Wednesday, 25 November 2015

Alternative Autumn Statements: Continued Tory Failure Versus Corbynomics

By Michael Burke
Having spectacularly failed in his stated goal of eliminating the deficit in the last parliament, George Osborne is repeating his experiment in this one. Both the June 2010 and 2015 Budgets proposed ‘fiscal tightening’ of £37 billion. In the first of these Budgets the main method was cuts in public spending. In the second it is the sole method.

In the latest Autumn Statement this now falls to £36 billion and takes place more slowly after the U-turn on implementing cuts to working tax credits. These are now effectively scheduled to take place more slowly under the guise of ‘reform’ to the Universal Credit system.

The effect of renewed austerity is reasonably predictable. The economy has not grown significantly in the last 5 years. As nominal GDP is approximately 16% higher, so the impact of almost exactly the same nominal cuts will be very similar as from 2010 onwards. Likewise, the starting-point for growth is about the same. In the 3rd quarter of 2010, ahead of that Comprehensive Spending Review the GDP growth rate was 2% and on an upward trajectory from the depth of the recession. In the recent preliminary estimate the growth rate in the 3rd quarter of this year was 2.3% and slowing from 3% following the election boost to the economy, as shown in Fig.1.
Fig.1 GDP Growth Since the Recession
The effect of the first round of austerity was to slow the economy to a crawl. Living standards fell and the deficit actually began to rise. GDP growth was 1% in both the 2nd and 4th quarters of 2012 and only lifted above that by the boost from the London Olympics. The economy is set to slow again in 2016 under the impact of austerity and based on past experience may slow towards 1% growth in 2017.

Policy Options
At the time of the March 2015 Budget there were blood-curdling forecasts of the decline of public spending to lower levels than the 1930s. This was entirely a political manoeuvre, a trap designed to get Labour to support unfeasible spending plans and so have nothing positive to offer in the election campaign, which Ed Balls duly jumped into.

In fact, it is the content of government current spending which matters far more than its proportion of GDP. Government spending on education, on health, on childcare and other public goods improves the living standards of the population. An increase in social security payments because of rising joblessness or in-work poverty is necessary but can only partially alleviate falling living standards. There is a world of a difference between current spending that falls because well-paid jobs are being created on a large scale, or falls because the NHS is being cut.

The medium-term history of the British economy is stable or rising Government current spending as a proportion of GDP, as shown in Fig.2. It is the composition of this spending which has adversely altered. To take just one well-known example, the public sector has almost given up on house-building but incurs £25 billion annually in housing benefit payments, which are paid to landlords – enough to build over 160,000 affordable homes. This reflects both slower growth and rising inequality.

Fig.2 Government Current Spending (lhs) & Net Investment (rhs) as a Proportion of GDP

The focus for cuts over the longer run has actually been to public sector net investment. This has been renewed by Osborne. The Blair/Brown government slashed public sector net investment to an all-time low (to meet other, extremely damaging Tory spending plans in 1997 to 2000). But Brown increased public sector net investment to 3.2% of GDP in response to the slump in 2008 and 2009 and this was responsible for the recovery. Osborne has effectively halved this rate of investment.

SEB has previously shown that the private sector followed suit in both cases; increasing or decreasing its own investment rate in response to the rise or fall in public sector investment, with a time lag of 6 months. This is a practical demonstration of what is meant by the phrase state-led investment.

These very different trends in the components of government spending reveal the truth behind the Tory rhetoric of ‘deficit-reduction’, ‘living within our means’ and ‘shrinking the state’. Successive governments, of which this is just the most brutal, have not reduced total current spending as a proportion of GDP and have been content to borrow to fund that spending. They have simply changed its content. Landlords and others, after all, are part of the class of capitalists in whose interests economic policy is formulated.

