Socialist Economic Bulletin

The Corbyn Government and the private sectorBy Tom O’Leary
There has been a furious and ill-informed reaction to comments by Jeremy Corbyn and John McDonnell regarding the pharmaceuticals industry. This follows a renunciation of Corbynomics by the well-known blogger Richard Murphy. Both cases illustrate widespread confusion on the left and on the centre of British politics about the economy and its driving forces. Confusion is never helpful, and may be highly damaging and so it should be ended.

The central problems of British politics are that the Tory Party believes it understands the fundamentals of economic policy and that many on the Labour side share this high opinion the Tories hold of themselves. The fact is that the Tory Party has been in office for the overwhelming majority of the last 150 years in which time Britain has experienced a continuous relative economic decline without precedent in the modern era.

The Tory notion, that as business runs the economy then whatever business wants must be good for the economy, has been maintained throughout this decline and is even used as a justification for it. It is claimed that alternative policies would have been worse despite the mass of evidence provided by other countries who have experienced an enormous advance in their relative economic weight in the world economy over the same period. In economics, the Tories forget nothing and have learned nothing. It is not possible to offer economic solutions to the current crisis by mimicking them, as many in the Parliamentary Labour Party wish to do.

Corbynomics in government

The purpose of a political party is not to strike a pose or make propaganda but to wield power in support of the interests it serves. Jeremy Corbyn and John McDonnell reject the failed Tory nostrums of austerity, under-investment and chronic decline. In the economic sphere their aim is to achieve office in order to boost the living standards of the population, address key threats such as climate change and inequality and to ensure that the overwhelming majority of the population enjoy a far greater share of the wealth they create.

The context for this programme is that the private sector is the dominant component of the economy in Britain and will be for the foreseeable future. But the foolish Tory/Labour right notion that everything the private sector wants should be delivered is blatantly false in the era of the Panama Papers, Mike Ashley and Philip Green.

Instead a sober assessment is required of the strengths and failings of the private sector and government intervention should obviously be designed to strengthen the former and correct the latter. Overall, the current crisis was caused by the failure of the private sector to invest and has been extended by their continued refusal to organise an investment recovery.

There is a list of industries in Britain that have completely failed to deliver the necessary level of investment. There is a homebuilders’ sector which builds no homes, an energy sector which is keener on pollution through fracking than investing in renewables and which has led to power shortages being officially predicted this winter, and a set of railway companies which couldn’t run a whelk stall despite receiving a bigger government subsidy than British Rail. Crucially, Britain now has the highest level of charges for higher education in the world and yet a below-average attainment of a Master’s degree or above in the OECD.

The essential approach to these industries is that the private sector has failed to invest so that the public sector must. In some cases this means (re)nationalisation. But in all cases it means that the public sector regulates the level of investment at a much higher level and that the benefits or returns on this investment must also accrue to the public sector in order to be sustainable. This means the government or local authorities and others building homes. It means the state investing in renewable energy and energy storage and levying the energy sector companies to contribute to that. It means taking over the train operating companies and boosting investment via Network Rail. In education it means scrapping fees and raising the universities’ budgets so that they can increase their level of R&D and investment.

There is a separate category of profitable industries, many of whom employ large and well-paid workforces. These include banking and financial services, the military sector and pharma. There are others. Even here spectacular failure is possible so that nationalisation is unavoidable, such as Lloyds and RBS banks or potentially a large chunk of Rolls Royce. But in all cases the role of a radical government of the left is to harness those industries for productive use. This includes directing them towards useful new activities and ending subsidies and tax breaks for useless or harmful activities, using public purchasing, tax changes, regulatory measures and legislation to promote useful investment and deter damaging activities. To take just one very simple example, George Osborne cut tax credits for business investment in 2011 to in order to fund a cut in the rate of Corporation Tax. This is a net benefit to companies that do not invest at the expense of those who do, and should of course be reversed.

