Monday, 19 June 2017

Two key reasons for Corbyn’s stunning advance

By Tom O’Leary

Under Jeremy Corbyn’s leadership the Labour Party has staged a stunning revival, prevented Theresa May achieving a landslide which she would have claimed as a mandate for ‘Hard Brexit’ and has caused a crisis of Tory government which will make it harder to make new cuts in public spending, apart from rising inflation. None of Corbyn’s opponents could have possibly achieved that outcome.

This point can be factually established in two ways. First, there is the record of the election campaign itself. None of Jeremy Corbyn’s internal or external opponents would have conducted anything like the same campaign or written anything similar to the manifesto that was produced. On the contrary, the tactic of Corbyn’s opponents was to ‘give him enough rope to hang himself’, believing that his programme would prove massively unpopular. 

The Labour manifesto was leaked on May 11. It was probably not the intention of the leaker(s) but the effect was that Labour was able to have two launches and close examination of what proved to be a very popular manifesto. The polling effect was clear. On May 11, Labour was 14 points behind the Tories at 32% to 46% in the average of polls. On June 8 that lead had been cut to 2 points. 

No doubt some of the narrowing was due to the Tories’ own manifesto, which in the words of one commentator ‘promised permanent winter but never Xmas’. But in the event the Tory support only fell by 4 points overall despite the dementia tax, axing free school meals, ending the ‘triple lock’ on pensions, no new money for the NHS and much else besides. Evidently, the main motor of the narrowing of the gap was Labour’s own platform aimed at defending living standards. 8 of the 12
point narrowing in the Tory lead was due to Labour’s campaign.

Chart 1. UK Poll of polls 2017
Source: Guardian

Secondly, there is comparative data to draw on. The Dutch general election and French Presidential elections have already taken place this year. The Labour Party has sister parties in both countries, the Dutch Labour Party the PvdA and the French Socialists, Partie Socialiste. They both stood on platforms that were at odds with the Corbyn manifesto. In both cases they accept and even embrace austerity. They also have policies which are anti-immigrant and anti-Muslim. Corbyn’s Labour had none of these. The result is a full justification of the superiority Corbyn approach in electoral terms.

Chart 2. European Left Vote in 2017 Elections

For a number of years numerous commentators and academics have claimed that UKIP primarily took votes from the Tories, that Labour was therefore ‘unelectable’ and even that UKIP ‘posed an existential threat to Labour’. All this was done to support the reactionary claim that Labour could only advance by being anti-immigrant, as this reflected the views of its core supporters. As the election result shows, none of this was true.

Labour primarily advanced because it promoted policies to defend living standards when they are falling once more and the Tories plan to deepen that. Labour eschewed all blame on migrants for the crisis, and the manifesto only had warm words for the contribution that migrants make to the economy and to society more widely.  

Partly as result, where 41% of voters cited immigration as a key issue in 2015 only 6% thought it was a key issue in 2017, according to Ashcroft’s exit polls. In 2015 Labour had a ‘zero-based spending review’ and pledge to cut net migration but in 2017 it had policies to defend the living standards of the overwhelming majority and only warm words about migration. Labour rose by almost 10% in 2017.

As the economic crisis deepens and real wages continue to fall sharply the Tories will attempt to deflect the blame for their policies onto migrants once more. Labour is currently on course to win the next election because it has policies that defend the material interests of most people. Labour looks for solutions to the crisis from those who have caused and benefitted from it, big businesses who refuse to invest and the rich whose incomes have risen even in economic stagnation. In stark contrast to the Tories, Labour has not sought scapegoats. This is a winning formula. 

Thursday, 15 June 2017

Why the US economy remains locked in slow growth

By John Ross
The latest US economic data confirms the US remains locked in a prolonged period of slow growth with major consequences for geopolitics and destabilising consequences for US domestic politics.
The latest US economic growth data
Almost no international issue is more crucial for economic and geopolitical strategy than economic trends within the US. It is therefore crucial to have an accurate analysis of these. Regarding such a serious issue and such powerful forces there is no merit in ‘pessimism’, underestimating US growth, and no merit in ‘optimism’, overestimating US growth – there is only a virtue in realism.
This article therefore analyses the latest US GDP data. The conclusion is clear. The data confirms the US fundamentally remains in a period of medium/long term slow growth which will last for at least a minimum of several years.
Strikingly, taking a period of 15 years after the beginning of the international financial crisis, average US growth will be slower than after the beginning of the Great Depression in 1929. Analyses which appear in parts of the media claiming the US is entering a significant new period of rapid growth are fundamentally in error – for reasons analysed in detail blow.
Such slow US growth necessarily has major geopolitical consequences and provides a backdrop for continuing instability and turns in US politics. The recent period within US politics has already seen:
  • Trump selected as Republican Party Presidential candidate against the wishes of that Party’s establishment, and elected President against the opposition of the overwhelming major of the US mass media.
  • Since Trump’s election sharp clashes have continued within the US political establishment with leaks against the President by the US security services, the President’s sacking of the FBI head, investigations by the US Congress and US police of close aides to the President, and open campaigns to force the President to change policies or to remove him from office by major US media such as the New York Times and CNN.
  • Within the Democratic Party a serious challenge mounted to the Party establishment’s candidate Clinton by the first figure declaring themselves to be a socialist to receive major US public support for almost a century – Sanders.
As US medium/long term slow economic growth will continue sharp turns and tensions in US politics will not disappear but are likely to continue.

The consequences for US relations with China flowing from this situation, and geopolitical tensions between the US and its traditional allies such as Germany shown for example at the recent G7 summit, are analysed at the end of this article. The conclusion is that China’s constructive approach to the Trump administration is clearly correct but that the risk of sharp turns in the situation must be taken into account due to the tensions within the US created by its historically low growth.

This prolonged period of slow growth in the US, and in the advanced economies in general, combines with China’s own transition to ‘moderate prosperity’, and then to a ‘high income’ economy by World Bank international standards, to create under Xi Jinping a qualitatively new period in China’s development.

The Great Stagnation

Starting with the global background to the latest US economic data, a defining feature of the present overall international situation is extremely slow growth in the advanced Western economies.

In nine years since the 2008 international financial crisis average growth in the advanced Western economies is already almost as slow as during the ‘Great Depression’ of the 1930s and by the end of 2017 it will be significantly slower. By 2016, total GDP growth in the advanced economies in the years since 2007 was only 10.1% and by the end of 2017, on IMF projections, the growth in the advanced economies after 2007 will be lower than in the same period after 1929 – total growth of 12.3% in the 10 years after 2007 compared to 15.1% in the 10 years after 1929.

Even more strikingly IMF data projects that future growth in the advanced Western economies, following the international financial crisis, will be far slower than in the same period after 1929. IMF projections are that by 2021, fourteen years after 2007, total growth in the advanced economies will be less than half that in the 14 years after 1929 – average annual growth of only 1.3% compared to 2.9%, and total growth of 20.6% compared to 49.8%.

This data is shown in Figure 1. An aim of this article is instead to carry out the necessary factual checks that the latest US data does not represent a break with long-term trends.
Figure 1

US GDP growth

In the 1st quarter of 2017 US GDP was 2.0% higher than in the first quarter of 2016.[1] To evaluate this 2.0% growth, given that a market economy inherently displays business cycles, it is necessary to separate purely cyclical trends from medium/long term ones. Failure to do so leads to false analysis/statistical trickery – comparing a peak of the business cycle with the trough will exaggerate growth, while comparing the trough of the business cycle with the peak will understate growth. Such cyclical effects may be removed by using a sufficiently long term moving average that cyclical fluctuations become averaged out and the long term structural growth rate is shown. Figure 2 therefore shows annual average US GDP growth using a 20-year moving average – a comparison to shorter term periods is given below.

Figure 2 clearly shows that the fundamental trend of the US economy is long-term slowdown. Annual average US growth fell from 4.4% in 1969, to 4.1% in 1978, to 3.2% in 2002, to 2.2% by 1st quarter 2017. That is, the most fundamental long term growth trend in the US economy is that it has been slowing for half a century. The latest US GDP growth of 2.0% clearly does not represent a break with this long term US economic slowdown but is in line with it.
Figure 2

Per capita

US per capita GDP growth follows the same falling trend. Figure 3 shows a 20-year moving average for US per capita GDP growth. Annual average US per capita GDP growth fell from 2.8% in 1969, to 2.7% in 1977, to 2.4% in 2002, to 1.2% by the first quarter of 2017. The latest US data shows no break with this trend of long term slowdown - it is in line with it and continues these long term trends.

This data shows clearly claims the US economy is currently ‘dynamic’ driven by a ‘wave of innovation’ are therefore factually false – a pure propaganda myth repeated by US media such as Bloomberg with no connection with factual trends. US per capita growth has in fact fallen to a low level.

