UK economy: no Plan B

The latest IMF GDP forecasts confirm that the UK economy will be stagnant this year and in effect is virtually back in a ‘technical recession’ (see my post, Britain’s technical recession, 25 April 2012).  Back in the spring, the IMF thought the UK would grow by 0.8% this year and by 2% in 2013, but the new forecast pencils in growth of just 0.2% this year and 1.4% in 2013.  In its World Economic Outlook last September, the IMF was expecting the UK to grow by 1.1% in 2011.  Now we know it grew by only 0.7% in 2011.

The coalition government is at sixes and sevens over what to do about it.  Its Plan A was one of austerity: to cut back the size of the public sector, save on public spending – and raise taxes on households, while reducing it for corporations and the rich.  This is at a time when the inequality of incomes has never been so extreme since the 1930s.

Plan A was in order to ‘make space’ for private investment to expand and eventually take on more labour and drive the economy up.  But Plan A is not working.  Business investment is still in a slump, unemployment is not falling and real wages are still declining despite the recent slowing in inflation.

The capitalist sector of the economy is failing, while the public sector, such as it is, is being further curtailed.  Why is this?  Well, unlike the US, the British corporate sector has not experienced a rise in profitability.  On the contrary, the rate of profit, as measured by official sources, is falling and in the case of the manufacturing sector, is at a very low ebb.

The mass of profit remains some 6% below its peak in 2007.

No wonder business investment is not expanding to ‘take up the slack’. The reason for the poor recovery in UK profits lies with the ‘rentier’ nature of the British economy.  So dominant is the financial, property  and ancillary professional services sectors in the economy that it cannot recover quickly or sufficiently because of the dead weight of unproductive and fictitious capital built up in the credit boom that now still crushes the productive sectors.  As I have remarked before, the UK capitalist sector is like a large Switzerland that supposedly supports the living of a fast-growing population (the latest census tells us that it has never grown so fast in the last decade), but cannot do so because of the lack of sufficient value-creating sectors.  The finance sector is really like a large aircraft carrier moored off the Tower of London, on which workers board every morning and leave every evening, with the fruits of their work spirited offshore through foreign transactions, investment and tax havens.  It has little or no connection with any value-added to the rest of Britain, where the majority live and work.  On the contrary, the financial sector, often claimed by the apologists of capital as a huge contributor to the economy, has now become a fetter on growth.

The aircraft carrier has turned out to be faulty and rusting.  But it cannot be stripped down and overhauled, as it’s just not ‘fit for purpose’, to use the modern management jargon.  Its captains have turned out to be incompetent, corrupt, and arrogant overpaid liars. After Madoff, Stanford, MF Global, the Libor-Barclays/Diamond scandal (‘you can trust me, I’m a banker’), the JPM derivatives ‘London whale’ debacle and the recent Peregrine fraud, we now have HSBC hauled before the US Congress ‘for its pervasive and corrupt culture’ in money laundering drug barons in Mexico and terrorists from Iran!

The pilots for London’s financial navigation (the Bank of England and the FSA) have been exposed as useless guides/regulators.  The chief pilot, Mervyn King, governor of the Bank of England, now tells us that we are “only halfway through” the crisis.  His answer:  to inject another £50bn into the banks through so-called quantitative easing (QE).  But the BoE’s monetary policy committee (MPC) voted to spend another £75bn on government bonds last October and another £50bn in February, to make a grand total of £325bn since March 2009. And has it helped the UK economy?

At the same time, austerity (Plan A) is not working even on its own terms.  The UK’s Office for Budget Responsibility (OBR) reported that the medium-term outlook for government debt control had deteriorated since last year.  Net public debt would now reach 76.3% of GDP by 2014-15.   And yet, the government continues to slash public sector pensions, housing benefits, tax credits, youth services and benefits and a host of other welfare measures.

The pension cuts are not often noticed.  The OBR reports that the net present value of future public service pension payments would be £175 billion lower than was reported in 2010. That’s because the government has changed the inflation index on the value of public sector pensions from the traditional RPI measure, which includes mortgage costs, to the lower CPI measure, which does not.  And reducing the value of the return on the fund will cut another £69 billion.

As I have argued in other posts (see my posts on The pensions myth on 3-4 December 2011), proper pensions for all could be afforded even if the population is aging, as long as real GDP grows fast enough.  Yet the OBR reckons that UK productivity growth will average just 2.2% a year, in line with the average rate over the past 50 years. And it could be even lower in this depression.  That’s the real reason why it is difficult to fund proper pensions.  The cruel irony is that public sector pensions are being cut so much that, even with the prospect of this slow growth ahead, gross public service pension costs for the government will fall from 2.2% of GDP in 2016-17 to 1.3% in 2061-62.  This is partly due to the slashing of the public sector workforce.  Because of sharply increased contributions from this depleted workforce, the net cost will fall from 1.7% of GDP in 2016-17 to 0.9% in 2061-62.  Again the cruel irony is that if no changes were made in public sector pensions, the net cost to the government would still be less in 50 years time than now!