Harnessing these industries for productive use means banking becomes a channel for investment not speculation, the defence industry shifts into civilian use technologies such as industrial hardware, scientific research, civilian marine, aerospace and satellite production and so on. For pharma this means shifting R&D from ultra-expensive questionable palliative and non-essential drugs towards effective generic drugs and drugs to tackle the big global killers, malaria, heart disease, HIV/AIDs and so on which are currently neglected. In this way pharma is subordinated to the NHS and global health needs. For each of these industries there will also be strong benefits through government increasing its own funding for investment.

A third group of industries are mainly in the retail or service sectors, everything from real estate activity, to the leisure industries to personal services such hairdressing and high street shops. This group also increasingly includes functions such as social care and others formerly carried out by the public sector which have been outsourced to the private sector. Many, not all, of these are low-paid jobs. The role of government is to ensure that they are properly regulated, both in terms of staff and in terms of their customers. The National Minimum Wage, the fight for pay and job equality for women, black people and others and all forms of worker protection should be rigorously enforced across all sectors, but these are the sectors which include the most egregious employer offenders. Childcare needs to be placed on a well-funded collective enterprise, not a ramshackle and over-priced home industry as is currently the case.

Across all sectors the principles are to use whatever is the most effective lever to increase the level of the investment in the economy and ensure that the benefits of that are shared more equally among the overwhelming majority of the population. People’s Quantitative Easing, a National Investment Bank and regional offshoots, increased borrowing for investment all means to achieve that end. The state must aim to regulate the level of investment in the economy and that level must be much higher than currently. This is the road out of the crisis.

Norway, Switzerland or Albania?By Tom O’Leary

•  Under current circumstances and for the foreseeable future membership of the EU single market is crucial to the prosperity of the UK economy; living standards will fall outside it
• The Freedom of Movement is a fundamental pillar of the single market, not an add-on or trade-off with it
• In both cases, the single market and its Freedom of Movement component raise living standards in this country greater than they would otherwise be
• The notion that it is possible to negotiate with the EU to access the single market while restricting Freedom of Movement (FoM) is false. It is unacceptable to the EU as a whole.

Theory of under-consumption cannot explain the current crisisBy Michael Burke

Incorrect ideas usually reflect a one-sidedness or distorted analysis of a problem, reflecting one or a limited series of factors rather than encompassing the totality of all important factors, their proper weight and their inter-connection. So, the theorists of the Medieval church who insisted that the Sun and the planets revolved around the Earth could point every morning to the dawn and every evening to the sunset. The Earth was the centre of the Universe. Famously, what they could not explain is why Jupiter’s moons revolved around Jupiter or later, more prosaically, why a tall ship disappears gradually beyond the horizon, its tallest mast disappearing last. The theory explained one phenomenon but could not withstand new evidence.

The theory of under-consumption is espoused across a variety of schools of thought, in mainstream economics as well as by some of those describing themselves as either Keynesians or Marxists. It bears the same relation to scientific analysis as the ideas of the Medieval church do to astronomy. This is meant in a strict sense. Under-consumption can be used explain one or more phenomena, but cannot explain an all-encompassing crisis such as the current slump. It does not stand up to the evidence.

In a ‘normal’ or average business cycle downturn it might appear that some combination of household or government spending, or private sector investment or exports start to fall more or less simultaneously and GDP as a whole weakens. (Very often, behind the apparent widespread downturn is the leading role of falling business investment, but that can be set aside here). Some change in fiscal or monetary policy, increased government spending, lower interest rates, or a lower currency and so on may off-set the slump, ‘demand’ recovers and expansion resumes across all sectors of the economy.

But under-consumption cannot explain this crisis (or severe downturns in general). This is shown in a stylised account of the current crisis of the British economy using annual data. Fig.1 below shows the level of GDP, Consumption and Investment in real terms from 2007 to 2015. The data table is shown below for clarity.

The pre-recession peak of activity was in 2007. From that point to the low-point of the slump in 2009 GDP fell by £77 billion. Over the same period Consumption fell by £29 billion and Investment fell by £50 billion. Even though Investment is a far smaller component of total expenditure it fell by far more than Consumption. It was an Investment-led slump.

The period since has been the weakest economic recovery on record. Annual GDP only surpassed the 2007 level in 2013. Over that time GDP rose by £34 billion while Consumption rose by £20 billion. But Investment was still the main brake on the recovery, down £31 billion from its peak level.

