Labour will inherit a crisis not a recovery

.702ZLabour will inherit a crisis not a recoveryBy Michael Burke

For once it seems that the widespread reaction to a Budget was correct. Chancellors usually bury bad news in the detail of a Budget released long after their speech. However the dire electoral position of the Tories means that the main changes were announced with a flourish. The personal income tax rate threshold was raised to £10,500 a year, which the Institute for Public Policy Research has shown mainly benefits the highest earners. In addition, the annual amount of tax-free savings was boosted to £15,000 a year, which is actually close to the average (mean) disposable income in Britain. This was a Budget to shore up the Tory vote among higher earners and savers and staunch the defections to UKIP.

Osborne did nothing to address the economic crisis. This is not because the crisis is over or a self-sustaining recovery is underway. That is a dangerous delusion. Even the forecasts from Office for Budget Responsibility (OBR), which has proved to be significantly over-optimistic on growth since it was established, project only an annual average growth rate of approximately 2.5% over the next 5 years.

Embedding poverty

SEB has previously shown that a huge gap has accumulated between the current level of economic activity and the previous trend rate of growth. Even if 2.5% GDP growth materialises that gap will not close. At best it will not widen further. The poverty and misery arising from the current crisis will become embedded in the economy.

To arrive at its forecasts the OBR has made the following assumptions:-

  • Wages will only rise half as fast as GDP growth
  • Average real wages (after inflation) will not rise at all, yet
  • Non-wage incomes (salaries, interest and rent) will rise sharply
  • House prices will rise by over 30%, and
  • Stock markets will rise by 27%

Even under the OBR’s forecasts it is clear that all the benefits of projected growth are claimed by high earners, the rich and the owners of capital. Even if all these gains were spent by the rich (which is never the case) this would be insufficient to power the growth the OBR is projecting. The main contribution to growth envisaged by the OBR over the next period is a rise in household debt. This is shown in the chart below (Chart 3.33 in OBR data).

Fig1. OBR Projection of household debt

Reversing the post-crash trend, the OBR assumes that households will increase their debt on average from 142% of their incomes currently to 166% by 2019, close to levels preceding the crash. Under these officially-sanctioned forecasts most households will see no rise in incomes, only a rise in debt. They will be worse off in 5 years time than they are now.

It is not necessary to enumerate all the ways in which this forecast might be proven wrong, if for example there are increases in interest rates or inflation picks up because the currency falls, and so on. The key point to note is that for most people the crisis will be an enduring one, at least a decade long.

Causes unaddressed

The crisis will continue because its root cause has not been addressed. Currently the fall in investment is approximately three times as large as the entire fall in GDP since the begnning of 2008. Investment has fallen by £58bn and GDP is still £21bn below its previous peak in the 1st quarter of 2008.

In fact, while GDP inches ahead in the longest-ever recession, investment (Gross Fixed Capital Formation) continues to decline. In addition, as the statisticians refine their understanding the most accurate position, the data for investment has mainly been revised lower. This is shown in the chart below (Chart in the OBR data).

Fig. 2 Business investment & its revisions

Total investment in Britain is one of the lowest of all the industrialised economies over a prolonged period (as shown in Fig.3 below, Chart G in OBR data). Business investment is currently equivalent to just 8% of GDP, also one of the lowest. Yet the OBR is effectively forecasting that the problem will disappear.

Fig.3 Total investment as % of GDP in industrialised countries

The OBR forecasts that business investment will rise by 50% in the course of the next 5 years- which has never happened in Britain outside of war. This means investment will be growing approximately 5 times as fast as the rest of the economy- even though, according to the OBR, there will be a tremendous profits squeeze, with profits falling from 33% of GDP in 2012 to 27% in 2018. These are outlandish forecasts. Only a policy to control and direct investment could produce such results.

Meanwhile, minimal wage growth, rising household debt and the investment slump are all related. It is impossible to create new, high-skilled high pay jobs without investment. The government can boast that one million jobs have been created in the last two years. But less than half of these have been for full-time employees and many of those are on zero hours or minimum wages. In order to finance any increase in spending at all, workers whose real wages are falling are obliged to drawn down savings or take on new debt.

This is the mess that the Tories will bequeath to Labour. Only a thorough break from the policies of austerity can solve it.

That Tory recovery in perspective

.260ZThat Tory recovery in perspectiveBy Michael Burke

This week George Osborne will announce his latest Budget. The specific measures in this Budget were not published at the time of writing. But it is a fairly safe assumption that he will boast that the economy is on track, and that there is a recovery. This is simply an exercise in redefinition.

The economy grew by just 1.9% in 2013. This is following a period of historically slow growth, the deepest recession in living memory and the weakest recovery on record. Yet many commentators and not just explicit supporters of austerity seem to believe this means we are automatically on track for a genuine recovery with all that means for growing jobs, rising real pay and improving living standards.

