Wage falls in the UK as ordinary workers suffer since the recession

workersEvidence here, once more from the UK’s TUC (Trades Union Congress) that real wages here fell by 10.4% between 2007 and 2015; in other words, since the financial crisis and recession. This is the worst record in the group of rich OECD countries and roughly the same as Greece.

On the bright side, employment growth has been relatively strong in recent years, although putting the two together suggests that a large proportion of the jobs created pay low wages. This means that job creation is less likely to reduce poverty for those already struggling.

As I have written previously, strong population growth has flattered the GDP growth figures so that per capita growth in incomes and output has been poor since the recession.

Stagnant or falling wages should boost the profits of firms, at least for a while, which could feed through into rising investment, which is necessary for productivity growth. But if real wages do not at some point pick up, then the only way that consumption can grow is for people to take on more debt, which will eventually prove unsustainable, especially from today’s already high levels.

Of course, the government will put a positive spin on the figures by distracting from them with the employment figures and overall GDP growth rather than the per capita evidence. But the picture is clear. We have a lot of ground to make up on productivity and real wages compared with our fellow OECD members and it is these variables which play a big role in determining living standards.

The continued failure of the government’s ‘long term economic plan’

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The ex-chancellor George Osborne in his hard hat

Some evidence here that the outcomes of the oft-mentioned ‘long term economic plan’ of the UK government have fallen far short of predictions and claims. First of all: austerity. Geoff Tily, Senior Economist at the TUC, shows that public sector net borrowing for the first quarter of this financial year was £26.6bn, more than the November 2011 official forecast for the whole of the 2015/16, which was £24bn.

The cuts to public spending and tax increases have reduced the deficit much more slowly than hoped, since growth has been much weaker than forecast since 2010.

The government has claimed many times that it has turned the economy around and saved it from ruin. What it doesn’t mention is that recovery was underway when it came into office in 2010. The combination of austerity and the Eurozone crisis slowed growth significantly until 2013, when it picked up and the chancellor George Osborne in fact relaxed austerity to some extent.

The UK’s recovery since the recession has been the weakest since records began. Continue reading

Anwar Shaikh’s Classical theory of inflation

9780199390632Economic theory needs to account for the phenomenon of inflation. This post draws on Chapter 15 in Professor Anwar Shaikh’s recently published book Capitalism in which he outlines his theory of inflation under modern fiat money (state-backed money not fixed in value to gold or another commodity). He contrasts it with neoclassical and Keynesian theories, and provides empirical evidence to support his ideas.

The essence of Shaikh’s model is quite simple. Inflation, a rise in the overall price level in an economy, is determined by aggregate demand and supply, and these are influenced by three factors having either a positive or a negative effect on it: new purchasing power (PP), net profitability (the rate of profit minus the interest rate, rr) and the so-called ‘growth utilization rate’ (u).

PP is a demand-side factor, and the other two factors operate on the supply-side. PP is influenced by private and public sector credit, or a rise in borrowing to fuel greater spending in an economy. Note that this can be generated domestically or from abroad, for example through a rise in net exports. In theory, under modern fiat money, the amount of PP generated by the government ‘printing money’ has no limit, and history shows that in wartime, governments have often financed the extra demands on their activities through the creation of new money, which has given rise to inflation. This source of inflation, generated from the demand-side, seems similar to monetarist theory, in which the state is to blame via its intervention in the economy and its creation of an excessive growth of the money supply, and trying to keep unemployment below its ‘natural rate’. Continue reading

Postcapitalism: Paul Mason’s ‘guide to our future’?

MasonCoverI said I would post something on Paul Mason’s thought-provoking book, Postcapitalism – a guide to our future, which has just come out in paperback. It makes a good read, and contains a wealth of ideas from economics, political economy, and futurism, all mixed together in the author’s aim to inspire a progressive transition beyond capitalism, but not to socialism, which he admits has been a huge failure for the left. Instead, he calls his utopian vision ‘postcapitalism’.

