UK the agony and the ecstasy

Reblogged from Michael Roberts blog at http://thenextrecession.wordpress.com/2014/10/18/uk-the-agony-and-the-ecstasy/ The Bank of England chief economist certainly put the cat among the pigeons with his speech on the British economy on Friday (http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech764.pdf). Andy Haldane was ‘off message’ from the story painted by his boss, the useless, confusing and grotesquely overpaid Mark Carney (see my post https://thenextrecession.wordpress.com/2013/08/13/a-blind-guide-dog). For months Carney has been going around hinting that the BoE would hike interest rates soon because the UK economy was booming and he wanted to control the racy property market and avoid rising inflation (instead inflation is now slowing fast!). In contrast, Haldane says that he is “gloomier” about the prospects for the economy than he was a few months ago and thinks that rates will have to stay lower for longer. Now Haldane has ‘form’ in being off message and not following the banker’s line. He even spoke to the Occupy movement in the days of the crisis, suggesting that they had plenty of things to complain about and that the banking system was to blame and needed radical reform (see my post https://thenextrecession.wordpress.com/2013/10/31/the-value-of-banking-according-to-mark-carney-and-alan-greenspan/). A little bit more on message was Haldane’s warning that Britain was vulnerable to another round of the Eurozone crisis. This is the line adopted by the UK’s conservative finance minister, George Osborne, who has already suggested any slump in Europe would be the excuse for the downturn in the so-called boom in the UK economy – forecast to be the fastest growing in the G7 this year (see my post, https://thenextrecession.wordpress.com/2014/10/10/draghis-answer-to-euro-depression/). However, Haldane went off message again in his so-called Twin Peaks speech, when he outlined the fault-lines in the UK economy: falling real-wage growth and flat-lining productivity. On wages, Haldane was brutal: “Growth in real wages has been negative for all bar three of the past 74 months. The cumulative fall in real wages since their pre-recession peak is around 10%. As best we can tell, the length and depth of this fall is unprecedented since at least the mid-1800s! This has been a jobs-rich, but pay-poor, recovery.” Haldane has constructed what he called his ‘agony index': a simple index of real wages, real interest rates and productivity growth. In this blog, I have referred to a ‘misery index’, the sum of the unemployment rate and inflation, as an indicator of misery for the average household (https://thenextrecession.wordpress.com/2011/01/29/britains-misery-index/). But in an economy like the UK or the US, where unemployment and inflation have been falling but real wages have collapsed along with productivity and pension returns, Haldane’s agony index is way better. Haldane’s index shows that the British people and the economy have been in ‘agony’ for the longest time since the 1800s, with the exception of world wars and the early 1970s. This is not the sort of thing that the government and Haldane’s boss, Carney, want to hear. But as Haldane said: “The BoE, in common with every other mainstream forecaster, has been forecasting sunshine tomorrow in every year since 2008 – that is, rising real wages, productivity and real interest rates. The heatwave has failed to materialise. The timing of the upturn has been repeatedly put back.” Instead it was a mixed picture of ‘twin peaks’ of agony for average households and ecstasy for richer ones. To add to Haldane’s argument and refuting the line of the government that the British economy is on the road to sustained recovery and fast growth, official figures on productivity growth in the major economies since the Great Recession have been released. Output per hour in the UK was 17% below the average for the rest of the major G7 industrialised economies in 2013, the widest productivity gap since 1992. On an output per worker basis, UK productivity was 19% below the average for the rest of the G7 in 2013. And it is getting worse. UK output per hour fell slightly in 2013 compared with 2012, contrasting with an increase of 1.0% across the rest of the G7. UK productivity levels are about the same as in 2007, but 15% below where they ought to be if pre-crisis productivity growth had continued. And productivity growth matters if overall economic growth is to be sustained. Real GDP growth is a combination of employment growth and productivity growth (output per worker). Employment growth in the UK even with wholesale immigration (and that is going to stopped by a re-elected Tory government) is unlikely to be higher than 1% a year. So to achieve sustained 3% real GDP growth, the minimum necessary to get unemployment down further, reduce the budget deficit and government debt and start to raise real incomes, productivity growth must be at least 2% a year. But instead it is falling. I have discussed the reason for these chronically bad productivity figures in previous posts (https://thenextrecession.wordpress.com/2014/05/07/britain-is-booming/). It’s been a combination of the growth of low value-added self-employment (taxi drivers, cleaners, odd jobbers etc), low skilled part-time, temporary and full-time jobs (Asda, McDonalds, Starbucks etc) and, above all, the lack of new investment in technology to boost the productivity of those working. UK business investment remains in the doldrums, while public sector investment has collapsed (see my post, https://thenextrecession.wordpress.com/2014/02/26/is-the-uks-investment-strike-over/). What Haldane did not say was why there had been such the fall in real wages and a rise in his agony index. It’s because rather than investment to raise productivity, British capital has opted to squeeze wages and cut costs to try and restore profitability. You see, contrary to the view of neoclassical and Keynesian economics alike, productivity and profitability are not the same thing – indeed they are often contradictory. Squeezing wages has boosted the rate of exploitation (and raised levels of inequality). But this has failed to raise UK profitability much. The way to raise profits is by new labour-shedding technology that increases productivity and lowers costs. But British capital is reluctant to invest when it is still burdened with spare capacity in old technology and corporate debt. That needs to be liquidated first – in another slump. There is more agony to come yet.

