US GDP figures even worse than they look

By John Ross

The 2nd quarter 2011 US GDP figures, showing annualised growth of 1.3% in that quarter and a newly revised downwards annualised 0.4% in the 1st quarter of 2011, were interpreted as bad. But they are far worse even than they look at first sight.

First, the downward revision to the depth of the recession, to a trough of 5.1% in the 2nd quarter of 2009, means that instead of having already recovered its pre-recession GDP level the US economy remains 0.4% below its peak in the 4th quarter of 2007. This is shown in Figure 1.

Figure 1

Second, as shown in Figures 1, 2 and 3, it is misleading to draw attention to personal consumption expenditure, and its weak annualised 0.1 per cent increase in the 2nd quarter of 2011, as the key feature of the downturn. The really fundamental cause of the US recession is the collapse in fixed investment.

As may be seen from Figure 2, in the 2nd quarter of 2011 US GDP, in 2005 constant prices, was $56 billion below its peak level in the 4th quarter of 2007. However all major components of GDP except for fixed investment were already above their 4th quarter of 2007 levels – private inventories $37 billion above, government consumption $51 billion above, personal consumption $66 billion above, and net exports $159 billion above. However private fixed investment was $342 billion below its 4th quarter 2007 level – i.e. the entire decline in US GDP was due to the fall in fixed investment.

Figure 2

Nor was this decline in fixed investment entirely accounted for by the residential sector – see Figure 3. The overall fixed investment fall was divided essentially half and half between residential and non-residential fixed investment – the decline in residential fixed investment being $199 billion and the decline in non-residential fixed investment being $192 billion.

Figure 3

In short, as this blog has continuously pointed out, the core of the ‘Great Recession’ in the US, as in other countries, is not a decline in consumption but a huge fall in fixed investment. The ‘Great Recession’ is actually ‘The Great Investment Collapse’. Until this reality is grasped, and the policy consequences drawn, US GDP figures are likely to continue to surprise on the downside.

Meanwhile the latest US GDP data is shockingly bad - worse even than the features the official press release and initial press commentary concentrates on.

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This article originally appeared on the blog Key Trends in Globalisation.

Boris Johnson economic proposals should have put Londoners before bankers

Ken Livingstone has a new article taking apart Boris Johnson’s economic proposals, including the Tory Mayor’s call to get rid of the 50% top rate of income tax, on the Guardian's Comment is Free here.

It analyses ‘Boris Johnson's economic proposals, made following weak UK GDP figures this week and centring on cutting the top rate of income tax from 50%, are part of his campaign to be the next Conservative party leader. He is courting the Tory base, including its right wing. Proposing to cut income tax on those earning over £150,000 a year plays well with them…

‘Johnson's proposals… constitute part of his continuing policy of hitting Londoners in their pockets in pursuit of his political ambitions and record of backing bankers – the two coming together in Tory party politics. These proposals, however, are economically incoherent and uncosted…. Johnson's positions, both on tax and on fares, aid the best off. They do not help ordinary Londoners. The mayor should be putting Londoners first – not bankers or his political ambitions.’

BRICS say Greek bailout too soft on the banks

By Michael Burke

The rapid growth of the so-called BRIC economies (Brazil, Russia, India and China) is providing a global benefit in terms of economic growth. But their increasing weight in the world economy will also provide a growing benefit specifically to all the European economies, and most especially the majority of citizens in the most crisis-hit countries.

The latest example of this arises in relation to the Greek crisis. Because of their more rapid growth the BRIC economies subscription of the funds for the IMF are growing. Their weight in the IMF is growing as a result, where previously the interests of the US have always held sway. It is clear from a report in the Financial Times on July27th that representatives of the BRICs are unhappy with the term of the latest bailout involving Greece. The complaint is twofold - that the austerity measures imposed on Greece are too harsh and the level of losses imposed on the banks is too small.

According to the FT, ‘Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMF’s executive board, said the Greek government’s austerity plan was too tough and the restructuring of Greek debt held by European banks was too small.

“Greece is not having an easy time,” he told the FT. “The mostly European private creditors of Greece have had an easy time.”’

Mr Batista also went on to argue that, while there were suspicions about bias towards European bondholders (EU banks), Christine Lagarde the new IMF MD and former French Finance Minister had the perfect opportunity to dispel such suspicions (by taking a tougher line on bank losses).

Further, the FT reports, ‘Arvind Virmani, the Indian executive director on the board, said the plan dealt with short-term cashflows but left Greece with a large and precarious sovereign debt stock, threatening further defaults.

“I am not convinced [the plan] addresses the basic problem of liquidity versus solvency,” he said, adding the fund had dodged the question for more than a year.’ The clear implication is that Greece requires further debt write-offs if it is to become solvent.

