What level of investment should Corbyn & McDonnell aim for?

By Michael Burke
The policies outlined by Jeremy Corbyn and John McDonnell have the capacity to transform the economic debate in Britain. More importantly, if the ideas outlined for an investment-led recovery are implemented then they could alter the trajectory of the British economy, from stagnation and rising inequality towards sustainable growth and a general rise in living standards.

Therefore it is important to examine thoroughly what is the scale of the investment needed, which areas will be prioritised, what will be the overall effects on the economy, how it will be funded, and a number of other questions. Here, only an outline of the first question is addressed, what is the scale of the investment needed?

Identifying the problem
The population as a whole is primarily concerned with its own well-being, on matters such as wages, health care, good schools, good quality public services and (for themselves at least) some reassurance that social security will provide sufficient support if they cannot work. In general these fall under the economic category of Consumption. 

SEB has shown over a number of articles that Consumption cannot drive economic growth. Consumption follows Production. Increasing Consumption alone simply leads to increased debt, a claim on future production. This is precisely what has occurred in the British and other economies since the crisis. Consumption has outstripped production and households in particular have been obliged to either increase debt or run down their savings. It is not sustainable. In order to increase production over the medium-term it is necessary to increase the means of production through Investment.

Jeremy Corbyn and John McDonnell have said on a number of occasions that they will borrow to invest (audio link & transcript) but will run a balanced budget on current government spending. This is correct. Only borrowing to achieve a positive return and economic growth. It is this Investment (and borrowing to fund it) that leads to higher living standards, including higher Consumption.

But it is precisely the level of investment which is currently the key drag on the British economy. In Fig.1 below the level of real GDP, Consumption and Investment from the beginning of 2000 onwards are shown. Trend lines for GDP and investment are also shown as these show the general trajectory rather the more short-term fluctuations.

Fig.1 UK Real GDP, Consumption & Investment, Q1 2000 to Q3 2015

 

One of the more ridiculous claims by the Tory Government is that its austerity policy is responsible for recovery. There has been no substantive recovery of the output lost in the slump. In most business cycles the sharpness of the recession is matched by the pace of the recovery. This business cycle is a rarity. None of the three key variables is anywhere near recovering its previous growth trend. As a result there is a risk that the loss of output will become permanent and the British economy will have shifted onto a long-term, lower growth trajectory.

The most important of these three variables in determining future growth is Investment. If GDP growth had continued on its previous trend it would now be 16% higher than its current level. But Investment has experienced the sharpest fall, and is currently 26% below its previous trend. In fact Investment is the only variable to remain below its pre-recession peak, although that may alter in the near future. 

How much investment?
Because both the future level of GDP and Investment are unknown, it is impossible to say at this point what the precise level of additional Investment would be needed under a Corbyn-led Government. But it is possible to extrapolate from previous trends in order to demonstrate the approximate rate of Investment needed. 

This can be done by replicating the trend rate of growth from 1st quarter of 2000 over 8 years to the pre-recession peak in the 1st quarter of 2008. If that growth trend was repeated over the following 8 years, by the 1st quarter of 2016 real GDP (annual) would be £2,090 billion. From the previous peak Investment would be £390 billion. 

Investment is currently way below this level, around £310 billion. In the early part of 2016 it would require an annual additional increase in Investment of £82 billion in precise terms, from £310bn to return to trend growth rates. This would be an increase equivalent to 4% of GDP to 18.75% of GDP. 

As the private sector has been unable or unwilling to produce an investment-led recovery, the public sector will be obliged to lead this increase in investment equivalent to 4% of GDP. This is in addition to the current miserably low rate of net public sector of 1.5% of GDP, bringing the total level of net public investment (after depreciation) up to 5.5% of GDP.

It is reasonable to assume that the private sector itself would then increase its own rate of investment to some extent, as the anticipated level of new profits would rise and based on past experience. But as this cannot relied on as the overall economic conditions at the outset of a future Labour Government are unknown, so this assumption cannot form a central part of the overall projection.

Competitiveness
The issue of how much additional investment is not exhausted by reference to previous trends, particularly since the British economy has had a lower rate of investment than comparable economies over the very long-term. Simply returning to 2000 to 2008 rates of investment is a minimum requirement in order to prevent permanently embedding the effects of the slump. 