The most recent data to 2015 show GDP has increasd by £124 billion from 2007. Consumption has risen by £92 billion. But Investment has not recovered, being less than £1 billion higher in 2015 than in 2007. Worse, Investment has begun to contract once more in the latest two quarters. Therefore a GDP increase of £124 billion and a Consumption increase of £92 billion has led to zero increase in Investment, which is now declining.

Consumption has risen in the UK economy since the slump. But Investment has not. The theory of under-consumption, with the policy prescription that boosting Consumption will itself lead to a recovery in Investment has been demonstrated as false. The same pattern is true in the US and the Eurozone economies. Consumption is higher but Investment is flat or lower.

This is because private sector Investment is not determined by the level of Consumption but by profitablity. Without a rise in profits, private investment will not rise. Therefore it falls to the public sector to Invest, or wait until the private sector businesses graciously deign to invest once they see fit, perhaps destroying existing factories and offices and jobs first in order to recover profitability.

All theory is supposed to be able to explain the world. The theory of under-consumption cannot explain the world and the actual performance of the most advanced industrialised economies since the crisis. The theory is demonstrably false and should be junked.

Tory economic policy: “Welcome to Slumsville”By Michael Burke

In what is probably a desperate attempt to stay politically relevant Chancellor George Osborne has announced a ‘5-point plan’ the centre-piece of which is an undated intention to cut the Corporation Tax rate to 15%. This is justified in terms of attracting investment to off-set the shock of the Brexit referendum outcome. It will do nothing of the sort. The effect will be to reduce further the funds available for public sector investment. As this deepens the investment crisis of the UK economy Osborne’s claim that this cut signifies that ‘Britain is open for business’ is false. Instead it indicates ‘welcome to a low tax, low investment Slumsville’.

Emergency measures to boost investment are almost certainly needed in the wake of the Brexit vote. Private sector investment was already in recession (two quarters of contraction) before the vote. As investment is the most volatile component of output it is likely that the first and most damaging effect of the shock will be further sharp reductions in private sector investment. But it is a myth that investment increases with reductions in Corporation Tax, as proved by Britain’s own recent history

SEB has previously shown that repeated cuts to the level of Corporate Tax (on profits) have not led to an increase investment at all. This is illustrated in Fig.1 below which shows the level of the CT rate and business investment as a proportion of GDP.

The highest levels of business investment in this period were when the CT rate was at 30%, close to its highs. After the slump business investment staged a weak recovery from 2009 onwards while the tax rate was unchanged. But repeated cuts to the tax on profits under Tory governments saw business investment stall. As noted above business investment has begun to contract once more even while the CT rate is at its low.

This should not be surprising. Business investment is driven by returns or profits. If Company X makes profits of £1 million and pays a 30% CT rate then the net profits will be £700,000 and it may be attractive to invest further. But if the same Company X makes profits of £500,000 and pays just a 20% CT rate of its net profits are just £400,000. This may be too low to attract investment.

Private investment is driven by returns not tax rates. Otherwise, Bulgaria, with a 10% CT rate would be one of the high investment economies in Europe with commensurately high living standards and Germany with a 29.65% CT rate would be one of the low investment economies with low living standards. The opposite is the case.

But the effect of the CT rate cut is worse than neutral. The UK Treasury works with the assumption that each 1% cut in the CT rate reduced Government revenues by £2 billion. Table 1 below shows the level of CT revenues by year.

Migration is an economic benefit
By Michael Burke

Migration is an economic benefit which has the potential to lift the living standards of the whole population. Unfortunately, the debate on the EU referendum has been dominated by the two official campaigns, both of whom are anti-immigration. The leaders of the Leave campaign are the more virulent of the two. This is an economic (as well as political) dead-end, which will deepen the current economic crisis rather than end it.

As human society has developed its basic economic unit has grown ever larger. Societies have moved from being based on the tribe or similar entities through estates to towns and villages and to the nation state, including barbarisms such as slavery along the way. A key contributor to these successive developments has been the movement of goods and people as well as capital. 