Mason starts by describing the current political economic paradigm, neo-liberalism, as having reached its limits with the crisis of 2008 and the subsequent tepid, or in many cases absent, recovery. There has been sluggish output and productivity growth, alongside wage rises for those at the very top of the income distribution but barely any change for the middle and bottom. In fact, these trends were only temporarily overcome by the excessive expansion of credit prior to the crisis which allowed consumption to grow in countries such as the US and UK despite stagnant wages. Continue reading

The IMF changes its tune on neoliberalism (a little)

International_Monetary_Fund_logo.svgHere is a link to a recent article by IMF researchers which backtracks on some of the tenets of that institution’s policy during what could be called the neoliberal era. It makes for interesting reading.

In particular, they make the case for capital controls to stabilize financial flows in certain circumstances; for reductions in inequality through ‘predistribution’ or redistribution in order to promote more sustainable economic growth; and they cast doubt on the wisdom of austerity which aims to reduce public debt as a share of GDP through tax rises and spending reductions instead of simply through policies to promote growth.

The piece does not wholeheartedly reject neoliberalism. In fact the authors praise certain aspects of it, such as the role of the expansion of international trade in reducing poverty. But this seems like a small step in the right direction.

Optimal investment and growth: why institutions matter

CentralKigaliHow much investment is optimal for sustained economic growth? Two recent blog posts present contrasting views on the answer to this question. The first, from Michael Burke on the Socialist Economic Bulletin, puts forward a simple theory: the greater the share of investment in GDP, the faster is economic growth, within certain limits. Furthermore, he argues that widespread economic stagnation in the growth of output and productivity among the richest countries today can be remedied by a large increase in public investment. In other words, the state can lead a recovery.

The second, by Michael Pettis on his blog China Financial Markets, discusses the role of what he calls ‘social capital’, or economic, social and political institutions in a broad sense. For Pettis, it is not enough for governments to enact policies which raise the investment share in output, if the institutional framework leads to it not being utilized effectively. If there is a high level of social capital, which might include levels of education, government competence, a lack of corruption, law and order, property rights etc, then policies which increase investment should have a better chance of increasing productivity and output. If these institutions are lacking, then more investment is not enough, and it will be used unproductively. Continue reading

Marx’s Grundrisse: some key points

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Karl Marx

Karl Marx’s Grundrisse is a collection of preparatory notebooks, laying out some of the themes which he was to explore in his great work Capital. It is not an easy read, but it helped that I have read some Marxist economics already, including Capital. Many of the ideas were therefore familiar.

Here are a few of the ideas which Marx explores in this book, with occasional comments from me: Continue reading

When and how will UK trade rebalance?

In my previous post, I suggested that for UK public (and private) debt to fall sustainably would require a dramatic shift in the current account from deficit to surplus, which would need to be maintained for a number of years. I also suggested that this seemed an unlikely scenario in the medium term. The UK current account deficit hit 6% of GDP in the third quarter of 2014 and has averaged over 5% for more than a year. Continue reading

Mechanisms of sustained economic recovery for the UK

After a period of relatively good performance, UK economic growth appears to be easing up, and data from the global economy also shows a deterioration. In particular, the Chinese economy is slowing, while the news from the Eurozone is dismal, with the once apparently mighty German economy flirting with recession, and the rest of the area performing poorly, and struggling to recover. Continue reading

Rents, rent-seeking and the role of industrial policy in economic development

The role of industrial policy in helping countries such as Japan, South Korea and Taiwan ‘catch up’ economically with the world’s rich countries in the post-war period has been extensively documented. Yet industrial policy, defined here as a government policy of targeting particular industries and technologies with support with the view that their rapid development has wider social and economic benefits in the national interest, has been far from a universal success story across developing countries. In fact, the failures probably outnumber the success stories in that only a few countries have made the successful transition from developing to rich country status. Rent-seeking processes have often been blamed for these failures, yet such studies ignore the pervasiveness of rents and rent-seeking in all modern economies. As will be discussed below, the desire to eliminate rents and rent-seeking is misguided and the creation of rents which support the development process has been key to the success of a number of newly industrialised countries (NICs).

In order for poor countries to catch up with the rich ones, they need to go through a process of rapid productivity growth and structural change, much faster than that prevailing in the technological leaders. Their companies need to learn how to use increasingly sophisticated technology as they move up the  ‘ladder’. At the early stages of development, innovation is probably less important than technological ‘learning-by-doing’: they must learn how to use technologies already in existence, rather than create new ones, although there is likely to be a degree of adaptation to local conditions, which could be seen as a kind of innovation.