State spending has not shrunk, but state investment has been savaged. The trend is towards minimal or even zero net public investment. This is because investment creates the means of production. If the public sector invests it owns those means of production. They are not owned by business. To the extent that the state owns the means of production it can direct the level of investment in the economy and its overall trajectory. Private business cannot directly make profits from the means of production it does not own, which explains the contrary drive towards privatisation.

Corbyn & McDonnell are right

The response of the Labour leadership is therefore correct. Prior to Comprehensive Spending Review Shadow Chancellor John McDonnell said his approach could be summed up as “investment, investment, investment”. Firm opposition from the Labour leadership to cuts in working tax credits produced Osborne’s U-turn.

Investment (Gross Fixed Capital Formation) has been in a long-term downtrend in the British economy. It was also specifically responsible for both the recession and for the weakness of the recovery. The long-term investment downtrend is shown in Fig. 3 below, which shows both total investment and Government investment as a proportion of GDP.

Fig.3 Total Investment and Government Investment as proportion of GDP
The startling fact revealed by this chart is that it is the slump in Government investment which is primarily responsible for the decline in aggregate investment. Over the entire period the peak to trough decline in total investment has been 26% of GDP to 15% in the recession. The decline in the Government component of that is 7.5% to 0.5%. It is the cut to Government investment which is driving the long-term decline in British investment, responsible for 7% of a total decline of 11%.

As the chart also shows, the decline in investment in the current cycle began in 2006, long before either the financial crisis or the recession itself- and was led by a private sector decline. The rate of investment is decisive for the trajectory of the economy as a whole.

The policy focus must not be on investment in general, with exhortations or bribes to the private sector to invest. This has been tried by Osborne and failed. It must be direct investment by the public sector itself, in housing, transport, infrastructure, renewable energy and education. The private sector will follow.

This is why the proposed Public Investment Bank is so important, supported by measures such as PQE and changes to the tax system to penalise unearnt income such as shareholder dividends while promoting investment. The Public Investment Bank can mop up the idle cash of the large corporations, and direct it for productive investment. Crucially, it also allows the public sector to reap the benefits of that investment, so that it acquires a larger and enduring weight in the economy able to sustainably increase investment over the long-term.

Thursday, 12 November 2015

Debating Corbynomics

By Michael Burke
The Labour Assembly Against Austerity conference in London takes place this Saturday, November 14. The author is pleased to be able to share a platform with Ann Pettifor a direct of PRIME and author of ‘Just Money’ as well as Professor Victoria Chick whose major works include ‘The Theory of Monetary Policy’ and ‘Macroeconomics After Keynes’. 

All the panellists (and probably the audience) are opposed to austerity, and the debate is within that context. The opponents of austerity all want an alternative to this policy and to raise living standards. The debate turns on how this can be done. 

As SEB has previously shown there are only two uses of output; either investment or consumption. A sustained increase in living standards requires an increase in output. Increased consumption is a consequence of increased output. The question then becomes, can living standards be increased by increasing the rate of consumption, or is it necessary to increase the rate of investment?

The answer to this question provides the fundamental basis of economic policy, and not simply fiscal policy. If Consumption ‘C’ is the fundamental driver of growth over the medium-term then all available economic levers should be used in order promote it, monetary, fiscal, regulatory and so on. The converse is true if Investment ‘I’ is the fundamental driver of growth.

The recent history of the British economy is instructive in resolving this question. After a bout of austerity followed by a pre-election boost to demand in the last parliament living standards effectively stagnated, measured as per capita GDP. As this measure is an average it disguises the transfer of income from poor to rich and from labour to business that the austerity policy entails. Most people are actually worse off than 5 years ago.

The chart below shows the key developments in the level of GDP and its composition in the period since the recession began in the 1st quarter of 2008 to the 2nd quarter of 2015. 

