That Tory recovery in perspective

By 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

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 Pack: Click 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

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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.

Register: https://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

By 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?

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.

Two different levels of economic mismanagement

By Michael Burke

The attempt by the Tory-led government to talk up recovery in the wake of the latest GDP data is entirely predictable. But the gulf between the propaganda and the reality of the British economy is now so wide that stagnation is being redesignated as recovery.

In the first estimate for the 4^th quarter Britain’s GDP grew by 0.7%. This may be updated or revised at a later date. From this supporters of austerity make a series of outlandish or spurious claims about the ‘recovery’.

In fact the British economy has not actually recovered its previous peak before the recession, unlike even the exceptionally weak recoveries elsewhere in the advanced industrialised countries. The Reuters’ chart below shows the performance of those economies since the 1^st quarter of 2008.

Fig. 1 Advanced Economies GDP In the Recession

 Far from being the strongest recoveries the British economy is one of the weaker of the industrialised economies. It has not yet entered a recovery phase, unlike the Germany, the US and Canada. Even now the British economy is weaker than the much-derided French economy.

The economy is no longer contracting. But pretending there is a recovery where none exists is a charade that could only fool the gullible. But there is another level of economic mismanagement altogether with regard to the effects of British economic policy in Ireland.

It has become customary to refer to the crisis countries in Europe as Portugal, Ireland, Greece and Spain. In fact Italy has been hit by a slump much deeper than any of these with the exception of Greece. But the direct and indirect effects of a crisis to destabilise the Italian financial markets, crucially the €2 trillion government bond market would threaten to bring down the entire European financial system.
The performance of the economy in the North of Ireland, where fiscal, monetary and other policies are set to by Westminster, is worse than any of the crisis countries except Greece.

The chart below was first produced by the author for this piece. It shows real Gross Value Added (GVA) for selected OECD economies plus real GVA for ‘Northern Ireland’ in the ONS regional accounts. GVA is the same as GDP except it removes the effects of taxes and subsidies on production. It is used to measure regional accounts as those effects are difficult to allocate regionally.

Fig. 2 Percentage Change in Real GVA in Selected OECD Economies & in Northern Ireland

In the chart there are effectively four broad groupings. Sweden, the US and Germany have been the most successful of these selected OECD economies. But even Sweden has increased its GVA in real terms by only 4.7% over a 5-year period. This might be regarded as crawling from the wreckage.

The next grouping includes France and the Euro Area where growth has been less than 1% in either direction around zero. This is effectively stagnation. As it probably encompasses the entire OECD the overall situation in the industrialised economies should be characterised as the Great Stagnation.

The third grouping includes the laggard economies of Portugal, Britain, Spain and the Republic of Ireland, where real GVA has each fallen by around 3% over the period. In effect these are economies where output is well below its prior peak and recovery remains elusive.

Finally there are economies where the crisis has been an outright disaster. Taking Italy alone, there have been sharper recessions in Western Europe in the post-World War II period. But none was so severe that there was still a 6.6% fall in output more than 5 years later. Greece has experienced the most severe slump of any OECD economy in the post-WWII period. The performance of the NI economy sits between these two. This is a qualitatively worse level of economic performance even than in Portugal, Britain, Spain and Ireland.