Capitalism developed in the city-states of northern Italy and reached its flowering first in the nation states of Holland and England, with the flow of goods, people, capital and expertise playing a decisive role in each case. It is evident that the US could not have reached the heights of becoming the world’s leading economic power with the highest standards of living of its population without migration on a vast scale, as well as the forced migration of slavery on an unprecedented industrial scale. Less widely acknowledged, it was the immigration of the Huguenots and Jews fleeing persecution in Europe, the mass migration forced by the Highland clearances, the migration-by-starvation practised by Britain in Ireland that provided the raw material, cultural links, language skills and expertise which contributed to and helped to sustain the English Industrial Revolution. 

Goods, services and above all capital itself are in now constant motion around the world. These are all among the physical manifestations of what Adam Smith called the division of labour, or what Marx called the socialisation of production. That is, the production process itself becomes ever more complex and intricate, requiring ever-greater specialisation in ever-larger marketplaces across national borders in order to increase efficiency and so maximise profits. A key contradiction is that capitalism has become a global system while still resting on the nation-state. 

The advocates of restricting freedom of movement within the EU such as Cameron, or withdrawing from the EU and the single market in order to prevent it such as Gove, Johnson and Farage are literally reactionary. They attempt to oppose a process of migration which has been present since the dawn of humanity and which has increased as human society has progressed. They wish to resolve this contradiction by going backwards. A nostalgic and unfeasible version of the nation-state takes precedence over the actual development of society and the economy. 

Four Freedoms

The European single market is built on ‘Four freedoms’, the freedom of movement of goods, of companies, of capital and of workers to move across borders within that market. The reactionaries wish to limit the freedom of just one of those, the movement of workers. The effect would be twofold. First, the functioning of the single market would become less efficient and average prosperity would be lower as a result. The division of labour/socialisation of production would be hindered. Secondly, within the single market it would be the bargaining power of labour that would specifically decline.

Even in the heyday of rising British industrialisation there were restrictions on the freedom of movement of workers, known as the Poor Laws which kept the unemployed from seeking work outside their parish. In this way a permanent reserve army of labour was prevented from going AWOL, and kept as a permanent threat to those in work. The Poor Law legislation was only finally abolished by the progressive post-war Labour Government in 1948.

If companies and capital are free to move, but workers are not then the easiest trick for employers to pull is to say, “accept these worse terms or lower wages, otherwise we will move to A N Other country”. Tata Steel is currently deploying a variant of this, “gives us these subsidies and allow us to cut pension entitlements, or we will fold the British business”.

It would be even more reactionary to respond that these four freedoms should all be limited, precisely because it reverses the trend socialisation of production. When increasing overseas trade last gave way to national protectionism in the 1930s it led to global economic slump.

Labour share

There is a separate objection that the fruits of these freedoms, and of globalisation more generally have been disproportionately claimed by big capital, the large banks and multinational firms. But this is increasingly true of all positive economic developments as the share of national income in the advanced industrialised economies is increasingly claimed by capital, not by labour. 

But no serious commentator suggests we should abandon the benefits of mass telecommunications because of the enormous profits made by Apple, Amazon, Microsoft and so on. Returning to the pigeon post is no more sensible than restricting free movement of workers. How the benefits of economic advances are distributed is an independent matter, a product of the struggle between classes. But the working class cannot claim a greater share of these benefits if the benefits themselves have disappeared.

It is not possible to find a way out of the economic crisis by advocating policies that would deepen it, such as protectionism or restricting the freedom of movement of workers. Socialists advocate the increasing socialisation of production; greater investment, greater free education, growing trade, free movement of workers because these raise the material well-being of society as a whole, especially the material well-being of workers and their dependants. This is where the term socialism comes from.

Migrants to Britain create twice as many jobs as their proportion of the population, 14% versus 7% to 8%. They are net direct contributors to government finances of approximately £20 billion per annum, over and above anything they receive in social protection. The indirect fiscal effect is far greater, taking into account the employment creation noted above. Whatever the claims and counter-claims of the two warring Tory factions in charge of the EU ‘debate’ the truth on migration is very simple: Migration is an economic benefit.