This fall of US per capita GDP growth to a low level clearly has major political implications within the US and underlies recent domestic political events. Very low US per capital growth, accompanied by increasing economic inequality, has resulted in US median wages remaining below their 1999 level – this prolonged stagnation of US incomes explaining recent intense political disturbances in the US around the sweeping aside of the Republican Party establishment by Trump, the strong support given to a candidate for president declaring himself to be a socialist Sanders, current sharp clashes among the US political establishment etc.
Figure 3

Cycle and trend

Turning from long term trends to analysis of the current US business cycle it may be noted that a 5-year moving average of annual US GDP growth is 2.0%, a 7-year moving average 2.1% and the 20-year moving average 2.2%. Leaving aside a 10-year moving average, which is greatly statistically affected by the severe recession of 2009 and therefore yields a result out of line with other measures of average annual growth of only 1.4%, US average annual GDP growth may therefore be taken as around 2% or slightly above. That is, fundamental structural factors in the US economy create a medium/long term growth rate of 2.0% or slightly above. Business cycle fluctuations then take purely short term growth above or below this average. To analyse accurately the present situation of the US business cycle therefore recent growth must be compared with this long-term trend.

Figure 4 therefore shows the 20-year moving average for US GDP growth together with the year on year US growth rate. This shows that in 2016 US GDP growth was severely depressed – GDP growth in the whole year 2016 was only 1.6% and year on year growth fell to 1.3% in the second quarter. By the 1stquarter of 2017 US year on year GDP growth had only risen to 2.0% - in line with a 5-year moving average but still below the 20-year moving average.
As US economic growth in 2016 was substantially below average a process of ‘reversion to the mean’, that is a tendency to correct exceptionally slow or exceptionally rapid growth in one period by upward or downward adjustments to growth in succeeding periods, would be expected to lead to a short-term increase in US growth compared to low points in 2016. This would be purely for statistical reasons and not represent any increase in underlying or medium/long US term growth. This normal statistical process is confirmed by the acceleration in US GDP growth since the low point of 1.3% in the 2nd quarter 2016 – growth accelerating to 1.7% in 3rd quarter 2016 and 2.0% in 4th quarter 2016 and 1stquarter 2017.

President Trump’s administration may of course claim ‘credit’ for the likely short term acceleration in US growth in 2017 but any such short-term shift is merely a normal statistical process and would not represent any acceleration in underlying US growth. Only if growth continued sufficiently strongly and for a sufficiently long period to raise the medium/long term rate average could it be considered that any substantial increase in US economic growth was occurring. The latest US growth data, 2.0% year on year, however does not represent any acceleration in US growth compared to longer term averages and is therefore in line with the pattern of US slow growth and does not represent a break with it.
Figure 4

Key determinants of US growth

Turning to the causes of this slow US growth, and therefore evaluation of the possibility of overcoming it, statistical analysis shows numerous factors explain purely short term fluctuations in US growth. Factors ranging from fiscal or monetary policy, to international trade fluctuations, even to the weather may therefore affect short term US growth. However, over anything except the short term Table 1 shows clearly that two factors are decisive in US growth – total US net saving/capital creation (the sum of household, company and government saving) and US net fixed investment. Over a 5-year time frame the correlation of the percentage of net savings in US GDP and the percentage of net fixed investment in US GDP with US growth is over 0.5, more powerful than any other factors, while over an 8-year time frame the correlation of net fixed investment with GDP growth is an extremely strong 0.72.
Consequently, while over the short term numerous factors are correlated with US short term growth, making short term trends difficult to predict, over a medium-long term frame the correlation of US economic growth with US net savings and net fixed investment is decisive.

It is unnecessary for present purposes to analyse whether US net fixed saving and US net fixed investment causes economic growth, or economic growth causes high net fixed savings and net fixed investment, or a third process causes both - it is merely sufficient to note that these high correlations means that over the medium/long term US GDP growth cannot be substantially increased without an increase in either US net savings or US net fixed capital investment. As changes in US net savings and net fixed capital investment have significantly different implications for US domestic and foreign policy and politics they will be considered in turn.
Table 1

Net saving
Figure 5 shows the long-term trend of US net savings/net capital accumulation since 1929. The curve of long term development of the US economy can be seen clearly and the slow growth of the US economy in the present period therefore placed in a clear historical context:

  • During the deep crisis at the beginning of the Great Depression in 1929-33 US net capital accumulation was negative – the US economy was consuming more capital through depreciation than it was creating. This necessarily produced deep economic crisis. After this the rate of US savings/capital creation rose, with a powerful acceleration during World War II, to reach a long-term peak as a percentage of the US economy in 1965. This coincided with the great boom in the US economy during World War II and decades immediately following it.
  • After 1965 US net savings/capital creation steadily fell as a percentage of the US economy until it once again became negative during the ‘Great Recession’ in 2008-2009. Given the strong correlation of US net saving/capital creation with US growth this declining trend of US capital creation naturally explains the long-term growth US slowdown that was shown above.
Figure 5

Turning to the latest data for the 1st quarter of 2017, to analyse if there has been any break with the long-term trend, Figure 6 clearly shows that at the latest date available there has been no long-term recovery in US net capital creation. Naturally there has been some recovery since the extreme depth of the financial crisis, when US net capital creation again became negative, but the present level of US net saving is still below the pre-crisis period. Furthermore since 4th quarter 2015 there has been a small but definite fall in the share of net saving in the economy – a decline from 3.3% of Gross National Income (GNI) in 4th quarter 2015 to 2.3% of GNI in 1st quarter 2017. As an extremely strong correlation exists between US net capital creation and medium/long term US GDP growth a medium/long term US economic acceleration could only take place when there was a major increase in US net capital creation – which has not occurred.

As investment must necessarily be financed by an exactly equal amount of savings it may therefore be noted that no increase in the percentage of US domestic resources available for investment has taken place.
Figure 6

The implications for US domestic politics

Turning from economic trends to their implications for US politics, as US net savings are US domestic capital creation, and the total US economy is necessarily equal to consumption plus savings, any attempt to increase the level of net capital creation in the US economy has major implications for US politics as it reduces the proportion of the economy allocated to consumption by the US population.

Purely in principle, the level of US net capital creation/net savings could be raised without attacks on the living standards of the US population. In particular US military expenditure, from a technical economic point of view, is a form of consumption. Reducing US military expenditure could therefore raise US savings without lowering the proportion of the economy devoted to the population’s living standards. However, the Trump administration has rejected this policy - projecting a major increase in US military expenditure.

Other measures by the Trump administration to increase the percentage of the US economy devoted to net capital creation would necessarily be politically unpopular under conditions of slow US growth. For example

  • Reducing the proportion of the US economy devoted to wages, with the aim of increasing company profits and therefore potential company savings, would be unpopular as it would involve a reduction of the proportion of the US economy devoted to the main source of the population’s income.
  • Reduction of the US budget deficit (that is decreasing the level of government dis-saving) through reductions in state expenditure on health, education, social protection etc. would involve reduction in the population’s living standards.

For these political reasons, given the commitment to increased military spending, attempts by the Trump administration to increase US net savings are likely to be politically unpopular and therefore difficult. Indeed, if US taxes are cut without corresponding state expenditure reductions the resulting increase in the US budget deficit would actually reduce the US net savings level.

Net fixed investment

Turning to US net fixed investment, it should be recalled that total investment is equal to total savings.[2] However US investment does not necessarily have to be financed by domestic US savings. US investment can also be financed by foreign capital/savings and foreign borrowing. This, however, as analysed below, has major implications for US foreign policy.

Analysing the fundamental data on US net fixed investment Figure 7 shows that the overall historical trend of this follows the same historical pattern as US net savings – reflecting that in the US, as in all major economies, the main source of financing of new investment is domestic. In more detail, historically:

  • US net fixed investment was negative during the onset of the Great Depression - that is more capital was being consumed through depreciation than was being newly invested.
  • US net fixed investment then rose very sharply during World War II and the decades long boom following it, before declining from the mid-1960s onwards. This decline was correlated with the long slowdown of the US economy shown above in Figure 2.

The chief difference to be noted between the trends in US net fixed saving and those of US net fixed investment is that during the international financial crisis after 2007 US net fixed investment fell to a very low level but did not become negative as US net savings did. The reason for this is that during the international financial crisis the US continued to finance its fixed investment through foreign borrowing – as analysed below.
Figure 7

Turning to the latest data, for 1st quarter 2017, Figure 8 shows that there has been no fundamental recovery in the US net fixed investment level. There is again naturally a recovery from the extremely low level during the 2007-2009 international financial crisis but US net fixed investment remains substantially below pre-financial crisis levels.
Given the close correlation of US medium/long term economic growth with US net fixed investment no basis therefore exists at present for any medium/long term US economic growth acceleration.
Figure 8

The possibility of US foreign borrowing

The considerable domestic US political obstacles to increase US domestic savings were analysed above. However, an increase in US investment could in principle also be financed by foreign borrowing. What, therefore, are the practical possibilities of an increase in US investment financed from foreign savings/capital?

