mess has centred on the UK’s inability to emulate Singapore, because the government no longer has a parliamentary majority for the big tax cuts that would be necessary. This assertion was made in The Times and repeated in the New Statesman is wrong on both counts. The Financial Times also incorrectly argued that the Singapore model was one of low taxation.

There would be a majority among the Tory and DUP MPs, probably allied with the LibDems for tax cuts. This is what has happened in the two previous parliaments as part of austerity. What is stopping them from going down this route now is not parliamentary arithmetic but the opposition of the EU, who would refuse any beneficial trade deal if the UK adopted beggar-my-neighbour tax policies. And this is too embarrassing to admit.

But the debate also betrays a complete lack of understanding about the post-World War II economic performance of Singapore, which is not based on low taxes at all. As the huge rise in Singapore’s level of prosperity is simply a unique combination of general factors determining economic growth, that misunderstanding should be challenged and overcome.

Economic policies
The UK has already ‘done a Singapore’ as its main rate of Corporation Tax is currently 19%, with an intention to cut it to 17%. Singapore’s CT rate is 17%, but this has only been in place since 2010, long after the Singapore miracle began. Until 2000, the main CT rate in Singapore was 26%, and the growth rate has been slower since.

The measure of Singapore’s tremendous performance can been gauged by taking just one indicator, per capital GDP. Using Angus Maddison’s data, in 1950 Singapore’s per capita GDP was just $2,219 and the UK’s was more than treble that at $6,939. By 2008 Singapore had far outstripped that of the UK at $28,107 to $23,742. There is a strong material incentive to learn from Singapore’s success story.

Singapore is a capitalist economy, but it is not a bastion of laissez-faire economics, as is often wrongly asserted. The state owns all the land. This is not mainly deployed for rent, but allows the state to direct investment through the allocation of land for commercial and other purposes. The effect is to be able to direct strategically the level and focus for investment.
In addition, the state itself has a very high level of investment. A number of Government-Linked Companies are among the largest in the economy and include SingTel, Singapore Airlines and others. Effectively these are the sectors privatised in the UK, which Singapore has kept in state hands. Overall, the direction of investment through land ownership, and the ownership of major companies and a tax system which favours investment over speculation has produced a much higher rate of investment (Gross Fixed Capital Formation) in Singapore than in the UK over 50 years, as shown in Chart 1.

Chart 1. UK, Singapore Gross Fixed Capital Formation, % GDP

From the early 1960s onwards, that is after independence in 1965 Singapore has had a very high rate of investment, much higher than in the UK. But there is a far greater gap between the UK and Singapore in terms of merchandise trade as a proportion of GDP. This is shown in Chart 2 below. Singapore is one of the most ‘open’ trading economies in the world, with total trade a large multiple of GDP. It is also a significantly more open economy than the UK.

Chart 2. UK, Singapore Merchandise Trade as % GDP
To be clear, this is not an ‘export-led’ growth where exports grow and import growth is suppressed. Throughout the earlier period, from 1960 to the mid-1980s Singapore’s imports were larger than its exports, as shown in Chart 3 below. Exports have only pulled ahead of imports in the later period, as overall growth has slowed.
Chart 3. Singapore Exports and Imports, % of GDP
Instead, the growth of the of the Singaporean economy has been ‘trade-led’. That is, the economy has become more thoroughly integrated into the world economy where both imports and exports have grown rapidly as the economy has industrialised and become more thoroughly integrated with regional and global supply chains.

The specific weight of the contributing factors to Singapore’s growth have been analysed, most recently in Vu Minh Khuong’s excellent ‘Dynamics of Asian Growth’. This should be closely studied by all those interested in economic development, but its fundamental analysis could be applied equally well to a country looking to revive growth and re-industrialise, such as Britain, as to developing countries. In summary, Vu found that 59 percent of Singapore’s economic growth came from capital investment, 34 percent from growth of labour inputs, and only 8 percent from productivity (Total Factor Productivity) increases.

But the scale of the growth of all these inputs and of real GDP and per capita GDP was only possible because of the size of the market in which Singapore increasingly operated, the regional Asian market and the global market. As Adam Smith remarked, it is the size of the market which sets the limit on the scope of the division of labour.

None of this is what is planned by any of the Tories. The bluster that leaving the EU will allow the UK to trade more with other countries is just that. In fact, the UK is currently the EU’s second most important exporter of goods outside the EU, after Germany. But its non-EU exports are little more than a third of Germany’s. At the same time, UK imports from outside the EU are almost on a par with Germany’s, as shown in Chart 4 below. The UK’s chronic difficulties on trade have nothing to do with limited global access arising from EU membership; German non-EU exports are thriving. It has everything to do with a lack of British competitiveness caused by chronic lack of investment.

Chart 4. Export and Import Share of EU Economies to Non-EU Markets
To follow Singapore, which would mean to achieve (re-)industrialisation in the case of the UK, would require large-scale state intervention in the economy in order to direct investment to a qualitatively higher level combined with an increased openness to international trade. The Tories are in favour of lower state intervention and privatisation, they are cutting state investment and with Brexit they will be cutting this economy from its largest market without any means even of replacing the trade lost.