Fig.2 below shows a comparison of labour productivity per hour in the UK and the rest of the G7 group of economies. UK productivity is now over 20% below that of the rest of the G7, the highest productivity gap on record. Since 2000 every country in the G7 has made gains relative to UK productivity.

Fig.2 Relative UK & G7 Productivity

 

UK productivity has also fallen in the recovery, which is extremely rare. Usually, existing plant, factories and machinery that have fallen idle in the slump is brought back into production and productivity rises. Instead, labour inputs have risen as the UK economy has employed more people in longer hours in low value-added jobs, so output has not grown at the same pace.

Despite much discussion there is no ‘puzzle’ behind the very weak level of UK productivity. It is because the UK has a very weak relative rate of investment. As the UK economy has a persistently lower level of fixed investment, so the relative decline in productivity is unavoidable.

Productivity (labour output per hour) will increase in proportion to the increase in quantity and quality of machinery and other fixed capital used in output (as well as the skills level of the workforce). As Fig.3 below shows, throughout the entire period from 2000 to 2014, the UK economy had a lower proportion of GDP devoted to the investment (Gross Fixed Capital Formation) than the other countries of the G7. Furthermore the higher levels of productivity by country are closely correlated to their higher levels of investment.

Fig.3 GFCF as a proportion of GDP in the G7

 

All other G7 economies gained on the UK in terms of productivity because they all had higher levels of investment over the same period. This relatively low rate of investment in Britain also accounts for the relatively weak competitiveness of the UK economy, including its large and growing external deficits.

There is a widespread fallacy that it is cheap overseas labour which drives the deterioration in the UK trade and current account balances. But 80% of British goods exports are to other industrialised economies and 70% of its imports are also from those economies. Because Britain has much lower investment and productivity than those economies it runs a substantial trade deficit with them, approximately £60 billion per annum in the most recent data.

The G7 economies as a whole have allowed investment to fall as a proportion of GDP. All of the G7 economies have experienced this fall, the sole exception being Canada. But the UK economy has throughout the entire period had the lowest rate of investment of all. 

The median level of G7 GFCF as a proportion of GDP has fallen from 23.7% to 19.5% in a short period, from 2000 to 2014. At the same time it has fallen in Britain from 19.9% to 17.1%. Therefore a supplementary aim should be to get the rate of investment in Britain up to the G7 average over the medium-term simply in order to prevent further declines in competitiveness.

Total cost 
Osborne claims to be in favour of investment. But austerity is the latest manifestation of the neoliberal economic model which has held sway in the Western economies since Reagan and Thatcher. It is absolutely opposed to public sector investment because handing public sector assets to the private sector is a decisive means of boosting profitability. In this economic model, the means of production must be handed to private capital. 

Osborne is a subscriber to this view. As a result, public sector investment has fallen dramatically. On official projections from the Office for Budget Responsibility (OBR) the level of public sector investment will fall over the next three years (Table 3.6). Public sector net investment will fall to 1.4% of GDP in the last years of this parliament (Table 4.35).

As noted above the additional level of public sector investment required under a Corbyn-led government would be approximately £82 billion, or 4% of GDP in order to return to previous trends. According to the OBR the total level of net public sector investment in the current Financial Year will be £33.6 billion (Table 4.15). However, this is after the deduction of depreciation of just under £40 billion. The gross level of public sector investment in the current FY is projected to be £73.4 billion. The required investment of £82 billion is in addition to this gross total, giving a total level of public sector investment need at £155 billion.

Of course, not all of this needs to carried out by central government and still less needs to be funded by government borrowing. But this assessment is simply what is required in order to return to pre-crisis growth rates and would not even be sufficient to maintain current low levels of competitiveness versus the other countries of the G7.

Equally there will be attempts to cast this analysis as ‘extremist’ or simply ‘unrealistic’. But it is no more extreme or unrealistic than the analysis of the chief economics commentator of the Financial Times, Martin Wolf in Cameron is consigning the UK to stagnation. 

