Socialist Economic Bulletin

Britain’s trading performance is making us poorer

October 5, 2016 Uncategorized

yesBritain’s trading performance is making us poorer
By Tom O’Leary

Britain is not a great trading nation, or more accurately is no longer a great trading nation. Its exports are just one third of Germany’s. As recently as 1988 UK exports as a proportion of GDP were larger than Germany’s exports on the same measure. Exports can be a key driver of growth, for all countries. It is therefore extremely important to understand how that can be achieved in Britain and what both the scale and the scope of the problem is.

Some simple maths

It is sometimes argued, in what is described as growing anti-globalisation sentiment, that all nations cannot have export-led growth, or that the growth of trade is itself in some way exploitative. Both of these views are quite commonplace and wrong.

If the world economy were a zero-sum game, it would of course be true that the growth of one country’s exports has its counterpart in the decline of another country’s exports. But the world economy isn’t a zero sum game. What it actually leads to is the growth of another country or countries’ imports. This distinction matters.

If something is growing, such as world trade, it is possible for all countries to have rising exports. Further, if something is growing faster than GDP, such as trade, it is possible for all countries to have exports rising as a proportion of GDP.

This is exactly what has happened. Table 1 below shows the proportion of exports in the GDP of selected leading economies. In all cases exports have risen as a proportion of GDP.

Table1. Selected Economies Exports as a Proportion of GDP
Source: OECD

In all cases exports have risen as a proportion of GDP, although the growth of UK exports has been the weakest of all. But to be clear, if exports are rising as a proportion of GDP, this of course means the exports have grown faster than GDP for all these countries.

Unfortunately, the growth in the level of exports as a proportion of GDP in the UK has been the weakest of all these economies over a prolonged period. Exports have risen faster than UK GDP, but much less strongly than in other economies. Exports have not contributed as much to UK growth as they have in other countries. 

To avoid any misunderstanding that the growth of exports in these economies has been at the expense of other, poorer countries, Chart 1 below shows the proportion of exports in the GDP of all Low and Middle Income Countries over a similar period 1970 to 2015. Exports have risen strongly as a proportion of GDP for all Low and Middle Incomes in aggregate. Exports comprised 8.8% of GDP for this group of countries in 1970 and this had risen to 25.5% of GDP in 2015. This represents a rise of 290%. Low and Middle Income Countries have also experienced export-led growth. Of course, as with other countries this has declined from 2007 onwards as part of the Great Recession.

 
Chart 1. Low & Middle Income Countries’ Exports as % GDP
 
Some fundamental economics

It is only possible for the whole world to experience rising exports as a proportion of GDP if world trade grows faster than world GDP. This in turn implies that exports lead GDP growth and, furthermore, that the greater the participation of an economy in growing world trade the faster it will grow, all other things being equal.

This corresponds to the most fundamental laws of economics. These were first elaborated by Adam Smith in ‘The Wealth of Nations’, where he sets out what he describes as the division of labour as the most fundamental force in developing the productive level of the economy. This concept was itself developed by Marx in Volume I of ‘Capital’, where the socialisation of production brings in all the productive forces of a society, capital in all its forms as well as land and labour. For Marx, the motor force of economic development is the socialisation of production and is the economic basis of socialism, the integration of all production determined by the needs of society as a whole.

The growth of trade at a faster rate than GDP is just one aspect of the overriding importance of the (international) division of labour, or socialisation of production. Another is the growth of the capital stock (Marx’s ‘organic composition of capital’) at a greater rate than GDP, which is why the rate of investment is the second-most important factor in determining growth. A further factor is the importance of education, as labour becomes increasingly skilled in order to function in an increasingly complex and interconnected, or socialised economy.

This socialisation of production means that inputs grow faster than outputs. These inputs include both capital, including fixed capital and circulating capital, as well as the inputs of labour, both the numbers in work and their levels of skill and education.

All the preceding points made in relation to exports apply equally to imports. Indeed, they have to as the sum of world exports must equal the sum of world imports, even if the statisticians struggle to align the two. 

It would be one-sided and so false to examine only the growth of exports. Imports necessarily grow at the same pace, at least on a world scale. In addition, because production is increasingly socialised, it is necessary to import in order to export.

In general, the largest Western economies and the most productive are highly dependent on imports in order to export. The import content of exports tends to be around 25% of the total. According to the OECD in 2011 the import content of exports was 28.2% of the total. For the OECD as a whole, even in the relatively short period 1995 to 2011 the import content of exports has risen from 14.9% to 24.3%. This is shown in Chart 2 below.

 
Chart 2. OECD Countries Import Content of Exports, Percentage
 
The rise in the import content of exports is rising extremely rapidly as the world economy becomes increasingly integrated. The partial exception to this general rule is the US, which also has an increasing import content, but the proportion was only 15% in 2011. This is because the US has built a somewhat more self-contained, but nevertheless vast, continental-sized economy. 

Just as both exports and imports are rising faster than GDP, the import content of exports is also rising even faster than exports/imports themselves. So, the import content of exports is the fastest-growing aspect of the all the OECD economies’ growth. This provides a clear indicator that inputs grow faster than outputs, and that the socialisation of production is a fundamental factor in the development of the productive capacity of the economy.

There are a number of consequences that flow from this factual and theoretical analysis. One of them is that the idea of a national-based economic revival is a pipedream and that restricting imports in an advanced economy in order to boost economic activity is a backward-looking fantasy. It would cut any an economy off from the most advanced technologies and the integrated supply chains which increasingly determine world economic activity. Therefore, for any economy the key task is ensure its optimal insertion into the world economy under the most advantageous circumstances.

