‘If appearance always coincided with essence
there would be no need for science.’ Karl
Marx
The UK economy has experienced nine years of unbroken
growth, low inflation, and full employment under
Gordon Brown and his former chief adviser, now
Economics minister at the Treasury, Ed Balls. Sounds
impressive; moreover, the statistics seem to stack
up. We are constantly told that this is New Labour’s,
read the Balls/Brown duumvirate’s, greatest
achievement.
The UK economy is now ‘strong’ - a
showcase for the rest of Europe to follow.
That’s the conventional wisdom, even on
the left; and although the left-liberal literati
don’t openly admit this, they are stuck with
an inescapable conclusion: namely, that Mrs Thatcher
and her policies were, albeit in a crude and brutal
manner, broadly speaking correct. Neo-liberalism,
under the various semantic flags of convenience,
namely, ‘reform’, ‘globalization’ ‘flexible
labour markets’ et cetera, has worked. The
UK economy has enjoyed its success because New
Labour adopted the market oriented neoliberal approach
of its predecessor.
Looking behind the headline figures reveals a
rather different version of economic history than
that described in headline journalism. Taking the
claims in turn, firstly GDP growth.
Gross Domestic Product (GDP)
This is a measure of economic activities carried
out in a country expressed in monetary terms. GDP
growth is the change in this figure measured in
yearly intervals. Gross National Product (GNP)
is like GDP but factors into its calculations income
flows from the overseas earnings of corporations
and individuals. Earnings from outward investment
(e.g. UK investment abroad) counts as a positive
income stream, whereas the earnings by foreigners
and foreign companies whose operations are based
in the UK count as negative income streams. So
GDP and GNP can be very different figures. Moreover,
GNP would seem a more reliable indicator of a country’s
economic growth than GDP. Japan for example has
a much higher GNP than GDP because of the extent
of its companies’ overseas earnings.
It is
the opposite with countries such as Ireland which
has practically no outward investment but a very
large volume of inward investment. The distorting
effect of this GDP methodology makes Ireland
the 5th richest country in the world after Luxembourg,
Norway, Switzerland and Denmark, which patently
is not the case. This is because 50% of Ireland’s
GDP is produced by foreign corporations and most
if not all of this is wealth created by inward
investment which will as a matter of fact be repatriated
to its country of origin. So Ireland is not necessarily
as rich as the GDP figures would suggest. The same
is true of the UK although there is more in terms
of outward investment.
Income Inequality
Then there is the little matter of how GDP is
internally distributed – who gets the growth?
Well, it should be known by now that the UK is
the most unequal income and wealth economy in Western
Europe. In terms of the ‘Gini Coefficient’ (the
standard method of measuring income/wealth inequality)
Britain is seventh in the league table of inequality
sandwiched between Georgia and Azerbaijan, Russia
being top of the league.
UK GDP per capita is $30,000 but this figure is
a purely mathematical construction. It says nothing
about the distribution of wealth. The same is true
of average income. The fact is that modern Britain
has become so economically and socially Balkanised,
with regional, ethnic and gender variations, much
of its economic activity moved offshore, and much
of its GDP being the wealth of overseas companies
and individuals, that the whole concept of GDP
and growth is becoming increasingly meaningless.
Inflation
The claim that we are or have been experiencing
low inflation is at best highly questionable and
at worst blatantly fraudulent. Ultimately it all
turns on definitions and which measure of inflation
is chosen. From the standpoint of the current orthodoxy
rampant asset-price inflation, in the property
market, a trend now spreading to other commodities,
such as base and precious metals, oil and gas doesn’t
count! Why it does not count is not explained.
The government’s preferred inflation measure
is the Consumer Price Index. This leaves out items
like Council tax, energy costs and mortgages. Little
wonder it is the government’s preferred instrument!
It is all too reminiscent of the Tories under Thatcher
when unemployment was constantly redefined and
after every redefinition the headline figure for
unemployment fell. When the present government
changed from the old inflation system RPIX to the
new CPI in December 2003 the rate of inflation
fell from 2.5 to 1.4%. Strange that!
Unemployment
Numbers out of work (note, we will exclude the
two million or so ‘economically inactive’ on
Incapacity Benefit – that’s a separate
discussion by itself) has risen every month since
January 2005. The present level – using the
Labour Force Survey – indicates 5.1% or approx
1.5 million unemployed, the highest figure since
2003.
Debt
Consumer debt, together with government expenditure
has without question been the main driver of the
UK economy during the Balls/Brown ascendancy. And
driving this debt creation has been house-price
inflation which has enabled homeowners to obtain
loans on their properties, through refinancing
and remortgaging – Mortgage Equity Withdrawal.