“He [Jonathan Portes of the NIESR] recommends a £30bn investment programme (about 2 per cent of GDP). I would go for far more. Note that the impact on the government’s debt stock would be trivial even if it brought no longer-term gains…

‘…the government… is refusing to take advantage of the borrowing opportunities of a lifetime…. It is determined to persist with its course, regardless of the unexpectedly adverse changes in the external environment. The result is likely to be a permanent reduction in the output of the UK”.

In future posts SEB will examine where this investment should be concentrated, what its likely impact will be on growth and living standards, and how it could be funded, as well as other issues.

Demand doesn’t create its own supply. A National Investment Bank is needed to direct investment

By Michael Burke
“The second [pillar of my leadership] is a new economy that puts public investment front and centre stage: in science, technology and the green industries of the future. Instead of Osborne’s economic house built on sand, our focus will be on the reindustrialisation of Britain for the digital age, driven by a national investment bank as a motor of modernisation – and sustainable growth that will slash the welfare bill in the process”, Jeremy Corbyn writing in the Guardian.

The economic policies of John McDonnell and Jeremy Corbyn are blowing away some of the accumulated cobwebs of British post-World War II economic policy. Almost literally, they are a breath of fresh air.

There is an old and rightly discredited idea in economics known as Say’s Law, that in effect supply creates its own demand. It is evidently false, because if it were true it would mean that there were never any gluts of products, and never any unsold inventories of stock.

As Adam Smith demonstrated, we do not live primarily in a barter economy; goods are exchanged for a monetary equivalent which then allows the seller to purchase goods. As a result, the producer must first sell his commodity before s/he can purchase. A failure to sell means an inability to purchase. But it took Marx to point out that capitalists may sell a commodity without any intention of purchasing, because they simply intend to accumulate capital which can be used to pay interest or debt, or it may be consumed, may be put into circulation as new products or may be hoarded as capital. For a capitalist enterprise realisation of profit through the sale is the aim, not the subsequent purchase of another product, although in time of crisis even this sale may not be possible. 

Yet there is a modern and widely-held inversion of Say’s Law even among progressives, which effectively argues that all that is needed in the current investment-driven crisis is to increase ‘demand’ (by which is generally meant consumption) and supply and investment will follow. While reversing Say’s Law this notion reproduces its fundamental errors. It rests on the assumption that the economy tends towards equilibrium; all that is needed is the occasional stimulus to demand. As a result, it has no explanation for the crisis itself, other than irrationality (of businesses, or of policy makers, sometimes supplemented by greedy bankers). It entirely ignores the role that profit has in determining business ‘purchases’, that is investment. As a result, it cannot explain why demand or consumption may rise, but investment can still stagnate or even fall.

This is important because it describes the current situation. Consumption has risen since the crisis, but investment has not. Fig.1 below shows the level of real GDP in the OECD as a whole since before the crisis to 2014. Real consumption (final consumption expenditure) and real investment (Gross Fixed Capital Formation) are also shown on the same basis. The data are presented in the OECD’s constant prices and constant PPPs (Purchasing Power Parity terms).

Fig.1 OECD Real GDP, Consumption & Investment, US$ PPP terms, 2007 to 2014

In the OECD as a whole GDP has risen by US$2,663bn from 2007 to 2014. Over the same period Consumption has risen by US$2,320bn. But Investment has fallen by $284bn at the same time.

The largest economy in the OECD and the economy held up as the model for growth is the US. It has grown more strongly than many other large economies in the OECD area in the recent period. But the same pattern is evident. This is shown in Fig.2 below.

Fig.2 US Real GDP, Consumption & Investment, US$mn PPPs 2007 to 2014

 

In the US real GDP has risen by US$1,102bn over the period 2007 to 2014. Of this US$839bn is the rise in Consumption but Investment has fallen by US$56bn at the same time. For reference, the same data is show for the UK economy in Fig.3 below.

Fig.3 UK Real GDP, Consumption & Investment 2007 to 2014

 

These results are tabulated below, along with the same data for the Eurozone and the Japanese economy.

Table 1. Change in Real GDP, Consumption & Investment for OECD and selected countries,
2007 to 2014, US$ PPPs

 

With the exception of the Eurozone, GDP has risen in all cases and has risen in the OECD as a whole. But even in the Eurozone, Consumption has risen. Yet in no case had this led to an increase in Investment over the time period.