Fig.1 Change in GDP & Components Since Recession Began
The recovery has been exceptionally weak by historical standards. Even so, real GDP has increased by just under £100bn since the recession began in 2008, an increase of just 5.9% in more than 7 years! Consumption (including both household and government consumption) has risen by more than £80bn over the same period, an increase of 5.6%. By far the weakest component of GDP has been investment, which has risen by less than £5bn, or 1.6%. Given the time period, in statistical terms this is effectively zero growth of investment. (The residual, the difference between GDP and C and I combined of £15bn is accounted for by net exports, inventories and other items).

Osborne has not ‘rebalanced’ the economy, but has tilted further in the direction of consumption and away from investment. This matters because only investment (and education) can increase the means of production. Consumption cannot do that.

If it were true (in some sort of inversion of Say’s Law) that consumption creates its own investment, then we should have expected investment to rise at least in line with consumption over the ‘recovery’ period. But prior to the recession the ratios of GDP to consumption and investment were approximately 7:6:1. In the recovery period the ratios have been changed to 20:18:1. 

The rate of consumption has risen and the rate of investment has fallen. But the mass of the population is not better off. This is because investment is required to sustain growth, which is the basis for rising living standards.

It may be argued that the rise in consumption is insufficiently strong to spur an increase in investment, and that much stronger growth in consumption would produce more investment by reducing spare capacity. But there is no evidence for this assertion. As profit-maximisation is the goal for producers, it is just as likely in the current period that producers would meet capacity-straining increases in consumption with higher prices.

In fact the entire crisis is characterised by what Keynes dubbed ‘liquidity preference’ and Marx called the hoarding of capital. Firms are investing a low and declining proportion of their profits. More revenues from consumption and more profits are not leading to a revival of investment.

It is a false notion that it is possible to increase living standards over the long-run by prioritising the growth of consumption. The sustained growth of production requires the growth in the means of production, which requires investment. It is only in this way that that is possible to sustainably raise living standards.

Friday, 6 November 2015

Labour Assembly Against Austerity- key discussions for the left

By Michael Burke

The Labour Assembly Against Austerity meeting on November 14 is an excellent opportunity to discuss the key economic issues, promote the anti-austerity policies of the Labour leadership and debate the way forward. 

The Labour Party and the left in Britain generally has never before been in a situation where its leadership has been under such sustained and ferocious attack from its opponents. This is because Labour’s new leadership is also something entirely new. It espouses policies which run counter to the austerity offensive, which is the main project of big business and its political representatives. So bringing together all those who want to defend this leadership against right-wing attack, discussing the alternatives to austerity and debating the way forward is vital.

The keynote speaker is the Shadow Chancellor John McDonnell. Along with Jeremy Corbyn and their allies, he has pushed the Tories back on cuts to working tax credits, so much so that it would now be a surprise if at least some concessions were not made. But it should be clear that any gains made through amendments to Osborne’s plans and the Tories’ political difficulties arise because there has been such firm and clear opposition from Labour.

Even if there are certain tactical retreats, it is also clear that the Tories will be relentless in their pursuit of austerity policies. There is no significant section of big business opinion which does not support austerity. Therefore it will be increasingly important for the entire anti-austerity movement and the Labour Party to clarify its economic alternatives and to popularise them among the widest possible layers in society. The debates should be about how to defeat the Tories and their austerity policy, and what the sustainable alternatives should be. As such, the debates will need to be comradely ones aiming to maximise light while minimising heat.

In Britain and in many Western economies in the period since World War II there has been a bastardisation and then the almost complete marginalisation of advanced economic thought. The most important economists are reduced to fortune cookie phrases in the case of Adam Smith’s ‘invisible hand’, completely distorted with reference to Keynes’ ‘digging holes and filling them’ or ignored completely in the case of Marx. Building a movement that is capable of challenging and then defeating the Tory arguments will require a culture of debate and familiarity with these authors and more besides.

SEB has shown that growth is required to raise living standards and that growth itself is primarily determined by the rate of investment. It is because the rate of investment is so low in the British economy that there has been no growth in living standards since the crisis began. The economy has expanded by just £100bn from the 1st quarter of 2008 to the 2nd quarter of 2015, less than 6% in over 7 years. But of this growth £80bn has been the growth of consumption while just £4bn has been a rise in investment. We remain in an investment crisis.

