Wednesday, 30 March 2016

Rotten Tory ideology laid bare by crisis in steel

By Michael Burke

In order to defeat Osbornomics it is necessary to understand it. A central tenet is that the private sector is the key to prosperity and that therefore everything possible should be done to promote and encourage it. The state should shrink in order to release the inherent dynamism of the private sector. The argument runs that it may be that some people fail temporarily so some sort of safety net may be necessary, if affordable. In this framework, if it is necessary to cut support for disabled people and the poor in order to fund tax cuts for high earners and business, then so be it.

The attack on disabled people has rightly been the focus of hostility to Osborne’s Budget. But this is not an isolated case, as all those who have suffered those cuts can testify. This has been a repeated pattern of Osborne Budgets, supported by all Tory and LibDem MPs beginning in 2010. The right of the Labour Party has had no significant disagreements with it.

At the same time, the long-term decline of the steel industry has turned into a full-blown crisis. In a very useful report the Institute of Public Policy Research (IPPR) debunks the myth that the crisis is due to ‘dumping’ of steel in the EU. The UK loss of market share in core industries producing intermediate goods, such as steel, is twice the rate of the industrialised countries as a whole over the long-term. Despite alleged ‘dumping’ by Chinese firms in Europe, German steel production rose by 2% in 2015.

The IPPR report shows that all of these industries combined have suffered a devastating reversal. While by the end of 2014 UK GDP had recovered by 4% from its pre-crisis level in 2008, the producers of core materials used in manufacturing and construction were still 20% below their pre-crisis level. They are in a deep crisis.

Two trends

These two trends are linked in policy terms; the repeated attacks on the poor and those who should be entitled to support, combined with a decline in key industries. In this way, the central proposition of Osbornomics is revealed by the most striking simultaneous giveaway in the 2016 Budget, which was the further cuts in the tax rate on corporate profits, as well as the cuts to Capital Gains Tax (CGT). 

Osborne has cut CT so that it now stands at 20%. In the 2016 Budget the announced cut to 17% is in effect funded by attacking disabled people and cutting public services sharply in real terms (after adjusting for inflation). He also further cut CGT. It should be remembered that New Labour also cut both CT and CGT.

All of this has been cast in terms of boosting investment and ‘freeing the private sector’. It is nonsense. In Fig.1 below the level of CT is shown against the proportion of business investment in GDP. It also shows the projected level of CT rates that Osborne has announced for future years.

Fig.1 UK Corporate Tax Rate and Business Investment as % of GDP
 
Both the tax rate and the investment rate have been in a long term downtrend. The high-point for business investment over the period was in 1998 and 1999 when the CT rate was 30%. Cutting taxes has not spurred investment. The new freedom for the private sector is a greater proportion of its post-tax return is free to fund excessive boardroom pay, share buy-backs and to fund speculation in financial markets, including housing.

Britain has an investment crisis. This has led to a crisis of production and of jobs. But cutting the CT rate has done nothing to address it as business investment continues to remain weak. All other things being equal, the cut in the rate from 28% to 20% has reduced public sector tax revenues by approximately £30 billion in the current Financial Year. If the private sector will not invest, then the public sector must. Any measures to begin to reverse this unproductive cut in taxes will lead to greater revenues available for public sector investment.

Steel should be renationalised and provided with large scale investment via a National Investment Bank. This and an all-round programme for investment is the way to generate growth and prosperity. On this basis there would be no more cuts to the entitlements of disabled people and others and the cuts to incomes can be restored.

Wednesday, 23 March 2016

Building an economy that works for all

By Ken Livingstone
The following article, setting out why Tory economic policy is failing and the Labour framework set out by Jeremy Corbyn and John McDonnell is necessary, was first published by the Morning Star.
* * * 
Jeremy Corbyn was right to say last week that the Budget the Chancellor delivered was “actually a culmination of six years of failure” and that “this is a recovery built on sand.”
Almost all the growth in our wealth in recent years has gone to the richest 1 per cent, while working-class and middle-class families have seen real incomes cut by 9 per cent since the banking crisis.

Yet in much of the media, we are still subjected to the big lie — repeated again by George Osborne this week — that we are in this mess because the last Labour government spent and borrowed too much.

The truth is that in the 36 years since Thatcher came to power there were only two years in which the Tories produced a balanced budget, and three years in which Labour did. All governments have borrowed to fund their revenue spending, but there has not been enough investment in infrastructure and rebalancing our economy.

The Tories constantly say Thatcher’s economic strategy “saved Britain” and claim that Osborne’s austerity is now building on this legacy. But when Thatcher died The Economist, which devoted six pages to her record, did not mention growth in the economy or investment.

We were told that breaking the power of the unions, cutting taxes for the wealthiest and big corporations and deregulating the banks would unleash a wave of investment and growth. But in the 30 years following Thatcher’s election the British economy only grew at two-thirds of the rate it did in the 30 years before Thatcher came to power.

And while the Tories say manufacturing was past its sell-by date and did nothing to invest in it, Germany did and one-fifth of its economy is still manufacturing, whereas ours is now less than 10 per cent. That matters because more than half of all our exports come from this sector, which is why we now have the biggest trade deficit in our history.

Now the ideologically driven austerity of Thatcher’s heirs, confirmed again in the Budget last week, threatens even our fragile economic recovery.

As John McDonnell put it, “productivity growth, the essential ingredient in delivering rising living standards, has stagnated,” while “the gap between the UK’s productivity and those of the Germany, the US and France is the widest it has been for a generation.”

The scale of these problems requires leadership from people who can think outside the box and present a clear, radical alterative. Jeremy, John and the talented team that has been put together have shown in their response to the Budget this week that they are up to this challenge, and have put the issue of investment in our economy centre stage.

What holds back Britain’s economy is a lack of investment, both public and private, which is now running at its lowest level since WWII.

Nearly all economists now agree that investment is not just the most important factor in economic growth, but outweighs all others put together. This is why, when Cameron and Osborne took power and slashed the last Labour government’s investment spending, it pushed our economy back into recession.