In addition, efficiency of all investment is a function of its access to the most productive (efficient) capital equipment in the world. A relatively poor country would be able to increase production much more effectively with access, say, to the most advanced harvesting machines, than if it expended far greater sums in creating its own inferior equipment. This is the same analogy as Adam Smith’s pin maker transposed to a national or international scale. (Although for a developing economy a period of protection for one or two sectors may be necessary or desirable as they ready to enter the world economy).

The contrary policy where import substitution is the dominant trend has been tried and failed miserably on numerous occasions. The collapse of Argentina’s relative economic wealth under Peron and others, or the stagnation of Franco’s Spain all testify to the bankruptcy of this policy when it is adopted wholesale and pursued vigorously. The modern exemplar would be North Korea.

The UK example

Data already shown in Table 1 indicate that the UK economy had by far the greatest proportion of exports in GDP of any of the major economies in 1970. It still has one of the larger export shares of the leading economies but it has experienced a sharp relative underperformance of its growth compared to other countries.

Chart 3 below shows the sharply declining UK share of world exports markets and the Office for Budget Responsibility’s own assumptions of further decline. In the index the 2003 level equals 100. The data are stark, showing that the UK’s export share of world trade has fallen by 30% in 30 years.

Chart 3 UK’s Share of World Export Markets, 2003 = 100
Source: OBR

Throughout the crisis a number of ideas have been advanced regarding both its source and the cures. However, many of these are simply incapable of addressing the chronic decline in export competitiveness. The notions that the UK could reverse its plummeting export performance by monetary measures, or by reversing ‘financialisation’, or by boosting ‘demand’ or by tax reform, however laudable they may be in themselves, are frankly silly.

The crisis of British export performance is a crisis of competitiveness brought on by lagging productivity. This is itself is caused by very low relative levels of UK investment. With the exception of Japan, the rest of the G7 countries have higher productivity than the UK. France, Germany and the US are all more than 30% more productive, as shown in Chart 4 below.

Chart 4. UK and G7 Productivity, UK=100
 

Productivity, output per hour worked, is determined by the amount or sophistication of machinery and equipment in the production process, as well as the skills of the workforce. More or better machinery requires investment. This in turn is a function of the level of investment, both in capital and in the skills and education of the workforce. Taking only the former, it is easy to see why UK productivity languishes so lowly in the international comparisons and why its export growth has been so limited. Chart 5 below show the proportion of GDP devoted to investment (Gross Fixed Capital Formation) in the G7 economies (of course the level of Chinese investment and its export growth are considerably higher).

Chart 5. GFCF as a Proportion of GDP in the G7 economies
 

In 2014 the proportion of GFCF in UK GDP was just 17%, compared to over 21% for the G7 average. Simply in order not to fall further behind would require increasing UK investment by approximately 4% of GDP, or £75 billion a year. To actually begin to close the productivity and competitiveness gap would require significantly more, at least £100bn additional investment per annum. This is the task facing the UK economy if policy is aimed at benefitting from the growth in world trade.

The apparent Tory Party U-turn on public investment is in reality a purely rhetorical one. In his day Osborne too was fond of donning a hard hat and talking about investment. But under current plans public sector net investment is due to reach new all-time lows under this Government. The £2 billion promised for housing builds very few houses and does not register at all in measures of investment as a proportion of GDP.

Separately, the accumulation of all investment (the capital ‘stock’-Smith, the ‘organic composition of capital’-Marx) is itself dependent on the size of the market. What has become known as ‘economies of scale’ is in reality the level of productive capital appropriate to the scope of the market in which it operates.

The largest market in which the UK economy can operate with its current level of productive capacity is the EU. If it were going to flourish in a global market it would need to compete with countries such as India or China, where investment as a proportion of GDP ranges from 33% to 43%, led by state investment, which no-one intends.

Conclusion

Therefore, given current levels of UK investment membership of the EU and single market is vital to maintain even the economy’s current level of integration in the international division of labour and into global supply chains. If other countries have higher levels of investment, UK levels of wages will converge to their level simply in order not experience a catastrophic loss of competitiveness.

This analysis also highlights the scope of the challenge facing the next Labour Government. £75 billion a year in public sector net investment and rising is required simply in order not to experience further declining competitiveness. Membership of the EU and the Single Market are both vital to medium-term economic prospects. Otherwise, the long-term relative decline of the UK economy, its productivity and living standards will continue.

Tories out – austerity has failed – National Demonstration 2 October

September 29, 2016 Uncategorized

am, Victoria Square, Birmingham

 
At Teresa May’s first Tory Party Conference as Prime Minister the People’s Assembly Against Austerity will be holding a mass demonstration to say we demand an alternative to ‘Austerity Britain’
 
The demonstration will demand:
  • investment in public services, in infrastructure, and in decent jobs for all
  • an end to scapegoating of migrants which divides our communities and whips up racism
Transport is being arranged from across the country. Check here for details
 
 
 
 
 
 

Illusion of the narrowing trade gap

September 15, 2016 Uncategorized

Illusion of the narrowing trade gap
By Tom O’Leary

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

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

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

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

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

Fig.1 UK, German World Exports, US$bn
 

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

Currency Devaluations

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

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

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

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

Fig.2 Sterling Trade-Weighted Index

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

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

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

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

Fig.3 UK Trade Balance July 2014 to July 2016 £ billion
Source: ONS
 

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

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

The ‘Golden Age’ and the Public Sector Deficit

September 5, 2016 Uncategorized

The ‘Golden Age’ and the Public Sector Deficit

By Tom O’Leary

John McDonnell’s fiscal policy framework continues to come under fire from both left and right. The framework broadly states that the Government should borrow for investment (the capital account) and that over the business cycle Government day-to-day spending (the Government’s current account) should be in balance. 