Are we witnessing a housing bubble?

House prices outside London and the South East rose by 0.8% in the last year according to the Office for National Statistics in London it was even greater at 9.9% this is an incredible rate of increase and shows a lot of the housing policies this government have brought in are aiding this property bubble. UK house prices have been rising at the highest annual rate since June 2010. The rise coincides with the government's Help to buy scheme, introduced to boost the housing market. But will the scheme create a new housing bubble? UK house prices have risen by 9.9% in the year to August, according to the Halifax's latest house price survey. The government's Help to Buy scheme, which began in April, allows buyers to put down a deposit of just 5%, and take out an equity loan from the government for up to 20% of the property's value, up to a maximum home value of £600,000. It is designed to help first-time buyers get on the property ladder and enable existing homeowners to "trade up" to larger properties by giving banks greater confidence to lend. Help to buy currently only applies to new builds but from January it will be extended to cover existing homes, with mortgages being backed by a government guarantee. The scheme got off to a "flying start", according to the Home Builders Federation (HBF) in June. But Help to buy has also been criticized for having the potential to artificially raise house prices, with Business Secretary Vince Cable warning of "serious inflationary pressures". Experts give their views on whether help to buy risks creating a new housing bubble. Dr Beverley Searle, research fellow at the Centre for Housing Research, University of St Andrews Help to Buy, or any intervention which helps pay for housing, will inevitably create a housing bubble. Providing assistance with the purchase of housing artificially props prices up. We have witnessed this twice before. When it became easier to borrow money during the 1980s house prices rose. Even after the 1990s downturn the market just kept finding ways to lend people more money, allowing prices to rise again. If people cannot afford to buy a home because they cannot afford to save for a deposit, then there is something fundamentally wrong with the housing system. The government is clearly acknowledging this by providing an additional "deposit loan". For prices to stabilise there needs to be a significant increase in the supply of housing for sale and rent and the market given time to adjust. Even though Help to Buy is aimed at new build properties, it will interfere with this adjustment process. It seeks to encourage high levels of demand, with only a very limited increase in supply. The housing market has failed, it needs government intervention, but this should be in supplying housing people can afford, not letting them borrow more money for housing they cannot. Quite clearly this is adding some of the growth we are seeing now in the UK but will this last? With the UK’s rate of profit still not recovered to anywhere near what it was like before the great recession and there seems to be no will to revive the rate of profit. Housing is one way of boosting credit but I can only see this being a short term fix. The next boom is coming which will be followed by another bust. Due to the unfixed contradictions of capitalism which are always there a bigger crisis is not far away.