Unfortunately both the celebrations and the optimism are misplaced. Of course this does not mean that the economy will never grow again. It is even possible that growth will be a little better in 2014 than it was in 2013. But after most recessions the economic rebound is usually fairly strong. After a very steep recession the recovery should be very strong. That is not the case currently.

Annual growth in GDP of just 1.9% in 2013 is the best since 2007. But that is really a measure of the crisis of the economy and how badly policy has failed.

Prior to the current crisis, in the 20 years to 2008 the average annual growth rate of GDP was a little under 3%. In the same 20 year period from 1988 to 2008 only 3 years have seen worse growth for the British economy than last year’s 1.9% and all of those were associated with the recession under the Tories in the early 1990s (the ERM crisis).

So, a growth rate associated in the past with crisis is now redefined as recovery and heralded as success. Crisis is redefined as success; stagnation is now growth.

Current growth rates also remain well below the previous trend. That means the gap between where we are and where could or should have been is actually getting wider. It would take many years of sustained growth above that 3% rate in order to close the gap between the actual level of GDP and its previous trend. No major forecasting body suggests anything like that is going to happen over the next few years. The chart below shows the trend growth of Britain’s GDP in from 1988 to 2008.

Fig.1 Trend GDP Growth From 1998


This growing gap matters because it effectively means living standards cannot significantly recover without altering the current structure of the economy. Instead, the misery of the economic slump will become embedded as a long-term feature of the economy.

In all probability living standards for most people will not rise for several years and for many they will fall further unless growth accelerates significantly. Austerity policies have the effect of ensuring that the lion’s share of any recovery goes to a minority of the population.

Most Budget coverage is a deluge of minutiae about minor changes to the tax system. But the most important fact is this: talk of recovery is entirely misplaced. For the overwhelming majority of the population austerity policies mean that living standards will continue to decline.

The People’s Assembly National Recall Conference 15 March 2014

.447ZThe People’s Assembly National Recall Conference 15 March 2014

The People’s Assembly National Recall Conference

15 March 2014, 10AM – 5PM

Emmanuel Centre, London SW1P 3DW
Register for the conference: http://padelegateconf.eventbrite.co.uk/
Conference PackClick here

Motions Document: Click here
The final motions document will be available on the day. If we’ve missed anything out please emailconference@thepeoplesassembly.org.uk


Conference Highlights include:

National Union of Teachers General Secretary, Christine Blower, will be discussing how we make the teachers’ strikes a success and how we bring that energy into the demonstration on 21 June.
Kirstine Carbutt, a leading Unison member in Doncaster who has just organised a seven day strike against Care UK, will be relaying her experiences on how to organise successful workplace action.
PCS general secretary Mark Serwotka and the People’s Charter will be proposing an alternative to austerity.

Francesca Martinez will be closing the conference talking about why we need a mass movement.
Steve Turner, Unite the Union Assistant General Secretary, will report from Unite’s community membership strategy and will be chairing part of the day.

Natalie Bennett, leader of the Green Party, will be addressing the conference about how we bring climate change issues into the anti-austerity movement.

Dr Jackie Davis will propose plans to campaign against the sell off of our NHS.

Lindsey German from the Stop the War Coalition will talk about why the anti-war campaigns need to remain high on the agenda.

And trade unionists, community activists, students and pensioners will be debating the next steps in the campaign against austerity.

Registerhttps://padelegateconf.eventbrite.co.uk
As well as being the democratic body of the People’s Assembly, we want to use the conference as a way to strengthen and grow the organisation. So please do get in touch with trade union branches, campaigns and community groups locally and ask them to send delegates. We will be sending out a formal invitation and model motion which can be adapted to send to local organisations in a following email over the next few days.

We have set the delegate entitlement for local People’s Assembly groups quite high to ensure newer activists are able to attend the conference.

Details in brief:

People’s Assembly Delegate Conference
Date: 15 March 2014 Time: 10am – 5pm

Venue: Emmanuel Centre, Marsham Street, London, SW1P 3DW
Nearest tubes: Westminster, St. James’ Park, Pimlico
Buses: 88, 87, 3, 11, 24, 211, 148, 507, 53, 453, 12, 159

See the Emmanuel Centre website for detailed maps: http://www.emmanuelcentre.com/

How to book your delegates places:
Book your places through our eventbrite page for the People’s Assembly Delegates Conference now: http://padelegateconf.eventbrite.co.uk

Should you require another format please let us know.
Please do get in touch if you have any questions. We have set up a special email address for all communication to do with this event: conference@thepeoplesassembly.org.uk

Google map and directions
CONTACT Clare · conference@thepeoplesassembly.org.uk · 0208 5256988
TICKETS £5.00 GBP · Purchase tickets

Marx was right all along, says investment bank

.449ZMarx was right all along, says investment bankBy Michael Burke

Well, not quite. But a recent study by leading investment bank Credit Suisse shows that long-term growth rates of GDP in selected industrialised economies are negatively correlated with financial returns to shareholders. That is, the best returns for shareholders are from countries where GDP growth has been slowest, and vice versa. Where growth has been strongest, shareholder returns are weakest.