To analyse this precisely, it should be noted that statistically the US balance of payments on current account is necessarily equal to the US capital account balance with the sign reversed – i.e an increased positive flow of foreign capital into the US must be reflected in a corresponding increase in the negative US balance of payments on current account. Figure 9 therefore shows the US current account balance of payments. The trends are clear:
  • Prior to Regan’s election in 1980 the US balance of payments was close to balance. Excluding foreign transfers, which were primarily payments on US overseas military expenditure and foreign aid typically tied to US foreign policy objectives, the US balance of payments was usually in surplus. Therefore, prior to Reagan the US was not dependent on, and did not undertake, significant net foreign borrowing;
  • Under Reagan a new policy was adopted of large scale US foreign borrowing. This may be seen in the very sharp deterioration in the US balance of payments during the Reagan period - the US balance of payments on current account worsened from a surplus of 0.3% of GDP in the 4th quarter of 1980, the last quarter before Reagan came to office, to a deficit of 3.4% of GDP by the 3rd quarter of 1986. This 3.7% of GDP worsening of the US balance of payments is equivalent to over $700 billion at today’s prices.
  • Under George H. W. Bush (Bush Senior) the US temporarily abandoned large scale foreign borrowing. With foreign sources of financing US investment reduced US net fixed capital formation fell sharply, from 7.5% of GDP in the last quarter of 1988 to 4.8% of GDP in 1st quarter 1992. The US fell into recession in the last quarter of 1990/1st quarter 1991 – the unpopularity of this leading to Bush’s electoral defeat.
  • Under Clinton and George W Bush US foreign borrowing increased massively, rising to 6.3% of GDP by the last quarter of 2005 – such huge borrowing was unsustainable, was a significant contributory factor to the international financial crisis, and necessarily had to be reduced.
  • The onset of the international financial crisis forced a huge reduction in US foreign borrowing – reducing net inflows of capital into the US from 5.3% of GDP in 1st quarter 2007 to 2.5% of GDP in the 2nd quarter of 2009. The level of US foreign borrowing has since remained essentially unchanged - net inflows of capital into the US were 2.4% of GDP in the latest available data in the last quarter of 2016.
Figure 9

If the US once again turned to financing its investment through a major increase in international borrowing there are very clear geopolitical and political consequences.

  • Prior to Reagan US net export of capital/outward transfers from the US were a stabilising factor in the world economy – increasing the supply of capital for other countries and therefore aiding their economic development.
  • After Reagan the reliance of the US on large scale foreign borrowing to finance its investment was a destabilising factor in the world economy – decreasing the supply of capital in other countries and thereby making more difficult their economic growth.
  • As the US from Reagan onwards was dependent on large scale foreign borrowing to finance its investment, and given the strong correlation of US growth with net fixed investment, US growth became strongly dependent on sources of foreign capital.

Therefore, analysis of the ability of the Trump administration/US to tap large scale sources of foreign finance requires examining which countries could potentially supply this and the issues in US foreign policy this creates.

Can Trump achieve large scale foreign borrowing?

It was analysed above that considerable political obstacles exist to raising the US domestic savings level. However, the US obtaining capital/savings from other countries also raises significant issues in foreign policy - as becomes clear when it is analysed which countries could supply such capital/savings to the US as they possess large balance of payments surpluses. The fundamental data on this is shown in Figure 10 - in this chart the percentages at the end of the graph lines are for the country/region’s balance of payments surplus/deficit as a percentage of the US’s 2016 balance of payments deficit.

The source of the huge US foreign borrowing from Reagan to Clinton was clear – Japan. Japan’s balance of payment’s surplus was equivalent to 54% of the US balance of payments deficit under Reagan, 127% under George H.W. Bush, and 60% under Clinton. As Japan cannot defy the US on any major issue Japan could, therefore, easily be forced into policies which supplied capital to the US even if this damaged Japan’s economy – as indeed it did from the 1980s onwards in the creation of the ‘bubble economy’.[3]

However, by the beginning of the 21st century, Japan alone became too weak to finance a large part of the US deficit. During George W Bush’s presidency, 2001-2008, the percentage of the US balance of payments deficit that could be financed by Japan’s surplus fell to only 24% - too little to finance US needs. However fortunately for the US, prior to the international financial crisis, weakening of Japan’s ability to meet US financing needs did not lead to severe problems for the US as George W Bush found two additional international sources of finance. These were:

  • Middle East oil exporters, whose balance of payment surplus was equivalent to 27% of the US balance of payments deficit due to the high oil price,
  • China – whose balance of payment deficit was equivalent to 24% of the US balance of payments deficit.

The ability of the US to tap these two new sources of finance, however, necessarily entailed foreign policy choices. The easy one of these for the US was with the Middle Eastern oil exporters. Many of these (Saudi Arabia, Kuwait, UAE etc) are essentially in the same position as Japan in being entirely subservient to the US and can therefore, if necessary, be instructed/pressured to finance US deficits.

China, however, is not in that situation – it is not a semi-colony of the US or subservient to it. But George W Bush, throughout most of his presidency, maintained reasonable foreign policy relations with China – not seeking to create great tensions. This created a mutually beneficial situation in which China was content to de facto aid financing the US balance of payment deficit in return for no major trade or political tensions existing with the US.

The severe fall in the international oil price from mid-2014 onwards, however, sharply changed the situation for US borrowing by eliminating the balance of payments surpluses of the Middle East oil exporters – as shown in Figure 10. Recent aid from Saudi Arabia, following Trump’s trip to the Middle East, is useful but too small to fundamentally affect the situation of the US economy. The only countries with sufficiently large surpluses to finance very large scale borrowing by the US are China, with a balance of payment surplus equivalent to 58% of the US deficit, and Germany – with a balance of payments surplus equivalent to 64% of the US deficit.

It is for this reason that the key foreign policy countries for the US, from an economic viewpoint, are now China and Germany – Russia is important for the US geopolitically and militarily but not economically. To revive US economic growth by foreign borrowing either or both China and Germany must be peruaded or forced into substantially increasing supplies of capital to the US. This, of course, in turn necessitates key foreign policy decisions by the US.
Figure 10

Geopolitical conclusions

The geopolitical conclusions flowing from these fundamental economic factors are clear – the implications for domestic political instability in the US have already been analysed. The rational US economic course, to minimise geopolitical risk and domestic political tension, would be to increase its net savings/net fixed investment via a reduction in military expenditure. This however, has already been rejected by the Trump administration. Therefore, regarding Germany and China:

  • In the run up to Trump’s election, and early in this presidency, he clearly attempted to intimidate/pressure Germany into greater economic subordination to the US. Politically this was carried out by reversing the historic US policy of support for the EU and instead seeking to weaken/break it up by supporting anti-EU currents such as Brexit and LePen in France. This led to a clear clash with Germany – for which the EU represents a decisive economic reserve and chief market. Merkel made clear Germany was not prepared to subordinate its interests to Trump’s requirement either by an inordinate increase in German military expenditure or accepting US protectionism. Germany also secured a crucial strategic political victory against Trump with the overwhelming election of Macron against LePen in the French Presidential election. These clashes between US and German policy were clearly reflected at the recent G7 summit and in Merkel’s declaration following it, in which she was clearly referring to the US, that: ‘The times in which we can fully count on others are somewhat over, as I have experienced in the past few days.’ German diplomacy followed this up actively with in rapid succession the visit of Indian Prime Minister Modi to Germany, the visit of China’s premier Li Keqiang to Germany, and the invitation of Putin to visit France by Macron – such an invitation was clearly discussed by Macron in advanced with Merkel. It is important not to exaggerate, a serious split between Germany and the US on military matters is not possible. But refusal of Germany to be intimidated into significantly subordinating itself to US economic demands blocks one of the only two major sources of large scale foreign capital which could be transferred to the US.
  • Regarding China, the other major potential foreign source of capital, Trump’s team again initially appeared to attempt intimidation – the notorious phone call with Taiwan leader Tsai Ing-wen in violation of the bedrock 'One China' policy followed by the US since establishment of diplomatic relations with China, the bringing of hard line anti-China ideologues such as Navarro and Barron into the administration etc. However, China made clear it would not accept any intimidation regarding ‘core interests’ such as the One China Policy, the South China Sea etc. China is certainly correct to propose positive ‘win-win’ policies for both the US and China, but it is not subordinate to the US as Japan was – and therefore will now allow its economy to be fundamentally damaged to subsidise the US, as Japan did, and China will not be intimidated regarding fundamental issues.