This will not remain the case forever. At a certain point Investment will recover its previous level before the crisis. In most cases Investment is already somewhat above its crisis low-point. But Consumption is everywhere above its pre-crisis level and has not produced a recovery in Investment. In consequence, in every case the proportion of GDP directed to Invested has declined. As SEB has previously shown, a high or rising proportion of Investment is necessary for high or accelerating levels of GDP growth. As investment in the OECD and its component economies is low and declining, the rate of GDP growth will in general continue to decelerate.

It cannot be argued that Consumption has not recovered. Yet Investment has not recovered. Policies aimed at increasing ‘demand’, by which is meant increasing consumption, will not by themselves lead to increased investment, as 7 years of crisis in the OECD demonstrates. 

To increase investment, it is necessary for the state to increase it as the private sector has shown it cannot or will not do so in the current circumstances. A key component of that will be a National Investment Bank, and the Labour leadership is right to focus on this. A NIB will allow the public sector to direct investment and to a certain degree to determine its scope. It will so allow the public sector to reap the rewards of the investment it is funding and thereby allow for both improving government finances and further increases in investment. Osborne had a completely phoney Green Investment Bank which was starved of funds. Labour will have a genuine one to raise the level of investment, and therefore growth and living standards.

Relying on increased Consumption to produce a rise in Investment has been tried and failed. This is because demand does not create its own supply. Increased public investment is required and a National Investment Bank is a key mechanism for that.

Latin American left needs to study China’s ‘revolution in production’

By John Ross

The following article appeared in Spanish in Ecuador’s El Telegrafo on 19 December.

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In the later part of the 20th century Latin America suffered an economic catastrophe from neo-liberal policies. Until 1993 average per capita GDP in developing Latin American economies remained below 1981 levels. By 1998 annual average per capita GDP growth was still only 0.9% – taking a five-year average to remove cyclical fluctuations.

Only after Chavez was elected Venezuela’s President in 1998, followed by other left wing Latin American leaders, did economic growth seriously accelerate. By 2007 annual average per capita GDP growth in Latin America reached 2.8%, again taking a five-year average, with faster growth in key countries – Ecuador 3.4%, Venezuela 5.7%, Argentina 7.7%. After 2007 economic growth slowed due to the international financial crisis but remained positive across Latin America as a whole – unlike the decline under neo-liberalism.

It is therefore threatening economically that right wing forces won Argentina’s recent presidential election, Venezuela’s legislative elections, and are attempting to impeach Brazil’s President. Although forces supporting these shifts present themselves as ‘centrist’ for political propaganda purposes this is merely disguise. Their economic programmes represent a shift back towards neo-liberalism. As these policies produced economic disaster not only in Latin America but elsewhere it is serious that such forces have reacquired support in Latin America.

The present author is based in China but follows events in Latin America closely and has travelled there including twice for conferences with President Chavez personally. It may therefore be useful to have observations from this experience comparing China and Latin America.

The truly great historic achievement of Latin America’s left governments was their ‘revolution in distribution.’ During previous periods of rapid Latin American growth the financial benefits went overwhelmingly to better off layers of the population while a large part went abroad. The left wing Latin American governments ensured that this time the benefits from Latin America’s growth went to the majority of its population.

But in comparison to China, the difference was that despite this huge achievement, some of these governments did not successfully make a ‘revolution in production.’ For nearly four decades China’s economy grew at over 8%, taking it from one of the world’s poorest countries to the threshold of a ‘high income economy’ by international criteria. This was the largest ‘revolution in production’ in human history.

Contrary to US myths China’s growth did not benefit chiefly the rich but ordinary people. China lifted more than 728 million people, greater than Latin America’s entire population, from World Bank defined poverty.

The key to the ‘China model’ is clear. China has both a private and a state sector but it is not a ‘mixed economy’ in a Western sense. In such Western economies the private sector is dominant, in China’s official formulation there is ‘the dominant position of public ownership.’ This can be also be expressed in Keynes’s words: ‘the duty of ordering the current volume of investment cannot safely be left in private hands,‘ it is necessary to aim at ‘a socially controlled rate of investment,‘ and this requires ‘a somewhat comprehensive socialisation of investment.’

