Thursday, 28 August 2014

Austerity is the cause of the crisis in France. Investment can end it

By Michael Burke

The French economy is in a grave crisis, much worse even than the sluggish growth of the OECD countries and almost as bad as Britain. In the 6 years since the beginning of the crisis the OECD economy as a whole has grown by just 4.5%. Over the same period the French economy has grown by just 1.2%. This is closer to the British economy, which was still 0.6% lower than when the recession began. The data is shown in Fig. 1 below.

Fig.1 Real GDP in OECD, Britain and France, Q1 2008 to Q1 2014
Source: OECD

Supporters of the Tory government’s austerity policy have bizarrely attempted to congratulate themselves on the recovery in Britain as the following quarter finally saw the British economy exceed is previous peak. But 0.2% growth in over 6 years is the worst performance since the Great Depression.

Similarly, there is an absurd attempt to portray the situation positively in Britain because it is better than the crisis in France. This is both factually incorrect (in the 2nd quarter of 2014 the French economy was 1.2% above its pre-recession peak) and meaningless. However bad the sitation in France, this would make no-one in Britain better off.

Investment Strike

In reality, the cause of the crisis in France has the same source as the crisis in the OECD as a whole and in the British economy. It is the fall in productive investment (Gross Fixed Capital Formation) which accounts for both the severity of the initial recession and the prolonged character of the following stagnation.

The various trajectories of each economy have also been determined primarily by the chages in investment (GFCF). Initially the crisis in France was much less severe than the in the OECD as a whole because the fall in investment was less sharp. By contrast, investment fell further in Britain and the recession was sharper than in either France or the OECD. However, the recovery in French investment stalled in mid-2012 almost immediately after Hollande won the Presidential eelction and began to apply austerity policies.

By contrast, OECD investment has been painfully slow to recover. But it has been on an upward trend since the 3rd quarter of 2009, which accounts for the steady crawl out of recession. In Britain the ludicrous zig-zags of government austerity policy killed off a weak recovery in 2010. But large government subsidies to reflate a housing bubble have had the effect of increasing consumption and house building from its all-time low from the end of 2012. These trends are show in Fig. 2 below.

Fig.2 Real GFCF in OECD, France, UK, Q1 2008 to Q2 2014
Source: OECD

The French Crisis

There are two key indicators of the role of the slump in investment as the cause of economic crisis in France. These are the performance of investment relative to other components of the national accounts and investment relative to its previous trend.

Investment in France began falling once more when the Hollande government began implementing austerity policies. Prior to that point, the right-wing Sarkozy administration had talked about the need for austerity, but was generally keeping these measures in reserve in the hope of getting re-elected (similar to the Tory government from mid-2012 onwards, with a similar lack of success likely).

Fig.3 below shows the real performance of France’s GDP and its components from the beginning of the crisis to the 2nd quarter of 2014. In aggregate GDP is almost €21bn higher than it was in the 1st quarter of 2008. Investment (GFCF) is the only component of GDP which remains significantly below its pre-crisis level. Consumption by both the private sector and of government is higher. The problem of the French economy is not primarily a crisis of ‘aggregate demand’. It is investment, not consumption which is the brake on a genuine recovery.

Private consumption is over €31bn higher and government consumption is strongest of all at over €44bn higher. This also belies the idea that austerity is aimed at reducing government spending. Pro-business parties are far less concerned about increasing government spending if this is directed towards consumption. They are opposed to an increase in government investment, which interferes with the dominant role of the private sector in the ownership of the means of production. Despite much talk about the ‘bloated state sector’ in France government investment is actually a smaller proportion of the total than in the Anglo-Saxon countries of the US and UK (just 15.3% of the total in the most recent 2011 data).

Investment is now €37.5bn lower than its pre-crisis peak. It has fallen from 20.4% of GDP to 18.2%. Only net exports are also negative, but the decline is much less significant with a fall of just €2.6bn. The performance of real GDP and its components is shown below.

Fig. 3 France Real GDP & Components, Q1 2008 to Q2 2014
Source: OECD

The trend decline in investment is equally stark. Investment has fallen by 9.9% in a little over 6 years since the crisis began. In the comparable period prior to the crisis investment had expanded by 18.9%. If this prior trend growth rate of investment had been maintained, it would now be €109bn higher. This would directly add 6% to GDP even before any productivity effects from higher investment are taken into account. GDP and the investment trend are shown in the Fig. 4 below.