Green shoots of recovery or another false start

? There is certainly a growing mood of optimism in the business world that a recovery is under way. Is this something as socialists we should be pleased for or not ? We must always remember workers and boss's interests are not the same. Its a tricky one. It’s true, however, that employment is a lagging indicator – it looks backward to what has happened and not forward to what will happen. And the consensus is that faster growth is on its way, and along with it, a rise in real incomes and employment. This optimism is based on the significant rises in the Purchasing Managers Indexes (PMIs) around the globe in the last few months. The PMIs, are the best high-frequency measures of the level of activity in capitalist economies that we have. They are really measures of what company managers think about the state of their industries and markets. They are not measures of actual sales or production. Thus they show what might happen in the future. ). For the first time, in August, that indicator (data from the ISM) went close to what is considered boom territory So perhaps the US economy is finally on its way up? Similarly, across the globe, PMIs rose in August. But let’s be careful. This does not mean every region of capitalism is expanding. It means that each region is now doing better (or less worse than before), according to the PMI indicators. Also, the OECD announced its latest update for forecast real GDP growth in the advanced economies of the OECD, revising up their measures slightly. Many of the forecasts for capitalism are tentitively confident of the coming period. Even during longer term trends of a recessionary period or slow growth there can be smaller trends almost micro trends within a trend. The OECD reckoned that growth was “proceeding at encouraging rates in North America, Japan and the UK” and the Eurozone was “out of recession, although output remains weak in a number of economies”. But, although some advanced economies looked like growing faster in the rest of this year than previously thought, some larger emerging economies were slowing down: “the numbers for advanced economies are a tad higher, and for France and the UK more than a tad higher”, but the average rate of growth in emerging economies would be about 1% point a year lower than in the recent past. And remember what the OECD is talking about is growth of about 2% a year or less for the major economies , hardly a ringing endorsement of economic strength. It would seem contary to what was previously thought the more advanced economies appear to be returning to growth all be it on a small scale and the emerging economies are slowing down especially China and India now. The IMF has also begun to raise its forecasts a little for the advanced capitalist economies. But the IMF has dropped its rosy view of the emerging economies which it had considered were the ‘dynamic engine of the world economy’, instead noting that “momentum is projected to come mainly from advanced economies, where output is expected to accelerate”. It is now admitting that the faster growth in economies like Brazil, India, China etc was partly a product of a flow of cheap credit (fictitious capital as Marx called it) into the emerging economies. The huge expansion of credit generated by central banks printing money had not gone into new investment in the productive sectors of the advanced economies, but instead into buying financial assets (bonds and equities) The fact that optimism about UK recovery is based on its services sector is no accident. What has been recovering is the property market. Residential property prices are rising at over 10% a year in London and around 3-5% a year elsewhere. It is the same phenomenon in the US, where home prices are rising at over 12% a year. The boom in these economies is concentrated in the unproductive sectors of finance, property and the stock market, not in investment and employment in manufacturing, industry and exports. Indeed, UK industrial output was completely flat in July And exports to non-EU countries fell by over 16% in July, the largest monthly decline since January 2009. As much of the UK’s ‘better’ real GDP growth in the last quarter came from exports this does not suggest that this current quarter will deliver much faster growth. I get the sense that the slight boom we are seeing in the UK and teh US is a fictitious boom based on credit and the housing market will have to crash at somepoint it is simply unsustainable forever. There is not a permenant slump in capitalism it is a much more complex thing than that there is growth in some areas all be it slow and contractions elsewhere too. Recent optimistic noises from the capitalists and their industrial voices is unconvincing to me as a longer term thing as there still remains the case that the rate of profit has still not recovered to its pre 2007 levels. There is still a lot of capital in the system which is being a barrier to new capital and further investment. For me, the key indicators of sustained recovery in capitalism would be rising rates of profit, a sharp pick-up in business investment and substantial falls in unemployment. There are little signs of any of this. with extracts and sections from Michael Roberts at http://thenextrecession.wordpress.com/2013/09/07/autumn-pick-up/