The attacks from the right are largely disingenuous. They argue that the McDonnell framework is little different from that of Ed Balls, a cloak for austerity-lite. The Balls approach also included a commitment to match Tory spending plans in the first two years. These would have been the deepest cuts to public spending in history and were so draconian that the Tories themselves abandoned them in office after May 2015. Balls supplemented this with a ‘zero-based spending review’, that is a commitment to have no commitments, not even to pensions, to social welfare for disabled people, or to the NHS. 

The contrast with John McDonnell is a sharp one. He has consistently opposed austerity. Crucially, McDonnell he has committed to the establishment of a National Investment Bank to address the acute investment shortage of the UK economy. He has also committed to borrowing £500 billion for investment to tackle the crisis. The McDonnell framework is not different to Balls because it can be suspended. Its content and its effects would be entirely different.

‘Keynesian’ misunderstanding

Unfortunately, because of a deep misunderstanding of economics, economic history and public finances, many progressive or ‘keynesian’ economists echo these same rightist criticisms. As this is primarily misunderstanding not malevolence, it is worth addressing once again.

From a theoretical perspective the misunderstanding arises because of the widespread view that Consumption can lead growth. Therefore, it is argued, the Government should increase its own Consumption in order to foster recovery. The premise is false.

Consumption cannot lead growth because it is not an input to it. Consumption is a consequence of production, and growing Consumption is a consequence of growing production. If production has not risen increased Consumption requires borrowing, which is a financial claim on future production. Furthermore, if an increasing proportion of output is devoted to Consumption rather than Investment the growth rate of the entire economy will slow, and so too will Consumption.

Yet ‘keynesians’ and other progressives who wish to end austerity persist in arguing for Government to increase Consumption by borrowing on its own account- hence the attacks on McDonnell. This is also flies in the face of economic history.

History

It is widely recognised the economic growth rate of the UK and of many of the Western economies was greater in the post-World War II period, from 1945 to the early 1970s than in the subsequent period. This recognition includes ‘keynesians’ and many others, some describing it as the ‘Golden Age’.

This itself is a misreading as the far higher growth rate in the US and to a lesser extent the UK was in the pre-war and war period itself. The exceptionally strong growth was caused by the state taking control of investment and directing very large increases, in order to wage war. The subsequent ‘Golden Age’ was the gradual deceleration of this war boom.

Even so, the recognition that growth in the post-War period was markedly stronger than the period beginning in the early 1970s is shared. It is factually correct. Yet this ‘Golden Age’ does not at all conform to the ‘keynesian’ prescription for permanent public sector deficits on the current Budget. In fact it shows the opposite.

In Fig.1 below the UK Current Budget Deficit is shown as a proportion of GDP. A level above zero shows a deficit. Below zero shows a surplus. For the entire period of the ‘Golden Age’ the UK Current Budget was not just balanced, it was in surplus.

 
Fig.1 UK Current Budget Deficit as a Proportion of GDP
 
The smallest surplus on the current Budget in the entire period was equivalent to 0.9% of GDP in 1960/61. The largest surplus was equal to 7.9% of GDP in 1969/70. The current Budget did not move into deficit until 1974/75, precisely when the ‘Golden Age’ of stronger growth was ending. Apart from brief periods, there have been large and growing deficits ever since and the trend in GDP growth has slowed at the same time.

This post-WWII period of large current Budget surpluses coincided with the establishment of the NHS, the creation of the ‘welfare state’, a massive public sector house building programme, large scale nationalisations and other measures.

How is this possible? How can there both be (sometimes huge) surpluses on the current Budget while Government current spending was initiating a whole series of new or improved public goods? 

The answer is investment, public investment. Fig.2 below shows the level of Public Sector Net Investment as a proportion of GDP over the same period.

 
Fig.2 UK Public Sector Net Investment as a Proportion of GDP
 
The high points in net public sector investment coincide with the very large surpluses on the public sector current account (or in reality precede those surpluses by 18 months to two years). This demonstrates a fundamental law of public finances. The returns to the public sector from investment are not registered in the investment account but are overwhelmingly returned to the public sector current account.
When governments build a rail network, a university science park, superfast broadband, or when a local authority builds a home, the investment return is not more rail networks or homes than those built. It is registered as increased tax revenues and, via job creation, as lower social security outlays such as on unemployment, payments for poverty such as tax credits, and so on. The investment comes back mainly as tax revenues, which is part of the current account balance. The UK Treasury estimates that every £1 rise in output is recorded as a 70p improvement in government finances, 50p of which is higher tax revenues. Those revenues can either be used either for more investment, or to increase current spending or some combination of the two.

This explains why both rightist and leftist criticisms are misplaced. The McDonnell framework will not lead to austerity if investment is increased. More importantly, it offers a way out of the crisis. If investment is sufficiently strong the economic recovery will provide sufficient tax revenues and lower social security outlays to become self-sustaining. This improvement in government finances can be used for more investment and for increased current spending.

On the other hand, if it should be the case that recovery remains weak and therefore the current budget remains in deficit, then the answer would not be to cut current spending, but to increase public sector investment.