This is shown in the chart from Credit Suisse below.

Business Insider magazine carries a report of the research. It makes a series of bizarre arguments in an attempt to explain the correlation. The first is that stock markets anticipate future economic growth. But given that these data are based on the last 113 years, the stock markets must be very far-sighted indeed. The subsequent arguments do not get any stronger.

The negative correlation does not prove negative causality. But it does support the theory which suggests that the interests of shareholders are contrary to the interests of economic growth and the well-being of the population.

The clearest theory which this data supports, that the interests of shareholders are counterposed to that of economic growth, was formulated by Marx. In Capital he argues that the ‘development of the productive forces’ (the investment in the means of production and in education that are required to increase the productivity of labour and hence economic growth) runs up against the barrier of the private ownership of the means of production*.

Shareholders are not concerned with economic development but are driven by profits. Where those two conflict, the latter always win out. This is true in general, but becomes very evident in a period of crisis. Private capitalists could end the current economic slump by increasing their level of investment and they have the means to do so. They choose not to because they judge there are currently insufficient profits to be made.

So, either we wait until they deign to invest, perhaps cutting wages and corporate taxes to encourage them. Or we adopt policies that use their cash hoard to fund the investment that is necessary from growth and economic well-being.

*This contradiction is one of the central themes of the whole work. The following excerpt is a good example:

‘It is not that too much wealth is produced. But from time to time there is too much wealth produced in in its capitalist, antagonistic forms.

The barriers to the capitalist mode of production show themselves as follows:

  1. In the way that the development of labour productivity involves a law, in the form of the falling rate of profit, that at a certain point confronts this development itself in a most hostile way and has constantly to be overcome by crises;
  2. In the way that….a certain rate of profit…determines the expansion or contraction of production, instead of the proportion between production and social needs….Production comes to a standstill not at the point where needs are satisfied, but rather where the production and realisation of profit impose this.’ – Capital, Volume 3, Chapter 15, Development of the Law’s Internal Contradictions 

Who’s fooling who at the BBC?

.274ZWho’s fooling who at the BBC?By Michael Burke

Robert Peston is the BBC’s new economics editor. He has opened his new role with a programme called ‘How China Fooled the World’. For a time it is available on BBC iPlayer and Peston’s own summary is here.

In the blog and the programme Peston argues that China dodged the global economic crisis by increasing investment, specifically state-led investment. But the prevailing level of investment was already excessively high, the argument runs, and merely postponing the crisis by increasing it further will only exaggerate the inevitable crash.

The strangest thing about this argument is not the misapprehensions about the Chinese economy or even the evident lack of understanding about the forces that created what is described as the Chinese ‘economic miracle’. The main fault is that Peston does not seem to grasp the mutual relations between economies, or what is the motor force of economic growth. The BBC’s economics editor is making economic howlers.

This is the most important feature of the programme. Neither what Peston nor what SEB says is likely to affect the outcome for Chinese growth. But understanding its dynamics is crucial to a wider understanding of the economy and how to address crises where they actually exist. One of the countries where there is currently an economic crisis is Britain, not China.

Growth Forecasts

The argument rests on Peston’s own forecast of an imminent economic and financial crash in China. This puts him at odds with all the main leading global economic institutions, the IMF, World Bank, OECD and so on.

To take one example the IMF estimates that China’s real GDP growth will be 7.3% in 2014 after increasing by 7.6% in 2013. It also forecasts an increase of 7% in each of the three years from 2015 to 2018. By contrast, the IMF forecasts that British growth is stuck around the 2% rate every year until 2018, when it accelerates to 2.3%. The IMF data and projections for GDP real growth for Britain and China are shown in the chart below (Fig.1).

Fig.1 IMF data & forecasts for China and Britain real GDP Growth

It is entirely possible that the official bodies are all wrong on Chinese growth. But without making the argument on why growth is destined to collapse, Peston is simply joining the very long list of those who have wrongly forecast China’s imminent demise, some of whom have continued to do so over a very prolonged period.

SEB is firmly associated with the view that the crisis of the British economy and of the leading Western economies in general is accounted for by the slump in investment. By contrast, Robert Peston argues that the underlying source of China’s alleged crisis is an excessive level of investment. This is a crucial question for growth and for prosperity.

Since the reform period began at the end of the 1970s, Chinese annual investment has not fallen below one-third of GDP and is approaching 50% of GDP. Britain’s investment as a proportion of GDP has not much exceeded one-fifth of GDP for any sustained period and has declined to 14% of GDP. The relative proportions of GDP devoted to investment are shown in Figure 2 below.

Fig. 2 Investment as a proportion of GDP 1980 to 2018 (IMF forecast)

It is this rate of investment which is the main driver of growth in the Chinese economy over a prolonged period. It is a decisive element in the growth of all economies. The charge that China invests ‘too much’ does not stand up. China has steadily increased its rate of investment while in Britain it has steadily reduced.
The results are plain to see. The chart below (Figure 3) shows IMF data and forecasts for the level of real GDP in China and in Britain from 1980 to 2018, using international US Dollars at current Purchasing Power Parities.