Fig.4 Real GDP & GFCF Trend, Q3 2000 to Q2 2014
Source: OECD

The resources for investment

If there were no idle resources in the economy it would be necessary to constrain consumption in order to finance investment. But that is not the case currently. In common with most OECD economies (including Britain) the profits of French firms have been recovering.

In nominal terms the profit level (Gross Operating Surplus) peaked at €668bn in 2008. But after a slump in 2009 profits have turned slowly higher and finally recovered (in nominal terms, not taking account of inflation) to €674bn in 2013. But investment has continued to fall and is now €17bn lower than in 2008. The investment ratio (investment as a proportion of profits) has therefore declined.

This is the culmination of a long-term trend. Fig.5 below shows the nominal level of profits and the investment for the French economy over the last 40 years. At the beginning of the period the investment ratio was approximately two-thirds. In 2013 investment was €395bn compared to profits of €674bn, an investment ratio of just 58.6%. Simply restoring the former investment ratio would increase the level of investment by approximately €40bn. Instead, the level of uninvested profits continues to grow.

Fig.5 France Profits & Investment, 1974 to 2013, €bn
Source: OECD

France is not in crisis because of the Euro. The main features of the crisis are the same as in Britain, which maintains its own currency. Nor is it true that the crisis of the French economy is caused by a bloated state sector. On the contrary, government investment as a proportion of total investment is now lower in France than in either the US or UK.

This is actually a key part of the problem. The crisis is accounted for by the fall in investment. The private sector is on an investment strike. This is exacerbated by the cuts in the government’s own level of investment.
The resources exist to resolve the crisis throught state-led investment. This can be funded by using uninvested profits of the private sector. A certain proportion of this can be done indirectly via government borrowing, especially as borrowing costs for 10 years are just 1.25%. It can also be done directly, directing the state-owned enterprises and the the commercial banks to increase investment, as well as other measures.

Monday, 21 July 2014

Three charts to explain why most people are getting poorer

By Michael Burke

Most people in Britain are getting poorer. For obvious reasons, the government and supporters of austerity would prefer not to discuss this fact.

Yet in the strained language of the Labour right, there has also been a clamour for Ed Miliband to ‘change the narrative’ on the economy by no longer talking about the cost of living crisis. This is based on the completely false notion that that the economic recovery under way will inevitably produce higher living standards. This fails to understand the content and purpose of current economic policy. It is also based on a refusal to face facts.

Some of the key facts on the cost of living crisis are glaringly obvious. The chart below shows the change in regular average pay as well as the change in total pay including bonuses. Also included is the change in consumer price inflation.

Chart 1. Change in regular pay, pay including bonuses and CPI inflation, %
Source: ONS

Under four years of the Tory-led Coalition, regular pay has fallen by 5.25%. This real decline in pay is understated in two ways. The first is that the CPI is a narrow measure of prices. In particular it excludes housing costs. Broader measures of inflation have tended to be higher over the last four years. In addition, only the pay of employees is captured by these average wage data. Anyone forced to work in self-employment, casual or other work without a regualr wage is not included in the data. These categories, along with part-time workers, have formed the bulk of the jobs growth over the last period, which has been a key factor in depressing wages generally. A broader, more accuarate picture of average wages would show a picture that is much worse.

It also seems as if the fall in living standards on this measure is unprecedented. The chart below is via Ed Conway, economics editor of Sky TV, who regularly provides very useful economic data. It shows the cumulative fall in real wages over a 5-year period.

Chart 2. Cumulative fall in real wages over a 5-Year Period, % Change

This shows real wages contracting by 7.6% over that time period. Real wages have not fallen so sharply since records began in 1864, not even in the Great Depression of the 1930s. As we have already seen, there is also no end in sight. Wages continue to fall behind inflation.

This is the key fact which underpins the ongoing cost of living crisis. But it is not confined to the issue of wages. Of a total British population of 64 million on latest estimates, only 30.6 million are in work. The rest, the majority of the population, are mainly comprised of young people, the elderly, the unemployed and economically inactive. They too have tended to experience a fall in living standards as social security entitlements and public services have been cut. They are often at the sharpest end of the cost of living crisis.