The US therefore certainly has some economies (Japan, Middle East oil exporters, Taiwan province) that are entirely subordinate to its policies and which can transfer capital to it – but, unlike in the Reagan period, these are now too economically weak to meet the needs of very large scale US foreign borrowing. The only two economies which could potentially transfer capital/savings to the US on a sufficiently large scale, Germany and China, are too strong to be economically intimated to the US. Germany and China certainly seek ‘win-win’ outcomes with the US but they cannot be intimidated into undertaking policies which would finance the US at the cost of serious damage to their own economies.

Therefore, unless either Germany or China can be persuaded/forced into large scale capital transfers to the US the basis for accelerating US economic growth through very large scale foreign borrowing does not exist at present.

IMF predictions

Finally, while the above analysis is made in terms of economic fundamentals, in case it may be argued that the above analyses suffer from a ‘pessimism bias’, an underestimation of the growth potential of the US, it worth doing a cross check against the implications of IMF projections. These show that in terms of medium/long term growth the IMF projects that the US economy will not accelerate but even slow further.

In the next six years 2016-2022 the IMF projects that annual average US GDP growth will be 2.0% - below the 20-year moving average for the US economy, although in line with the 5-year moving average. As a result, taking into account the sharp recession in 2009, US long term growth, the 20 year moving average, will actually fall further to 1.9%. This is shown in Figure 11.
Figure 11

Once again it is useful to make a comparison of the period since the international financial crisis to that of the Great Depression after 1929. In the 15 years after 1929 US economy more than doubled in size, growing by 112%, an annual average 5.1%. In comparison IMF projections are that in the 15 years after 2007 the US will grow by 26%, with an annual average 1.6% growth. In short in the 15 years after 1929 US total economic growth was over times four times that projected in the 15 years after 2007, which results for a post-1929 average US growth rate over a 15 year period that was over three times that projected after 2007.

Conclusion for discussion in China

Analysis of the latest US GDP data therefore leads to a clear conclusion – the US remains locked in a period of slow growth which will last for at least a number of years. Claims to the contrary in sections of the media that there will be a substantial increase US growth, in anything other than a purely short term sense already analysed, results either from ‘wishful thinking’ or basic economic errors. As China’s policy, particularly on such a fundamental issue, must be based on the principle of realism and ‘seek truth from facts’, not on wishful or confused thinking, it is therefore worth analysing the errors of some claims in part of the media that there will be a substantial increase in US medium/long term economic growth.

  • The simplest form of ‘wishful thinking’ is that it would be highly ‘helpful’ from the point of view of China’s trade and development if the US economy grew rapidly. This is undoubtedly true - but because something would be desirable does not mean it will happen!
  • Since Trump’s election China has rightly proposed numerous forms of economic cooperation with the US – setting these out comprehensively in the Ministry of Commerce’s ‘Research Report on China-US Economic and Trade Relations’. This is extremely important in foreign policy terms, showing clearly the goodwill of China to the US, the search for win-win outcomes, and that any problems in US-China relations do not arise from China. Such proposals, because they are win-win can aid sectors of both the US and Chinese economies. But the sums of finance involved are not sufficient by themselves to overcome the deep-seated problems creating slow US growth which have been analysed. To give the scales of finance involved it may be recalled that the extra foreign borrowing undertaken under Reagan would be equivalent to over $700 billion at today’s prices.
  • A confusion (whether deliberate or objective) is sometimes expressed in parts of the Chinese media between purely short term growth fluctuations and basic trends. For example, it was noted above that US growth has increased from an extremely depressed 1.3% in the 2nd quarter of 2016, and for statistical reasons it is likely that in 2017 US growth will increase from the low 1.6% annual level of 2016. Any such short-term acceleration in growth does not alter the fundamental trend of the US economy – only if such more rapid growth were continued for a significant period would it represent a basic acceleration in the rate of US growth.
  • It is sometimes claimed that the US will experience rapid economic growth due to a ‘wave of innovation’. However, as has already been shown factually, the US has not been experiencing ‘rapid growth’ but very low growth. Furthermore, while there is ample evidence that innovation embodied in increasing fixed investment leads to faster growth, there is no evidence from the US that innovation which is not accompanied by increased fixed investment leads to rapid growth.
  • It is sometimes claimed tax reductions proposed by Trump will lead to rapid growth. This is based both on errors in economic theory and wrong factual information regarding what occurred under Reagan – whose administration did cut taxes. First, tax cuts if unaccompanied by equivalent state spending reductions, increase the budget deficit and therefore reduce the overall domestic US savings level – which, because of the close correlation of net savings and growth will reduce GDP growth. Second, Reagan used massive foreign borrowing to sustain US growth as was shown in Figure 9. Certainly, if Trump could achieve huge foreign borrowing by the US growth would be expected to increase during the period of such borrowing. But as already analysed only two countries have the resources necessary for this, Germany and China, and for different reasons neither is likely to supply the huge borrowing required.
Claims appearing in sections of the media that there will be a basic acceleration of the US economy from its present state of low growth are therefore false – as such analyses have been previously tested and rejected by events during the very prolonged slowdown of the US economy analysed at the beginning of this article and was shown in Figure 2.

Practical Conclusion

The practical conclusions of this situation for China’s policy are clear and provide a clear backdrop showing the coherence of the initiatives taken by China under Xi Jinping.

The latest US data confirms there is no break in the trend of long term slow growth in the US. Numerous geopolitical conclusions affecting China follow from this – these are too numerous to analyse all here. However, some are fundamental:

  • The fact that China has to base its economic perspective on the continuation of slow US growth for a prolonged period means that while initiatives are rightly being taken for ‘win-win’ outcomes between the two countries a very rapid increase of China’s exports to the US cannot be relied on. Furthermore, as the US is not merely the world’s largest economy, but it particularly influences trends in the other advanced Western economies. overall growth in the advanced economies will remain relative slow by historical standards.
  • As this extremely slow growth is confined to advanced economies, and not to developing economies, it means that economic role of developing economies, and in particular the OBOR region, will be even more decisive for China. IMF projections are that total GDP growth in the developing economies from 2007-2021 will be 98% compared to only 21% in the advanced economies Measured at current exchange rates in 2016-2021 the OBOR region will account for 46% of world economic growth.
  • The unfolding development of geopolitical and political events is significantly affected by the fact that while long term economic growth after 2007 in the Western economies is becoming even slower than after 1929 nevertheless the form is significantly different. The slow average growth during the ‘Great Depression’ after 1929 was produced by an extremely violent recession follow by sharp recovery in the majority of advanced economies. This extreme initial recession unleased rapid political crisis. In September 1931 Japan invaded Manchuria, beginning its military attack on China; in September 1931 Britain abandoned the gold standard, resulting in collapse of the then existing international financial system; in November 1932 Roosevelt was elected US President, leading to the ‘New Deal’, in January 1933 Hitler became German Chancellor. In contrast, after 2007 the initial recession was far less severe but the long term slow growth in the crisis was prolonged. Instead of being extremely rapid the political crisis after 2007 was therefore slow building and cumulative – leading eventually to key turning points such as Brexit and Trump’s election.
  • Within the US as very slow growth will last for a prolonged period there will be a not rapid return to US political stability. The sharp turns represented by the election of Trump, the rise in support for Sanders, the continued severe fighting within the US political establishment over Trump and foreign policy will continue. While continuing with its correct policy of seeking ‘win-win’ solutions with the Trump administration China must, however, be prepared for sharp turns in the situation. This is why issues such as military reform, as emphasised by Xi Jinping, are correctly running side by side with economic initiatives such as OBOR and seeking win-win economic relations with the Trump administration.

The character of the international period

Finally, this continuation of very slow US growth confirms one of the two key features defining the present period facing China under Xi Jinping:

  • Domestically, China is making the transition first to ‘moderate prosperity’ and then within a decade to a ‘high income’ economy by World Bank classification.
  • Internationally China faces a situation of slow growth in the US and advanced economies.

This combination of domestic and international trends constitutes a new period in China’s development and has not faced any previous Chinese leader. This may therefore be understood as a background to the distinct policies launched under the Presidency of Xi Jinping. * * *

The original version of this article originally appeared in Chinese at Sina Finance Opinion Leaders.


[1] For economic specialists’ differences between the way GDP data is presented in the US and in China are explained here.

Some media reported US GDP growth in 1st quarter 2017 as 1.2%. This reflects the way the US Bureau of Economic Analysis presents the data – ‘real gross domestic product (GDP) increased at an annual rate of 1.2% in the first quarter of 2017.’ But it is not sufficiently widely understood that US GDP data is presented in a different way to China’s data.