Inspired by their US mentor, ex-Fed chief, Alan
Greenspan, the Balls/Brown GDP growth in the UK
has been a function of a general policy and culture
of easy credit and cheap money. Household debt
at £1.158 trillion is now larger than annualised
GDP by £30 billion. Correct me if I am in
error but isn’t this an example of a fools’ paradise?
Don’t get me wrong, I’m not against
debt or deficit financing –household, business
or government - provided it is cyclical. Cyclical
debt financing means you borrow in the bad times
and pay back in the good. That is, as I understand
it, Keynesian monetary policy. Keynes, however,
did not envisage a permanent infusion of liquidity
into the economy regardless of capacity constraints.
Such a policy would lead inexorably to structural
debt and unavoidable inflationary pressures, in
addition to problems with balance of trade. However,
our present debts are structural – which
means they don’t get paid back and therefore
just get bigger.
Unsurprisingly financial distress is now gradually
assuming significant proportions in the UK. The
number of people filing for insolvency in Britain
rose by almost 50% to new record levels over the
past year as consumers struggled to cope with the
debts amassed in recent years, according to government
figures released in April 2006. Personal insolvencies
were up by 11.6% in the third quarter of 2005 and
46% higher than in the same period a year ago.
If current trends continue Britain could see more
than 100,000 people being declared bankrupt by
the end of 2007.
Of course this was bound to happen just as it
is bound to get worse. If the present policy of
debt driven growth is carried on it will simply
lead to an inflationary collapse – no question.
It worked in the short run, but it can never work
in the long run. Unfortunately the government doesn’t
seem have a plan B. Or if it has it is not telling.
I suspect it is simply crossing its fingers and
hoping for the best.
Trade Deficit
I’ll leave this bit to the excellent Larry
Elliott of The Guardian:
‘It's hard to credit that governments used
to be obsessive about the balance of payments when
today there is barely a flicker of concern in the
City that the UK's deficit on goods hit £65bn
last year, more than 5% of GDP. Services and financial
wheeling and dealing mean that the current account
is a lot smaller than that, around 2% of GDP, but
the notion that an economy running a trade deficit
of that size is in rude good health is, frankly,
risible.
A shrivelled manufacturing base also has an impact
on Britain's productivity performance. Why? Because
it is easier to boost output per person in a car
plant than it is in a barber's shop or a dentist's
surgery. A haircut or a filling takes the same
amount of time as it did 10 or 20 years ago; the
output of the public sector (although difficult
to measure with any degree of accuracy) has almost
certainly not been keeping pace with the resources
pumped into it.
What that means is that the UK is a long way from
being the knowledge economy of the government's
dreams. It has pockets - in London and along the
M4 and M11 corridors, but in reality there has
been no economy-wide shift of people out of manufacturing
and into the high-powered bits of the service sector.’ Enough
said.
Productivity and R&D
One of the reasons why the UK GDP is (slightly)
larger than France is that we Brits work longer
hours, have less holidays, and have longer working
lives. France’s productivity levels are higher
than the UK. In fact most developed countries levels
of productivity are higher than the UK. We simply
do not invest enough particularly in terms of Research
and Development (R&D).
In spite of recent improvements, the UK still
spends a paltry 1.9% of GDP on R&D, compared
with the 2.2% spent by France, 2.5% by Germany,
2.6% by the USA and 3.2% by Japan. Even worse,
a third of R&D is foreign-owned and of no particular
benefit to the UK, which is bad news for a government
whose stated tactic for beating off competition
from emerging economies is to boost significantly
the "value-added", knowledge-led economy.
Neither do future commitments look good. At its
Lisbon summit in 2002, the EU set a target to increase
R&D spending to 3% of GDP by 2010. Britain
could only agree to a limited 2.5% by 2014.
Given the continuous Panglossian drivel peddled
on a daily basis in the media and by politicians,
think-tanks and soi-disant ‘experts’ on
the subject, this analysis is deliberately bearish.
The implications of the current orthodoxy is that
we can spend and borrow our way into prosperity
since property prices will rise forever, and anyway
structural debt and deficits on current account
don’t matter any longer. It also seems to
imply that asset price inflation is the same as
wealth creation. We thus can sit back and get wealthier
as house prices rise. If only …
In fact prosperity is brought about by increasing
the social productivity of labour and by spreading
these gains evenly throughout society; the prerequisite
of this is saving and investment (in both public
and private sectors). This is the tough reality
of economics. Unfortunately it looks as though
we’re going to have to learn it the hard
way. |
This
month
Archive
of past articles