Fig.3 Real GDP, China & Britain US Dollar PPPs

In 1980 the Chinese economy was a little over half the size of the British economy. By 1990 the two economies were at the same level and by 2000 the Chinese economy was double the size of the British economy. The IMF forecasts that by 2018 the Chinese economy will be more than 7 times the size of the British economy.

To combat any mistaken notion that this relentlessly higher investment and growth rate is at the expense of living standards, at the beginning of the reform period per capita GDP in China was just 3% of British levels. According to IMF forecasts, Chinese per GDP will be more than one-third of the British level by 2018.

To reinforce this, the Table below shows the long-term growth rate of consumption for the economy as a whole and for households in real terms, based on World Bank World Development Indicators. China has by far the fastest growth rate in consumption of any of the countries listed and of any large economy. Both total consumption and the consumption of households are shown.

Table 1. Percentage change in Consumption and Household Consumption

It is only possible to have such strong rates of consumption growth because such a high proportion of GDP is devoted to investment. It is this factor which determines the growth of the economy as a whole and from which it is then possible to raise living standards.

Increasing investment leads to increasing growth and rising living standards. While the current structure of the British economy does not allow for the rate of investment to match that of China, anything that raises British rates of investment towards Chinese levels would improve the trend rate of growth and allow the improvement in living standards.

Chinese growth can be good for British prosperity

Perhaps the strangest idea of all in the Peston argument is presented at the end of his programme and blog. Rhetorically, he asks would a weaker China be good for the West, and answers that “it wouldn’t be all bad”.

This follows from the assertion is that British manufacturers were killed off by Chinese competition. But this begs a very important question which relates to the current structure and future growth of the entire British economy. Why did many US, German, Swedish French and Italian car markers survive, even though in many cases their rates of pay are higher than in Britain? We could go further. What was it that caused the demise of steel making, ship building, mining and many other industries in Britain, long before China emerged into the global economy? The decisive factor was lack of global competiveness caused by under-investment.
Rather than address this issue, and the consequences of repeating the same mistakes, the BBC’s economics editor prefers to recycle myths that the rise of Chinese destroyed British industries. This may be very comforting but is delusional.

The pernicious consequences of an unwillingness to face reality can be seen from the simple fact that the rate of Chinese economic growth is a significant benefit to many economies, but that Britain is barely one of them. According to the British Foreign Office, in 2011 Chinese imports from the rest of the world were equivalent to £1.2 trillion, or approximately 80% of British GDP. Yet the British share of that market has fallen to 1%. This contrasts with Germany whose share of China’s imports is 5 times greater than Britain’s.

Britain could benefit from China’s growth. The question is how to realise that potential. It would require large-scale investment in key industries, in aerospace technology, business services, pharmaceuticals, the creative industries and so on. It would mean integration in global supply chains where China is sometimes a destination but also where it is a link in that chain, adding value for re-export. It would mean acquiring language skills, and would be aided by some knowledge of Chinese culture and history. All of this would boost British GDP, jobs and prosperity.

The alternative is equally clear. Britons could sit at home watching TV programmes that provide distraction from the long-term decline of Britain’s economic performance with reassuring fictions about the imminent collapse of the Chinese economy. This would be very foolish.

World Bank sees a ‘turning-point’ in world economy

.857ZWorld Bank sees a ‘turning-point’ in world economyBy Michael Burke

The World Bank has recently released its updated forecasts for the world economy. Two key features of the forecasts have received the greatest attention. The first is that the World Bank describes the overall trend in the world economy as at a ‘turning-point’ and secondly that this is led by a recovery in the advanced industrialised countries, or High Income Countries in the World Bank’s categorisation.

In terms of the forecasts, global GDP growth is expected to advance from 2.4% in 2013 to 3.2% this year rising to 3.4% in 2015 and 3.5% in 2016. Within that the Developing Economies are expected to grow by 5.3% in 2014, accelerating to 5.5% and 5.7% in 2015 and 2016 having grown an estimated 4.8% in 2013. But the bigger contribution to global growth is expected to come from the High Income Countries (HICs) which grew by just 1.3% in 2013 (estimated) rising to 2.2% in 2014 and 2.4% in both the following years.

So global growth is only ‘led by’ the HICs in the sense that the modest acceleration in projected growth is from the low base of 2013, a rise from 1.3% to 2.4%. By contrast the Developing Economies as a whole are expected to accelerate from 4.8% in 2013 to 5.7% in 2016, a rise of 0.9%. As a result the growth gap between these two key categories of the global economy narrows from 3.5% to 3.3%, on World Bank forecasts.

Over the medium-term the compound effect of growth differentials of this magnitude is very large. If a 3.3% differential in growth were maintained over 25 years, the Developing Economies would double in size relative to the HICs.

Turning to the performance of the HICs alone, the chart below shows World Bank data for their gross savings and investment (Gross Fixed Capital Formation) as a proportion of GDP (left-hand side). The growth of GDP is the grey line shown on the right-hand side.