Austerity At Work

An obvious question arises, if the economy is recovering in real terms how is it that real wages have fallen so sharply? The answer is twofold. First, the population is growing, so that GDP per capita remains significantly below its 2008 level, before the recession.

But the content of austerity is to transfer incomes from labour and the poor (such as wages, or the benefits of social security as well as public spending) to capital and the rich (in the form of profits, tax breaks, tax cuts, privatisations, and so on). The aim is not to lead to stagnation, which is a consequence of the investment strike by firms. The aim of austerity policy is to boost the returns to capital. Under conditions of stagnation, this can only be achieved by reducing wages and the transfer payments to workers and the poor.

This can be seen directly even in the form of incomes and prosperity. The chart below is via Chris Williamson, chief economic at economic survey and analysis firm Markit. It shows expectations of household finances over the next 12 months by income bracket. In effect, the higher income households tend to be more optimistic on average about their living standards, while the poorer are more pessimistic. The poor are getting poorer. Among the rich, the lion’s share of the recovery is claimed by the ultra-wealthy, the owners of capital, landlords and so on.

Chart 3. Household incomes and optimism on household finances

The Tory Party sees no reason to change these trends of the economic policy that led to them. They would carry out more of the same, renewing the austerity offensive that has been soft-pedalled ever since the poll ratings plummeted in 2012.

Labour is currently debating economic policy. Evidently, it would be wholly counterproductive to abandon the focus on the cost of living crisis now, which is already the deepest on record and is continuing. Yet the scale of this crisis also means that any policy is appropriate to the magnitude of the crisis. SEB has previously outlined some of the measures that could be taken. All proposals and policies need to be assessed in light of the extremely grave economic crisis that Labour will inherit in 2015.

Tuesday, 8 July 2014

Hoarding cash while refusing to invest

By Michael Burke

The world’s largest companies are hoarding cash and cutting productive investment at the same time. The Financial Times reports a survey from one leading ratings’ agency, Standard & Poor’s, which shows that the 2,000 largest private firms globally are sitting on a cash mountain of $4.5 trillion, which is approximately double the size of Britain’s annual GDP.

Yet capital expenditure, or ‘capex’ by those firms fell by 1% in 2013 and is projected to fall by 0.5% this year. But this does not presage an upturn. Steeper declines in productive investment are projected by those firms in both 2015 and 2016. Taken together, if these projections materialise the actual and projected falls in capex over the 4 years from 2013 to 2016 will approach the calamitous fall in productive investment seen at the depth of the recession in 2009. This is shown in the FT’s chart below.

Chart 1. Real Capital Expenditure by 2000 leading firms

SEB has previously argued that companies are not prevented from investing by lack of access to capital or similar factors. They are sitting on a cash mountain. The same is true of British firms. There is plenty of money left, but firms refuse to invest it.

This is because private firms are not concerned with growth, either GDP growth or the growth of their own productive capacity. They are primarily driven by the growth of their own profits, or preserving them. Where that is not possible, where new capex will not meet an expected level of return, no new investments will be made.

The survey findings are reinforced by recent research from investment bank Morgan Stanly, which focused on the US economy. It argued that there were two reasons to expect little improvement in productive investment. One is that the US economy is far below using all the existing manufacturing capacity currently available, so has little need to add new fixed capital. The second reason is that shareholders tend to oppose heavy commitments to new, large-scale investment. Managements that do not invest are rewarded by shareholders, while those that do are punished (lower share ratings, lower financial rewards for managers and ultimately, loss of job if the investment turns sour).

Contrary to mainstream economics, this indicates that the interests of shareholders are not ultimately aligned with those of society as a whole. Instead the interests of shareholders frequently stand opposed to an increase in productive investment, which is the key mechanism for raising productivity and living standards.
Or, as another investment bank shows, the greater the long-run returns to shareholders, the lower the growth rate of GDP, and vice versa. The chart below is from CSFB and has previously been used by SEB. It shows the relationship between average shareholder returns and average GDP growth over a number of countries from 1900 to 2013. GDP growth is strongest where the returns to shareholders are lowest, and vice versa.

Chart 2. Shareholder returns and GDP growth for selected countries, 1900 to 2013

This has clear and direct implications for economic policy. The Tory-led government has attempted to encourage private sector investment with a series of inducements, bribes, subsidies, privatisations and so on. But it has not worked.