The Labour Assembly Against Austerity meeting will offer the opportunity to hear from leading figures in the Labour Party, the trade unions, campaign organisations and the anti-austerity movement. A series of workshops will allow more detailed debate. Both of these are necessary if the movement as a whole is to continue its momentum and build a clear understanding of the alternative to austerity.

Labour Assembly Against Austerity
10am – 5pm Saturday 14th November

Institute of Education, London WC1H 0AL

Speakers include:
Shadow Chancellor John McDonnell MP
Diane Abbott MP
Lucy Anderson MEP
Michael Burke, Socialist Economic Bulletin
Victoria Chick, Emeritus Professor of Economics, University College London
Andrew Fisher, Left Economics Advisory Panel (LEAP)
Professor Özlem Onaran, Professor of Workforce and Economic Development Policy, University of Greenwich
Ann Pettifor, Director, Policy Research in Macroeconomics (PRIME).
Mark Serwotka, General Secretary, PCS
Steve Turner, Assistant General Secretary Unite
Dave Ward, General Secretary, CWU

Sessions will cover:
Labour's alternative to austerity
Free public services & decent wages
Tackling the housing crisis
Who should pay for the crisis?

Tickets £10/£7 at:

Wednesday, 4 November 2015

Labour Assembly Against Austerity Conference - Saturday 14 November

10am - 5pm Saturday 14 November
Institute of Education, 20 Bedford Way London WC1H 0AL
Tickets here:

• John McDonnell MP, Shadow Chancellor

• Diane Abbott MP
• Lucy Anderson MEP
• Shelly Asquith, Vice-President (Welfare,) National Union of Students
• Michael Burke, Socialist Economic Bulletin & Economists Against Austerity
• Victoria Chick, Emeritus professor of economics at University College London
• Katy Clark, Co-Chair, Labour Assembly Against Austerity
• Sabby Dhalu, Stand up to Racism
• Betsy Dillner, Director, Generation Rent
• Fiona Edwards, Student Assembly Against Austerity
• Siobhan Endean, Unite the Union
• Councillor Maryam Eslamdoust, Camden
• Andrew Fisher, Left Economics Advisory Panel (LEAP)
• Don Flynn, Migrants Rights Network
• Carol Hayton, Labour Party National Policy Forum
• Councillor Emine Ibrahim, Haringey
• Francesca Martinez comedian, writer and campaigner
• Andrew Murray, Stop the War Coalition & Unite the Union
• Councillor James Murray, Islington & Labour Party National Policy Forum
• Professor Özlem Onaran, Professor of Workforce and Economic Development Policy, University of Greenwich
• Ann Pettifor, Director, Policy Research in Macroeconomics (PRIME)
• Tim Roache, GMB Yorkshire & North Derbyshire
• Christine Shawcroft, Labour Party NEC
• Mark Serwotka, PCS General Secretary
• Steve Turner, Assistant General Secretary Unite & Co-Chair People's Assembly Against Austerity
• Dave Ward, CWU General Secretary
• Councillor Claudia Webbe, Islington
• Peter Willsman, Labour Party NEC & CLPD Secretary

Sessions on:
Labour's alternative to austerity
Corbynomics: raising growth and improving living standards
Free public services, decent wages and unions for all
Tackling the housing crisis – building council houses & controlling rents
Who should pay for the crisis? - tax justice not benefit cuts
Ending austerity, building the movement and winning for Labour
Oppose racist scapegoating – refugees and migrants are not to blame
Invest in people and the planet not war

£10 full price / £7 concessions


The Labour Assembly Against Austerity is a forum to discuss alternatives to austerity and the policies Labour needs to stimulate growth, jobs and rising living standards.