Why Osborne fails to cut the deficit- and how John McDonnell can
By Michael Burke

As the UK economy is slowing once more, it is likely that the public sector deficit will begin to rise again as it did in 2012 under the impact of economic stagnation. George Osborne’s claimed target of deficit-reduction will once more recede on the horizon.

The Office for National Statistics (ONS) has recently published the data for public sector finances for the Financial Year ended in April. This shows a deficit of £76 billion, even though George Osborne (in)famously claimed he would eliminate the deficit in the previous year.

An examination of these data shows how the austerity policy has failed in its stated objective of deficit-reduction. More importantly analysis shows how the Labour plan initiated by Jeremy Corbyn and John McDonnell can regenerate the economy and thereby end the crisis in government finances.

Deficits matter

In the first instance it is important to state why public sector finances matter as there are some, even among progressive economists, who seem to believe that large scale deficits are of no consequence, or should even be permanently embraced. 

Deficits matter because they are a tax or lien on the public sector by the private financial sector via the bond market. So for example, because of the current crisis government interest payments have remained exceptionally low and are effectively unchanged since before the crisis at just over £30 billion per annum. At some point interest rates should recover to pre-crisis levels. Only if there is a permanent crisis will interest rates remain unaltered. Pre-crisis interest rates combined with the current trebling of the level of Government debt would see interest payments soar. These are funds that could be used for productive investment or in providing government services. Instead, there would be increased payments by governments to the financial sector which is the principal source of the outsized growth of the financial sector (pdf), which is frequently but mistakenly described as ‘financialisation’.

Outside exceptional periods, routinely borrowing via the bond market is justified only if the return to the government is greater than the initial outlay, which can only occur via investment. Under these conditions, the borrowing is used to grow the economy and, far from leading to an outsized financial sector reduces its relative weight in the economy because the productive sectors grow more rapidly led by public investment.

Osborne’s track record

To date the progress in eliminating the deficit has been painfully slow. The Tory-led Coalition came into office in May 2010, almost coinciding with the beginning of the new Financial Year. As most Government spending and revenue is determined by policies and economic trends from the preceding year, the more accurate starting-point to gauge the effect of austerity policies should be the total deficit in 2010/11, which was £137 billion. As noted above, the deficit at the end of FY 2015/16 was £76 billion. Far from eliminating the deficit in 5 years, Osborne has not even halved it.

Yet contrary to the claims of the extreme right, there have been very substantial cuts in public spending. As a proportion of GDP public sector spending has fallen from 43.9% of GDP to 38.2% in 2015/16. In relative terms this is a decline of 12% while the population has increased by 3.55% over the same period. Austerity is real.

Even so, because the economy has grown modestly and there has been inflation, the nominal level of public spending has increased from £681 billion to £716 billion. It is extremely difficult to reduce the deficit by cuts. They have to be on an enormous and devastating scale, like Greece, to achieve even very modest outcomes.

The principal factor which has led to modest deficit reduction in the UK is modest economic growth. While nominal Government outlays have risen by £35 billion to £716 billion, over the same period Government revenues have risen from £577 billion to £682 billion. If the OBR estimates of outlays and receipts are presented in real terms, adjusted for inflation the same trends are evident. Outlays have risen by £11 billion in real terms while receipts have risen by £62 billion. It is growth, not austerity which has produced deficit reduction.

Austerity and the deficit

Under Osborne, and supported by the entire Tory parliamentary party, the minimal reduction in the deficit has only occurred via growing Government receipts, which is a product of economic growth. The reason that progress has been so slow is that growth itself has been too weak.

This weakness of economic activity is a product of austerity policies. Although the cuts to investment are the least visible cuts of all, they are the most damaging to the living standards of the population over the medium-term precisely because investment raises the level of GDP. 

The most direct effect of this slow growth is on the Government current account, not on the capital account itself. This is because growth increases all types of tax revenues as more people are in better-paid jobs. In addition Government outlays fall for the same reason as unemployment benefits fall along with social protection payments for the low paid. 

The cut in the level of Government investment has produced a ‘saving’ of £16 billion in the most recent Financial Year compared to the peak level during the crisis. However the cumulative effect over 6 years of continuous cuts to investment has been to reduce the capital stock by £50 billion compared to what would have been the case if investment had been maintained at previous levels.