In contrast, Labour’s economic plan for a big expansion of investment in transport, housing and upgrading our broadband system is crucial in turning the British economy around.

Given the very low level of interest rates this is the best time to borrow in order to invest. When I persuaded the last Labour government to put £5 billion into building Crossrail, ministers knew that the growth generated by the project would give them between £10bn and £15bn more in tax.

Another big Tory lie repeated ad nauseum is that Labour will increase our taxes, but we don’t need to do that as long as everyone pays their fair share.

The scandal of Google, Starbucks and Amazon is just the tip of the iceberg. Tax avoidance and evasion, mainly by international corporations, could be the equivalent of a quarter of the government’s Budget. Experts believe that tax avoidance and evasion equals 10 per cent of our annual GDP, at least £120bn and perhaps as much as £150bn.

Jeremy has made it clear he will crack down on the tax dodgers, and that can help provide the money we need for the healthcare and education we all have the right to expect.

Britain is the fifth largest economy in the world and the idea that we can’t make the changes necessary to give all our people the chance to succeed is rubbish.

The Labour leadership’s clear position on the economy can win the 2020 general election for Labour. Jeremy and John’s ability to speak clearly and provide a real alternative to cuts and austerity is what’s needed now because they are offering hope for a better future to a generation that has had no hope. Let’s make it happen.

Ken Livingstone is re-running for the Labour Party’s National Executive Committee as part of the Centre-Left Grassroots Alliance (CLGA) ticket. Nominations are now open and each constituency party can nominate up to six candidates. You can follow his campaign at facebook.com/Ken4LabourNEC and @Ken4LabourNEC, and find out more information about the CLGA at grassrootslabour.net.

This article was first published by the Morning Star, where it can read here.

Thursday, 17 March 2016

Osborne slashes investment and growth. Labour would increase it

By Michael Burke

George Osborne’s stated aim once again is the elimination of the deficit. It was also his stated aim at the beginning of the last parliament. He failed spectacularly as by the May 2015 general election the budget deficit was still 3.1% of GDP. Yet the price of this failure is far greater. His policies have caused widespread misery and slowed the economy. Some economists believe that the damage done is permanent and the latest forecasts from the Office of Budget Responsibility (OBR), which Osborne relies on, have slashed its long-term growth forecasts for the British economy. 

The reason for this failure is a function of a complete misunderstanding of economics in two crucial respects. Investment, not consumption drives the economy. Secondly, Government finances are not wholly independent of the economy, but interact with it.  

In the course of the last parliament Osborne announced total spending cuts amounting to £74.2 billion. Yet total UK public sector current expenditure over the 5-year period from the Financial Year ending in March 2010 to the FY ending in March 2015 rose in real terms (after adjusting for inflation) from £672.8 billion to £673.3 billion. 

Cuts aren’t savings

Asinine right-wing commentators such as John Redwood and others claim that because current spending has not fallen there has been no austerity. The millions of public sector workers who have had their real pay cut, pensions cut or lost their jobs, the people struggling on ever-lengthening NHS waiting lists, the hundreds of thousands of disabled people who have had a variety of benefits cut, the carers who have had to cope with closed Sure Start centres, public sector workers fired, and so on, can all testify that is not the case.

There are three key reasons why cuts in current spending have not led to reductions in the current spending under Osborne. Cuts in one area lead to increased cost pressures. The largest of these is probably the cuts to social care putting pressure on the NHS Budget. Secondly, the economic effects of Tory policies increase Government current spending. So for example, rising in-work poverty puts upward pressure on in-work benefits, and rising housing costs increase the subsidy to landlords from housing benefit. Thirdly, Osborne has used Government finances to promote consumption, especially in housing as part of his re-election strategy. This includes ‘Help to Buy’ and a number of other schemes.

Fig.1 below shows that Public Sector Current Spending has only fallen modestly from elevated levels associated with the crisis (pushed higher by rising unemployment payments and other social protection). It is still way above pre-crisis levels. By contrast, it is government investment that has been slashed. This is a key contributor to weak growth and worse-than-expected government finances, including stubbornly higher current spending.

Fig. 1 UK Current Spending and Net Investment
  
Growth is the key

A very clear exchange took place on BBC Radio 4 on the morning after Osborne’s Budget. The interviewer wanted to reduce John McDonnell’s policy focusing on investment to a secondary matter. Justin Stewart said, “We’ll come to investment. But you can’t balance the current budget with investment can you?” John McDonnell replied, “Yes you can. You raise the level of growth and so tax revenues go up.” This is precisely correct (and the interviewer was somewhat lost as a result). It is also the case that current budget outlays will fall too with higher investment-led growth as more people are in better-paid jobs.

The Labour contrast with Osborne is stark. As Fig.1 shows public sector net investment has been slashed under the Tories. The latest Budget shows the plan is to cut it further despite all the parading in high-vis jackets. In the years 2018 and 2019 the intention is that government capital spending will fall outright. As business investment has also been much weaker than forecast, the Tory government’s actions exacerbate the key failing of the economy. There can be no serious hope that productivity will increase or that exports will grow significantly with falling investment.

In fact, Osborne and the OBR seem to have given up on hope. Their previously over-optimistic forecasts have given way to a much reduced long-term growth outlook. But they have failed to understand cause and effect. Austerity halted a mild recovery in business investment and cut government investment outright. Hardly anyone, except Osborne is surprised then when growth is weaker as a result and government finances do not improve as expected.

The alternative from John McDonnell and Jeremy Corbyn is correct, borrowing for investment while aiming to balance the current budget over the business cycle. It should also be clear that this is the sustainable foundation of decent public services. Rising investment will primarily impact government finances by raising the level of current tax revenues, and to a lesser extent reducing government current spending. The greater the sustained level of investment, the greater the funds available for public services. A third impact of rising investment will be to increase government capital revenues, but this is a relatively small effect compared to the first two effects. 

This issue is crucial in generating popular support for an investment-led programme and will be addressed in future pieces.