Thursday, 29 October 2015

Tories have no answer for slowdown. Corbynomics does.

By Michael Burke
The British economy is slowing down. In the 3rd quarter of 2015 the economy had expanded by just 2.3% from the same period in 2014. This measure removes the volatility of erratic quarter to quarter movements in GDP.

The most rapid pace of growth in this recovery has been the 3.1% recorded in the 2nd quarter of 2014, which mainly reflected government efforts to stoke consumption (particularly in housing) in the run-up to the election. Since that time the growth rate has progressively slowed. This is shown in Fig.1 below. Despite the severity of the recession, at no point has the growth rate matched the higher levels seen before 2008 to 2009.

Fig.1 UK GDP- Growth is slowing

The slowdown does not mean that a recession is imminent, although this business cycle will come to an end at some point and the global economy is also experiencing some difficulties. The more immediate danger is the effect of government policy and the renewed imposition of austerity policies.

As SEB has previously shown, Austerity Mark II announced in the July 2015 Budget is exactly the same as Austerity Mark I announced in June 2010, a fiscal tightening of £37 billion in both cases. The real effect will be somewhat less this time as the economy has expanded moderately in the interim. Even so, the effect of the first round of austerity was to slow the economic growth rate from a little over 2% year-on-year to 1%. A similar outcome should be expected this time around.

Examining the slowdown

This weakening outlook is the increasing subject of commentary. An article in the Guardian by David Graeber has received a lot of attention. He is a committed opponent of austerity, and all disagreements should always be read in that context. In ‘Britain is heading for another crash: here’s why’ he correctly castigates George Osborne’s economic fallacies, but then supplies a few of his own. As these appear to be widely shared by other progressive economists and opponents of austerity, they are worth debunking.

Graeber argues that any government surplus must entail a private sector deficit. As he correctly states, this is simply an accounting identity and must be true; every borrower requires a saver and vice versa. He goes on to say that the determination to run public sector surpluses is necessarily negative, as it forces the private sector to borrow. He further states that this debt is forced on to those least able to pay it and that this causes recessions, which is often the case.

But in this key passage (using the chart he supplies) he adds, “But if you push all the debt on to those least able to pay, something does eventually have to give. There were three times in recent decades when the government ran a surplus:

Note how each surplus is followed, within a certain number of years, by an equal and opposite recession.”

Note the reason why the surpluses of the private sector do not cause recessions is never explained, nor why we might be entering another recession even though there are still large government deficits.

There are in fact four separate episodes of fiscal surpluses in Britain shown in the chart. Examining them debunks the fallacy that government surpluses cause recessions. The chart used shows the largest surplus of all on the overall fiscal balance in 1948. There was no recession at all until 1974! At the end of the 1960s there was modest surplus, followed by 5 years of continuous growth, and the largest-ever growth rate recorded in a single year, 6.5% real GDP in 1973. The small surplus in 2000 was a result of New Labour sticking to extreme Tory spending plans in the first two years after election in 1997, which was subsequently relaxed. Reasonably strong growth (in British terms) followed and the subsequent crash 8 years later had nothing to do with that surplus. The surplus in the late 1980s was a function of the glut of North Sea oil. This should in fact have been larger, had Government saved this windfall for future investment, as Norway did. Instead, along with Government borrowing it was used to stoke a consumption surge, the ‘Lawson Boom’. The subsequent recession occurred when boom turned to bust. The surplus did not cause the recession – borrowing for consumption while also floating in oil revenues caused an unsustainable boom that inevitably failed.

This argument for permanent fiscal deficits makes no distinction at all between borrowing for investment and borrowing for consumption. The long-run history of the British economy and its decline is in part characterised by the rising rate of Government consumption coupled with a falling rate of Government net investment.

Fig.3 below shows that the strongest rate of growth of GDP in the 1960s was associated with the lowest levels of Government current spending, and vice versa. The higher rates of Government consumption are associated with the slowest levels of growth. The long-term trends are also clear; rising Government spending and declining rates of GDP growth.