US data in the above form is presented as the percentage growth between one quarter and the next on an annualised basis. That is, the new US data in that form is presented as the growth of 1st quarter 2017 compared to 4th quarter 2016 presented on an annualised basis. Actual US GDP growth between 4th quarter 2016 and 1st quarter 2017 was 0.3% on a seasonally adjusted basis – 1.2% on an annualised basis.

China however emphases presentation of GDP growth year on year growth – China’s GDP growth of 6.9% in 1st quarter 2017 was the change compared to 1st quarter 2016.

What may appear a technical issue has considerable significance due to a serious and known problem in the US data. The US method has the disadvantage that for accurate data the seasonal adjustment between quarters must be correct – different quarters of the year have features which strongly speed or slow growth in that period. But as is widely known among Western analysts the seasonal adjustment in US data for the 1st quarter of the year is inaccurate as it understates growth – the US statistical authorities are aware of this but have not so far succeeded in resolving the problem. To avoid this, it is better to use the system of comparing the 1st quarter of 2017 with the 1st quarter of 2016 – as this automatically avoids the need for seasonal adjustment. On that basis US year on year GDP growth was 2.0% not 1.2%. In order to avoid understating US growth this 2.0% is used in this article.

A second issue is that a market economy inherently displays business cycles. It is therefore necessary to separate purely cyclical trends from medium/long term ones. Such cyclical effects may be removed by using a sufficiently long term moving average that cyclical fluctuations become averaged out and the long term structural growth rate is shown – as is done in this article.

[2] From a theoretical point of view US savings and investment includes inventories as well as fixed investment. However taking a quarterly average since 1947 97% of US gross investment has been fixed investment and only 3% inventory formation, therefore by focusing here only on fixed investment and not dealing with inventories no significant distortion of trends occurs.

[3] To allow capital to flow out of Japan to the US, particularly after the 1987 Wall Street stock price crash Japan’s interest rates were held at a low level, therefore creating huge financial bubbles within Japan’s economy which duly exploded in the 1990s.

Tuesday, 6 June 2017

For the many, not the few. Vote Labour on June 8

Over 100 economists have endorsed the Labour manifesto for this election. For good reason. The manifesto sets out to defend public services and improve living standards. It will seek to balance current spending over the business cycle and improve public services by increasing taxes on big business and the highest-paid 5%. It will also see to improve prosperity, pay and jobs with an investment-based industrial strategy.

Labour is the only party promising this. The Conservatives intend to the do the opposite, renewed austerity to make workers and the poor pay for their own disastrous economic mismanagement, including Brexit. There is only one choice to defend living standards.


Thursday, 18 May 2017

Tories want to drive living standards lower. Corbyn wants to end austerity

By Tom O’Leary

During the current crisis the UK has experienced the longest-ever recorded fall in living standards. The biggest part of that fall is not the cuts to government spending, even though these have had severe effects. Instead the largest factor contributing to the fall in living standards is the decline in real wages. The Resolution Foundation calls this decade the worst for falling pay in over 200 years

This fall has now resumed once more because of the combination of stagnation in wage growth and rising prices. The rise in prices is a Brexit effect, after the sharp devaluation of the pound following the referendum result in June 2016. It is ridiculous for Theresa May to suggest the falling pound and therefore the fall in real wages, is not the result of the Brexit vote.

Chart 1 below shows the recent acceleration of the inflation rate as measured by the CPI, up to 2.7% from a year ago in April. Other measures are worse. The RPI, which the ONS has replaced with the CPI shows the inflation rate at 3.5%.

Chart 1. UK CPI Inflation Accelerates

Mainstream economists, including the former and current chairs of the US central bank bemoan the fact that wages are often ‘sticky’. This means that ordinarily, outside ferocious attack, authoritarian dictatorship or worse, it is hard to get workers to accept cuts in their pay in cash terms. This is regarded as a necessary condition for capitalist recovery, as wages fall and profits rise. But the most effective way of driving down real wages is to hold wages down and let prices rise. This can be supplemented by other factors, such as freezes to the pay of the public sector and casualisation of the workforce. This is what has happened.

As Chart 2 shows, the pace of the fall in real wages in the UK currently has begun to resemble the decline at the start of the recession. It is precipitate. The 1-month data and the 3-month average are both shown. The latter is highlighted by the Office for National Statistics (ONS) as it smooths out fluctuations. This now shows real wages declining once more. But the 1-month data is useful in highlighting turning-points, as SEB has previously argued. On this measure, real wages are down 0.5% from a year ago. With further devaluation-induced price rises in the pipeline, the fall in real wages has much further to run.

Chart 2. UK Average Real Wage Growth, 1-month and 2-month measures, year-on-year
The cumulative scale of the decline in real wages over this crisis is shown in Chart 3 below. On a monthly basis, real weakly wages peaked at £531 in February 2008, just as the recession was about to begin. They had fallen to £497 in March of this year.

The peak in wages was in part because wages are ‘sticky’, they were still rising even as the economy was just about to slump and prices had been slowing. There was also the last hurrah of the financial boom, and reflects the City bonuses paid then.

In essence the whole of the austerity policy can be understood as a conscious effort to overcome this stickiness, that is to drive down wages and to get workers and the poor to bear the brunt of the recession while allowing big business and the rich to be shielded from it.

Chart 3. UK Real Average Weekly Earnings, £
Average weekly earnings data only applies to those in full-time work. But it seems unlikely that those in part-time work or in the swollen ranks of the fake ‘self-employed’ will have fared better than those in full-time employment.

There are currently just under 32 million in workers in the UK. As already noted, average real weekly pay has fallen since just before the recession by £34. Even if we take the less erratic quarterly data, it has fallen to £496 from £520 in the 1st quarter of 2008. This is a real fall of £24 per week, or effectively a fall of £1,250 per year. For 32 million workers that is approximately an aggregate decline of £40 billion in real wages from the 1st quarter of 2008 to the same period in 2017. Even if only the 23.5 million full-time workers are considered and part-time workers ignored entirely, the fall in their real wages amounts to over £29 billion.

By contrast, despite severe reductions in the growth rate of public spending and cuts to all types of social welfare, Government Consumption expenditures have actually risen over the same period. According to OECD data Government final consumption expenditures have risen by £32 billion since the 1st quarter of 2008.

This may seem strange, given the harsh burden of austerity that hits workers and the poor. But the rise in real Government Consumption reflects the almost inescapable rises in government spending, on items such as pensions, the NHS, education and so on, even where these do not keep pace either with growing demand or the specific inflation in those sectors. The latest Tory Manifesto, with cuts to all types of social welfare is an attempt reduce these outlays, while maintaining tax cuts for the rich and big business.

But the maths are plain. The biggest factor in driving living standards lower is the fall in real wages. This has now resumed. The Tory Government will be hoping to turn that to good effect using the fall in wages to drive up the profit rate, where they previously failed. At the same time it will reduce the automatic rises in some areas of the Budget, further reductions on those areas of spending which otherwise rise automatically.

This Tory plan is built around a Hard Brexit. Leaving the Single Market will hurt both wages and profits, as trade barriers are introduced and investment is diverted towards larger markets. In those circumstances, the Tories are attempting once more to ensure that the greater share of that loss is on wages, not profits.

By contrast, this Labour leadership is opposed to austerity in all its forms. It will attempt to shield workers and the poor from the crisis and therefore should be wholeheartedly supported even on those grounds alone.

Some on the left reject these arguments on wages, and refuse to accept that Brexit is driving living standards lower. This is an error, reflecting their misconceived support for Brexit. The left should always be the best defenders of living standards for the overwhelming majority of society, and propose arguments that would reverse the falls that are imposed during a crisis. To do that, it must first recognise reality, that real wages are falling once more from a combination of stagnant cash wages and rising prices caused by the Brexit currency devaluation. Any sober assessment would suggest that further falls in wages and living standards must be expected as the Tories attempt to get workers and the poor to pay for the Brexit crisis.

The big trade unions are sure to offer resistance to the new offensive, as will this leadership of the Labour Party. The same cannot be said of any of Corbyn’s opponents in the Parliamentary Labour Party, who either embrace austerity or offer fake opposition to it. 

The left as a whole needs to be clear about the very negative consequences of Brexit and stand with the unions and the Corbyn leadership who will resist job cuts and lower pay. It also needs to be clear about how this renewed crisis came about in order to end it.

Tuesday, 16 May 2017

Why the 'Belt & Road' region will be the main locomotive of the world economy

By John Ross

The importance of the Belt and Road (B&R) summit for China and participating countries is well known. What is not so widely grasped is that the B&R region is now by far the most powerful locomotive not only of the regional but of the global economy. To be precise:

· Measured at current exchange rates the IMF projects that in the next five years’ growth in the B&R region measured in absolute dollar terms will be almost twice that in North America and four times that in Europe.