The period of the greatest advances in public sector current spending took place when there were surpluses on this current account, only made possible by relatively high levels of public investment, in British terms at least. Current spending has been in crisis ever since 1974, with Denis Healey’s fake IMF crisis, then Thatcher and her successors, who slashed public investment. 

Mainstream economics largely tries to bury economic history. Those genuinely seeking an alternative to austerity should not make the same mistake.

The ‘Golden Age’ and the Public Sector Deficit

September 5, 2016 Uncategorized

The ‘Golden Age’ and the Public Sector Deficit

By Tom O’Leary

John McDonnell’s fiscal policy framework continues to come under fire from both left and right. The framework broadly states that the Government should borrow for investment (the capital account) and that over the business cycle Government day-to-day spending (the Government’s current account) should be in balance.

The attacks from the right are largely disingenuous. They argue that the McDonnell framework is little different from that of Ed Balls, a cloak for austerity-lite. The Balls approach also included a commitment to match Tory spending plans in the first two years. These would have been the deepest cuts to public spending in history and were so draconian that the Tories themselves abandoned them in office after May 2015. Balls supplemented this with a ‘zero-based spending review’, that is a commitment to have no commitments, not even to pensions, to social welfare for disabled people, or to the NHS.

The contrast with John McDonnell is a sharp one. He has consistently opposed austerity. Crucially, McDonnell he has committed to the establishment of a National Investment Bank to address the acute investment shortage of the UK economy. He has also committed to borrowing £500 billion for investment to tackle the crisis. The McDonnell framework is not different to Balls because it can be suspended. Its content and its effects would be entirely different.

‘Keynesian’ misunderstanding

Unfortunately, because of a deep misunderstanding of economics, economic history and public finances, many progressive or ‘keynesian’ economists echo these same rightist criticisms. As this is primarily misunderstanding not malevolence, it is worth addressing once again.

From a theoretical perspective the misunderstanding arises because of the widespread view that Consumption can lead growth. Therefore, it is argued, the Government should increase its own Consumption in order to foster recovery. The premise is false.

Consumption cannot lead growth because it is not an input to it. Consumption is a consequence of production, and growing Consumption is a consequence of growing production. If production has not risen increased Consumption requires borrowing, which is a financial claim on future production. Furthermore, if an increasing proportion of output is devoted to Consumption rather than Investment the growth rate of the entire economy will slow, and so too will Consumption.

Yet ‘keynesians’ and other progressives who wish to end austerity persist in arguing for Government to increase Consumption by borrowing on its own account- hence the attacks on McDonnell. This is also flies in the face of economic history.

History

It is widely recognised the economic growth rate of the UK and of many of the Western economies was greater in the post-World War II period, from 1945 to the early 1970s than in the subsequent period. This recognition includes ‘keynesians’ and many others, some describing it as the ‘Golden Age’.

This itself is a misreading as the far higher growth rate in the US and to a lesser extent the UK was in the pre-war and war period itself. The exceptionally strong growth was caused by the state taking control of investment and directing very large increases, in order to wage war. The subsequent ‘Golden Age’ was the gradual deceleration of this war boom.

Even so, the recognition that growth in the post-War period was markedly stronger than the period beginning in the early 1970s is shared. It is factually correct. Yet this ‘Golden Age’ does not at all conform to the ‘keynesian’ prescription for permanent public sector deficits on the current Budget. In fact it shows the opposite.

In Fig.1 below the UK Current Budget Deficit is shown as a proportion of GDP. A level above zero shows a deficit. Below zero shows a surplus. For the entire period of the ‘Golden Age’ the UK Current Budget was not just balanced, it was in surplus.

Fig.1 UK Current Budget Deficit as a Proportion of GDP
The smallest surplus on the current Budget in the entire period was equivalent to 0.9% of GDP in 1960/61. The largest surplus was equal to 7.9% of GDP in 1969/70. The current Budget did not move into deficit until 1974/75, precisely when the ‘Golden Age’ of stronger growth was ending. Apart from brief periods, there have been large and growing deficits ever since and the trend in GDP growth has slowed at the same time.

This post-WWII period of large current Budget surpluses coincided with the establishment of the NHS, the creation of the ‘welfare state’, a massive public sector house building programme, large scale nationalisations and other measures.

How is this possible? How can there both be (sometimes huge) surpluses on the current Budget while Government current spending was initiating a whole series of new or improved public goods?

The answer is investment, public investment. Fig.2 below shows the level of Public Sector Net Investment as a proportion of GDP over the same period.

Fig.2 UK Public Sector Net Investment as a Proportion of GDP
The high points in net public sector investment coincide with the very large surpluses on the public sector current account (or in reality precede those surpluses by 18 months to two years). This demonstrates a fundamental law of public finances. The returns to the public sector from investment are not registered in the investment account but are overwhelmingly returned to the public sector current account.
When governments build a rail network, a university science park, superfast broadband, or when a local authority builds a home, the investment return is not more rail networks or homes than those built. It is registered as increased tax revenues and, via job creation, as lower social security outlays such as on unemployment, payments for poverty such as tax credits, and so on. The investment comes back mainly as tax revenues, which is part of the current account balance. The UK Treasury estimates that every £1 rise in output is recorded as a 70p improvement in government finances, 50p of which is higher tax revenues. Those revenues can either be used either for more investment, or to increase current spending or some combination of the two.