Monday, 14 March 2016

Why China can achieve its 6.5% growth rate target

By John Ross

Economic targets for China were announced during the National People’s Congress of at least 6.5% annual GDP growth during the 13th Five Year Plan in 2016-20 and 6.5%-7.0% for 2016. Some Western economists claim such targets cannot be achieved. In fact, analysis of supply side factors, which will primarily be relied on to achieve this goals, shows clearly why China can achieve its 6.5% minimum growth goal.

Current international economic trends, particularly trade, are undoubtedly unfavourable owing to slow growth in the advanced economies. Slow trade growth negatively affects China’s supply side, as with all countries, by limiting its ability to benefit from international division of labour. In the next period China will consequently will have to rely primarily on domestic supply side factors to achieve its growth targets. Data on global growth in turn shows clearly which are the most powerful economic supply side forces and why these can successfully allow China to achieve its targets.

To understand clearly the fundamental reason China can achieve its economic goals the starting point is that an economy’s growth rate is strictly determined by the percentage of fixed investment in GDP divided by what is known as the Incremental Capital Output Ratio (ICOR) – the latter being a measure of the efficiency of investment, and equal to the percentage of GDP that has to be invested for the economy to grow by 1%. For China the latest internationally comparable World Bank data for these, for 2014, showed that China’s percentage of fixed investment in GDP was 44.3% and its incremental capital output ratio was 6.1. China’s GDP growth rate was therefore 7.3%.

Since 2014 the percentage of fixed investment in China’s GDP has fallen, probably to around 42-43% of GDP, which will be assumed to show why China can achieve its 6.5% growth target. Supply side factors may then be divided into the rate of fixed investment and those which determine the efficiency of that investment (ICOR).

The most powerful supply side factor for all countries studied is what are known technically as ‘intermediate products’ – one industry’s inputs into another which reflect increasing division of labour throughout the economy’s supply chain. In the US, the world’s most advanced economy, 52% of economic growth is due to growth in such intermediate products.

Growth of intermediate products is also crucial for understanding the role of innovation. Innovation is not just a few ‘big bang’ inventions. As an economy is an interconnected network it can only be as strong as its major weakest links. For example, merely installing the most modern machinery in a factory will not yield optimal results if there is not an adequate supply of component parts, if there is not sufficiently skilled labour, if the logistics system does not efficiently take products to and from the factory etc. Given the economy’s interconnectedness every part must function efficiently for successful operation. China has therefore stressed applying innovation across the entire economy.

Such a supply side division of labour requires a multitude of factors ranging from infrastructure to product standardisation – all of which China has to develop further for its supply side to function efficiently.

The second most powerful supply side factor is fixed investment – which is above all required to incorporate technological upgrading. Leaving aside intermediate products, internationally fixed investment accounts for 61% of economic growth.

The third most powerful supply side factor is growth in quantity and quality of labour – accounting for 29% of GDP growth globally. Given China’s working age population is not expanding improvements in education and skill are a decisive factor in this area.

Other inputs (scale of production, individual entrepreneurship etc) account for an average 10% of growth globally. These are technically termed Total Factor Productivity (TFP) and contribute to China’s supply side development.

Taking these factors together shows why China’s 6.5% growth rate is entirely realistic and why the claims of Western critics are erroneous. Given the fundamental ratios already outlined then for China’s economic growth rate to fall below 6.5%, from its 6.9% level in 2015, one or both of two things would necessarily have to occur.

Either China’s ICOR, its efficiency of investment, would have to deteriorate substantially, or

The percentage of fixed investment in China’s GDP would have to decline in a major way.

Without one or both of these occurring it is simply numerically impossible for China’s growth rate to fall significantly. Those critics claiming that China’s economy will not meet its 6.5% growth target, and who either do not explain why China’s level of investment or its efficiency of investment are going to drastically decline, are engaging in economic ‘hot air’ – unwarranted claims without any serous factual basis.

Given China’s current investment level and the efficiency of that investment there is no reason why it will not achieve its 6.5% growth rate.

*    *    *
This article originally appeared at China Daily.



Friday, 11 March 2016

John McDonnell lays the basis to restore Labour’s economic credibility with the ‘Fiscal Credibility Rule’

By Michael Burke

Labour lost the last general election because it had no economic credibility, as the overwhelming bulk of opinion polls show. John McDonnell’s new ‘Fiscal Credibility Rule’ decisively and correctly addresses that issue.

“Labour would balance tax revenues and day-to-day spending over a five-year cycle, but this target would exclude long-term investment projects, allowing Labour to spend billions on projects such as housing, railways or high-speed broadband”, is how The Guardian summarised the new policy framework.

Despite an inevitably hostile Tory media McDonnell’s approach can succeed because it is correct. It stands in sharp contrast to George Osborne’s fiscal rules which place a ban on all borrowing for productive investment. This is Neanderthal economics which has the support of hardly any serious economist, even on the right. It also gets rid of the confusions of the ‘keynesian’ left of the Ed Balls type – which had little to do with the views of Keynes and fatally undermined Labour’s economic credibility.

Basic economics

All economic policies, including fiscal rules should be set within the basic laws of economics. Unfortunately after decades of the dominance of the Thatcherite economics which led to crisis, economic debate has been debased and a crop of crackpot ideas has grown up, Osborne’s among them. 

A significant increase in production requires investment in the means of production. Prosperity cannot be raised by no investment, as Osborne suggests. For example his policy has been to encourage consumption without increasing investment in areas such as housing. The net result has been a growing housing shortage. In effect he raised demand for housing without increasing investment. The effect was higher prices, just as the textbooks say. Across the whole economy the effect has also been to increase indebtedness. Household debt has soared along with overseas debt. This would be the effect of all schemes which see consumption as the key to growth.

Therefore McDonnell’s Fiscal Credibility Rule is correct. Increasing investment, and in conditions where private investment is low Government borrowing to achieve it, is the only sustainable mechanism for increasing output and the prosperity that depends on it. At the same time current or day-to-day spending will be balanced over the medium-term cycle. This too is correct, as it allows Government to respond to any downturn in the economy by raising spending. But under ordinary circumstances current spending should be balanced by tax revenues.