In the latest GDP data for the 1st quarter of 2014, business investment in the British economy remains £25bn below its previous peak level in the 1st quarter of 2008, even though GDP as a whole is £10bn below its previous peak. Total investment, which includes the government and the household sectors is now £49bn below its previous peak. The fall in investment accounts for the stagnation of the British economy and the main investment deficit originates in the business sector. The trend in business investment is shown in the chart below.

Chart 3 Real Business Investment, Q1 2006 to Q1 2014, £bn

A continuation of the same policy is unlikely to yield different results. Instead a radical, reforming Labour government could direct investment itself, using the available resources. Even the current government has recently ‘fined’ Network Rail for to failing to meet its targets and will use the proceeds to upgrade wifi on the rail network, that is to engage in productive investment on a very small scale.

The same logic on a vastly greater scale could be applied to the problems of declining energy capacity and the need to de-carbonise the economy. Fines running into billions could be legally applied to the privatised energy companies if they fail to meet new legislative targets on investment in renewables and energy efficiency. The proceeds can then be used for direct state investment.

These and other methods could be applied to a series of key sectors, banking, energy, transport, health, education, infrastructure and so on. If the private companies still refuse to invest, government can use the fines to invest directly itself. In fact there are any number of methods of achieving the same objective. But, as the surveys and analysis from the financial sector show, the private sector currently has no intention of leading an investment recovery as profits have not yet recovered. So the state must lead an investment recovery.

Thursday, 26 June 2014

The levers government can use for investment

By Michael Burke

At a certain point in the next few months the recession in Britain will officially be over as the real level of GDP will finally exceed its previous peak in the 1st quarter of 2008. The media coverage will be generally very favourable, in the hope that this will boost the Tory vote and vindicate the austerity policy. In reality it will do neither. The economy was already recovering modestly when the Coalition took office and the austerity policy reversed that upturn. This is the weakest and most drawn out recovery since the 19th century.

Nor is the hoped-for political impact likely to materialise. One reason why the Tory vote in opinion polls has hit a ceiling fractionally above 30 per cent is precisely because of austerity. The policy is designed to transfer incomes from labour and the poor to capital and the rich. At the same time, the austerity policy of cutting state investment undermines any robust or sustainable recovery. The economy overall continues to stagnate and only a fraction of society feels any benefit from the recovery. During this ‘recovery’ most people’s living standards continue to decline. The political impact is that the Tory Party can shore up its core vote, but not add to it.

It is important to be clear about the task that will face an incoming Labour government. Labour will inherit a crisis, not a recovery. While the economy will soon recover its pre-2008 level, this represents 6 years of lost output. Living standards should have been rising, but they have not because of economic stagnation. Instead, living standards for the overwhelming majority have fallen as a direct result of austerity policies. A continuation of austerity policies after 2015 would produce the same result of economic stagnation and falling living standards for the majority.

Chart 1 below shows the medium-term trend growth for the British economy, and its current performance. The economy is approximately 16% below its previous trend level of growth. There is no evidence to suggest that this gap between previous and actual growth rates will close in the foreseeable future.

Chart 1. Trend and Actual GDP Growth

This means the poverty created during the slump will become a semi-permanent feature of the British economy. An incoming Labour government would need a radically different policy in order to achieve a very different outcome. It would need to address the cause of the crisis.

The fall in investment remains the main brake on recovery, led by the decline in private sector investment. On current estimates, GDP in the 1st quarter of 2014 was still £10bn below its peak level in the 1st quarter of 2008, but investment (Gross Fixed Capital Formation, GFCF) remains £50bn below its level at the same time. The slump in investment more than accounts for the current stagnation. The private sector has been unwilling to lead investment higher, so government policy must lead the way.

How to pay for investment?

Since Britain was not a high-investment economy even before the current crisis, £50bn a year in additional investment over the lifetime of the next Parliament is the minimum that would be required to resume trend growth. Replacing lost output and investment would require a further £320bn to avoid the loss incurred in the recession becoming permanent.

These are enormous sums, approaching the level of the bank bailout in 2009. There is no appetite for borrowing on this scale, even though there is clearly a case for some increased government borrowing to fund productive investment, especially when government interest rates remain close to zero in real terms.

Therefore, the bulk of the funds must come from another source. If it were really the case that ‘there is no money left’ then that would be the end of the matter. But it has already been noted that sometime in the near future the economy will recover its pre-crisis peak. Logically, this means there will soon be more money, more resources available than was the case before the recession, not less.