· Measured in purchasing power parities (PPP’s) growth in the B&R region will be almost five times that in North America and more than five times that in Europe.

Growth in the B&R region, in summary, will dwarf that in North America and Europe.

This fact that the B&R region has now emerged as the most powerful locomotive of the world economy is due to two simultaneous developments:

· Rapid growth in the B&R region,

· Extraordinarily slow growth in the West by historical standards.

The aim of this article is therefore to put more precise orders of magnitude on these trends. The data used is the five-year growth projections of the IMF. It should be made clear that using these figures does not at all mean that they are being taken as a 100% accurate prediction of what will occur. But the IMF data clearly establishes that the economic growth potential of the B&R region is so much greater than that of either North America or Europe that entirely implausible assumptions of future development patterns would have to be made for the far stronger growth of B&R not to be strikingly apparent.

This data therefore clearly establishes that the B&R region will be the main locomotive of the global economy during the next period.

Slow growth in the Western economies

The first feature creating this new situation in the international economy is the quite extraordinarily low growth in the Western economies by historical standards. The statement sometimes made in the Chinese media that the period commencing with the international financial crisis of 2008 is the West’s ‘worst economic crisis since the Great Depression’ is somewhat misleading put in that form as in one crucial way it understates the problem. The overall slow growth and stagnation in the Western economies is already almost equivalent to that after 1929 while the factual projections for the next five years lead to the conclusion that the cumulative slow growth/stagnation of the Western economies will be worse, although different in form, from that during the period following 1929. To show this Figure 1 illustrates three sets of data:

• Growth trends in the advanced Western economies after 1929.

• The factual trend in the advanced Western economies from 2007-2016;

• The latest IMF predictions for 2016-2021.

The data in Figure 1 of course shows that the onset of the ‘Great Depression’ after 1929 was far more violent than that of the international financial crisis in 2008. After 1929, during only three years, overall GDP of the advanced Western economies plunged by 15.6% compared to only 3.3% after 2007.

But it is not so widely understood that after the initial post-1929 economic collapse recovery during the 1930s was rapid and post-crisis growth was strong – the US being the most important exception. This can be clearly seen in Figure 1 and by examining the situation in 1938, the last year before World War II. By a convenient statistical coincidence, 1938 was nine years after 1929, and 2016, the most recent year for current factual data, was nine years after the last pre-international financial crisis year of 2007. Therefore, in comparing 1929-38 with 2007-16 the same length of time is being analysed.

The strong recovery of most advanced economies following the post-1929 recession is demonstrated by the fact that by 1938 the GDP of most major advanced economic centres was substantially above 1929 levels. To be precise by 1938:

• Japan’s GDP was 37% above its 1929 level;

• Germany’s GDP was 31% above its 1929 level;

• UK GDP was 18% above its 1929 level;

• Western Europe’s GDP was 13% above its 1929 level;

• The overall GDP of the advanced economies 7% above its 1929 level.

The US was an exception - US GDP in 1938 was still 5% below its 1929 level.

However, in contrast after the 2008 international financial crisis there was no rapid recovery and strong growth as there was after the post-1929 collapse. By 2016, nine years after the last financial crisis year, the recovery from the crisis in the advanced economies was almost as slow as during the ‘Great Depression’ of the 1930s and by the end of 2017 it will be significantly slower. More precisely due to the slow growth by 2016, total GDP growth in the advanced economies in the nine years after 2007 was only 10.1%. By the end of 2017, on IMF predictions, the growth in the advanced economies after 2007 will actually be lower than after 1929 – total growth of 12.3% in the 10 years after 2007 compared to 15.1% in the 10 years after 1929. Furthermore IMF data shows that the future growth in the advanced Western economies after the international financial crisis will be far slower than in the same period after the 1929. IMF projections are that by 2021, fourteen years after 2007, total growth in the advanced economies will be less than half that in the 14 years after 1929 – average annual growth of only 1.3% compared to 2.9%, and total growth of 20.6% compared to 49.8%.

Figure 1

Developing economies

To grasp the present pattern of global development, and the background of B&R, it should however be noted that the data given above is specifically for advanced economies. Growth in developing economies is far faster both than in the advanced economies after 2007 and in the advanced economies after 1929. As shown in Figure 2 on IMF projections total GDP growth in the developing economies from 2007-2021 will be 98% compared to only 21% in the advanced economies. Annual average growth in developing economies in 2007-2021 will be 5.0% - not merely faster than the annual average growth of the advanced economies of 1.3% in the same period but much faster than the average 2.9% in the advanced Western economies in the 14 years after 1929.

The extreme slowing of economic growth in the present period is therefore specifically an issue of the advanced Western economies.

Figure 2

The B&R

Turning specifically to the B&R, which as will be seen is the most powerfully growing region among the developing economies, this is of course closely connected with China - which is now one the three great centres of the world economy with the US and the EU.

Comparing these three economic centres it is well known that measured at current exchange rates China’s economy is smaller than either the US or the EU – in 2016 China’s GDP was $11.2 trillion compared to $16.4 trillion for the EU and $18.6 trillion for the US. Measured in PPPs China’s economy is actually larger than the US but to avoid discussion of PPP calculations, and because data on savings is not available in PPPs, in this article all measures are at current exchange rates unless specified otherwise.

However, while China’s GDP is smaller than the US or EU it is not yet sufficiently widely understood that China already enjoys a decisive advantage over these other economic centres in one decisive field - savings, that is finance for investment. Furthermore, China’s considerable lead in this will get bigger with time. As shown in Figure 3 by 2016 China total annual savings - that is the sum of company saving, household saving and government dissaving – was $5.1 trillion compared to $3.5 trillion for the US and $3.6 trillion for the EU. By 2021 on IMF projections China’s annual finance created for investment will be $6.9 trillion, compared to $4.2 trillion for the EU and $4.0 trillion for the US.

In summary, while China’s GDP is smaller than the US China has already overtaken the US as a financial ‘superpower’. It is this which enables China to take initiatives such as AIIB and international fixed investment and infrastructure initiatives which are crucial in the B&R.

Figure 3

B&R as locomotive

Based on these economic fundamentals the comparative growth potentials of the B&R region, North America and Europe may now be analysed. As B&R is a regional initiative IMF data for North America, including Canada and Mexico, is given - rather than simply that for the US. For Europe the European Union (EU) as a whole is taken. Given this framework then:

· Measured at current exchange rates projections from IMF data from 2016-2021 shows that in the next five years the B&R region will account for 46% of world economic growth - compared to 24% for North America and 10% for the European Union - as shown in Figure 4.

Figure 4

The situation in 2016

Turning now to the impact of the different growth potentials in the main world economic centres on the structure of the global economy, as a starting point Figure 5 shows that in 2016 the GDPs of the B&R region and the North American region were approximately equal in size while the EU was slightly smaller than either – B&R being equivalent to 27.5% of World GDP, North America 28.1%, and the EU 21.8%.

Figure 5

However, as the average growth rates in countries in the B&R region are much faster than those in either North America or the EU within five years the structure of the world economy will be sharply changed - as is shown clearly by Figure 6 and Figure 7. By 2021 the GDP of the B&R region, calculated from IMF data, will be $29.7 trillion, compared to $21.1 trillion for North America and $18.3 trillion for the EU. In percentage terms the B&R region will be 31.3% of world GDP - compared to 27.3% for North America and 19.2% for the EU.

Figure 6

Figure 7

Can another country block B&R?

The fundamental economic data also makes clear why no other individual country can block the success of B&R – specifically India cannot block B&R. This is due to the fact that while B&R is open to numerous countries economic realities make clear which countries are indispensable for B&R’s success.

Four large economies are within the B&R region – in descending order of GDP size China, India, Russia and Indonesia. Together these make up 79% of the GDP of the B&R region in 2016 and 85% of its projected growth in 2016-2021. However no other country makes up even 5% of the GDP of the B&R region or 2% of its projected growth – therefore no single other country than these four is by itself large enough to ensure the B&R initiative did not succeed.

Of these four large economies Russia and Indonesia are strong supporters of B&R and their presidents will attend the Beijing summit. India is therefore the only large economy in the B&R region which has indicated at the time of writing it will not participate in the Beijing summit.

This reticence is regrettable, and India’s enthusiastic participation in B&R would undoubtedly strengthen B&R. But in 2016 India was only 11% pf the B&R region’s GDP and 15% of its projected growth in 2016-2021. Put in other terms, 89% of the GDP of the B&R region and 85% of its growth potential was outside India. Given this weight India could not block B&R’s development even although its participation would be extremely valuable.

