During his election campaign, Donald Trump’s rhetoric was consistently anti-free trade. He threatened to impose tariffs on US imports from China and to renegotiate trade agreements such as the North American Free Trade Agreement (NAFTA). His argument for such policies is that they have led to enormous job losses in American industry. Indeed, this may explain some of his appeal to former ‘Rust Belt’ workers who have not been sharing in the ‘American Dream’.
The absence of the American Dream for enormous numbers of Americans is nothing new. Since the 1970s, median wages have been largely stagnant, while the so-called 1%, at the top of the scale, have done exceptionally well. This is reflected in rising income inequality. Among the 1%, one might include CEOs and many of those working in the financial sector.
So if Trump is as good as his word, will he enact protectionist policies, and will these restore more widespread prosperity among the poor and middle-class? Continue reading →
The Economist magazine has a piece this week on the role of manufacturing in the UK. While it half-heartedly concludes that a larger, more competitive manufacturing sector may benefit the economy, it suggests that today’s shrunken sector is increasingly employing only highly skilled workers on high wages, producing hi-tech products. The piece argues that the hope that a larger sector would directly benefit those currently left behind by its relative decline over the last few decades is a forlorn one. In other words, jobs which pay more moderate wages and demand fewer skills would not be created, given recent trends.
I disagree. This argument merely extrapolates trends which were at least in part due to the periodic and sustained overvaluation of the pound vis-a-vis our trading partners. I have argued here recently that the serious imbalances in the UK economy could be significantly reduced by an economic strategy which gives a greater priority to a lower exchange rate. Continue reading →
Will the vote for Brexit derail the UK economy? The Guardian newspaper yesterday contained a brief report here from two economists, both formerly members of the Bank of England’s interest rate-setting Monetary Policy Committee (MPC). Both of them focus on trends in domestic spending and consumption, driven mainly by wage growth and employment. Unemployment has apparently ticked up a little according to the latest figures. They conclude that economic growth will slow into 2017, and while one predicts that the UK will avoid recession, the other concludes with some gloomy speculation on an ‘oncoming Brexit tsunami’.
The pound has fallen sharply since the result of June’s referendum became apparent. Whatever else happens, I see this as a good thing, and necessary to help promote a long overdue rebalancing of the economy. As Roger Bootle writes here, the Brexit vote was the trigger for the pound’s devaluation, but not its deeper cause. Continue reading →
“Capital is a particular form of social wealth driven by the profit motive. With this incentive comes a corresponding drive for expansion, for the conversion of capital into more capital, of profit into more profit. Each individual capital operates under this imperative, colliding with others trying to do the same, sometimes succeeding, sometimes just surviving, and sometimes failing altogether. This is real competition, antagonistic by nature and turbulent in operation. It is as different form so-called perfect competition as war is from ballet.
…Real competition is the central regulating mechanism under capitalism. Competition within an industry forces individual producers to set prices with an eye on the market, just as it forces them continually to try to cut costs so that they can cut prices and expand market share. Cost-cutting can take place through wage reduction, increases in the length or intensity of the working day, and through technical change. The latter becomes the central means over the long run [my emphasis].
…The notion of competition as a form of warfare has important implications. Tactics, strategy, and resulting prospects for growth are central concerns of the competitive firm…In the battle of real competition, the mobility of capital is the movement from one terrain to another, the development and adoption of technology is the arms race, and the struggle for profit growth and market share is the battle itself.”
Larry Elliott’s economics opinion piece from today’s Guardian discusses the issue of the UK’s large current account deficit and how to reduce it. He refers to a paper by Roger Bootle and John Mills, two authors spanning the political divide (the paper is free to download here). Bootle is a free-market Keynesian economist who runs his own consultancy, Capital Economics, and generally favours light regulation and low taxes, but also attaches importance to the Keynesian emphasis on aggregate demand. Mills studied economics at Oxford, is a successful businessman and a major Labour party donor. On the issue of the UK’s exchange rate, they seem to agree.
The pound fell sharply following the result of the UK’s referendum on EU membership. Economic theory teaches that a lower exchange rate, by reducing the price of a country’s exports and increasing that of its imports, all else equal, should boost sales of the former and reduce those of the latter. In the UK’s case, this should reduce the current account deficit. At 7%, the latter is at the highest level since records began. The financial markets don’t seem to mind financing it for now, but there are a number of reasons why it makes sense to maintain the current lower level of the pound. Continue reading →
This post continues an occasional series based on chapters in Ha-Joon Chang’s book 23 Things They Don’t Tell You About Capitalism. Chapter 12 aims to counter the idea among free market economists that the government should not be in the business of supporting particular firms or sectors, and should leave things, as far as possible, to the market. In other words, if industrial policy is at least partly about ‘picking winners’, then ministers and bureaucrats should stay out of the way, as those in business will inevitably know more about how to achieve economic success.
Chang notes that there are plenty of examples from across the world in the history of capitalism of the successful picking of winners by the state, from South Korea to the US. In another part of the book, he points out that what is good for one particular firm may not be good for the economy as a whole. After all, economic growth and development under capitalism involves a process of creative destruction and structural change, as some firms succeed and others fail, expanding and creating new jobs in some cases, and stagnating or shrinking in others, going bankrupt or being taken over and restructured, with jobs being lost. There is constant change in a successful economy, and this is essential to rising productivity and overall living standards. If the state can play a role in facilitating this process, then this may involve intervention and not simply deregulation and leaving it all to the market. Continue reading →
I 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 →