What is clear is that all three variables are in a downtrend. That is, both the cyclical high-points and low-points become progressively lower over time. The slump in activity in 2008 and 2009 is the exception not the rule. The rule is a steady downtrend in activity.

Savings are the basis for investment. Of course savings can be supplemented by borrowing but as both the interest and principal on debt must be repaid at some point, debt can only serve to reschedule the time when savings are used for investment.

It is the declining proportion of GDP devoted to investment which is the primary determinant of the slowdown in GDP growth. All output is either consumed or it can be saved for investment purposes. It is only with the accumulation of capital through investment that economic activity can expand.

GDP growth in the industrialised countries is in a long-term downtrend because economic activity is determined by the declining rates of savings and investment. The ‘turning-point’ for the HICs may only be growth is no longer falling. But it is not in an uptrend.

Developing Economies’ Turmoil

However it is also notable that from the mid-1970s to the late 1990s investment exceeded the gross savings of the HICs. This can only arise by the HICs drawing on the savings of other countries and using them for investment. The last great wave of savings flowing from the Developing Economies to the HICs (primarily the US) was in 1997 and 1998, through the Asian financial crisis. Since that time savings and investment have been almost identical.

The World Bank among others highlights the risk that talk of a recovery in the industrialised economies will combine with reduced money-creation (‘tapering’ by the US Federal Reserve) to place some of the Developing Economies in severe difficulties. Some Developing Economies have low savings levels and are highly dependent on inflows of foreign capital to finance overseas debts or trade deficits, or both. The risk is that savings flowing into New York, London and other financial centres from the high savings economies (mainly in Asia) will stay there and not be recycled to the Developing Economies that require them. Financial markets have already identified a hit-list of potential casualties.

The graphic below from the Financial Times highlights some of those economies. The currencies of Indonesia, South Africa and Turkey have all fallen by approximately 20% versus the US Dollar in the last year. Other countries on this list include Brazil, India, Chile, Hungary and Poland.

The financial market speculators and the FT may not be proved correct. Certainly some countries listed have ample foreign exchange reserves to meet external funding needs for quite some time. It is also possible that they could come to some bilateral arrangements with high-savings economies who might choose to invest directly in these economies. Of these high-savings economies China is the most important.

Even so it is noteworthy that chaos and dislocation has already begun in some Developing Economies because of developments in the indistrialised countries led by the US. The HICs have a feeble economic recovery that does not threaten to break out of the long-term downtrend. But the weakness of savings and investment in the industrialised economies is so marked that any upturn comes at the expense of growth and living standards in some Developing Economies.

The ‘turning-point’ that the World Bank speaks of is unlikely to be a return to robust growth in the industrialised economies. The greater risk is that it is actually a new round of turmoil for many of the Developing Economies.

How bad will it get?

.690ZHow bad will it get?By Michael Burke

Chancellor George Osborne has recently been promoting two ideas. One is that a recovery is under way and the other is that further cuts in government spending are needed, up to £25bn.

The contradictory nature of those two statements tells us something important about the nature of the current recovery and the actual content of economic policy. It is clear that however weak the current recovery is, the overwhelming bulk of the population will not benefit from it. Austerity policies have always been aimed at transferring incomes from labour and the poor to capital and the rich. So for example, a VAT increase was said to be necessary to cut the deficit yet was simultaneously implemented with a cut in the corporation tax rate which reduced government revenues by almost exactly the same amount.

The popular shorthand for this is a recovery solely for the 1%. The class content is clear. The policy is designed to boost capital at the expense of labour and its allies.

Austerity is not at all designed to boost total economic output, in which capital might be one of the beneficiaries. The reason is simple. In the ordinary course of events an economic downturn or slump leads to a fall in profits far greater than the fall in output. A simple recovery in output could entrench that for a prolonged period.

So, the owners of a car firm sell cars worth £1,000 million in a year. Their main costs are all the inputs of labour, capital and raw materials amounting to £800 million. But these largely to tend to stay the same or even continue to rise a little when the downturn occurs. Suppose sales fall by 10% to £900 million. Input costs are unaltered in aggregate. Now profits are only £100 million and previously they were £200 million. On a 10% decline in sales, profits have fallen by 50%. Profits fall faster than output.

From the owners’ perspective the danger is that over the next period everything, sales and input costs all rise at the same rate. If so, once they have more or less recovered to £990 million in sales (an increase of 10%) the costs of labour, capital and raw materials will have risen in parallel by 10% to £880 million. Where the profit margin was previously 20% now it will be just 11%. Austerity policies are designed to avoid this permanent and unacceptable decline in the profit rate by pushing costs lower (or increasing unpaid labour though zero hours contracts, unpaid overtime, reduced pension benefits, etc.).

There is no shortage of capital to invest. SEB has previously shown that British firms are sitting on a cash mountain as are firms in nearly all the Western economies. But it is imperative from their perspective to permanently lower costs, most especially labour costs before resuming investment.