Tasks for the B&R

These macroeconomic trends naturally do not mean there are no problems for B&R. The advantage of North America and the EU is that their per capita GDPs are much higher than the B&R region, and both NAFTA and the EU have an institutional structure which B&R does not have nor is projected to have at present. But the much greater growth performance in the B&R region compared to any other, and therefore the vastly greater market expansion of the B&R region than any other, is much stronger than the institutional framework of the relatively stagnant North American and European economic centres.

It is clear that the B&R region is aided by, and can build on, the existence of a number of partial institutional frameworks within its area. These include the Association of South East Asian Nations (ASEAN), the Shanghai Cooperation Organisation (SCO), the existing Eurasian Economic Union (EAEU – Russia, Belarus, Kazakhstan, Armenia, Kyrgyzstan) and the Asian Infrastructure Investment Bank (AIIB). The wider proposed initiatives include the Regional Comprehensive Economic Partnership (RCEP) promoted by China. The wider concept of a Eurasian Union promoted by President Putin clearly overlaps with the B&R – as President Putin states.

The Beijing summit on 14-15 May will therefore have numerous tasks to work on not only its own projects but building and integrating existing initiatives. But the reshaping of the world economy by the B&Rs much greater growth potential than any other region is clear.


It may be seen from the data above that the differences in growth potential between the B&R and other major economic centres are not small – that is within the margin of error of five year economic forecasting . On IMF data projections:

· In the next five years, the B&R region will account for 46% of total world growth.

· The growth of the B&R region in the next five years will be almost twice that of North America, and over four times that of Europe.

· By 2021 the B&R region will account for a substantially higher share of world GDP than North America or Europe.

No plausible margin of error therefore alters the fundamental fact that in the next five years the B&R region will be by far the most important locomotive of the world economy. In particular, that the growth potential of the B&R region far exceeds that of North America and Europe. This reality must therefore be the basis of economic strategy in the coming period.

* * *

This article originally appeared in Chinese at Sina Finance Opinion Leaders.

Thursday, 20 April 2017

What is at stake in France?

By Tom O’Leary

Although they are broadly similar in terms of GDP and population size, France is a more important country than Britain in the EU. Any move by France to exit the EU and the Single Market would have a far greater impact than the self-inflicted damage to living standards in Britain arising from Brexit. As a founder member of all the EU’s forerunners and an economy more deeply integrated into the Eurozone economy, a French departure would have a shattering effect. At the very least a number of other countries could also be expected to depart, including Spain, Portugal and Italy.

Marine Le Pen is vying for the lead in the Presidential race, and she proposes a referendum on a French exit. The continued strength of Marine Le Pen’s far right and overtly racist Front National in the opinion polls is evidence of a deep malaise in French society. The FN continues to record about one quarter of the vote, while many other candidates also play a similar anti-immigrant and anti-Muslim tune in a lower register.

France, like many European countries including Britain, does not have an immigration crisis. It has an economic crisis in which immigrants and minority ethnic and/or religious communities are used as scapegoats. Without its migrants, and the daughters and sons of migrants, the economic crisis would be even more grave. 

The road to socialism is very unlikely to lead through the EU. Under certain circumstances, where a socialist programme of taking control of the means of production to increase investment was being offered, exit could lead to far better outcomes than sticking with the EU. Even then, the new government would need great skill in minimising the disruption to trade. But of course, this is not what the overtly racist Le Pen proposes, but nor does any other candidate.

The French crisis

Like every other phenomenon, the analysis of current economic situation must begin from evidence, not myth or rhetoric. The outline of the crisis is evident from Chart 1 below. It shows the change in real GDP since the crisis began and the change in the main components of GDP.

Chart 1. France Change in Real GDP & Components, 2007 to 2016
Real GDP has risen by just €104 billion since the crisis and after 8 years is only 5.2% higher than in 2007. This is equivalent to an annual average growth rate of little more 0.6%. Once again, we find that Consumption growth has been unable to lead the economy. Consumption has risen more strongly than GDP itself. Contrary to widespread belief, Government Consumption is also higher. It has risen by 13.8% over the period and in percentage terms is actually the strongest component of all.

The drag on GDP has come from the weakness of Investment, which has fallen by €8 billion since 2007. This combination of rising Consumption and falling Investment has led to a widening trade deficit. As falling Investment means declining competitiveness any increase in consumer and other demand is disproportionately met by rising imports. Statistically, the widening deficit on net exports has been the biggest factor subtracting from GDP. 

The fall in Investment has also been reflected in a decline in both industrial production and construction over the period. The French crisis is a crisis of investment.

Investment-led growth

In the corresponding 10-year period up to 2007, Investment rose by 39%. Simply in order to achieve that pace, Investment would need to rise now by €90 billion, equivalent to 4.2% of GDP. It would then need to continue to rise faster than GDP. The private sector, which accounts for the bulk of Investment in all capitalist economies, is either unwilling or unable to raise its level of Investment. French profits have not even kept pace with meagre GDP growth, up €63 billion in nominal terms since 2007 compared to a €280 billion rise in nominal GDP. As a result, the public sector is the only other agent that could increase Investment.

Is this even possible within the EU and operating under the EU Commission’s ‘Trimester’ of national budget oversight, the ‘six-pack’ and the strictures of the ECB?

The reality is that no country has tried. While a number of countries have a higher proportion of GDP directed towards Investment than France, they have all been cutting Investment. In virtually every European country (including the UK) public spending has been rising (on Consumption) while public sector Investment has been cut.

What would be required is a 180-degree turn. Public spending should be maintained, but public Investment should be very substantially increased. In terms of the main candidates, Le Pen says nothing coherent about the economy at all. Her entire programme and campaign is racist scapegoating. Macron says he would initiate a €50 billion public investment programme. But this is just €10 billion a year, when €90 billion and more is required. At the same time he would tear up worker protections, and slash taxes for businesses and the rich. This would lower living standards, and probably increase the public sector deficit, with even the meagre investment pledge the first likely casualty. Fillon’s policies are similar, if more right wing. He talks of €35 billion in public investment, but as this is conditional on private investment it has more of the character of a subsidy than an investment programme. By contrast, the only left candidate in the race is Melenchon who would invest a much more substantial €102 billion.

In EU terms, France is a very important country, the second most important after Germany. As a French exit risks destroying the entire EU, it has a very great weight within the EU and could use that for its own benefit and for the whole of Europe. A menu of measures could include:
  • a derogation from (or better, rewrite of) the EU fiscal rules to exempt public borrowing for investment from all fiscal targets
  • a large increase in public borrowing for investment
  • a large increase in the budget and lending of the European Investment Bank across Europe
  • an increase in the EU Budget for investment purposes
  • ECB bond purchases to widen to include the debt of the state-owned enterprises and semi-state sector, public bodies, regions and municipalities linked to their increased investment
  • Europe-wide investment programmes in renewable energy, integrated energy storage and distribution networks, hi-speed rail, improved broadband and telecommunications links, and in higher education
  • using their balance sheet strength, increase borrowing for investment by the still substantial French state-owned sector, including railways, energy, cars, telecoms, post, airports and others
  • altering the tax code to penalise companies paying exorbitant salaries or shareholder dividends, and to benefit companies increasing their level of investment and training.
Naturally, this is only an outline programme, and those with specific knowledge could improve and refine it substantially. It should be accompanied by a series of measures boosting wages, capping prices, and improving public services to ensure living standards rise and to bolster public support. The tax revenues from rising investment-led activity can be used to fund these.
What then, if the EU Commission and the ECB said no? In that event, the logical course would be to begin to implement these measures on a national basis. This would have a strongly positive effect on growth, albeit diminished if they are not EU-wide.
There would be huge risks if there was an attempt to sabotage this series of reforms. France could refuse to pay all fines or penalties that might be imposed by the Commission, secure in the knowledge that its bargaining position was greater than almost any other EU country. If then the ECB cut French banks adrift from its liquidity operations (as it did with Greece), this would be taken as a notice to quit the Euro.
In that circumstance, the EU institutions would be trying to prevent polices which were evidently in the interests of the overwhelming majority of the population. The French government would be trying to enact them. At that point, would the institutions risk the entire European edifice in order to block sensible reforms? This is an unknown, as it has not yet been tried. 

Thursday, 13 April 2017

Austerity has only half worked. New, more radical measures will be attempted

By Tom O’Leary

The latest GDP data show that austerity has only been effective in driving down wages. It has not been effective at all in boosting profits, which is its purpose. As a continuation of existing policy may simply yield the same results, new and more radical measures will be needed.