Both men also argued that the size of the IMF loan would be unacceptably large and would not have been made available to a developing country. The obvious implication is that either European taxpayers or bondholders should make a greater contribution- and it was clear that their preference is for the banks to take greater losses.

According to the latest official documents, the debt-reduction for Greece will be €26.1bn, less than 12% of total debt outstanding of €350bn. Clearly, this is a welcome first step but wholly insufficient to bring about solvency. Once all forms of ‘credit enhancement’ (very expensive insurance) on the debt being restructured are paid for, the total estimated debt reduction is actually smaller than the €28bn projected level of Greek privatisation receipts.

As the BRIC representatives say, the cuts are too harsh and the losses for bondholders too small. Politically, as well as economically, the rise of the BRICs is a major benefit. Progressive forces in Europe (including Britain) and elsewhere should increasingly look to them. Not only is it possible to learn from their rapid growth, but it is also very valuable to have them as allies in the interests of the overwhelming majority of the population of Europe, and against the interests of the bankers.

The stats show the Tories make you worse off and less safe

By Michael Burke

A small but growing number of commentators have analysed the way Tory policies make the average person worse off. New data released on police numbers and crime also show the way Tory cuts are making you less safe.

Even the Tories admit that the recession, which their cuts policies are deepening, will raise the threat of crime. In particular crime is increased by the cuts in welfare benefits – which is what the Tories are concentrating on.

The Times reported (£) on June 29th on the opinion of senior police officers on this coming increase in crime:

“It won’t be an even, upward progress, there will be a ragged line with different patterns in different areas and some crime types shooting up, while others remain level,” one said.

Chief constables and criminologists say that there is usually a gap between the worst of the financial crisis and the impact of austerity on the public before the effects are reflected in crime patterns.

They believe that crime will rise more dramatically as sections of the public feel the impact of public spending cuts, unemployment and, perhaps most significantly, cuts in benefit payments.

As The Times reported (£), some crimes are already going up:

Kenneth Clarke, the justice secretary, told the Commons last week that burglary was one of the crimes that is “rising at the moment”, adding: “It is going up rather alarmingly compared with a year ago.”

Ministers are nervous that rises in property crime herald the long awaited recession crime wave that will worsen if unemployment increases substantially and people have less cash in their pockets…

“There are indications that crime is about to turn. The reason it has not gone up yet is because unemployment has not risen that much,” one minister admitted.

Yet confronted with this rising threat of crime the Tories are actually cutting police numbers. The report (pdf) published by Her Majesty’s Inspectorate of Constabulary (HMIC) on July 21st confirmed there will be 16,200 fewer police officers in the UK as a result of the Tory led government’s cuts.

London – the Tory Mayor makes you less well-off and less safe

This increase in various types of crime is already feeding through into London. After the Tory Mayor of London has made Londoners worse off through his unnecessarily large above-inflation fare increases, the Conservative-led government and the Tory Mayor are additionally making Londoners less safe.

As The Times reported (£):

Burglaries, robberies and muggings are on the rise for the first time in years as fears grow among ministers that the economic downturn is driving up crime.

Figures from Britain’s biggest police force provide the first indication that years of falling crime are coming to an end. The Metropolitan Police has reported big increases in robbery, burglary and motor vehicle crime in the past 12 months…

Robbery, including muggings, pick-pocketing, burglary, shoplifting, theft of bicycles and interfering with motor vehicles increased, the Metropolitan Police report says. Figures show that there were more than one thousand more burglaries last month compared with May last year.

Robberies in the capital jumped by 15 per cent from 3,257 in May last year to 3,749 this May; house burglaries rose by 18.5 per cent from 4,410 to 5,228; and thefts of and from vehicles by 6 per cent to 9,299.

Yet despite this trend the Tory Mayor is pressing ahead with cuts in in police numbers. In the last year police numbers in London were already cut by 926. By 2014 there will be 3,111 fewer Metropolitan Police staff including 1,907 fewer officers, 820 less PCSOs, and 324 less police staff.

Tories – talk and not action on crime

These trends show clearly the picture which always exists: the Tories, whether as the UK government or as the Mayor of London talk a great deal about crime but take actions which increase it – both by deepening the recession and by cutting police numbers.

As Ken Livingstone said about the situation in London:

“Boris Johnson’s cuts mean on average every London borough will lose over 50 police officers. These cuts risk undermining the work which the police and local communities are doing to make our streets safer.

“The Conservative Mayor’s cuts will mean some of the most experienced and able officers losing their jobs, including 300 of the 600 sergeants who manage local police teams.”

The story is the same across Britain and in London: the Tory-led government and the Tory Mayor make you less well-off and less safe.

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This article originally appeared on Left Foot Forward.

British Economic Stagnation

By Michael Burke

The British economy continues to stagnate. Just over one year after the Tory-led Coalition announced its first Budget the British economy is virtually still in the water. In the preliminary estimate of GDP in the 2^nd quarter growth was just 0.2%. In the three quarters since the Comprehensive Spending Review (CSR) this figure constitutes the sum total of economic growth, i.e. just 0.2% - with the previous 6 months having registered no growth at all.