The direct effect of the cuts to investment on the current account includes two factors. First is the lower level of GDP simply by reducing investment, which is £16 billion. But fixed investment constitutes additions to the net capital stock, what used to familiarly be known as the means of production and the cumulative reduction under the Tories has been £50 billion. Secondly, therefore, it is also necessary to calculate the loss in production arising from this reduction in the net capital stock.
One way of estimating this loss of output is by using the Incremental Output Capital Ratio (IOCR). This is the measure of the level of the additional capital stock required to increase output by 1 unit a given year. It is calculated by dividing the capital stock by the level of annual Gross Value Added.  

According to the Office for National Statistics (ONS) the total IOCR for the net capital stock is 2.6. This means that to increase output by £1 billion in a single year it is necessary to increase the capital stock by £2.6 billion. Other estimates put the IOCR much higher, but as this is the official estimate, it will be accepted for now in the calculations below.

The reduction in the net capital stock arising from the Government’s cuts to investment amounts to £50 billion over 6 years, as noted above. If the IOCR is 2.6 then this reduction in the net capital stock reduces output in the latest year by £19 billion (50 ÷ 2.6).

Therefore the total reduction in output in the latest year is the sum of the reduction in investment (£16 billion) plus the cutback in output arising from the reduction in investment (£19 Billion). The combined effect of these two in the latest year is to reduce GDP by £35 billion. A ‘saving’ of £16 billion in Government investment has led to a total reduction in output of £35 billion in the same year.

The champions of austerity, including Osborne himself rarely talk about the actual cuts to investment that have been made by successive Tory Governments precisely for the reason that they are almost impossible to justify within any reputable economic framework. 

Fiscal impact is on the current account

As we have already noted a reduction in the level of GDP is the main cause of the fiscal deficit, while moderately higher growth has led to a moderate reduction in the deficit. It is the policy of cutting investment which is the primary cause of ongoing economic weakness and consequent inability to eliminate the deficit.

The effect of changes in GDP to changes in Government finances has been analysed previously by the UK Treasury and cited previously by SEB. Public finances and the cycle (UK Treasury Working Paper Number 5) estimates that for every £1 change in economic output, Government finances benefit by £0.75. 50 pence of that improvement arises from increased taxation revenues and 25 pence derives from automatically lower outlays. 

This is the ‘automatic stabilisers’ working in reverse; just as Government finances deteriorate in a slowdown they automatically improve in an upturn. It should be noted that the entirety of this improvement is registered in the current account in terms of both day-to-day revenues and outlays.

Returning to the current example a cut of £16 billion in Government investment has led to a reduction in GDP of £35 billion. But this also has a negative impact on the Government current account of approximately £27 billion (35 X 0.75). 

So, using official estimates, a cut of £16 billion in investment has led to a deterioration in Government finances of £27 billion, a net deterioration of £11 billion. All of this deterioration is registered in the Government’s current account, which is why it proves so intractable. Any actual deficit reduction is the combined product draconian cuts to public services, higher tax rates and very modest growth.

There are differing estimates of the ICOR for the UK economy, some much higher that the ONS estimate. This would have the statistical effect of limiting both the damage to growth and the negative impact on Government finances as a result, and cannot be dismissed. But in this piece there has been no attempt to include the spillover or ‘induced’ effects of Government investment on private sector investment, which would be an offsetting factor even if the direct damage to the economy and the public finances is overstated using official ICOR estimates. An illustration of these induced effects would be, say, if the public sector were to engage in a major house building programme then this might induce private brick makers or other producers of inputs to increase their investment.

It is easy to set the damaging effects of austerity into reverse. Jeremy Corbyn and John McDonnell have emphasized repeatedly the centrality of investment to their economic programme of regenerating the economy. For this reason, they stress that they will borrow for investment. This is exactly correct. There should be no confused or silly allegations that this is an austerity-lite programme, or similar. As shown above, their planned reduction in the current deficit naturally follows from a significant increase in public sector investment.