Misplaced criticism

Both of these policy planks have come under attack. It is widely argued that McDonnell’s rule is the same as Gordon Brown’s ‘Golden Rule’. Sometimes this is said as a result of a genuine misunderstanding. It also argued that the commitment to balance current spending with tax revenues means a commitment to maintain austerity. Both of these arguments are false.

The claim that John McDonnell is rehashing Ed Balls, made by commentators such as John Rentoul, is pure bullshit confirming that they do not understand basic economics, and the difference between investment and consumption. The difference between John McDonnell and Gordon Brown is that McDonnell is in favour of a massive increase in public sector investment. Brown slashed it to record lows. He only increased it later in response to the crisis.

Fig. UK Net Public Sector Investment as Percentage of GDP
 
In the 1960s and early 1970s public sector net investment had frequently exceeded 6% of GDP. Thatcher cut that to a low-point of 0.7%. But Blair and Brown kept it at 0.6% of GDP for 3 years at the beginning of their time in office. Later, Brown did increase public sector investment in response to the crisis which was crucial to economic recovery. But that was after a crisis in which chronically low levels of investment and high levels of speculation played a decisive role.

Brown’s was an entirely wrong economic policy – the reverse of what is required. It is government current spending which should be allowed rise temporarily in response to crisis, while investment should be maintained at persistently high levels. This is what John McDonnell proposes, and Gordon Brown did the exact opposite.

The separate argument that a commitment to balance current spending over the cycle is to adopt austerity is foolish and muddle-headed. The budget is comprised of two elements, outlays and revenues. A commitment to bring these two into balance says nothing about cutting spending, simply that taxes must match that current spending. 

The most effective way to increase tax revenues and to lower current spending is to grow the economy. SEB has previously referred to UK Treasury research which shows that government finances improve by 75 pence for every £1 increase in GDP. The excellent research is unjustly overlooked because it shows the very high sensitivity of government finances to changes in output. 

By implication it also shows the fundamental relationship between government investment and the provision of public services and social protection that are the key to a decent society. If the output multipliers from a change in output are generally about 1.5 or more and the sensitivity of government finances is 0.75, it possible to calculate the immediate effect on government finances from every £1 increase in investment as follows:

 1.5 X 0.75 = 1.125 

Therefore there is an immediate positive return to government finances of 12.5% from every £1 invested. A 12.5% return is a very large multiple of current government borrowing costs as the yield on long-term gilts (UK government bonds) is around 1.5% (and the yield on inflation-proofed or index-linked gilts is negative).


If done on a sufficient scale, from this return it is possible to commit further investment, improve public sector services and improve government finances. The new investment asset (housing, super-fast broadband, renewable energy production and so on) will also yield a return over the long-term either directly or indirectly.

Therefore there should be no fear of scary headlines of the type that ‘McDonnell plans to borrow billions’. State investment is correct under current circumstances, and state investment is supported by the leading economic commentators such as Martin Wolf. It clearly correctly distinguishes Labour from the Tories and voters will increasingly grasp that such investment is crucial. 

Borrowing for investment, not for consumption, is also key to rebalancing the economy. This means increasing the role and weight of the productive sectors of the economy and thereby producing a reduction in the role of speculative finance. It is logically impossible to persistently borrow for consumption and to reduce the weight of the finance sector in the British economy. As consumption does not lead to growth the only thing that will grow is government debt and the interest on it, which is the mainstay of speculative finance. This is why debt as a proportion of GDP has ballooned under Osborne from 65.2% of GDP to 83.7% of GDP even when interest rates are ultra-low.

It is evidently wrong to suggest that John McDonnell’s Fiscal Credibility Rule is either a rehash of Gordon Brown’s Golden Rule or a commitment to austerity. It is a recognition that investment leads growth while consumption cannot, and that very large government investment is required because of private sector failure. It codifies that understanding for government finances. As a result it can restore much-needed credibility to Labour’s economic policies.

Thursday, 10 March 2016

Labour right-wing still in the austerity dead end

By Michael Burke
Rachel Reeves, a former Labour shadow secretary for work and pensions, has produced a short note for Progress which has been hailed in the right wing media, and by the Labour right, as ‘an alternative Budget’. The New Statesman was perhaps the most excitable, describing Reeves as the shadow chancellor in waiting. All of this is entirely incorrect as the article offers no alternative to the Osborne’s resumed austerity, which he is certain to recommence in the next Budget.

Reeves has declined to join the current shadow cabinet under Jeremy Corbyn and her intervention is clearly posed primarily as an alternative to the economic policy framework outlined by Jeremy Corbyn and John McDonnell, not to George Osborne. It confirms once more that the Labour right is disloyally more interested in attacking the Labour Party leadership than in attacking the Tories. 

In reality the note offers no recognition that there is now a weakening economic situation in Britain following an historically weak recovery. Consequently it offers no policy framework to improve matters. The very few policies outlined do not amount to a Budget, alternative or otherwise. There is no alternative to austerity, no clear role for government intervention, and certainly no suggestion that there is any mechanism to fund that intervention. 

This amounts to a rehash of the economics of the Labour right, which wants nothing more than a cigarette paper between it and the Tories. It is the same as Ed Balls disastrous policy framework which played a key role in losing the last election. This approach also led most of the Parliamentary Labour Party under Harriet Harman to announce they would vote for the Tory cuts to working tax credits and only retreat to abstention under extreme pressure from unions and the Labour membership.

The real alternative
Osborne will argue that the UK economy is slowing, that this is because of deteriorating international conditions and that this therefore requires renewed austerity measures. Only the first of those statements is true.