Tory supporters are sufficiently concerned to have begun he discuss the need for a growth strategy, although the remedies offered are likely to exacerbate the situation, as will be discussed below.

As SEB has previously shown , before the Tory-led government’s policies began to take effect there had been an economic recovery. For comparison, in the three quarters preceding the CSR the economy had grown at a moderate rate of 2.1%. This is in sharp contrast to current performance which now reflects the effects of cuts to public spending and their wider impact on the economy.

In the three quarters since the CSR, the economy has expanded by just £660mn, compared to £26.7bn in the preceding 9 months. No wonder most households and businesses feel poorer and gloomier.

It is possible that the situation may get worse. Economies only respond to policy changes after a certain time lag. In both the phases of recovery and in the subsequent stagnation the economy as whole responded two quarters after significant changes in government spending. Although there was an ‘emergency budget’ in June 2010 and VAT was increased in January 2011, most of the cuts did not take place until the beginning of the Financial Year in April 2011. The depressing effect of those cuts is therefore only beginning to be felt and is likely to increase throughout the rest of this year.

Despite the fact that the recovery began at the end of 2009 GDP output is still 3.9% below its peak level. Other European economies such as Germany and Sweden have already recovered all the output lost in the recession, by taking precisely the opposite course. Growth was stimulated via a series of measures - most effectively by increased government spending. The consequence is their public sector deficits are falling, while in Britain the official forecasts for the deficit are being revised upwards. The reason for this is simply that tax revenues in Britain continue to disappoint as growth remains elusive.

In the Great Depression of the 1930s it took exactly 4 years for the previous level of output to be restored. The 2nd quarter of this year was the beginning of the 4^th year since the recession. It seems extremely unlikely that the economy will grow by close to 4% by the 1^st quarter of 2012. This depression will not be as severe as the Great Depression, but it seems likely to be even longer.

The stagnation of the economy and the damage this is doing to Tory popularity has sparked a debate about the need for growth. Predictably, it ignores that fact that the recovery was fostered by increased government spending, including investment and is being throttled by government spending cuts. Instead, the focus is on tax cuts for corporations and the rich, an end to all carbon reduction policies, a reduction in the minimum wage, abolishing employment laws, privatisation and so on.

This is a recipe for more of the same and, as in other countries, the effect of this huge transfer of incomes from poor to rich would be to depress economic activity even further as well increasing the public sector deficit.

Few of these ideas are likely to find much support outside Tory circles. But one which has is the idea of a corporate tax cut to boost investment. This call ignores two important facts. First, the government is already cutting corporate tax rates from 28% to 23%, yet the private sector’s investment strike continues and accounts for 80% of total lost output. Secondly, the non-financial corporate sector is already sitting on a cash mountain, which is simply financing dividend payments, enormous executive pay and takeovers- that is, everything but investment.

The call for lower corporate taxes obscures a central truth about the current crisis. In any normally functioning market economy the household sector is a net saver, that is it retains a portion of its income and does not consume it immediately. The savings are mainly held in banks. The corporate sector is a normally a net borrower for investment, and borrows from the banks. The government can either be a saver (budget surplus) or borrower (budget deficit). This depends on its own tax and spending policies, but also on what happens in the rest of the economy.

In the chart below, the level of lending or borrowing for these 3 main sectors is shown. Borrowing is a negative number and lending positive. Other important sectors (especially financial corporations and the rest of the world) have been disregarded for the sake of clarity.

Figure 1

What the chart shows is the British non-financial corporate sector has not been performing its designated role over a prolonged period. It has been a net saver. Disregarding the sectors not shown, in general the sum of these three sectors must balance to zero. Saving by one sector must have another sector its borrowing counterpart.

The saving of the corporate sector had two effects. In the first instance corporate savings (achieved through lack of investment and low wages) obliged the household sector to become a net borrower to finance consumption. It also obliged the government to increase its borrowing as the lack of investment depressed taxation revenues. When, at the beginning of 1998, the household sector took fright and returned rapidly to its traditional role of net saver, the government was obliged to sharply increase its own borrowing and the public sector deficit ballooned.

The primary cause of both the unsustainable nature of the prior business expansion and the subsequent recession was the failure of the corporate sector to borrow to invest. Rather than cut their taxes and increase this saving, the whole thrust of policy should be designed to oblige the corporate sector to borrow for investment.

A progressive government policy would be to encourage business investment by increasing the government’s own investment. If necessary, a radical government would simply seize these corporate savings and use them for investment purposes on its own account. But in no case should there be a reduction in the incomes of the household sector via wage cuts and public spending cuts. This only diminishes its ability either to spend or save, and does not create business investment.