To date this project has met with only limited success. Profits, as measured by the Gross Operating Surplus of firms is £14bn lower than in the first 3 quarters of 2008 when the slump began.

This explains the weakness of the recovery as firms continue their investment strike. The NIESR chart below will be familiar to many readers. It shows the current slump in relation to the most severe recessions of the 20th century. Although not as severe as the Great Depression the current crisis has lasted considerably longer. All prior slumps had led to a recovery after 4 years (48 months). By contrast the current downturn remains 2% below its pre-recession peak. It will be at last 6 years before there is a recovery of the previous level of output.

Source: NIESR

It may be useful to delve further back in history for comparison. Between 1879 and 1893 the British economy grew by just under 13% in what has become known as the Long Depression. Even if growth in the 4th quarter of 2013 was reasonably strong, for the year as whole GDP would be 2.5% below the level of 2007 a full 6 years later.

The current cycle is compared to the Long Depression in the chart below. For the time being, even this comparison is not encouraging as the current slump is currently more severe.

There can be no suggestion that any previous recession can be mechanically extrapolated in order to suggest the path from the current crisis. But the comparisons do provide a context for the both the severity and duration of the current slump. They also belie any nonsense from the supporters of austerity about the strength of the current recovery.

The recovery itself remains dependent on a revival in investment. This is not the same as an upturn in ‘demand’, which is comprised of both consumption and investment. Household consumption has almost completely recovered its prior peak and government consumption is at a new high. The fall in investment more than accounts for the entire fall in GDP. The fall in business investment alone (not including government or household investment) exceeds the fall in output.

This is also true historically. After contraction the British economy crawled along at a snail’s pace for a further decade in the Long Depression. It only began to grow robustly from 1894 onwards. Through most of the Long Depression investment continued to decline. It was only when investment recovered its pre-recession peak in 1894 that the economy began to grow robustly. This relationship between growth and investment during the recession and recovery of the Long Depression is shown in the chart below.

The structure of the British economy is very different now and so too is its weight and role in the world economy. Then increased exploitation of a growing colonial empire combined with increased military spending were key components of the recovery. Britain’s relative economic decline since then means that option is closed.

Even with increased imperial exploitation it required a full recovery in investment to end of the Long Depression. Unless and until there is a full and robust investment recovery the British economy is set to remain in an Osborne-recovery, weak and solely for the 1%.

Fairytales from the OBR, nightmare for the population

.221ZFairytales from the OBR, nightmare for the populationBy Michael Burke

The Office for Budget Responsibility (OBR) has come under fire from across the political spectrum following publication of its latest report accompanying the Chancellor’s Autumn Statement.

The economics editor of the Financial Times Chris Giles says there ‘is not a shred of credibility’ to the OBR forecast that the unemployment rate will fall to 7.1% at the beginning of 2014 and stay there for over a year. As the Bank of England has identified 7% unemployment as the threshold for possible interest rate increases, without much conviction. But there is clearly a political merit to forecasting 7%-plus unemployment, if no logic. It certainly saves George Osborne from having to explain why interest rates could rise even before the economy has recovered its pre-recession level.

Among opponents of austerity, the anti-poverty and tax campaigner Richard Murphy says the OBR’s assumptions resemble George Osborne’s ‘wish list to Santa’. James Meadway at the new economics foundation argues that both the OBR and Osborne will not reveal the true dynamic at work in the recovery which is rising consumer debt and the reflation of a property price bubble centred on London.

The OBR admits it has a poor forecasting record. This is hardly surprising given that it uses the Treasury model of the economy. In all the arcane debate about ‘multipliers’ (the cumulative economic effects of government spending) a central truth tends to be obscured. The highest multiplier admitted in the Treasury/OBR model is just 1. This implies that no area of government spending can add to growth at all. Since the private sector has no magic wand to render its own investment in bridges, housing, railways or education more productive than government, then logically it is impossible for the economy to grow at all. The long-term decline of the British economy has been given an official rationale.

However an examination of the OBR forecasts is revealing about the real dynamic at work in the economy.

How bad will it get?

According to the OBR over the next 5 years jobs and wages will grow and the unemployment rate will fall. These central forecasts are shown in Table 1 below (excerpted from the OBR’s Table 3.5 of OBR data here).

Table 1. Inflation, employment, wages and unemployment
Source: OBR

Consequently average earnings (the growth of wages and salaries divided by the number of employees) will stagnate or even fall in real terms. Measured against the CPI the OBR forecasts average earnings will return to 2011 levels only at some point in 2016. Measured against the RPI, which takes housing costs into account, real wages never recover over the forecast period.

Even this scenario seems unlikely. In a stunning reversal of both pre-recession trends and the entire aim of austerity, the OBR is forecasting is that the lion’s share of the recovery will go to labour, not to capital. Table 2 below shows the distribution of the growth in nominal GDP over the next 5 years (table attached to Chart 3.20 of OBR data).