The year-on-year growth rate has slowed in the UK from 3.0% in the 2nd quarter of 2014 to just 1.9% in the 4th quarter of 2015. Surveys, monthly data for early 2016 and other evidence all point to further slowing. Yet this is not induced by international conditions. Over the 18-month period real GDP has risen by a cumulative 3.3% but real exports have risen by 6.3% - indicating international demand is stronger than domestic demand. The slowdown in the British economy is not the result of international conditions (although these too are deteriorating). The slowdown is homemade.
Fig.1 Export growth much stronger than GDP growth


But Osborne’s argument that more austerity is required because there is a slowdown is as false as his other claims. It should be noted that Osborne’s austerity approach goes completely unchallenged in the so-called alternative budget. The effects of Osborne’s first bout of austerity should be well-known to readers of SEB:
 · Growth slowed dramatically and stagnated in 2012
· Average living standards (per capita GDP) stagnated
· Real wages fell
· Public services are in crisis as jobs were cut
· The public sector deficit was not eliminated, and actually rose in 2012 as the economy slowed to a crawl
 · Productivity actually fell, which had only previously occurred in the early years of World War I and in the Great Depression

In economic terms, renewed austerity is equivalent to applying leeches to the patient when the previous quack remedy has failed. As the effects of austerity fall mainly on ordinary workers and the poor, the social effects are enormously damaging. 

It is clear that what is actually required is a strategy for investment-led growth. This will address the economic crisis directly and so will correct the deficit in government finances in the process. Fortunately, this is possible with the new economic framework outlined by Jeremy Corbyn and John McDonnell .

In contrast to the note from Rachel Reeves the new leadership of the Labour Party has identified the deficit of investment as central to the economic malaise facing Britain. In the US they talk of ‘secular stagnation’ or tepid growth because investment has only expanded by 10% in the years 2007 to 2014, according to World Bank data. In Britain investment has increased by just 7.8% in those 8 years. This little more than half the world rate of investment growth (14.2%) which is itself weak by historical standards.

The policy of asking and bribing the private sector to invest, a policy shared by Osborne and the Labour right, has failed spectacularly at Hinkley and elsewhere. Fewer homes are being built despite soaring prices, flood defences have been allowed to deteriorate and the rail network is truncated and overloaded, there is a looming energy capacity crisis while investment in renewable energy has been cut, and so on.

Labour’s new leadership argues that the public sector should increase its level of investment, in order to address this deficit and to spur growth. Relying on the private sector to lead has been tried and failed. In addition, unlike the hopes or pious wishes of both Osborne and Reeves, they have identified the means to achieve this increase in public sector investment, principally through the establishment of a National Investment Bank. This can borrow cheaply in the financial markets with the implicit guarantee of the UK Treasury. It can also ensure that the returns on the investment accrue to the public sector and that the investment stream is maintained even if private sector profitability is insufficient, or deteriorates.

It should be noted that this authentic version of a National investment bank has almost nothing in common with Osborne’s sop of a Green Investment Bank or Nick Trott’s version produced under Ed Miliband, which was aimed at providing loans to small firms where the commercial banks have refused. As small firms are not engaged in large scale housing programmes, or construction of rail networks, or the huge investment needed in renewables, this would be rather pointless to address an investment crisis. 

Ending austerity

The word ‘austerity’ does not appear in the alternative Budget from Rachel Reeves. This is for the very good reason that the Labour right believes it is inevitable, and has only ever argued for slower or shallower cuts at most.

By contrast Corbyn and McDonnell have outlined the economic policy framework which can end austerity by investing for growth. The clear distinction in borrowing only for investment and balancing current spending over the business cycle is the correct framework as it is the only one which is sustainable because it maximises the government impact on growth and living standards, and the returns to government from that investment.

It is also a strong base from which to attack Osborne, who rules out even borrowing for investment (although in reality he has doubled the level of government debt by borrowing to cover current spending, which is clearly unsustainable). Osborne’s policy, to save first and only invest when there are sufficient accumulated funds, belongs to a pre-banking, pre-financial era. It is as stupid as it is primitive. 

The Corbyn/McDonnell framework also stands in sharp contrast to the accumulated confusions of ‘keynesians’ (who have little to do with the views of Keynes) who believe governments can perpetually borrow for consumption, rather than as a temporary measure to avert crisis. As this entails debt and interest on it without raising the level of output, so it becomes a drain on the economy and slows growth.

Osborne and Reeves share the view that the private sector should be left to determine the level of investment in the economy and consequently to maintain or extend its near-monopoly on the ownership of the means of production. They maintain this even when the private sector is manifestly failing to deliver adequate investment. Of course, the ‘keynesians’ are opposed to austerity and its effects (unlike Osborne and Reeves) but they lack a credible framework to achieve an alternative because they refuse to clearly distinguish between the economic consequences of borrowing for consumption and borrowing for investment.

Corbyn and McDonnell do have the framework to achieve that and a mechanism to do so. Not only are they committed to ending austerity but their plan to increase public sector investment via the National Investment Bank means the public sector can borrow sufficient funds for the scale of investment and direct it towards the sectors required. 

The consequent increase in growth will allow them to halt all austerity policies and to roll them back. Government revenues will rise with increased economic activity and government outlays will fall as decent well-paid jobs are created. This is a deficit-reduction programme based not on cuts but on growth, and a commitment to both social welfare and rebuilding public services in the transition to a stronger growth economy and beyond. Because it is theoretically grounded, this is a genuine, practical anti-austerity policy.

Wednesday, 9 March 2016

The giant consequences of China’s 6.5%-7.0% growth target


By John Ross
The following analysis of China's decision to adopt a growth rate target of 'at least 6.5%' for its new 13th Five Year Plan for 2016-2020 originally appeared at China.org.cn.