This explains why both rightist and leftist criticisms are misplaced. The McDonnell framework will not lead to austerity if investment is increased. More importantly, it offers a way out of the crisis. If investment is sufficiently strong the economic recovery will provide sufficient tax revenues and lower social security outlays to become self-sustaining. This improvement in government finances can be used for more investment and for increased current spending.

On the other hand, if it should be the case that recovery remains weak and therefore the current budget remains in deficit, then the answer would not be to cut current spending, but to increase public sector investment.

The period of the greatest advances in public sector current spending took place when there were surpluses on this current account, only made possible by relatively high levels of public investment, in British terms at least. Current spending has been in crisis ever since 1974, with Denis Healey’s fake IMF crisis, then Thatcher and her successors, who slashed public investment.

Mainstream economics largely tries to bury economic history. Those genuinely seeking an alternative to austerity should not make the same mistake.

‘No harm from Brexit vote’ is fantasy island politics

August 23, 2016 Uncategorized

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

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

Fig.1 Change in hourly wages in EU countries
Source: TUC
As previously, the rise in prices will take some time to work through the economy. This is because many goods and services that are imported are subject to fixed price contracts, which take time to be replaced. The rising oil price also feeds into the cost base of virtually all producers of goods, but does so with a time lag. Recently the oil price in sterling terms has risen from about £20bbl to £30bbl, a rise of 50%.

Brexit supporters argue that the lower level of the currency will make UK exports cheaper on international markets, as well as making imports more expensive. This is true. But a sustained increase in UK exports would also require that exporters increase their level of investment. Otherwise the potential boost to exports is squandered. Yet this is the long-run history of the UK economy, repeated currency crises and devaluations, and declining share of world export markets. More recently, the export performance of the UK economy following the 44% devaluation brought about by the crisis led to no significant export recovery. On the contrary, the UK external deficits are at record levels.

The missing factor is business investment. Previously, SEB has argued that it would be investment that would react most rapidly and most negatively to the Brexit vote. This is because the profitability of firms is in part driven by the size of the market in which they operate, and the Brexit vote threatens to cut the UK economy off from the largest market in the world. So far, as with almost all economic data, only survey data for investment has been published for the period immediately after the vote. The actual effects of the vote will be felt over a much longer timescale. The Markit PMI survey shows the fall in demand for investment goods alongside demand for other goods. The Bank of England’s regional agents’ survey covers firms with 1.2 million workers and shows that half of them plan to cut recruitment following the vote. 60% plan to cut investment, and none plan to increase investment following the vote. 

 
Fig.2 Bank of England Agents’ survey of investment intentions
Source: BoE
It is investment which is the main determinant of growth, after participation in the division of labour, including the international division of labour. The Brexit vote has immediately damaged both of these, investment and participation in the division of labour, and the full effects will only be felt over the medium-term. 

Of course, for those who insist against all evidence that consumption can lead growth, then the strong rise in retail sales in July are a harbinger of a rosy outlook for the UK economy. Shoppers will lead the way. No matter that real incomes are set to fall once more and that therefore rising consumption could only be sustained by falling household savings and rising household debt. At some point, these come to an abrupt halt.

This is part of the fantasy island economics and politics which led to the Brexit referendum and the vote itself. It will not be borne out by events.