Staring in to the future by looking at Japan’s past
By Michael Burke

The G7 meeting in Tokyo ended inconclusively, with no agreement on how to lift the advanced industrialised economies out of stagnation. The venue was appropriate. It used to be commonplace to talk of a Japanese ‘lost decade’ yet the recession that generally began in the G7 and elsewhere in 2008 is now 8 years old. Without any programme to end the crisis, Western governments are following the Japanese path, with a repeat too of the failed policies of successive Japanese governments.

In reality is there has now been a lost generation in Japan. The Japanese economy has effectively stagnated for 25 years. Since the stock market and property bubbles burst in 1989, Japan’s real GDP growth has on average been well under 1% per annum. In nominal terms the economy is substantially smaller now than it was in 1997 as deflation has also taken hold of the economy, that is persistent falls in the price level.

The source of the Japanese crisis is the slump in investment. In 1990 the proportion of GDP devoted to investment (Gross Fixed Capital Formation) was 29.7%. By 2014 it had fallen to 20.3%. While GDP as a whole has crawled along since the bubbles burst, investment has fallen outright, as shown in Fig.1 below.

Yet bizarrely this has not prevented the growth of a cottage industry devoted to claims that the Japanese crisis is based on over-investment (pdf). Even more extreme is the notion that it is excessive investment by the Japanese public sector which has caused the crisis, or at least has been useless in counter-acting it. This reaches ludicrous proportions with anecdotal evidence about ‘bridges to nowhere’ substituting for economic analysis. This propaganda against public sector investment obscures a central fact- that Japan’s public sector investment, like investment as a whole, has been cut and is contributory factor in the investment-led downturn (Fig.2).

However, these packages typically took the form of a stimulus to consumption. Where there was any focus on increasing investment this took the form of incentives, subsidies and outright bribes to the private sector, especially to the construction sector which is one of the main funders of the LDP and in whose interests it serves. As noted above, government investment was cut. But the private sector does not consider that increasing investment is in its own interests, which would be to increase profits.

Subsequently, these packages have been supplemented by a series of apparently ground-breaking policies including money-creation, inflation-targeting, deregulation, and currency devaluation. None of this has led a to a revival of investment. Therefore the crisis is unabated.

Could it happen here?

The Western advanced industrialised economies have nearly had a lost decade of their own, from 2008 to 2015. In all cases their growth has been weaker than the initial period of Japan’s lost decade from 1990 onwards which did not begin with outright recession. This is shown in Table 1 below.

US productivity declines
By Michael Burke

US productivity is set to decline for the first time in three decades, according to forecasts from the influential business research organisation the Conference Board. The level of productivity, which is the amount produced per hour of labour, is decisive for living standards. It is extremely difficult to increase the living standards of the mass of the population without increasing productivity, and impossible to do so on a sustained basis. The Conference Board is forecasting US productivity will decline in 2016.

The Financial Times quotes Bart van Ark, the Conference Board’s chief economist saying, “Last year it looked like we were entering into a productivity crisis: now we are right in it”. Fig.1 is the Conference Board chart reproduced from the FT. Rising productivity has been a feature of the US economy since the crisis of the early 1980s.

 

But the chart also shows US productivity growth has been exceptionally weak in the recovery phase since the 2008 crisis. This weakness or outright falls in productivity is a generalised feature of the advanced industrialised economies since the crisis.

The cause is easily identified. Weak productivity growth is associated with weak investment growth. Outright falls in productivity have followed declines in investment. This is the pattern evident in the US economy. Fig.2 below shows Federal Reserve Board of St Louis data on the level of real investment (Gross Fixed Capital Formation) in the US economy, which is falling.

Two further points are worth noting. First, the level of investment in the US economy never recovered its pre-recession peak and is now turning lower. The economic outlook is deteriorating as a result, not improving as the policy makers of the Federal Reserve Board seem to believe. 

Secondly, the chart clearly demonstrates that this was an investment-led downturn in the US economy. As the US led the whole world into crisis, therefore it is reasonable to state that the Great Recession was caused by the US investment decline. In the chart above the shaded area represents the period of the recession itself. Evidently investment declined long before the recession began. In fact, it was two years later that recession began, as investment peaked in the 1st quarter of 2006. As the financial crisis of 2007-2008 also followed the investment decline, the millions of words written in support of the idea that it was the financial crisis which caused the recession are factually wrong. It was the fall in investment which caused both the financial crisis and the recession.