*   *  *
The economy tops the agenda at this year's National People's Congress (NPC) with a focus on both prospects for 2016 and the 13th Five Year Plan for 2016-2020. Discussion on both was framed by two major events. On March 4, Chinese President Xi Jinping made key statements on China's long term economic strategy while attending a panel discussion at the annual meeting of the Chinese People's Political Consultative Conference (CPPCC). On March 5, Premier Li Keqiang delivered the government's work report to the NPC focusing on medium to short term targets. The relation between the two was clear.
At the CPPCC, Xi Jinping reiterated that China's fundamental economic structure would continue to be based on "diverse" forms of ownership which would develop side by side with a state sector that would play the "dominant" role - a firm restatement of China's fundamental economic strategy since reform was launched in 1978. This economic structure generated in 1978-2015 an average annual GDP growth of 9.6 percent - the fastest sustained expansion by a major economy in history.
Xi Jinping's emphasis may be placed in the context of two statements he made in November. At a politburo study session China's president emphasized that a Marxist political economy would continue to guide China's economic policy. Following a meeting of the Communist Party of China's Central Committee, the president stated that economic growth during the 13th Five Year Plan period must average "at least 6.5 percent."
Premier Li Keqiang's work report to the NPC outlined medium to short term projections within these fundamental parameters. As the international media focused attention on 2016's growth target of 6.5-7.0 percent, and the Five Year Plan's minimum annual 6.5 percent, these will be analyzed first.
Qualitatively, China's target is to achieve a "moderately prosperous" society by 2020. This translates into the Five Year Plan's arithmetic.
To achieve "moderate prosperity," the previous 12th Five Year Plan set the goal of doubling GDP for 2010-2020 - requiring a 7.2 percent annual average growth over the decade. However, in 2010-15 growth was faster than the targeted rate - averaging 7.8 percent. To complete the goal by 2020 now requires 6.5 percent growth. This constitutes the basis of the "at least 6.5 percent" target during the 13th Five Year Plan reiterated in Li Keqiang's government report. The 2016 growth target is to meet or exceed the annual rate required to achieve "moderate prosperity" by 2020.
Both the Five Year Plan and 2016 targets are aimed at achieving their goals without economic overheating. In 2016, inflation is forecasted at 3 percent, accompanied by a budget deficit of 3 percent of GDP - modest by current international standards. Environmental protection is emphasized with energy consumption per unit of GDP targeted to fall by 3.4 percent in 2016. The Five Year Plan, for the first time, incorporates a total cap on annual energy consumption - an equivalent of 5 billion metric tons of coal by 2020. To sustain technological innovation, R&D expenditure will rise from 2.0 percent of GDP in 2015 to 2.5 percent by 2020.
Socially, strong emphasis was given to poverty reduction, with central government funds being increased by 43 percent in 2016. Over the course of the Five Year Plan, all of China's 70 million people remaining in poverty will be lifted out of it, with 2016's goal being 10 million. Life expectancy, the most sensitive overall indicator of social well-being, is projected to rise by a further year during the Plan.
Achieving these goals will have truly dramatic consequences for China, constituting an enormous increase in human wellbeing. But to understand the world changing consequences of China achieving these goals, and therefore the scale of challenges faced, it is necessary to translate these figures into international standards.
China in 1949 was one of the world's least developed and poorest countries and has already transformed the world by achievements in poverty reduction. From 1981 to the latest World Bank data, 728 million people in China were lifted out of internationally defined poverty - the whole of the rest of the world achieved only 152 million. Now, after 37 years of rapid growth, China is about to transform the world towards the top range of international income levels.
"Moderately prosperous" is a specifically Chinese target, but the World Bank establishes an international criterion for a "high income" economy - per capita GDP of $12,736 in 2016. While exchange rates would affect the exact figure, China achieving the 13th Five Year Plan's growth and inflation targets would bring it to the threshold of or exceeding World Bank criteria for a "high income" economy.
But in the latest World Bank data, the combined population of all high income economies is 1.368 billion, while China's population is 1.364 billion. China entering the ranks of high income economies would, in a single step, double the number of people living in these countries.
Chinese people achieving "moderate prosperity" would transform the global economic situation. It would also transform China's position in the world, being reflected in corresponding changes in China's defence spending and foreign policy weight. But as a consequence, rather than concentrating on the enormous step forward for humanity that China's "moderate prosperity" would constitute, some forces are attempting to block China's rise - even if this means China's people, one fifth of humanity, would not achieve prosperity.
The most powerful such forces are U.S. neo-cons whose goal, in the words of a recent study for the U.S. Council on Foreign Relations on "Revising U.S. Grand Strategy Towards China," was, "preserving U.S. primacy in the global system ought to remain the central objective of U.S. grand strategy in the twenty-first century." To practically achieve this, it called for "new trade arrangements in Asia that exclude China." Parallel anti-China propaganda campaign attempts are seen as otherwise inexplicable attempts to portray China as facing a "hard landing" when China's growth rate is almost three times that of the U.S. with China adding more to the world's GDP each year than the U.S.
The fact China has set a growth rate goal of 6.5 percent and above for the next five years has a far greater significance than in domestic terms alone. It is the most important economic target on the planet.