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

August 23, 2016 Uncategorized

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

By John Ross
This article finds that the 1st, 2nd, 3rd, and 4th fastest growing economies during the period since the putting forward of the neo-liberal ‘Washington Consensus’ all follow, or are highly influenced by, China’s development model. These are the socialist states of China and Vietnam, Cambodia, and the Laos People’s Democratic Republic. Alternative development models, including the Washington Consensus, have been a failure in comparison. China’s economic model also far outperformed alternatives in poverty reduction.
These facts have international implications. The socialist development model followed by China was the unique creation of China’s economic policy as developed from Deng Xiaoping onwards. The Washington Consensus is the dominant economic strategy put forward by international economic institutions such as the IMF and World Bank.
The overwhelming economic superiority of the performance of countries following or highly influenced by China’s socialist development model shows that China’s economy not only outperformed alternatives but China’s economic strategy ‘out thought’ Western economic models.
A detailed theoretical analysis of the reasons that China’s development model outperformed alternatives is made in Chinese in my book 一盘大棋？中国新命运解析 (The Great Chess Game? A New Perspective on China’s Destiny). Shorter summaries may be found in English in my articles Deng Xiaoping and John Maynard Keynes, Why Adam Smith’s ‘classical theory’ correctly explained Asia’s growth and Deng Xiaoping – the world’s greatest economist. This theoretical analysis is therefore not dealt with here. The focus here is simply on establishing the facts – facts which clearly establish the outperformance by China’s socialist development model of any alternative.
* * *
This article compares factually the international results of two different economic development approaches – one which will be termed China’s ‘socialist development strategy’ versus the ‘neo-liberal’ Washington Consensus. The latter is the dominant economic development strategy advocated by the IMF and World Bank.
The reasons to make such a factual comparison should be clear. The wise Chinese phrase says ‘seek truth from facts’. Put in international language this dictum asserts the only basis of scientific analysis: that if facts and theory do not coincide it is the theory that has to be abandoned not the facts suppressed. ‘Dogmatism’, a fundamentally anti-scientific approach, consists of clinging to a theory even when the facts entirely contradict it.
Despite this requirement for factual study supporters of the Washington Consensus appear to strongly dislike systematic factual comparisons of the two development approaches. The reasons for this will become evident from the data below. This shows that China’s ‘socialist development strategy’ far outperforms the neo-liberal ‘Washington Consensus’.
The term ‘Washington Consensus’ was first coined in 1989 by US based economist John Williamson – although the actual practical policies were commenced in the late 1970s/early 1980s. The Washington Consensus is a classic form of ‘neo-liberalism’. It advocates in terms of economic policy privatisation and minimisation of the state’s economic role. Its social policy may be described as ‘trickle down’ – a belief that if there is economic growth all layers of society will automatically benefit as the benefits ‘trickle down’ from richest to poorest. Legally the Washington Consensus states the overriding goal is the strongest guarantees of private property. Politically, although claiming to be neutral, this combination of policies evidently favours capitalist and conservative political parties
China’s ‘socialist development strategy,’ which commenced with its 1978 economic reforms, is radically different in its entire framework and directly counterposed on key policy issues. China used, in Xi Jinping’s phraseology on economic policy, both the ‘visible’ and the ‘invisible hand’ – not simply the private sector but also the state. Indeed, in China itself, as the 3rd Plenum of the Central Committee of the 18th Congress of the CPC insisted: ‘We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector.’
In social policy, accompanying the economic dominance of the state sector, China did not rely on ‘trickle down’ but, in line with its socialist approach, China:
  • undertook massive and conscious programmes deliberately aimed at eradicating poverty – these are to be completed in the 13th Five Year Plan by 2020 by lifting the remaining 70 million people out of poverty;
  • China deliberately promotes development through urbanisation as a way of moving the population into higher productivity economic sectors;
  • China deliberately sought to narrow the income gap between rural and urban areas;
  • China does not rely exclusively on ‘the market’ but deliberately uses state infrastructure spending to raise the economic level of its less developed inland provinces;
  • legally China guaranteed private property but a key economic role was assigned to the state sector,
  • politically China was socialist.
What, therefore, were the factual outcomes of these two radically different approaches to economic development? To assess this, for reasons which will become evident from the statistics, not only will China itself be analysed but three other countries will be considered. These are Vietnam, which defines itself as socialist and which in reality drew heavily from China’s ‘socialist market economy’ approach, Cambodia, and the Lao People’s Democratic Republic – the latter two also being highly influenced by China’s development model.
The facts are summarised in Table 1 which shows the annual average rate of per capita GDP growth up to 2015 from 1978, when China began its economic reforms, from 1989, when the Washington Consensus was put forward, and from 1993 when data for Cambodia becomes available.
The data is of course extremely striking – indeed conclusive. From 1993-2015, when all four countries can be analysed China, Cambodia, Vietnam and Laos ranked respectively 1st, 2nd 3rd, and 4th in world per capita GDP growth – peripheral cases of countries with populations of less than 5 million or dominated by oil production are not included. From 1989, the date of the putting forward of the Washington Consensus, to 2015 China, Vietnam and Laos ranked respectively 1st, 2nd and 3rd in the world for countries in per capita GDP growth. From 1978 onwards China ranked 1st among all economies in terms of economic growth.
This ranking of growth necessarily shows that China’s economic model not only produced more rapid growth than developed economies but also capitalist economies at the same stage of economic development (level of per capita GDP).
Table 1
16 08 23 Chart 1
The degree to which economies influenced by the ‘China development model’ outgrew the world average was huge. From 1978 onwards China’s rate of growth was almost six times the world average Since 1989 China again grew almost six times as fast as the world average while Vietnam and Laos grew over three times as fast as the world average.
The contrasts not only of average per capital GDP growth but in eradication of poverty were overwhelming. From 1981 China lifted 728 million people out of World Bank defined poverty. Another socialist country, Vietnam, lifted over 30 million from poverty by the same criteria. The whole of the rest of the world, in which the dominant model advocated by the IMF was the Washington Consensus, lifted only slightly 120 million people out of poverty. In summary 83% of the reduction of the number of those living in poverty was in China, 85% was in socialist countries, and only 15% of the reduction in the number of those living in poverty was in capitalist countries.
This data, of course, also destroys the claim that is ‘capitalism’ which has produced rapid economic growth and poverty reduction. If capitalism were the motor of rapid economic growth and poverty reduction then this growth would be most rapid, and poverty reduction greatest, in capitalist countries. Instead it is in socialist China and socialist Vietnam that the greatest poverty reduction has taken place Socialist China and socialist Vietnam, together with the countries they influence Cambodia and Laos, have seen the fastest economic growth.
China’s ‘socialist development model’ therefore was a huge success while the Washington Consensus was a failure. Economic development remains the most fundamental issues for the overwhelming majority of the world’s population- on the latest World Bank data, 84% of the world’s population lives in developing countries. Any objective analysis based on aiming to maximise a countries development potential would therefore start with China’s ‘socialist development model.’ The facts of world economic development show that China’s development policies of a huge role for the state sector, large scale conscious policies to eradicate poverty, and a socialist political orientation were the most successful in producing both economic growth and poverty reduction.
The simple but decisive fact that the 1st, 2nd, 3rd and 4th most rapidly growing economies during the period of the Washington Consensus all use the ‘China socialist development model’ is the factual demonstration of the superiority of China’s socialist development path to any capitalist alternative.
Appendix
20 Fastest Per Capita GDP growth rates
16 08 23 Chart 2
*   *   *
This is an edited version of an article which originally appeared in Chinese at Guancha.cn.