Turning to the UK economy, a cottage industry has grown up attempting to obscure the fundamental forces driving the decline in productivity here. SEB has shown that it is the decline in investment, leading to a decline in the net capital stock which has caused the crisis of productivity here, and that all other explanations are spurious. In the words of the FT report, the UK may simply be the ‘canary in the coalmine’, its productivity decline a harbinger of what may happen to the Western economies generally.

The State of the Economy By Michael Burke

800 people packed into a recent ‘State of the Economy’ conference hosted by Shadow Chancellor John McDonnell to discuss economic trends and economic policy. This was in addition to the series of lectures that John McDonnell is hosting, with workshops at the conference allowing a more wide-ranging discussion and debate. In addition to important speeches by McDonnell himself and Jeremy Corbyn, there was a very valuable contribution from Ha Joon Chang, along the lines of his recent article in the Guardian.

SEB hopes to post videos and other material from the conference as they becomes available. Here is John McDonnell’s speech that opened the conference (video).

The piece below is based on a Powerpoint presentation at one of the workshops by the present author.

***

The UK economy remains in crisis, in contrast to the assertions of George Osborne and the supporters of austerity. The chart below compares the current slump to the Great Depression in this country and to the slump that followed the onslaught of Thatcherism (Fig.1).

Slowdown is made in Downing StreetBy Michael Burke

It is now customary for George Osborne to blame all the ills of the British economy either on overseas economic weakness or more recently the ‘uncertainty’ over the Brexit debate. This is nonsense. The renewed economic stagnation is directly related to the policies the Tories have pursued.

The three most widely discussed symptoms of the renewed stagnation are the decline in retail sales, the widening of the trade gap and the fall in production. Of these the fall in production is the most important.  

This point may require explanation, primarily because the strength of the neoliberal counter-revolution in economics has tended to drag all other schools of thought in its direction. As a result, there is widespread confusion on these matters as if to suggest that consumption, or wages, or some other factor can lead the economy.

Marx argued (in Grundrisse and elsewhere) that,

“The conclusion we reach is not that production, distribution, exchange and consumption are identical, but that they all form the members of a totality, distinctions within a unity. Production predominates not only over itself…..but over the other moments as well. The process always returns to production to begin anew. That exchange and consumption cannot be predominant is self-evident.”

It is self-evident that exchange and consumption cannot be predominant for the simple reason that it is impossible to exchange or consume a good or service before it has been produced. It is sometimes suggested that this is only true of pre-monetary economies. An individual or a whole economy can borrow so that the level of consumption rises beyond their share of what has been distributed to them after production. Very true. But since the money borrowed has to be paid back plus interest, the borrowing amounts to a claim on future production.

Production-trade-retail sales

This fundamental point applies to analysis of the current state of the British economy. Production and manufacturing are both in recession, that is at least two consecutive quarters of declines. The trade gap has widened to record levels. But retail sales have only just begun to falter by recording falls in February and March.

Osborne and others want to claim this is a result of Brexit ‘uncertainty’. But if British-based companies were cutting back on investment this would be reflected in lower import demand for investment goods. If British consumers’ greater uncertainty led to lower consumption, then this should be reflected in lower imports of consumer goods. In both cases the trade gap would narrow.  

At the same time, there has been no crisis of ‘demand’ in the British economy, if by that is meant under-consumption. Retail sales have been far stronger than either production or exports since the recession. This is shown in Fig.1 below.

Retail sales, which are primarily the key discretionary part of household consumption, have risen modestly since the beginning of the recession, up 6.5%. But output is now in its third recession in 8 years and has fallen back towards levels last seen in the depth of the Great Recession itself. It has fallen by 10%. Quite logically, if production in Britain is falling but consumption is rising, then the trade gap must grow.

To be clear, there is the same broad pattern when total consumption is taken into account, that is household discretionary and non-discretionary consumption plus government consumption. Like the rest of the economy Government has increased consumption and cut investment. The totals for consumption and investment are shown in Fig.2 below.