There is money left, it is simply not being invested. There is a yawning gap which has emerged between the level of investment (GFCF) and the level of profits. In 1990 the level of uninvested profits was £73bn. In 2013 it was £307bn. Even if we take profits after the effects of taxes and subsidies, the level of uninvested profits has risen from £5bn to £97bn in 2013. This is because taxes on production have been cut repeatedly over the period. The trend in uninvested profits is shown in Chart 2 below.

Chart 2. Profits & Investment, 1990 to 2013

What levers for a radical, reforming government?

Since the fall in investment accounts for the continued stagnation of the economy and corporate profits are not being invested at an increasing rate, it follows that any serious discussion on reversing the slump must be focused on the mechanisms for directing those profits towards productive investment.

The key areas for that investment remain home building, infrastrucure, energy, transport and education.
In passing, it should be noted that the uninvested profits themselves have number of different destinations, all of them with negative consequences. The main destinations for uninvested profits include increased executive pay and returns to shareholders in the form of dividend payments and share buybacks, which have all reached record levels. In addition, there is a growing cash mountain held in the bank accounts of British non-financial companies. It remains unused by them (and most is held in accounts yielding little or no interest). But it is used by the banks partly to fund increased speculation in financial assets, including housing, international stock markets and commodities, including foodstuffs.

Levers for investment

I . Using the banks One unintended consequence of the financial crash of 2008 to 2009 was to increase the role of the state in the economy, even, or especially in countries where governments were committed to laissez fare policies. In Britain a very large section of the banking industry remains in public ownership in the form of RBS and Lloyds banks, through the body UKFI. At the same time all banks operating here are subect to licensing, authorisation, regulation and capital requirements from the Bank of England and other public bodies.

Prior to deregulation and Thatcherism, the Bank of England used to engage in ‘credit direction’. This was largely done informally, but in some detail so that banks would be instructed not only as to the amount of credit they should provide to the economy, but to which sectors and in which proportions[i]. The formal powers and associated bodies now are far greater and renewed credit direction actually runs with the grain of current regulation, which favours lending to governments as far safer than lending to corporations.[ii]

The government has a wide array of measures it can use to instruct the banks to provide credit for productive investment. The government could create special vehicles in order to channel that credit, or use existing ones (see below). Where bank executives prove reluctant to follow those instructions, the summary dismissals of Fred Goodwin from RBS and Bob Diamond from Barclays demonstrate the public sector’s power over the banks, if it chooses to exercise it.

II . Transforming existing schemes In the post-World War II period all economic recoveries have been led by government spending. In that sense, this recovery is no exception. The crucial difference is the content of that government intervention, which has increased current spending, but slashed public investment. It has supplemented this with a series of subsidies for investment to the private sector.

These schemes include, funding for lending, help to buy, guaranteed profits for the builders of nuclear power stations and innumerable other schemes. One part of the nuclear guarantee alone may cost government £17.6bn[iii].

Without incurring any additional costs, a reforming government could simply reverse the priorities highlighted by these policies. For example, it could transform the Help to Buy Scheme which boosts house prices but not home building. Instead, it could offer the same £40bn in government guarantees to local authorities to build homes, at no extra cost but from which there would be an additional public sector revenue in the form both of income taxes from newly-employed builders and rental income from public sector tenants, as well as building desperately needed new homes.

The same logic applies to the whole panoply of government schemes. So, the nuclear subsidy should be scrapped and the same subsidy provided to generate renewable energy in which the state has a controlling revenue share.

III. Cutting waste All cash-strapped governments project huge savings from cutting waste which often remain unrealised. This is frequently because the biggest, most wasteful areas of expenditure are sacrosanct and not to be touched.

In Britain one of the biggest areas of wasteful spending is on the Private Finance Initiative and the generalised outsourcing of contracting and supplies by the public sector. Even George Osborne began as a critic of PFI waste and promised to replace it. Instead, in grasping how dependent private sector profits are on this subsidy from taxpayers, the Coalition has maintained PFI and expanded it. In the current and next Financial Year the level of private sector capital spending under the PFI amounts to just £3.3bn, which is only a portion of the total capital cost. Yet the private sector will be receiving £20bn in ongoing current payments over the same two-year period[iv].