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

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

August 23, 2016 Uncategorized

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

By John Ross
This article finds that the 1st, 2nd, 3rd, and 4th fastest growing economies during the period since the putting forward of the neo-liberal ‘Washington Consensus’ all follow, or are highly influenced by, China’s development model. These are the socialist states of China and Vietnam, Cambodia, and the Laos People’s Democratic Republic. Alternative development models, including the Washington Consensus, have been a failure in comparison. China’s economic model also far outperformed alternatives in poverty reduction.
These facts have international implications. The socialist development model followed by China was the unique creation of China’s economic policy as developed from Deng Xiaoping onwards. The Washington Consensus is the dominant economic strategy put forward by international economic institutions such as the IMF and World Bank.
The overwhelming economic superiority of the performance of countries following or highly influenced by China’s socialist development model shows that China’s economy not only outperformed alternatives but China’s economic strategy ‘out thought’ Western economic models.
A detailed theoretical analysis of the reasons that China’s development model outperformed alternatives is made in Chinese in my book 一盘大棋？中国新命运解析 (The Great Chess Game? A New Perspective on China’s Destiny). Shorter summaries may be found in English in my articles Deng Xiaoping and John Maynard Keynes, Why Adam Smith’s ‘classical theory’ correctly explained Asia’s growth and Deng Xiaoping – the world’s greatest economist. This theoretical analysis is therefore not dealt with here. The focus here is simply on establishing the facts – facts which clearly establish the outperformance by China’s socialist development model of any alternative.
* * *
This article compares factually the international results of two different economic development approaches – one which will be termed China’s ‘socialist development strategy’ versus the ‘neo-liberal’ Washington Consensus. The latter is the dominant economic development strategy advocated by the IMF and World Bank.
The reasons to make such a factual comparison should be clear. The wise Chinese phrase says ‘seek truth from facts’. Put in international language this dictum asserts the only basis of scientific analysis: that if facts and theory do not coincide it is the theory that has to be abandoned not the facts suppressed. ‘Dogmatism’, a fundamentally anti-scientific approach, consists of clinging to a theory even when the facts entirely contradict it.
Despite this requirement for factual study supporters of the Washington Consensus appear to strongly dislike systematic factual comparisons of the two development approaches. The reasons for this will become evident from the data below. This shows that China’s ‘socialist development strategy’ far outperforms the neo-liberal ‘Washington Consensus’.
The term ‘Washington Consensus’ was first coined in 1989 by US based economist John Williamson – although the actual practical policies were commenced in the late 1970s/early 1980s. The Washington Consensus is a classic form of ‘neo-liberalism’. It advocates in terms of economic policy privatisation and minimisation of the state’s economic role. Its social policy may be described as ‘trickle down’ – a belief that if there is economic growth all layers of society will automatically benefit as the benefits ‘trickle down’ from richest to poorest. Legally the Washington Consensus states the overriding goal is the strongest guarantees of private property. Politically, although claiming to be neutral, this combination of policies evidently favours capitalist and conservative political parties
China’s ‘socialist development strategy,’ which commenced with its 1978 economic reforms, is radically different in its entire framework and directly counterposed on key policy issues. China used, in Xi Jinping’s phraseology on economic policy, both the ‘visible’ and the ‘invisible hand’ – not simply the private sector but also the state. Indeed, in China itself, as the 3rd Plenum of the Central Committee of the 18th Congress of the CPC insisted: ‘We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector.’
In social policy, accompanying the economic dominance of the state sector, China did not rely on ‘trickle down’ but, in line with its socialist approach, China:
  • undertook massive and conscious programmes deliberately aimed at eradicating poverty – these are to be completed in the 13th Five Year Plan by 2020 by lifting the remaining 70 million people out of poverty;
  • China deliberately promotes development through urbanisation as a way of moving the population into higher productivity economic sectors;
  • China deliberately sought to narrow the income gap between rural and urban areas;
  • China does not rely exclusively on ‘the market’ but deliberately uses state infrastructure spending to raise the economic level of its less developed inland provinces;
  • legally China guaranteed private property but a key economic role was assigned to the state sector,
  • politically China was socialist.
What, therefore, were the factual outcomes of these two radically different approaches to economic development? To assess this, for reasons which will become evident from the statistics, not only will China itself be analysed but three other countries will be considered. These are Vietnam, which defines itself as socialist and which in reality drew heavily from China’s ‘socialist market economy’ approach, Cambodia, and the Lao People’s Democratic Republic – the latter two also being highly influenced by China’s development model.
The facts are summarised in Table 1 which shows the annual average rate of per capita GDP growth up to 2015 from 1978, when China began its economic reforms, from 1989, when the Washington Consensus was put forward, and from 1993 when data for Cambodia becomes available.
The data is of course extremely striking – indeed conclusive. From 1993-2015, when all four countries can be analysed China, Cambodia, Vietnam and Laos ranked respectively 1st, 2nd 3rd, and 4th in world per capita GDP growth – peripheral cases of countries with populations of less than 5 million or dominated by oil production are not included. From 1989, the date of the putting forward of the Washington Consensus, to 2015 China, Vietnam and Laos ranked respectively 1st, 2nd and 3rd in the world for countries in per capita GDP growth. From 1978 onwards China ranked 1st among all economies in terms of economic growth.
This ranking of growth necessarily shows that China’s economic model not only produced more rapid growth than developed economies but also capitalist economies at the same stage of economic development (level of per capita GDP).
Table 1
16 08 23 Chart 1
The degree to which economies influenced by the ‘China development model’ outgrew the world average was huge. From 1978 onwards China’s rate of growth was almost six times the world average Since 1989 China again grew almost six times as fast as the world average while Vietnam and Laos grew over three times as fast as the world average.
The contrasts not only of average per capital GDP growth but in eradication of poverty were overwhelming. From 1981 China lifted 728 million people out of World Bank defined poverty. Another socialist country, Vietnam, lifted over 30 million from poverty by the same criteria. The whole of the rest of the world, in which the dominant model advocated by the IMF was the Washington Consensus, lifted only slightly 120 million people out of poverty. In summary 83% of the reduction of the number of those living in poverty was in China, 85% was in socialist countries, and only 15% of the reduction in the number of those living in poverty was in capitalist countries.
This data, of course, also destroys the claim that is ‘capitalism’ which has produced rapid economic growth and poverty reduction. If capitalism were the motor of rapid economic growth and poverty reduction then this growth would be most rapid, and poverty reduction greatest, in capitalist countries. Instead it is in socialist China and socialist Vietnam that the greatest poverty reduction has taken place Socialist China and socialist Vietnam, together with the countries they influence Cambodia and Laos, have seen the fastest economic growth.
China’s ‘socialist development model’ therefore was a huge success while the Washington Consensus was a failure. Economic development remains the most fundamental issues for the overwhelming majority of the world’s population- on the latest World Bank data, 84% of the world’s population lives in developing countries. Any objective analysis based on aiming to maximise a countries development potential would therefore start with China’s ‘socialist development model.’ The facts of world economic development show that China’s development policies of a huge role for the state sector, large scale conscious policies to eradicate poverty, and a socialist political orientation were the most successful in producing both economic growth and poverty reduction.
The simple but decisive fact that the 1st, 2nd, 3rd and 4th most rapidly growing economies during the period of the Washington Consensus all use the ‘China socialist development model’ is the factual demonstration of the superiority of China’s socialist development path to any capitalist alternative.
Appendix
20 Fastest Per Capita GDP growth rates
16 08 23 Chart 2
*   *   *
This is an edited version of an article which originally appeared in Chinese at Guancha.cn.