No, the UK will not be turning into Singapore any time soon.

Stagnant economy, falling investment and profits

Stagnant economy, falling investment and profits By Tom O’Leary

In order to resolve a crisis it is necessary first to accept that there is one and then to identify its causes. These are indispensable preliminary steps before a solution is found. Unfortunately, Britain labours under a government-sponsored set of delusions about its own economic performance which need to be punctured before rational policy prescriptions can be formulated.

This piece follows a recent one on ‘Britain’s lost decade’ of economic stagnation with annual growth of less than 1% in real GDP over a decade, and its aim is twofold, to prove that Britain’s economic performance is in a crisis, in relative as well as absolute terms, and to show its fundamental driving force, the trend in profits.

Relative performance

As a measure of the absolute crisis, in per capita terms real GDP has risen in the UK by just 1.7% from its peak at the end of 2007 to the 1st quarter of 2017, which is effectively zero. This is in real £ terms. The UK’s relatively poor performance is shown in Table 1 below, in US$ terms.

Table 1. UK versus World GDP, percentage change from 2007 to 2016
Source: World Bank

In current US Dollar terms the World economy has grown by over 52% more than the UK economy, which in part reflects the repeated devaluations of the pound over the last decade. In Purchasing Power Parity (PPPs) terms, which adjusts for exchange rate differentials, the World economy, which itself has grown exceptionally slowly, has even so grown by almost 19% more than the UK economy over the period.

As a measure of the potential increase in prosperity for the population as a whole, it is useful to focus on changes in per capita GDP. In Table 2 below, the UK has fallen significantly behind the growth in World per capita GDP in both current US Dollar terms, and in PPP terms.

Table 2. UK versus OECD Real Per Capita GDP, percentage change from 2007 to 2016
Source: World Bank

Since the Great Recession both UK real GDP and real GDP per capita have grown far less rapidly than the World economy. The period is characterised by both relative and absolute crisis.

How did we get here?

In the previous article, it was shown how the main factor in the slump is the continuing crisis of investment. Recent data also show the continuing slump in UK productivity. Labour productivity fell in the 1st quarter of 2017. In general, mainstream economists have no explanation for this at all, and the Bank of England has called it a ‘puzzle’. Mainstream economists struggle to explain the crisis, even now.

Recently, the widely followed analyst Frances Coppola ( @Frances_Coppola ) posed the question as to why manufacturing productivity was still falling, and generally received replies that obscured rather than revealed causal relationships. SEB pointed out that the consequence of falling investment is that the stock of capital (the means of production) begins to fall as it is used up in production or becomes dilapidated. This is what has happened in the British economy over the longer-term, most markedly in manufacturing. Chart 1 below shows the level of real manufacturing capital stock in the UK economy.

Chart1. UK Real Capital Stock in Manufacturing 1995 to 2015

Effectively, the stock of manufacturing capital plateaued between 2004 and 2007. Business was only investing enough to replace exiting stock, not enough to add to productive capacity. From that point on it fell markedly. In 2015 the manufacturing capital stock was below its level in 2001. There is therefore no ‘puzzle’ about falling producitivity or falling output – the manufacturing means of production have been reduced. Manufacturing output is now 2.8% below its pre-recession peak. Over the longer term, manufacturing output actually peaked in December 2000 and is now 4.9% below that level.

More cannot be produced, and it cannot be produced more efficiently in modern manufacturing without investment. The consequence of disinvestment is lower output, lower productivity, lower pay and fewer jobs. But this then poses the question of why investment has fallen, leading to a fall in the means of production.

In an economy dominated by capitalism investment is determined by profitability. Crises of ‘overproduction’, ‘underconsumption’, ‘disproportionality’ between branches of industry, speculative bubbles, and so on, which all appear frequently can all be resolved relatively easily as long as profitability remains robust. But the contrary is also true. There can be no private sector-led recovery without a recovery in profits.

The current slump was caused by a slump in profits. Chart 2 below shows the relationship between UK profits, Investment (Gross Fixed Capital Formation) and GDP. Profits (as measured by the Gross Operating Surplus) in the UK peaked in the 1st quarter of 2006. Investment peaked in the 4th quarter of 2017. GDP peaked in the 1st quarter of 2008. It shows that Profits fell first, Investment followed and then GDP contracted.

Chart 2. UK Profitability, Investment & GDP

This is not simply a sequential relationship. It is also an arithmetical one. The largest percentage fall was in Profits, followed closely by Investment, and the fall in GDP was much more shallow. From peak to trough, the rate of return for UK non-financial companies fell by 24%. The maximum fall in the level of Investment was 11.7%, while the peak to trough fall in real GDP was 6.1%.

It should be noted that throughout the entire period from the 1st quarter of 2006 to the 1st quarter of 2008 Consumption continued to rise strongly. In fact it did not begin to turn lower until the 3rd quarter of 2008, six months after the recession began.

The recession was driven by the fall in Investment. The fall in Investment was itself driven by the fall in profitability. It is the weakness of Investment which continues to act as a brake on the economy, leading to stagnation or worse. Therefore the trend in profitability takes on decisive quality if there is to be a private sector-led recovery.