Table 2. Nominal GDP growth and its components (% contribution)
Source: OBR

Labour’s share of national income has been declining on a trend basis since the 1970s. The purpose of austerity is to reverse the natural fall in profits from a recession as sales fall but cost are unchanged or even rise (including the cost of labour). Yet the OBR’s forecast of flat or falling real wages is based on labour maintaining its share of national income or even increasing it.

Chart 1.

Perhaps the most outlandish forecast of all is reserved for the rise in business investment. The fall in business investment during the slump has now exceeded the entire fall in GDP. As government and other sectors have also cut their investment this means that total investment has now fallen far further than aggregate GDP. GDP has fallen by £40bn since the 1st quarter of 2008, business investment is £42bn lower and total investment has fallen by £61bn.

It is also accepted that the primary source of the OBR’s repeated over-optimistic forecasts have been its projections for rising business investment that have failed to materialise. Yet once again the OBR is projecting a rise in the expenditure of firms in plant, machinery, building, transport equipment, and so on.

Previously, SEB has shown that the investment rate (investment as a proportion of profits) of British firms has declined markedly over several decades. The OBR forecasts that profits as a proportion of GDP will peak in the second half of next year at close to current levels and that they will then gradually decline. Despite this, according to the OBR, business investment will rise dramatically at the same time, from a new low of 7.6% of GDP in the 3rd quarter of 2013 to over 10% of GDP by the beginning of 2019.

These trends and the OBR forecasts are shown in the Chart 2 below.

Chart 2.
Source: OBR, author’s calculations

Economic forecasting is always uncertain. But the notion that businesses will substantially increase their rate of investment while profits trend lower is fanciful. Businesses do not invest because it is socially necessary or even because the economy is growing. GDP has been rising since mid-2009 and business investment has been falling. In a market economy investment is driven by the return on it, which is profits.

In reality there are only two main trajectories for the economy while austerity remains in place. The first possibility is that the OBR’s assumptions about flat or falling real wages prove wrong and wages are driven down much further to boost profits. In that circumstance investment can rise if profits rise first. The alternative is the current pattern, where neither profits nor investment have recovered and a snail-like recovery takes place driven by increased borrowing to finance consumption.

There is a third variant, which breaks from austerity. This would see the state leading an investment based-recovery using its own resources and those of the private sector to boost growth and productivity, create well-paid jobs and so allow the sustainable funding of a decent social security system.

Unfortunately, without this radical change in policy, the fairytales from the OBR are likely to be a nightmare for the overwhelming majority of the population.

A milestone reached in the British slump

.016ZA milestone reached in the British slumpBy Michael Burke

The release of the second estimate of GDP in the 3rd quarter of 2013 marks an important milestone in the current slump. The fall in investment has for long been the driving force of the current crisis and in fact preceded it. As in many other countries investment (Gross Fixed Capital Formation) in Britain began to fall before the recession began. It also statistically accounts for the recession as the fall in investment is larger than the total fall in GDP.

With the publication of the latest GDP data it is now the case that the decline in business investment alone more than accounts for the entire slump in GDP in the current crisis. It is always possible that the data could be revised substantially with the release of the third estimate in the National Accounts data (and could be revised later). But the most recent data show that the total fall in GDP since the 1st quarter of 2008 to the 3rd quarter of 2013 is £40bn. Over the same period the total decline in investment (GFCF) is £61bn. This includes investment by firms, by government and by private households. But it is firms that play a dominant role in the British economy and its level of investment.

The decline in business investment now amounts to £42bn and exceeds the total decline in GDP of £40bn. These are shown in Chart1 below.

Chart1

The fact that the decline in both business investment and total investment can exceed the decline in GDP is accounted for by the fact that other components of growth have increased. Again, the data is subject to revision in the final release (on 20 December). But both government consumption spending and net exports have increased. The change GDP and its main components since the 1st quarter of 2008 are shown in Chart 2 below.
Chart 2

Taken together the change in government and household consumption combined since the recession began is effectively zero. Household consumption has fallen by £15bn and government consumption, has risen by £16bn. Government consumption is the component of GDP which has grown most over the period.

Zero growth in consumption is hardly to be commended. Yet it is much stronger than the performance of GDP in aggregate. This belies any notion that weak demand is driving the slump. There are a series of variants of this idea, that the economy lacks ‘effective demand’ or is suffering from ‘under-consumption’ and so on.

The driving force of the slump remains the fall in investment, led by the fall in business investment. The fall in business investment alone more than accounts for the entirety of the prolonged crisis. Government could act to offset this by investing on its own account, if necessary drawing on the resources of the private sector to do so. Instead, the Coalition cut public sector investment by £6bn after Labour increased it modestly.

It is still the case that increased public sector investment is the only viable means of resolving the crisis that doesn’t lead to further misery for the majority of the population.