This is a colossal waste, amounting to a direct subsidy to the private sector that the public sector could and has done more cheaply. New PFI could be ended, all existing contracts scrutinised for their potential to be rescinded and a new enforcement body established to apply the highest possible service conditions, again with the threat of cancelling contracts.

IV . Cutting Trident and defence spending £100bn could be saved by a decision not to renew the Trident missile system[v]. Clearly, nuclear weapons of mass destruction cannot possibly provide any economic benefit. Trident is not even an independent system, so could only be used under US authorisation and then in all likelihood only as part of a global nuclear conflagration which would have Britain as a prime target.

The notion of Britain ‘punching above its weight’ received an historic reversal with the decision not to bomb Syria. Yet British defence spending remains way above European countries, which have perfectly adequate defence. Cutting British defence spending to their average would release nearly £20bn for alternative purposes.

V. Taxation Government priorities were clear when increasing VAT but cutting corporate taxes, costing the same amount. This was a direct transfer from the poor to capital. Similarly, cutting the 50p tax rate while imposing austerity on the majority was a clear example of the logic of austerity.

Less widely remarked, the government also removed tax incentives for genuine investment while cutting the corporate tax rate. The effect was a higher rate of tax for those that do invest, and a lower one for those who do not, including the banks. All of this was done in the name of stimulating investment, which has not materialised. This is because private investment is driven by the rate of profit. Keeping a larger post-tax share of dwindling profits will not drive up private investment.

These priorities could be reversed at no cost, and no loss of investment. The tax system could be used to improve living standards and boost genuine productive investment while at the same time penalising those firms who refuse to invest but have high dividends, executive pay or share buybacks. Higher taxes on unearned income, speculation and capital gains could be combined with tax breaks for investment and lower taxes on the poor.

VI. Removing private sector subsidies A large number of private sector firms receive government subsidies for running monopoly services that can, and have been performed more efficiently in the public sector. These include, but is not confined to areas such as the railways, utilities such as water, energy, and even NHS procurement and provision.

A consequence of privatising natural monopolies is that the private firms maximise revenues simply by raising prices and cutting costs by reducing the quality of the service. At the same time, successive governments have created a system where public funds are used to subsidise the private sector firms. Removing these subsidies (guaranteed income, inflation-plus price rises, direct grants, and so on) would save both government and service users enormous sums.

The most well-known example is the privatised rail franchises, where the process of renationalising the franchises could be accelerated by a stricter insistence on the terms of the franchise contracts in terms of service, investment, fares, and so on. But a creeping privatisation has been under way for the NHS under successive governments. In 2011/12 the private sector obtained £8.7bn from the NHS for providing services, £8.3bn in secondary care[vi] and £2.8bn in drugs and other procurement for a total of just under £20bn. Detailed data is difficult to obtain, but the level of the private sector take of NHS spending will have risen dramatically under this government[vii].

VII. Renationalisation There are clear benefits in renationalising the privatised companies in terms of the government’s ability to direct investment. Higher levels of investment in turn lead to better services, lower costs and increased or better paid jobs for the workforce.

But there is also a fiscal and strategic economic benefit to renationalisation that meets the objection that a cash-strapped government must have other priorities for its limited resources. The real position is that renationalisation increases government resources and allows them to be directed to boost the economy.

This can be illustrated with the example of Royal Mail. Royal Mail pays a dividend to its private shareholders from the profits it generates and the dividend yield is 3.8% (for every £100 shares owned, the shareholder receives £3.80 each year). This will rise each year if the company grows. But the borrowing cost to the British government when it issues new debt to be repaid in 10 years’ time is currently 2.7%. Buying the entire shares of Royal Mail (renationalisation) would cost the government less in interest than it would be able to receive in dividends from the company itself. It would generate additional resources, which could be used to reduce the deficit, or better still, to increase investment on which there is an even greater return.

The same logic applies to the privatised energy and utility companies, whose dividend yields are all even greater than Royal Mail’s. There is also a strategic imperative. The energy companies have been creaming off profits since they were privatised, and not invested in either additional energy capacity or in renewables and carbon-reduction. Spare energy network capacity was approximately 25% when they were privatised and different estimates now put it at between 4% and 8%. In response to Ed Miliband’s promise of a temporary price freeze, they threatened an all-out investment strike, that they would ‘turn the lights out’. This may happen anyway in the near future, given the decline in network capacity.