The ‘China model’ did not eliminate the private sector but made state investment the economy’s driving force - with the private sector benefitting from the resulting growth. Latin American governments such as Ecuador have begun to move towards this. But those economies which achieved a ‘revolution in distribution’ without a ‘revolution in production’ faced difficulties deal with the new problems in the global economy – facilitating the right’s comeback.

For economic success study of China’s ‘revolution in production’ therefore needs to supplement the ‘revolution in distribution’ of which the Latin American left is so justly proud.

Understanding Britain’s wars

By Michael Burke
Britain is a very frequent participant in US-led wars. This stands in contrast to many other European states ranging from countries such as Sweden, to Spain, to Italy and Germany. The piece below examines the material reasons for this difference, and explains British politicians’ determination to join in US military adventures.
The widely held view that Britain’s contribution to an air war over Syria will make no significant change to its outcome also made little impact on the parliamentary vote for war. Military insignificance is even accepted by many advocates of action. Former Tory Defence Secretary Michael Portillo argues this boldly telling ‘This Week’ that Cameron had made no case for war, the arguments were flimsy and that there seemed to be no strategic plan. Nevertheless Portillo was in favour of war, saying that otherwise “the US will begin to regard Britain as an unreliable ally”. It appears that many MPs on both sides of House of Commons share this approach.

The question of Britain’s relations with the US has long been uppermost in the considerations of strategic policy making in Britain. The term ‘special relationship’ was itself coined by Winston Churchill after Britain’s failure to develop independent nuclear weapons technology. As such it is a sign of both Britain’s relative weakness and its resolve to participate in the US’s efforts to act as the sole global superpower.

This determination to act alongside the US is not simply reactionary nostalgia or imperial delusion, although these factors naturally play a role. There is a strong material reason for many British politicians’ eagerness for war, irrespective of the outcome. At the same time, there is a strong reason for all progressives, all socialists and all those who simply want to sustainably raise living standards to oppose those wars.

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In a previous piece in SEB the present author outlined the most important economic factors in the global current system of imperialism. The term imperialism as generally used is not a precise economic categorisation. As such, it can and does fall into misuse. Therefore, drawing on the conclusions of the earlier piece, the term imperialism here is strictly meant as:

• The global system of economic domination that has a specific headquarters, namely the US as sole global imperialist superpower
• That system requires continuous and expanding military and other interventions in order to maintain its rule
• This is because the imperialist powers together and the dominant imperialist power of the US are in relative decline economically (having reached their relative peak economic power in 1951)
• They no longer exploit the world primarily through a system of capital export and interest payment inflows (as was the case in Lenin’s time)
• Instead, of the US, Britain, France, Japan and Germany only the latter two countries have net assets at all. The first three countries are in fact net debtor nations. As a group these five have a broad balance on international assets, neither net creditors nor net debtors as the net debts of the US, British and French combined broadly equal the net assets of Japan and Germany
• Yet at the same time all of these have continued to receive vast inflows of capital in the form of net interest payments
• It is only possible to receive net interest when there or no net assets when there is a Mafia-style operation on a global scale, exacting interest and compliance at the barrel of a gun or the end of a Tomahawk missile
• The economically weakened imperialist powers, led by the US with Britain and France playing the role of aides-de-camp, are obliged to become more vicious and militaristic. They require continuous military operation in order to enforce those inflows (as well as favourable trade agreements, strategic military outposts, below market price contracts for raw materials and so on). Naturally, Japan and Germany benefit from this overall system but are not motivated to lead it since ordinary contract law enforcement will secure their positions.

The case of Britain

Within this overall framework the British case is a specific one. It is the first of the imperial powers to register a persistent trade deficit and then the first to switch from being a net creditor nation to being a net debtor. These are both milestones in and contributors to Britain’s historic decline as an economic power.

Britain has experienced the most spectacular decline within the imperialist bloc. Contrary to widespread assertion the British economy is now the tenth largest in the world (World Bank pdf). Britain’s weight in the world economy has undergone a spectacular relative decline over the long-term, as shown in Fig.1.