Fig.3 UK Public Sector Current Spending Rises As GDP Growth Declines
By contrast, high or rising rates of public sector net investment are associated with high or rising rates of GDP growth (again, in British, not global terms). This is shown in Fig.4 below with public sector net investment as a proportion of GDP alongside the rate of growth of GDP.

Fig.4 UK Public Sector Net Investment, % GDP & GDP Growth
Here, although the GDP data is erratic the relationship clearly trends in the opposite direction; as net investment declines so does the GDP growth rate, and vice versa.

In fact there is a significant negative correlation between public sector current spending and GDP growth of -0.41326. By contrast, there is a very small positive correlation between public sector net investment and GDP growth of 0.1281, which rises to 0.21235 if GDP growth is lagged for 3 years (possibly to account for the economic effects of large projects). But in an economy like Britain’s, public sector net investment is usually too small to determine the overall rate of economic growth.

Fig.5 below shows the rate of GDP growth alongside the proportion of total investment (Gross Fixed Capital Formation) in GDP from both the public and private sectors. Even a cursory glance shows the strength of this relationship and the correlation is 0.7721. It is investment which is the primary driver of growth.

Fig. 5 GDP Growth & GFCF as a Proportion of GDP
The proportion of GDP devoted to investment (GFCF) is the main determinant of the growth of GDP. But currently the level of public sector net investment is too small to affect the outcome of GDP. At the same time, the level of private sector investment is too weak to support a more robust economic recovery. What can be done?

‘Crowding out’ and Corbynomics

One of the greatest fallacies in modern economics is the notion of ‘crowding out’. This is the assertion that if a level of public sector investment or borrowing is too high then this will prevent the private sector from investing. It particularly came into vogue during the era of privatisations under Reagan and Thatcher and is inscribed in most Western econometric models.

It is a nonsense because it assumes a fixed or steady state economy. But if either the public or the private sector invests in the productive economy, there will be economic growth and so increased funds available for investment.

Over many decades the Western economies have provided ample evidence that the notion of ‘crowding out’ has little basis in fact. Fig. 6 below shows that over the medium-term UK public sector net investment as a proportion of GDP has been cut. In common with most Western economies, the total level of investment as a proportion of GDP has not risen but has actually fallen, although the British case is one of the more extreme examples of both.

Fig.6 GFCF as a proportion of GDP & Public sector net investment as a proportion of GDP

It is clear from the chart that public sector net investment leads investment overall. There is a lagged effect, so that the strongest effect of rising public investment on total investment is registered 5 years later. On this basis the correlation between the two variables rises to 0.6820. Far from public sector investment ‘crowding out’ private sector investment, high and/or rising public sector investment ‘crowds’ it in.

This in turn is a significant part of the answer to the question posed earlier, what is to be done if investment is the main determinant of economic growth, yet public sector net investment is currently too small to effect the outcome of GDP as a whole?

The austerity policy is in part a failed answer to this question. It assumes that if wages and taxes on business are pushed down, businesses will increase the proportion of their profits assigned to investment. This has not occurred.

By contrast, Corbynomics has a very different answer. As high or rising public sector investment crowds in private sector investment, the policy response should be to raise the level of public sector investment in order to raise the total level of investment in the economy. The purpose is to raise the sustainable growth rate of the economy and so improve living standards.

If there are future crises of private sector investment, it may be necessary to raise the level of public sector investment once more. But the answer to the current crisis is to increase public sector net investment to a level where total investment is sufficient to sustain much higher, more sustainable growth.

Currently, the level of investment as a proportion of GDP is 20.6% in the OECD as a whole. In Britain it is 16.9%. An immediate objective should be to raise British levels of investment towards that average, so that competitiveness is not further eroded and living standards do not fall further behind. That is the first step towards addressing the current crisis. Future steps will be discussed in subsequent pieces.