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

China’s economy growing 5 times as fast as US’

August 9, 2016 Uncategorized

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

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

Total GDP growth

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

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

Figure 1

Per capita GDP growth

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

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

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

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

Figure 2

U.S. economic deceleration

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

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

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

Figure 3

Conclusion

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

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

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

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

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

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

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

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

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

The above article is reprinted from China.org.cn

A reply to Richard Murphy

August 4, 2016 Uncategorized

A reply to Richard Murphy

By Tom O’Leary
The great potential of argument and dispute is that it leads to clarity of thought. Richard Murphy has done the left great service. In his broadsides against John McDonnell’s policy framework he has shown his own utter confusion. In this way, clearing up these confusions and clear misconceptions about economics nd economic policy provides an opportunity to clear out some dead wood from the left’s economic thinking. That the Murphy objections are unfortunately shared by a number of people who falsely believe that they are ‘keynesians’ or even Marxists only makes the task of clearance more important.
The John McDonnell framework is that there should be a balance on the current, or day to day Government spending over the business cycle. Borrowing should be reserved for the Government investment. Murphy acknowledges this in his piece. But he seems to have no understanding of what this means. As a result his critique of the McDonnell framework contains howlers. So, he argues that a commitment to balancing the current budget means McDonnell will ‘dampen the economy and at least partially withdraw cash from the economy’ at a certain point of the cycle. He also argues that the same commitment to balancing the current budget means being committed to austerity. Both of these points are nonsense.
The McDonnell framework places no upper limit on the level of Government investment at all. In the probable economic crisis McDonnell and Corbyn will inherit, Government will need very large borrowing for investment over the longer term, more than one parliament. Government will be boosting the economy for many years to come. The increase on the productive capacity of the economy via investment also means that capacity constraints are way off into the future.
Austerity and the deficit
This large scale increase on investment is not only the alternative to austerity, it is the opposite of it. Tory austerity is comprised of two elements. These are very deep cuts in public investment but public current spending has actually risen. This is not because, as some wild-eyed Tory MPs like John Redwood claim, because there has been no austerity. The cuts have been severe and deep. Women have borne the burden of them, and we await a study showing how black and Asian communities have suffered disproportionately.
But cuts to Government current spending and investment have not led to the elimination of the deficit. The deficit has not fallen at all because of austerity. George Osborne never understood why and it appears Richard Murphy doesn’t either.
The deficit has modestly fallen because of modest growth, caused by monetary easing, a falling pound, lower interest rates and Quantitative Easing. This has led to moderately rising tax revenues, not falling Government spending. It is growth that reduces the deficit. It is only growth which can eliminate it. This is exactly what John McDonnell intends.
How is this to be achieved? By increasing Government investment on a sufficient scale to restore robust growth. In this regard, Richard Murphy seems ignorant of two crucial facts.
  1. Any deficit is comprised of two components, expenditure and receipts. A commitment to eliminating the deficit says nothing at all about the level of expenditure alone. Deficits can be eliminated by increasing revenues, either through rising economic activity or (something Murphy ought to know about) tax reform to ensure lower tax evasion.
  2. The deficit on the Government’s current account is caused by economic weakness, primarily the weakness of private sector investment. Cuts to Government investment simply deepen this crisis. Therefore any increase in Government investment is expressed first as an increase in economic activity. This in turn is felt as an improvement in Government revenues, as tax rises and Government outlays on poverty fall. This is because the returns on an increase in Government investment come not to the investment account but to the current, or day to day spending. 

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

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

Economic Howlers

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

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

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

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

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

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

Consumption versus Investment

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

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

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

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