Fig.1 Britain’s Share of World GDP

Source: Maddison, World Bank for 2014 data, author’s calculations

Maddison records Britain’s share of World GDP as 9.5% in 1870 and 9.4% in 1900. It is likely that there was a higher peak at some point between those two dates. As Fig.1 shows the weight of Britain’s economy in the world had halved by the mid-1960s, perhaps over a period of 90 years or so. According to separate World Bank data it has halved again in about 45 years since. So, in 2014 Britain accounted for just 2.3% of World GDP. While the weight of the imperialist countries in the world economy has declined since the 1950s, Britain’s decline has been taking place far longer and is the most pronounced of all.

A key factor in that decline and a product of it is the structure of the British economy, with a very large financial sector and an industrial sector which has declined in relative terms for over a hundred years. (The industrial decline is now also absolute. Industrial production was lower in October 2015 than in the same month in 1988).

Formerly, the finance sector sucked up uninvested savings generated in the British economy and invested them overseas. This is the export of capital identified by Lenin. This was subsequently replaced with sucking in savings from the rest of the world and investing them globally, making a financial return on the difference. 

Fig.2 below shows the UK current account balance over time. The current account is comprised of net trade flows (exports minus imports of both goods and services) as well as the net flows of interest and dividend payments between Britain and the rest of the world.

Fig.2 UK Current Account Deficit Over the Long Run

Source: Bank of England, ‘Three Centuries of Data’

According to Bank of England data the British economy first registered a deficit on trade in 1876. But persistent trade deficits did not appear until the period immediately prior to the First World War. However persistent deficits on the current account did not appear until the period immediately prior to the Second World War, 25 years later. This is because in the interim Britain continued to receive a very large net inflow on interest payments.

This component of the current account, the Net Investment Income balance is crucial for understanding the latest phase in the trends in the British economy. It also directly impacts on British policy making, which will be discussed below.

But the first effect of persistent deficits on the current account with the rest of the world is that they must be covered by incurring debts or the sale of assets. This rundown of overseas savings has taken place over a prolonged period since the approach of the Second World War. The initial effect was a rundown in the net balance of overseas assets versus overseas liabilities, which is recorded as the Net International Investment Position. This was then followed by a further rundown of overseas assets and a decisive switch from being a net creditor nation to a net debtor, as shown in Fig.3.

 

Fig.3 UK’s Net International Investment Position

 

The UK economy only definitively became a net debtor economy in 1995, 60 years after it first began to accumulate current account deficits. Prior to that point and boosted by the revenues from North Sea oil in the 1980s it registered its largest modern level of net assets in 1986. But that windfall was frittered away with the disastrous consumption binge of the ‘Lawson Boom’.

It is important to note that there was a further one-off spike higher in net assets in 2008. This was directly linked to the banking and financial crisis. UK banks had expanded enormously overseas through leverage, or borrowing. They repatriated many of those assets at a loss in 2008 in order to avoid bankruptcy and have continued to wind down overseas assets since. At the same time the overseas loans to British banks were withdrawn. Apart from that spike, the precipitate decline in the Net international Investment Position resumed. This a key feature of how the Global Financial Crisis specifically impacted Britain.

The direct consequence of this has been a collapse in Net Investment Income, as shown in Fig.4 below. The UK is not the same as the US. Unlike the US Dollar, the rest of the world is not obliged to hold the British currency in order to meet international trade payments and to service interest on international debt obligations. Within the Empire and then its vestige of the Sterling Area, other countries were obliged to hold British currency. The ‘Sterling Area’ collapsed in mid-1972. As a result, and combined with the UK’s chronic lack of competitiveness, the interest income account switched to a deficit in the 1970s. 

This deficit was ‘rectified’ in the 1990s and the early part of this century by the growing role of the British banks in international finance, out of all proportion to the size of the UK economy. This was funded not by domestic savings but by international borrowing. Essentially, the operation was nothing more sophisticated than borrowing from other international banks and speculating on higher-yielding riskier assets overseas as well as on the domestic housing market. The benefit of this inflow accrued mostly to the banks and bankers themselves, and the Blair/Brown government came to rely on the tax revenue from them.