Tuesday, 8 March 2016

China won't have a hard landing - because it is not a capitalist economy

By John Ross

Some US hedge funds, echoed by parts of the international media, are currently trotting out the perennially inaccurate myth that China's economy is about to suffer a "hard landing." This invariably incorrect prediction has been periodically repeated for decades since China launched economic reforms in 1978. The claim then was that by failing to privatize companies, not adopting what became known as "shock therapy" in Russia and Eastern Europe, China condemned itself to stagnation. Instead in 1978-2015, China experienced average annual 9.6 percent GDP growth - the fastest by a major economy in human history.
Making these claims particularly vocally has been Kyle Bass' Hayman Capital Management, who has been taking positions summarized by the Wall Street Journal, "Hayman Capital's portfolio is … expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years - a bet with billions of dollars on the line, including borrowed money." "'… this is much larger than the [US] subprime crisis,' said Bass, who believes the yuan could fall as much as 40%." 
If Bass sticks to these positions, he will lose a fortune as analyzed below.
George Soros similarly recently claimed, "A [China] hard-landing is practically unavoidable." Soros has a disastrous record of investing in Russia and China - having lost approximately $1 billion in Russia's Svyazinvest telecommunications company.
Hedge fund managers speculating on RMB devaluation are self-evidently unreliable sources given that they have a financial interest in spreading "doom." Therefore, before showing the fundamental reason such views invariable turn out to be wrong, similar media errors can be noted. 
In 2002, Gordon Chang was promoted by the Western media as a "China expert" for writing a book The Coming Collapse of China which concluded, "A half-decade ago the leaders of the People's Republic had real choices. Today they do not... They have run out of time." Well over a decade later, China had not collapsed - but Chang has continued appearing on Bloomberg TV as a "China expert." 
In June 2002, The Economist produced a China supplement "A Dragon out of Puff" analyzing, "the economy still relies primarily on domestic engines of growth, which are sputtering. Growth … has relied heavily on massive government spending … the government's debt is rising fast … this is a financial crisis in the making … In the coming decade, therefore, China seems set to become more unstable." In fact, China then experienced the decade of the fastest growth ever by a major economy.
Such claims regarding a "China hard landing" are invariably false because they violate any serious sense of proportion. Take current claims on RMB devaluation, in January CNBC news claimed, "China is playing a dangerous game with its currency, moves that could send the global economy into recession. China's control-minded central bank allowed the biggest fall in the yuan in five months on Thursday."
In reality, the fall in the RMB's exchange rate against the dollar has been small compared to other major currencies. From January 2012 to March 2016, the dollar's trade weight rate soared 23 percent - the euro fell against the dollar by 18 percent, the yen by 24 percent, and RMB only 5 percent. From the RMB's peak dollar exchange rate in January 2014 to March 2016, the RMB fell against the dollar by 8 percent, the yen by 10 percent and the euro by 21 percent. 
Similar "intellectual shoddiness" was Bloomberg's recent claim China's economy was in a crisis paralleling Greece. "Chinese policy makers … have exhausted whatever magical powers they had been using to keep their economy aloft … the world … has had a few years to contemplate a Greek exit from the euro. But if the world's biggest trading nation suddenly hit a wall, it would be a catastrophe of a different order, wreaking havoc on economies near and far." Comparing Greece, whose economy shrank 26 percent in 2007-2014, with China whose economy expanded 81 percent in the same period, is bluntly ridiculous. 
The most fundamental reason claims that China will suffer a "hard landing" invariably turn out to be false is because they do not understand the consequences of the fact China is not a capitalist country. "Hard landings" occur in such economies because all major companies are privately owned and the state therefore has no ability to stop the investment collapses which cause "hard landings." 
During the post 2007 "Great Recession," US household consumption fell by 3 percent but private investment by 23 percent - the US "hard landing" was dominated by the investment decline.
Following 1990, Japan suffered a "hard landing" of a quarter century of less than 1 percent annual average GDP growth. However, in 1990-2013 Japan's household consumption rose by 31 percent. But Japan's fixed investment fell by 16 percent - the severity of Japan's stagnation therefore was exclusively due to its investment fall.
In contrast to the US and Japan's investment decline, creating true "hard landings," in 2007-14 China's fixed investment rose by 105 percent creating economic growth of 81 percent. This was possible because China possesses a large State sector which can be used to raise investment if the government needs to take anti-recessionary measures. Most fundamentally, China hasn't and doesn't suffer "hard landings" because it is a socialist not a capitalist economy.
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This article originally appeared, under the title 'China doomsayers misunderstand how socialist economies work' at Global Times.

Monday, 7 March 2016

Crisis remains an investment crisis

By Michael Burke
Prior to the recent G20 meeting leading international economic bodies such as the IMF and the OECD made tentative calls for increased investment, although this was often confused with increased spending. This is a belated or partial recognition of the real source of the crisis in the advanced industrialised countries. In terms of actual changes to policy it seems to have made no impact at the G20 whatsoever.

As the world economy is once more slowing and there are again a series of spurious explanations offered for this, it is worth revisiting the actual causes of the ongoing crisis which first became widely apparent in 2007. In this piece the advanced industrialised countries as a whole will be the reference point, using aggregate data for the OECD. But each individual economy within the OECD simply provides its own unique combination of these common factors, including Britain.

If one word can summarise the entire crisis in the advanced industrialised countries it is: Investment. The fall in Investment preceded the fall in GDP. It was also the largest component of the fall in GDP and it is the sole component which has failed to recover.

These points are illustrated in Fig.1 below, which shows real GDP, Final Consumption and Investment (Gross Fixed capital Formation, GFCF) for the OECD as a whole, using US$ Purchasing Power Parities.

Fig.1
Investment (GFCF) first fell in the OECD in 2008. Both GDP and Final Consumption Expenditure continued to increase and only fell for the first time in 2009. Falling Investment caused the crisis. On a full-year basis the total decline in Investment was 13% from its pre-recession high to the low-point of the recession in 2009. By comparison GDP fell by 3.5% and Consumption fell by 0.3%. The fall in Investment was far greater in proportional terms than GDP or Consumption.

Even though Investment is a far smaller proportion of GDP than Consumption in the OECD, its decline in monetary terms was far greater. From the pre-recession peak to the low-point of the recession Investment fell by US$1.3 trillion (in PPP terms). Consumption fell by US$ 0.03 trillion, or US$30bn, and barely constitutes a blip in the chart above. The fall in Investment was the largest component of the crisis.

Since the trough of the recession in 2009 real GDP has recovered by US$3.95 trillion. In 2014 GDP was US.55 trillion larger than its peak in 2008. Consumption is stronger. It has increased by US$2.17 trillion since 2009 and is now US$2.26 trillion above its pre-recession peak. By contrast Investment has recovered by only US.94 trillion from 2009 to 2014 and it remains US.37 trillion below its 2007 peak, or US$366 billion. The economic crisis in the OECD remains an investment crisis.

Consumption requires Investment
Economics should be the study and practise of achieving the greatest sustainable material well-being of the whole of society. For most of humanity this still revolves around the struggle for food, shelter and clothing. In the advanced industrialised countries, the required quality of those necessities has increased alongside the desire for good health services, education, welfare, access to recreation and leisure, and so on. Unfortunately, for material reasons a great deal of confusion surrounds that goal and the methods to achieve it. 

The (inverted Say’s Law) argument that increased Consumption will lead to increased Investment has evidently not materialised in the current crisis. As noted above, Consumption has increased but Investment has not. This was also the case in the Long Depression at the end of the 19th century as well as in the Great Depression of the 1930s. In both cases Investment continued to stagnate or fall despite a rise in Consumption. Currently we are in a phase of what Marx called the hoarding of capital. Keynes used the terms liquidity preference.