This is not a situation any government should allow. Ed Miliband has committed the next Labour government to decarbonising the economy by 2030. Given the resistance of the energy companies to even a modest price freeze, and their complete unwillingness to invest on the scale necessary to meet energy requirements, renationalisation is the only realistic option. Given the huge dividend payments currently made to private shareholders (5.2% for Centrica, 5.3% for SSE) there would be a very large benefit to government finances from their renationalisation.

VIII. Living standards The focus on living standards is the correct one, and led to Labour rising sharply in the polls. Given that living standards for the majority continue to decline, it remains the right theme to focus on.

The simplest way to restore living standards for those in work is to raise the national minimum wage to the level of the living wage, and to strictly enforce it. While boosting the living standards of millions of people, the single biggest beneficiary would be government itself, since the bulk of those in receipt of social security and other government payments are in work, not unemployed. This highlights a general truth, that the interests of a radical reforming government are aligned with those of workers and the poor.

The main objection is that firms find paying the living wage unaffordable. But we have already noted the huge level of uninvested profits, executive pay and returns to shareholders. These can be cut to make it affordable. Where there are genuine cases of small, shoestring firms operating at the margin, there could be some transitional arrangements to help preserve employment. But these would only be temporary measures, and would still oblige all firms to pay the living wage. Otherwise, the effect is to allow inefficient and super-exploitative firms to compete with efficient firms that pay decent wages, embedding the ‘race to the bottom’ in the economy.

IX . Equality A similarly robust policy should be adopted in pursuit of genuine equality. The most scandalous treatment of women has been a hallmark of the austerity drive, with the pay gap widening, reduced employment, greater burdens of childcare and other household burdens, reduced public services, and so on.

Without any cost to government it could strictly enforce equal pay provisions for all firms. Again, government itself would be the largest single beneficiary of this. There is too a recognition that investing in universal childcare provides a wider economic benefit, which naturally has a positive fiscal impact. But a similar approach should also apply to the issues of all social care and reduced public services, where the burden of removing them has fallen mainly on women. The public sector is more efficient provider of these services. If the economy is being boosted by a large-scale investment programme, preventing women from taking their equal place in the workforce on equal terms is a brake on the optimal development of the whole of society and the economy.

A similar approach should inform policies in relation to the equality of black people and ethnic minorities in the economy and wider society. Black youth are living in a different country to their contemporaries, suffering Greek-style levels of unemployment. Combatting unequal pay, and inequality in terms of access to jobs, housing and education need to be central to an economic programme that attempts to utilise all the talents of its citizens. In that light, the perpetual campaign against immigration is wholly counter-productive. The strong growth produced by an investment-based recovery will both attract and require additional immigration to Britain. The alternative is to create a slum which attracts no-one.

The discriminations based on sexual orientation and on disability need to be confronted. Basic human rights are being denied causing untold misery and the whole of society and the economy is poorer as a result.


The 9 points above are not designed to address every possible aspect of the economic and social crisis that will confront a Labour government, and are far from an exhaustive prescription. Instead, they are designed to highlight some of the key steps a radical, reforming government could take to address the scale of the economic crisis that will confront it.

Individually, none of the measures is very radical. All governments used to engage in ‘credit direction’ before the 1970s, windfall taxes were imposed by John Major and the postal system was nationalised by Gladstone. They only seem very radical because the political spectrum has shifted so far in the direction of those who caused the current crisis.

Taken together, these measures would allow the state to lead an investment-based recovery using the main levers that are currently available to it in Britain. That would be a major reform of the British economy and of society. A more enduring transformation would require other levers and a different alignment of social forces to be pulling on them.

[i] See the paper from Victoria Chick and Sheila Dow, Financial Institutions and the State: A Re-examination (pdf)
[ii] Under the Basel III capital adequacy rule for banks, their lending to governments has a zero risk-weighting while lending to companies has a risk weighting (requiring additional capital to be set aside) of 50% (pdf), KPMG, Basel III: Issues and implications, This is one of the many reasons banks are generally campaigning against the Basel III regulatory regime.
[iii] FT, UK nuclear deal with EDF could waste £17.6bn, says Brussels
[iv] UK Treasury, Private Finance Initiative Projects 2013: Summary data (pdf)
[v] CND, People not Trident (pdf)
[vi] Nuffield Trust: Public and private provision (pdf)

[vii] FT, Private groups invited to help NHS buy services, February 25, 2014

Friday, 6 June 2014

Economics and the debate on immigration II

By Michael Burke

The now notorious UKIP poster which suggested the entire population of the EU might come to Britain for work is designed to whip up racism. But it contains two fallacies that are unfortunately shared by many people who are not racists, and are therefore worth rebutting.