Rapid transformation from being a poor country to a rich one will in almost all cases involve industrialisation, the structural shift from an economy dominated by agriculture to one of industry and services. Productivity growth needs to take place in all three of these sectors, while labour shifts from the primary to the secondary and tertiary sectors.

While technological backwardness and the dominance of agriculture offer potential for catching-up, this is far from an easy or automatic process. It is widely acknowledged that in countries such as Japan during the 1960s and 1970s, and South Korea and Taiwan during the 1970s and 1980s, the state had a strong developmental role and used a range of policies to promote particular industries in the service of broader economic goals. The results were dramatic in terms of GDP and productivity growth, which were rapid over these periods. A second tier of countries, particularly in South East Asia, such as Malaysia and Thailand also grew rapidly during the late twentieth century, in the run-up to the Asian Crisis of 1997-8, when they entered deep recessions. Industrial policy was attempted in these latter two, but was not as extensive as in the NICs, largely due to political constraints, as they possessed a different balance of power between the state and various social classes which left a faithful copying of the industrial policies of the NICs very difficult.

Many other countries tried industrial policies during the post-war period, such as nations in Africa and South America, as well as South Asia. This often involved nationalisation of particular industries and import-substituting-industrialisation (ISI), in which domestic industries are protected from foreign competition by tariffs, as a form of infant industry protection. The aim is that companies should be sheltered from more productive rivals until they ‘grow up’ and are able to compete in terms of price, technological sophistication and product quality. This will occur if the protected firms and those they employ engage in learning-by-doing and especially if they can take advantage of economies of scale in production, both of which can stimulate productivity growth. However, many of these industries, while they made initial progress and contributed to fairly rapid growth in the aforementioned countries, never fully grew up to compete internationally and continue to produce for export, without government support. By contrast, in the successful NICs, initially protected industries did become internationally competitive after a period of protection. Government support in the form of subsidies, tariffs and preferential access to credit was withdrawn after a time, and the industries continued to grow and become more productive.

What was the difference between the industrial policy successes and failures? The economist Mushtaq Khan has argued that the view that differences in corruption and other forms of rent-seeking explain the contrasting fortunes is misleading, as corruption tends to be a structural feature of all developing countries. While all developing countries (and indeed probably all rich countries as well) suffer from rent-seeking, the major differences between successful late-developers and those countries which have not performed as well, are the rent outcomes produced by the rent-seeking processes.

The most successful of the late-developers such as South Korea and Taiwan had states that were able to carry out policies which targeted support at particular industries in a time-limited fashion: support was withdrawn both when sectors became competitive internationally and could engage in exporting and also when they failed to become competitive. One difference with less successful countries was that governments in the latter failed to withdraw support even when the sectors and firms didn’t to grow up to be competitive and such economies were left with substantial welfare losses and without the successful exporters that the NICs possessed. Khan argues that the outcome of failed industrial policies can be worse than simply ‘leaving it to the market’, due to both static and dynamic welfare losses. The first best outcome would be rapid development as a result of successful industrial policies, as in the East Asian NICs, but such policies, certainly in the way they were carried out in the NICs, are not possible everywhere. What countries need to do is to match their policies which aim to stimulate technological and industrial upgrading with what is possible given the balance of power between classes, which produce a particular political settlement. If particular social classes are able to prevent the withdrawal of state support to firms and sectors, even when these have not grown up and become competitive, then economic stagnation can result. In these cases, the rent outcomes will be negative. By contrast, a different balance of power within a society, from a strong state insulated from the such social classes, and/or one whose interests are aligned with capitalists providing kickbacks to the state, can produce positive rent outcomes which may outweigh the rent-seeking costs which are likely to prevail in all societies.

It follows that, certainly at earlier stages of development and during the catching-up phase of growth, states should focus on industrial policies that are achievable and, if none are, then political reform is important to enable such policies to be put in place. In short, state industrial policies should provide targeted and time-limited support to particular sectors, conditional on performance. If firms and sectors do not perform well and become competitive, ultimately on an international scale with export potential, then support should be withdrawn. The necessary political reform obviously goes beyond economics, and shows the importance of a political economy approach to development.