The reason is simple. The advanced industrialised countries are capitalist economies. Capitalism does not exist to satisfy human needs, or the desire for material well-being. It is not driven by ‘demand’. It is driven by profit. Under circumstances where Consumption has recovered, but profitability, or anticipated profitability has not, then Investment will not increase. This characterises the current situation in the OECD economies.

All Consumption of any good or service must be preceded by its production. Any attempt to increase Consumption without increased production simply leads to the creation of debt, a claim on future production. It is unsustainable. The current downturn in the British economy arises because household debt and overseas indebtedness have both increased to unsustainable levels. 

There are two principal methods of increasing production. One is to just get more people into work and/or make them work longer hours for less, or some combination of the two. The other is to increase the productivity of labour through increased Investment, either in the amount or quality of the means of production or through the increased skills of the workforce. The former cannot lead to rising living standards as it relies on working longer for less, and is the path Britain has chosen over the past period. The second method, the increased productivity of labour requires Investment.

Therefore, in order to raise living standards and to sustainably improve both the quality and quantity of goods and services generally available (including housing, health care, education, welfare and so on), it is necessary to increase Investment. Increased Consumption first requires increased Investment.

Levels, ratios and proportions
The Consumption of goods and services is a measure of the material well-being of the population. Yet, there are two main uses of all output, it can either be consumed or invested. So, if it were possible to sustainably increase the level of Consumption by reducing the proportion of the economy directed to Investment and increasing the proportion devoted to Consumption, then the level of Investment should be reduced to a minimum or even zero. In reality, the opposite is the case. The greater the proportion of the economy devoted to Investment, the faster the rise in sustainable Consumption.

Taking just the OECD data cited above, in the period from 2007 to 2014 investment as a proportion of GDP fell to 20.5% from 22.5% in the period 2000 to 2007. Consequently the proportion of GDP devoted to Consumption rose. Yet the level of Consumption increased by a cumulative 18.6% in the earlier period and has increased by just 6.4% in the same 7-period since the recession. The level of Consumption rose more rapidly when it was a smaller proportion of GDP.

This seems to be paradox, in that a falling proportion of Consumption in GDP leads to its faster growth rate. It is extremely important, since the population naturally does not care what proportion of the economy it is consuming, only that its material well-being is rising. But there is no paradox if it is understood that there is no such thing as a Consumption-led economy. On the other hand, as Investment increases the means of production, then the economy as whole can expand with rising Investment. From this expansion of GDP it is possible to increase the level of Consumption.

This is why the economic policy framework outlined by Jeremy Corbyn and John McDonnell recently is so important, because it is correct. There is a clear emphasis on borrowing for investment, and that the current or day-to-day budget will be in balance over the business cycle. The National Investment Bank will be the principal vehicle for the investment. This amounts to the public sector having a greater role in the investment function, thereby leading to stronger growth. It is primarily from this source of rising activity that the current budget will be brought into balance as tax revenues increase and social welfare outlays related to poverty and underemployment decline. Over time the entire austerity could be reversed and living standards raised.

It is George Osborne’s refusal to invest, indeed his ridiculous ban on productive investment that will deepen the crisis. The new framework from the labour leadership begins to offer a way out of perpetual crisis and austerity.

Thursday, 3 March 2016

Labour now getting it right on economic policy framework

By Michael Burke
Below is a series of short extracts from recent speeches or articles by Jeremy Corbyn and John McDonnell. They amount to the beginnings of a major campaign to reorient the economic debate in Britain along the correct lines.

Together they are based on the correct economic framework that investment is the decisive driver of economic growth and prosperity. As a result it is logical, as Socialist Economic Bulletin has repeatedly argued, to borrow for investment and to prioritise the creation of a National Investment Bank to focus on infrastructure and other investment. This in turn leads to a correct position on the budget deficit – there should be borrowing for investment but consumption over the business cycle should be financed out of taxation (i.e. over the business cycle there should be borrowing for investment but not current expenditure).

This clear distinction between investment and current expenditure stands in sharp contrast to the parallel errors of both George Osborne and confused self-styled ‘Keynesians’. Osborne would try to rule out Government borrowing for either investment or consumption - but actually he cuts investment and encourages households to take on debt to fund consumption. The self-styled ‘Keynesians’, who have nothing in common with Keynes (or Marx), would borrow permanently for Government consumption – a long term unsustainable position which leads to the lowering of the percentage of investment in GDP, and therefore over time both a slower growth rate and a slower rate of increase in consumption. In both cases borrowing for consumption leads to ever slower growth – or in current circumstances it produces very slow growth. Because it was the wrong economics the self-styled ‘Keynesians’ failure to distinguish investment and consumption undermined Labour’s economic creditability, while Osborne’s failure to make the distinction, thereby banning borrowing for investment, undermines his credibility both with most serious economic commentators, companies and trade union.

Jeremy Corbyn and John McDonnell have set out the outline of a correct framework for economic policy. Jeremy Corbyn’s full speech can be read here.

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Jeremy Corbyn: “Labour’s alternative will put investment first. We will only borrow to invest over the business cycle.

We will put public investment in science, technology and the green industries of the future front and centre stage.

Only by driving up investment will we achieve the higher productivity we need to guarantee rising living standards for all.

We want to see the reindustrialisation of Britain for the digital age driven by a national investment bank as a motor of economic modernisation based on investment in infrastructure, transport, housing and technology. That provides a solid return."

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John McDonnell: “We need to begin by underlining our commitment to bringing the government’s day-to-day spending into balance.

We know the importance of borrowing for investment, which lays the foundations for future economic prosperity.

Few things are more urgent than delivering the infrastructure our economy is crying out for, infrastructure which pays for itself by expanding economic activity and raising tax revenues.'

The full piece can be read here

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John McDonnell: “Winning back economic credibility is the most important fight in a generation. Step by step we need to demonstrate that of course we can manage government budgeting effectively. This isn’t about accepting cuts but making sure our income from taxation and economic growth matches our spending. It also means recognising the importance of borrowing for investment, which lays the foundations for future economic prosperity. Investment in our infrastructure pays for itself by expanding economic activity and raising tax revenues.'

The full piece can be read here.