Prospects for the UK economy

Prospects for the UK economy As we hear today Britain has seen some modest growth figures. Is this cause for celebration or a false dawn? — Britain's economy grew faster than thought in the second quarter, official data showed on Friday, extending a broadly based recovery. Gross domestic product (GDP) -- the total value of goods and services produced in the economy -- grew by 0.7 percent in the second quarter, the Office for National Statistics said in a statement. That marked an upgrade from the initial estimate of 0.6-percent expansion. Growth occurred across all sectors of the economy, with small upward revisions across manufacturing, construction and parts of services. Second-quarter GDP growth has more than doubled from the 0.3-percent expansion that was witnessed in the first three months of the year. The economy expanded by 1.5 percent in the second quarter, or three months to the end of June, compared with the equivalent period in 2012, the ONS added. That was also up from the previous estimate of 1.4 percent. Sterling and the London stock market shrugged off the news. Market expectations had been for no change to both figures, according to analysts polled by Dow Jones Newswires. The ONS added that construction activity expanded by 1.4 percent in the second quarter, up from the initial estimate of 0.9 percent, as the housing market was partly lifted by state schemes that are aimed at stimulating lending to homebuyers. Factory output grew 0.7 percent in the quarter, up from the prior figure of 0.4 percent, while consumer spending rose 0.4 percent. There were also upward revisions for output from distribution, hotels and catering firms, as well as business services and finance firms, and the agriculture sector. Britain's shrinking net trade deficit, which dropped to £3.2 billion ($5.0 billion, 3.7 billion euros) in the second quarter from a £4.3-billion deficit in the first quarter, also boosted growth as exports hit a record level. Friday's data comes one week after news that British retail sales -- a vital indicator of consumer confidence -- jumped 1.1 percent in July from June as a heat wave fuelled spending on food, drinks and summer clothing. "The slight upward revision to Q2 GDP continues the run of good news on the UK economy and the spending breakdown looks reasonably encouraging too," said Vicky Redwood, chief UK economist at consultancy Capital Economics. "The initial estimate of a 0.6-percent quarterly rise has been nudged up to 0.7 percent and now looks even better compared to the more modest rises seen in the US and euro zone in Q2. "As indicated by the timelier retail sales figures, consumer spending played a big role." ING economist James Knightley added that the higher estimate of GDP will "boost optimism on the economy". Although this is some modest growth it is still the fact that not enough constant capital dead labour in affect has not been destroyed to restore the rate of profit. As such the system is bound to hit trouble in the near future. As we know the capitalist system is not based on meeting so called demand in fact workers can never buy back what they create as this would mean the system wouldn’t be capitalist at all in fact. This is a crisis of profitability with the under lying crisis being caused by the law of the tendency of the rate of profit to fall which Karl Marx brilliantly described many years ago in his works on das capital in the 19th century. For the capitalist system to come out of recession a certain amount of constant capital needs to be destroyed to create space for new modes of production to sprout. The reason the recovery is so sluggish is due to the organic composition of capital and the simply fact there is still far too much constant capital to variable in a ratio form anyway. We are not out of the woods yet and any capitalist polititian calling this a real recovery should hold fire. Certainly in the UK much of this short term growth can be put down to the laying off of workers and the driving down of the surplus workers receive their wages in other wods increasing profits as a result. Capitalism is a system which invests for profits not to meet need so calling this a crisis of under consumption I don’t think is right as capitalism has never been about meeting the working class’s needs not now not ever. Understanding Marx’s 3rd law of capitalist motion is key to understanding that the system cannot be reformed or made to work for us. It simply must be replaced with a system planned to meet the mass’s needs before profits are even considered which under socialism they will become less and less relevant.

Work? What work? Work programme failing as economy tanks

With the DWP’s own figures out today and a startling figure whatever you think of the pro’s and con’s to the work programme has seen only 3.53% of those who were enrolled on the work programme in finding employment. That is staggering what a huge fail by this government and the previous gov who brought in the programme to help get people back to work. It’s clear to me at the time and also now that you can’t get people into jobs that do not exist. The right scream benefit scroungers and work shy but its clear there simply isn’t the jobs out there for people to get into. • Work Programme was launched nationally on the 1 June 2011 and replaced Flexible New Deal. • Work Programme official statistics on outcomes were released for the first time at 9.30 on 27 November 2012 by the Department for Work and Pensions (DWP). • The latest Work Programme official statistics on referrals and attachments were released on 7th November 2012. Work Programme Official Statistics The latest official statistics on Work Programme include figures to the end of July 2012. Key points from the latest release are: • The total number of job outcomes paid to providers from 1st June 2011 to the end of July 2012 is 31 thousand; • The total number of referrals and attachments to the Work Programme from 1st June 2011 to the end of July 2012 are 878 thousand and 837 thousand respectively Just 3.7% of people referred to workfare found work and just 2.3% kept jobs. This backs up the socialist party and Youth fight for jobs views at the time that we still need real jobs that pay a living wage for young and old people to live on. 0 hours contracts which I know many people on are not sustainable and are unreliable and poorly paid. If this is the Tories idea of getting the economy moving again there is real trouble ahead. The poor figures are more indication of a government in denial about its strategy of cuts and austerity. The work programme was never designed to get people back to work it has been used as a stick to beat the unemployed with and to demonise them as scroungers if they fail to get work and remain on benefits. It’s an awful system and something which capitalism loves your unpaid labour for nothing this is pure gold to a capitalist not even having to pay for their workers subsistence. Quite clearly we need to demand real jobs with a living wage, socially useful jobs that can help meet people needs not dead end jobs which give you nothing at the end of it.