 

Fig.4 UK Investment Income Collapse

 

The gains from that operation were always a mirage, a stark confirmation of what Marx called ‘fictitious capital’. As recently as 2011 the UK recorded a surplus of over £20bn on the investment income account and by 2014 this was a deficit of £32bn. This deterioration in overseas income of more £52bn represents 2.9% of 2014 GDP. It is an extraordinary slump, and transforms Britain’s ability to extract capital from the rest of the world.

The UK no longer has net overseas assets but substantial liabilities. It also has a persistent current account deficit. It is therefore difficult to foresee how this sharp deterioration in the net external position of the economy can be easily reversed.

Without a thorough reorientation of British economic policy and the current structure of the British economy there are in effect twin prongs to a recovery programme for Britain’s external financial crisis. The first will be to increase the rate of exploitation at home with lower pay and pensions, worse working conditions and public services. The second will be to increase the rate of exploitation overseas; to participate in the carve-up of nations, to access their basic goods at below-market prices and enforce onerous debts. This is what is meant by British politicians’ determination to ‘be at the table’ when the US judges that the maximum advantage has been extracted from wars or military interventions.

An alternative would be to use the remaining strength of the British banking sector, which has been bailed out by public funds, to redirect its lending from speculative activity towards investment in public goods and productive investment. But that would require a thorough-going change of economic policy and structures.

Three trends in the labour movement

Historically there have always been two main trends in the labour movement (as well as a multitude of intermediary ones). There has been an overtly pro-imperialist current almost always willing to support Britain’s wars and only departing from that attachment if the US was opposed (as with Gaitskell and the Anglo-French invasion of Egypt to seize control of the Suez Canal). This pro-imperialist current has always dominated the leadership of the Labour Party and many of the unions.

The election of Jeremy Corbyn has changed that. There has always been a minority current inside the Labour Party (though often barely represented in its leadership) who opposed British military adventures, even when they were done in support of the US. The opposition to the actions of British imperialism now comes from the leader of a major political party, one which could form the next government. As such it is an anathema to the interests of British imperialism as a whole. This explains the ferocious and relentless media onslaught on the Corbyn leadership of the Labour Party.

Between these two poles lies another broad grouping. This was highlighted in the two recent votes on cuts to working tax credits and the vote on bombing Syria. On the former there was virtual unanimity to oppose the government and vote against the cuts. On the matter of war, 66 Labour MPs voted with the Tory government and a number of others abstained.

Irrespective of the confused or contradictory ideas of individual MPs or groups of MPs, these votes reveal three fundamental political trends that have persisted for over a century in the British labour movement. The first is an overtly pro-imperialist bloc, many of whom may now go along with the anti-austerity agenda on a purely tactical basis, such as the Blairites. The second is a bloc led by Jeremy Corbyn which is both anti-austerity and anti-imperialist. There is also a third bloc, which is anti-austerity, but pro-imperialist. 

The outlook and ideas of this third bloc, like all ideas, spring from material conditions. Marxists understand that those material conditions amount to a separate layer in the labour movement known as the ‘labour aristocracy’. The ideas are what Lenin called ‘Economism’ but which has become known as ‘workerism’. That is a concentration on the immediate economic struggles of the workers and the poor and the relegation of ‘political’ matters, not least war and peace to an issue of second-rate or third-rate importance. In the specific circumstances of British Labour Party politics currently this might be expressed as the view that, while we oppose war it is much more important to unite around the issue of fighting the Tories on cuts.

Unfortunately the real world does not allow matters of war and peace to be relegated as if they are minor matters. The one issue that the population as a whole will always place ahead of its own living standards is its own security. 

The open representatives of imperialism understand this. In his July 2015 Budget speech, where the Tories announced austerity mark II, Osborne mentioned ‘security’ 30 times, more than the mentions of ‘growth’, ‘prosperity’ or ‘deficit’ combined. The intention is clear; to trump discontent over renewed austerity with a claim to offer a belligerent and reactionary ‘security’ agenda. This is also the thread running increasingly through the government’s reactionary ‘security’ agenda on energy, civil liberties, immigration, schools and aid policies.

Therefore politically it is not possible to disregard the war offensive, to by-pass it and win on the terrain of anti-austerity. Politics comes before economics. 