China accounts for 100% of the reduction in the number of the world’s people living in poverty

.649ZChina accounts for 100% of the reduction in the number of the world’s people living in poverty

By John Ross
In 2010 Professor Danny Quah, of the London School of Economics, noted: ‘In the last 3 decades, China alone has lifted more people out of extreme poverty than the rest of the world combined. Indeed, China’s ($1/day) poverty reduction of 627 million from 1981 to 2005 exceeds the total global economy’s decline in its extremely poor from 1.9 billion to 1.4 billion over the same period.’ The aim of this article is to analyse the situation taking data published three years after Quah’s analysis; look at the trends not only of extreme poverty, which the World Bank calculates using expenditure of $1.25 a day or less; examine a slightly wider poverty definition ($2 a day expenditure), and compare the trends in other regions of the world economy.

The conclusion is simple. Quah’s conclusion still holds. China is responsible for 100% of the reduction in the number of people living in poverty in the world. This finding is the necessary backdrop to any serious and informed discussion of the role of China in the world economy and its contribution to human rights.

*   *   *


There are many remarkable economic statistics about China.

  • China contained 22% of the world’s population when its reforms began in 1978, so the percentage of the world’s population directly benefitting from China’s rapid economic growth is seven times that of the 3% of the world’s population in the US or Japan when they began rapid growth, or the 2% of the world’s population in the UK at the time of the Industrial Revolution.
  • China’s 9.9% average increase in GDP per capita during the two last five year plans is the fastest economic growth per capita ever achieved by a major country in human history.
  • In the same period China’s annual average 8.1% increase in household consumption, and 8.3% annual increase in total consumption, including state expenditure on items vital for quality of life such as education and health, was the fastest of any major economy. Coupled with a life expectancy above that which would be expected from China’s GDP per capita it is evident China experienced the most rapid increase in living standards of any country.
  • Measured in Parity Purchasing Powers (PPPs) – that is the real increase in output in steel, cars, transport, services etc. – the greatest absolute increase in output ever recorded in single year by the US was in 1999 when it added $567 billion in output. But in 2010 China added $1,126 billion – more than twice the increase in output in a single year ever achieved by any other country in human history.

Nevertheless, impressive as such statistics are, from the point of view of human welfare it is another number which dwarfs all others: the contribution of China to the reduction of human poverty not only within its own borders but in its impact on the world. The astonishing fact remains that China has been responsible for the entire reduction in the number of people living in absolute poverty in the world!

To show this the table below gives the number of those in China and the world living on expenditure less than the two standard measures used by the World Bank to measure poverty. These are the criteria for extreme poverty, expenditure of less than $1.25 a day ($37.5 a month) and those living in poverty – expenditure of $2 day ($60 a month). Charts showing the trends are at the end of the article.

In 1981, on World Bank data 972 million people in China were living on an expenditure of less than $37.50 a month. By 2008 this had been reduced to 173 million, by 2009 it fell to 157 million. Consequently 662 million people were lifted out of extreme poverty in China in the twenty seven years up to 2008 and 678 million by 2009.

In contrast the number of people living in such extreme poverty outside China increased by 50 million between 1981 and 2008 – the number of people emerging from poverty was less than the population increase. This was due to the rise in the numbe of people living in extreme poverty in sub-Saharan Africa. China was consequently responsible for 100% of the world’s reduction of the number of people living in extreme poverty.

Analysing those living on $2 a day ($60 a month), still a very low figure, the trend was even more striking. The number of people in China living on an expenditure of this figure or less fell from 972 million in 1981, to 395 million in 2008, to 362 million in 2009. The number living on expenditure of $60 a month or less in China fell by 577 million by 2008, and by 610 million by 2009.

In contrast the number of those living at this level of poverty in the world outside China rose from 1,548 million in 1981 to 2,057 million in 2008 – an increase of 509 million. Again, China accounted for the entire reduction in the number of people in the world living at this level of poverty.

It is therefore almost impossible to exaggerate what a contribution not only to its own people but to the welfare of the whole of humanity China’s economic progress has made. Without China there would have been literally no reduction in the number of world’s people living in poverty.
The gigantic impact of this on human well-being is not only in its direct effect on personal income and expenditures. It is also in its indirect consequences for human welfare. To take simple examples

  • Life expectancy in China is nine years longer than in India – a country which at the end of the 1940s had a higher GDP per capita than China.
  • Measured per thousand people China has 66% more nurses and midwives and 160% more doctors than India.
  • In China the literacy rate for women aged 15-24 is 99%, on the latest World Bank data, while for India it is 74%.
  • The infant mortality rate per 1,000 live births is 12 in China compared to 44 in India.

The direct and indirect effect of bringing people out of poverty is also the greatest contribution that can be made to human rights, The reality is that China’s bringing over 600 million out of poverty means no other country in the world remotely matches China’s contribution to human wellbeing and real human rights.





Notes
Quah, D. (2010, May). ‘The Shifting Distribution of Global Economic Activity’.Retrieved January 2, 2012, from London School of Economics: econ.lse.ac.uk/~dquah/p/2010.05-Shifting_Distribution_GEA-DQ.pdf

This article originally appeared at Key Trends in Globalisation