Wages down, but profits not up

The purpose of austerity is to increase the share of national income that goes to business and the rich, that is, to boost the profit rate. It has nothing to do with deficit-reduction, which is much more readily achieved by polices that boost growth and thereby increase tax revenues. To boost profits, wages have been frozen or cut, while the total level of social spending has been frozen. Taxes have been cut for business and the rich. So, the UK began the crisis with a main Corporate Tax rate (on profits) of 28%. It is now 20% and is due to fall to 17% in 2020. At the same time, taxes paid by workers and the poor have risen, especially VAT.

But the UK version of austerity has only produced the effect of depressing wages and the incomes of the poor. Real wages have begun to decline once more. But austerity has not succeeded in transforming the profitability of UK businesses. Table 1 below shows the distribution of national income as a proportion of GDP in 2013, when the current very modest recovery properly began. It also shows the proportionate distribution of national income of the £200 billion rise in nominal GDP between 2013 and 2016.

Table 1. Distribution of UK National Income as a Proportion of GDP
Source: Calculated from ONS data (Schedule D of ONS national accounts release)

The share of profits (Gross Operating Surplus) has not risen at all. From 2013 to 2016 nominal GDP rose by £200 billion. The Compensation of Employees has risen by just £84 billion. Austerity has been very ‘successful’ in driving down workers’ share of incomes, from 50.5% of GDP in 2013 to just 42% of the change in GDP from 2013 to 2016. (In real terms, the effect of inflation is that total compensation has risen minimally over the period). 

But austerity has not been successful at all in driving up the profit share of private corporations. In the financial sector profits have actually fallen even in nominal terms. For non-financial private companies as a whole profits have only just about kept pace with the moderate rise in GDP. There has been no profits bonanza for private producers.

Instead, there has been a sharp increase in the ‘Other income’ share of national income. This includes a variety of income streams, and mixes profits and incomes of the non-profit institutions, households and others. Partly it reflects the growth of spurious ‘self-employment'.

To demonstrate this is not a quirk of using the year 2013 as a starting-point, the same exercise is repeated in Table 2 below. This shows the distribution of national income as a proportion of GDP in 2007, the last year before the recession. It also shows the proportionate distribution of national income in the £409 billion rise in nominal GDP between 2007 and 2016.

Table 2. Distribution of UK National Income as a Proportion of GDP
Source: Calculated from ONS data (Schedule D of ONS national accounts release)

The outcome is that austerity has worked to driven down the wage share, but it has not boosted the profits of companies. Without boosting their profits there will be no significant increase in business investment. As raising profitability remains the aim of policy, so further more radical measures will be required.

This government will try to impose radical measures to further curb wages and spending on public goods to boost profits. The mechanism for this will now be the opportunities afforded by Brexit. It seems likely, given the ineffective outcome of policy to date, that this project would have been attempted in any event within the EU. But removing the protections on workers’ rights, the environment, consumer safeguards and so on provides greater room for manoeuvre.

Weak starting-point

For the year 2016 real GDP grew by 1.8%. This is the second weakest annual rate of growth since the crisis began. Tory government policy temporarily boosted consumption in 2014 as part of its re-election campaign. Growth has been decelerating since.

Real UK GDP growth in 2016 was marginally less than that of the EU as whole (1.9%) and a little greater than the US (1.6%). Of course, it was a fraction of Chinese GDP growth (6.7%).

The effect of the Brexit vote has been mainly felt through a decline in the pound, which has both lifted prices and should boost exports. Those trends will not continue indefinitely. Instead, the act of leaving the Single Market will create a new situation. The GDP data provide evidence of what that new situation will look like and how the current contradictions will be resolved.

Chart1. UK GDP Growth Is Slowing
Commentators have tended to focus on the rundown in the household savings ratio to a new low of 3.3%. This is an average rate and clearly implies that a large and growing proportion of households are able to save nothing at all or are becoming more indebted.

Household Consumption grew by a full percentage point faster than GDP in 2016, 2.8% versus 1.8%. As Household Consumption accounts for about three-quarters of all Consumption in the UK this would usually mean total Consumption was rising strongly. If Consumption could lead growth this would be a positive development.

For ‘keynesians’ who persist in arguing that Consumption does lead growth, the UK economy is a text book case. Except that the argument is wrong. Strong Consumption has not led to rising Investment, as the ‘keynesians’ suggest. The rise in Consumption cannot be sustained by a persistently declining savings rate. Instead, at a certain point households will decide they cannot or will not continue to support rising Consumption when incomes are not rising as fast and will restrain spending, maybe sharply. Sustained rises in Consumption requires sustainably rising incomes. This is only generally possible if the economy itself is growing.

Falling business investment

Rising growth itself depends on increasing trade and rising investment. Yet business Investment fell in the final quarter of 2016, down 0.9% from a year ago. This is in line with 2016 as whole, where business investment fell by 1.5% from 2015 to 2016. Rising Consumption has not led to rising Investment as Chart 2 shows.

Chart 2. Annual levels of business investment and annual growth rates of business investment
Source: ONS

Private Investment is driven by anticipated profits. This is not the same as preceding profits, which businesses judge can and do vary considerably. Chart 3 below shows there is a close correlation between the change in Profits (blue line) year-on-year and the change in Business Investment (red).

Chart 3. UK Profits and Business Investment, % Change, 1997 to 2016
As the purpose of private investment is to realise profits, in general changes in profits tend to lead changes in business investment. But in 2016 business investment fell while profits grew very modestly. Businesses expect profits to be significantly lower in future. 

Naturally businesses can be wrong. A rise in exports could have a sustained positive impact on production and profits for export. This could be a response to the fall in pound, compensating for the rise in prices and fall in real incomes that is underway.

But there is no evidence that this is the case. Exports rose by 1.8% in 2016, not faster than GDP as a whole. By contrast imports rose by 2.8%. So the trade gap actually widened from £45 billion in 2015 to £52 billion in 2016. Economists speak of ‘J-curve’ effects on the trade balance after currency devaluations. This simply describes a process where the trade balance initially deteriorates and only improves years later as the effect of rising import prices fades and exporters win market share based on lower export prices.

That might be possible, although it would run contrary to established UK custom, where devaluations are used simply to hike prices, while investment is kept low so that any competitive gain is quickly eroded. If UK producers were gearing up for a global export drive, they would be using the windfall of the more competitive currency to restrain export price increases and raise investment. Neither of these two potential developments are taking place. As previously noted, business investment is falling. Remarkably too, UK producers have chosen to raise export prices at a faster rate than the rise in import prices (see Chart 4, below).

Chart 4. Indices of UK Export prices and UK Import Prices January 2015 to January 2017
Source: ONS
While the level of Investment in the UK economy is stagnant or falling it is almost impossible for real wages to increase significantly. Wages are not set primarily by the supply and demand for labour, but by the struggle between workers and their employers. To raise wages and conditions on the docks, it was necessary to end the system of day labouring through unionisation, not to reduce the number of dockers needing work.

Over the medium-term growth is driven by Investment. Without growth, workers would have to engage in enormous struggles in order to increase their wages by wresting capital’s share of total income. Real wages look set to fall further, and will be part of the government strategy for boosting capacity.
Brexit and the crisis

Using the Rahm Emmanuel dictum of ‘let no good crisis go to waste’ the government has embarked on a policy which will use the new-found freedom of Brexit to get rid of ‘red tape’ (workers’ rights such as restrictions on the working week or maternity leave, environmental protection and consumer standards).  

The claim is that the UK will be moving closer to the Singapore model of development. This is untrue. Singapore’s per capita GDP is US$85,382 versus the UK’s $41,756, according to World Bank data. This primarily arises from two factors. First, Singapore’s openness to trade is nearly 6 times greater than the UKs (326% of GDP versus 56.5%). Secondly, Investment (Gross Fixed Capital Formation) is a higher proportion of that much higher per capita GDP (25.5% versus 16.9%). Contrary to myth, Singapore also exercises a large degree of public control over investment, including outright state investment.

Chart 5 UK Average Weekly Earnings

The blue arrow points to the date in 2016 of the UK's EU Referendum

Brexit will not include any of this. In the words of leading leave campaigner Michael Gove, the aim is that the UK’s relationship with the EU will not be like Norway or Switzerland, but like Albania. The UK is severing its links with its closest markets, whereas Singapore has thoroughly integrated itself into the regional South East Asian economy and the rest of the world. In the UK the low level of investment is declining. The state will not be a directing hand over investment. It will be increasingly laissez-faire. In 2012 the Tories commissioned, but were unable to implement the main measures of, the Beecroft Report, calling for the wide-ranging removal of workers’ right.

So far, austerity has ‘worked’ only to drive down wages. It has not driven up profits. New, more radical solutions will be attempted if a real recovery in profitability is to be achieved, facilitated by Brexit.