It should also be clear from the economic analysis above that the two-pronged strategy of increasing exploitation at home and increasing exploitation abroad through war needs a two-pronged response. The worker who has her wages cut, or sees bills rise with another privatisation or has her tax credits cut has no interest in Britain pursuing another Middle East war, or in it increasing its military spending, or in renewing Trident. She has no interest in ‘getting a seat at the table’ or Britain’s dubious military ‘successes’. The interests represented at that table will be Britain’s hobbled banks and finance sector.

Instead, Jeremy Corbyn and his closest allies are right to oppose both austerity and war and to remain committed to fighting both.

US rate hike benefits banks - no-one else

By Michael Burke
The US central bank the Federal Reserve has raised interest rates for the first time since 2006. The Fed began cutting interest rates in 2008 in response to the Great Recession and the associated financial crisis. On the face of it the timing appears odd, as the US economy has not experienced any robust recovery since the crisis. 2010 was the strongest annual growth rate at 2.5%, which is an extraordinarily tepid rebound from such a sharp recession. 

More recently industrial production has gone back into recession, as shown in Fig. 1 below. Output has fallen for 4 straight months and is 1.2% below its level a year ago in November 2014. Although this is depressed by the fall in energy output, manufacturing as whole is barely stronger, rising just 1% from a year ago.

Fig.1 US Industrial Production In Recession

 

An economic slowdown and falling output might not seem the most appropriate time to raise the level of interest rates. But the level of Fed Funds is not correlated to the growth of industrial production at all, and has frequently moved in the opposition direction to the growth in output as shown in Fig.2 below. 





The Fed has entirely different goals in raising rates in the current period, although it will have to monitor closely the pace of the slowdown. The goal of the Fed is to bolster the attractiveness of the US economy to capital inflows, and within that strengthen the already dominant role of the banks.

One of the features of the current crisis is a widespread mystification of the role of credit and money in the economy. Interest rates are the price of credit, what is charged by the lender to the borrower. A key difficultly for banks in particular arises when interest rates are at or close to zero. If the price of credit generally available is close to zero and is readily available banks will find it extremely difficult to make profits. They will substitute lending for increasingly speculative activity, gambling in the stock markets, in housing, in commodities and so on.

However, there is a central misconception in the Fed’s efforts to ‘normalise’ the interest rate environment and it is a risky strategy. The idea is that raising interest rates will prompt a shift away from speculation towards productive lending for investment. But in aggregate US companies have little need to borrow for investment. This is because their own investment remains lacklustre and so can be funded well within their own resources, that is profits. Fig. 3 below illustrates this point by showing the nominal level of US GDP, company profits (Gross Operating Surplus) and investment (Gross Fixed Capital Formation).

 

Fig.3 GDP, Profits and Investment

From 2000 US GDP has expanded by $7.1 trillion. Profits have risen by $3.3 trillion and yet investment has only risen by $1 trillion. In the period from 2000 to 2014 the profit share of US companies has risen from 37.5% of GDP to 41.2%. At the same time the proportion of GDP devoted to investment has fallen from 23% to 19.5%.

If we take the measure of the investment rate as the proportion of profits devoted to investment, this has fallen from over 60% to little more than 47% over the period. As a result, firms can access their own funds in order to finance productive investment. Yet, as already noted, investment is a declining proportion of US GDP.

Instead, the most likely outcome of higher interest rates is likely to be increased charges to consumers, in the form of credit card debt, auto loans, mortgages and so on. This will effectively be a transfer of incomes from consumers to banks. 

On a global scale the effect is likely to be much worse. As the US Dollar is the sole world reserve currency all international debtors are obliged to borrow in US Dollars. For commodity producers, whose exports are priced in US Dollars the further fall in commodities’ prices reduces national incomes and tends to cause both currency depreciation and capital flight. 

Capital tends to flow towards the US with higher rates. Outside the industrialised countries the so-called ‘emerging markets’ are expected to have seen their first net outflow of capital in 27 years in 2015. For individual countries such as Brazil, Turkey, South Africa and many more the effect of capital flight can be dire.

But there is also a negative impact on the world economy as a whole. Capital flows to the US are to a low investment-high consumption economy. Sucking in capital from the rest of the world to finance US consumption – and bank interest on financing it - will have the effect of slowing world growth even further. It is a high-risk strategy from the Fed, one in which the US is unlikely to be the main casualty.