Myth 1

The first myth is that Britain is a uniquely attractive place within Europe in terms of pay or workers’ rights, or social security entitlements. The graphic below was produced by the UNITE union in Ireland in their argument for higher pay. But it is such a good graphic it is worth reproducing as it stands.

Graphic 1. Private Sector Hourly Compensation in Western Europe, € PPPs
Compensation includes both pay and social wages such as pensions and other benefits. The data is in Purchasing Power Parity terms, so that they account for price differentials between European countries. The data is drawn from Eurostat database here.

The compensation for British workers is among the lowest in Western Europe. Britain is not a uniquely attractive destination for economic migration within the EU. Therefore it should come as no surprise that Britain has one of the lower levels of immigration of the Western European economies.

Another graphic, this time from the Huffington Post, illustrates this point very neatly. It shows the level of immigration (the total stock of migrants) as a proportion of the total population. (The data source is also Eurostat).

Graphic 2. Immigrants as a proportion of total population, %
Although there are a series of cultural, historical and legal factors which are important, in general the higher the level of workers’ compensation, the higher the level of immigration. Britain is nearer the bottom on both measures.

Myth 2

The second myth is that immigrants ‘take’ jobs or drive down wages. If that were true, then the introduction of the single market in the EU and with it the provision for the freedom of movement of labour would have led to a convergence of both unemployment and pay rates across the EU.

But we have already noted that the highest pay is in many of those countries with the highest levels of immigration. The same can be said of unemployment too. Immigrants have neither increased unemployment nor driven down pay in those countries. In fact, there has been a divergence in rates of pay in the EU over a prolonged period despite increased mobility of labour.

The argument about immigrants ‘taking jobs’ or driving down pay has strong echoes of (male-dominated) labour movement opposition to women’s entry into the workforce. Exactly the same arguments were used. From an economic perspective the country of origin or the gender of the worker is immaterial. What is relevant is the skills and adaptability of the workforce as a whole.

This is because there is not a fixed ‘lump of labour’ in the economy, which immigrants, or women (or young workers) detract from. If there was a fixed amount of available labour no economy would ever be able to grow, even via the birthrate. Instead, economic activity grows and prosperity increases with what Adam Smith identified as the division of labour and what Marxists understand as the socialisation of production.
In the fastest-growing economies of the word, such as China and India, workers frequently migrate internally over vastly greater distances than is required in a move from one small corner of Western Europe to another. Sometimes too, the cultural and even language barriers are also greater.

This migration is a key factor in the growth of all economies. It is primarily responsible for the somewhat better performance of the US economy compared to the EU over a prolonged period. The absence of immigration also partly accounts for Japan’s long-term stagnation.

This is because the movement of labour is a necessary counterpart to the increase in the division of labour, or the socialisation of production. It increases both the size and the capacity of the whole economy. This in turn means that effects of the division of labour are magnified. As a result, immigrants increase jobs as whole. In Britain, 14% of new jobs are created by immigrants (approximately double their proportion of the population).

Consequently, any restrictions on the freedom of movement of labour within Europe will not create jobs but destroy them. They will not underpin pay, but will serve to drive it down. Labour MP Frank Field, who is strongly anti-immigration and in favour of restricting free movement of labour within the EU is explicit on this matter. If migrants are stopped from entering Britain to work, those on benefits can be forced to do the work instead. His anti-immigration agenda has nothing to do with protecting workers rights or pay. It is an agenda which supports the interests of capital, not those of labour.

There are some who mistakenly believe there is a genuine left-wing case for curbing immigration. But this is completely wrong. Immigration is a function of increasing prosperity and tends to reinforce it. The only effective way to reduce immigration in Britain is to lower living standards, reduce real pay and increase poverty. It is Britain’s relative decline in living standards which explains which it has lower immigration than most of Western Europe. There is no genuine left-wing case for reducing immigration.

The alternative is a policy aimed at increasing prosperity which is necessarily accompanied by increased immigration. Prosperity and immigration versus poverty with immigration curbs. That is the real policy choice.