So what about Plan B?  This is the idea of those opposed to the austerity plan A of the government.  Plan B is usually seen through the glasses of Keynesian economics.  Don’t worry about the size of the budget deficits or the level of public sector debt, just expand public spending and the extra income and jobs will be created and multiply into an economic recovery.  Specifically, more public investment in infrastructure is promoted, using perhaps a state-owned bank for funding it, perhaps converting the Royal Bank of Scotland.  This investment bank idea is more radical than the opposition Labour leaders propose.   The Labour leaders really advocate little more than ‘less austerity now for more later’.

To try and steal the thunder, the government itself has just announced a large infrastructure spending plan for rail transport electrification across Britain.  This would appear to be in contradiction to its own Plan A that includes particularly slashing public investment.  But then if you look more closely, it is unclear that this is new public investment at all.  Rail contractors will be funded by higher rail fares (already the highest in Europe) to avoid any rise in government spending.  In addition, the government now says it will underwrite up to £40bn of investment in infrastructure.  The government will guarantee loans by the private sector to kick-start schemes which have stalled due to problems raising funds.  None of this is really a capitulation to Plan B.

The real problem with Plan B is that it won’t work either.  There is a confusion about public spending.  Most public spending is consumption, namely spending on welfare benefits and public services like schools, health etc.  Only a very tiny portion of this spending is investment in things and services – indeed less than 3% of GDP in the UK compared to 13-15% of GDP by the private sector.  So investing for growth is still left to the private sector to do.  Even that 3% is mainly money passed over to private companies.  Indeed, much of government spending is now ‘outsourced’ to the private sector.

For example, the disastrous London Olympics security operation went to G4S rather than have it done directly by the police.  G4S is the biggest security company in the world and has loads of contracts with the public sector in the UK in prisons, the health service and the police themselves.  The government has reduced direct labour in public services as part of the ‘neo-liberal’ plan to reduce the size of the state and to boost profits for the private sector.  This has been dressed up as being ‘more efficient’ than direct labour.  But that’s rubbish.  Moreover, the private finance initiative introduced by both the Conservatives and Labour, where schools, hospitals and prisons are built with private funds guaranteed by the government, is now estimated to have cost £25bn more than it would have done if the government had just issued its own bonds to fund these investments.   Then there is the £1.2bn of public money lost every year because of rail privatisation.   And all this ‘outsourcing’ is only cheaper at the expense  of low-paid workers’ wages, jobs and conditions and effective democratic control (see Comment by Seamus Milne, The Guardian, 17 July 2012).  Graph shows public investment as % of GDP through to 2017.

As a result of this neoliberal agenda, the public sector cannot ‘step in’ where the private sector won’t because it is now way too small in an investment sense.  To do it would require a massive expansion of public ownership of and control over banking and what used to be called “the commanding heights” of the economy.

That exposes the second false assumption of the Keynesians: the idea of a partnership between public and private sectors, or public spending ‘stimulating’ or pump-priming the private sector.  If public investment is too small or is just filling in the gaps or is just funding private contractors to make a profit, it won’t deliver.  But if it replaces the private sector, then it threatens the very existence of the capitalist sector.  As Michel Kalecki, the radical Keynesian, put it in his seminal paper, The Political Aspects of Full Employment, in 1942: “The economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business (e.g. hospitals, schools, highways).  Otherwise the profitability of private investment might be impaired, and the positive effect of public investment upon employment offset, by the negative effect of the decline in private investment.”

Plan A is not working but neither will Plan B.  Either public investment through direct labour must replace the capitalist sector, or after a very painful and long period of depression, the capitalist sector will eventually recover on the bodies of old capital and the living standards of millions.  The latest UK data suggest, as Mervyn King says, that this is still a long way off – a decade of austerity away.

“The way we do business—our clients’ interests are at the heart of what we do at all times. We reinforce our business integrity every day by striving to improve the service that we provide, making responsible decisions in how we manage the business, and actively managing the social and environmental impacts of what we do.”  Bob Diamond, ex-CEO of Barclays Bank,  in the Summer/Fall 2012 edition of the Georgetown Journal of International Affairs,

5 Responses to “UK economy: no Plan B”

  1. Chart of the day: Old Blighty’s one-percenters | eats shoots 'n leaves Says:

    […] Chart of the day: Old Blighty’s one-percenters Posted on 2012 July 18 | Leave a comment From Michael Roberts Blog: […]

  2. duvinrouge Says:

    I agree that neither austerity nor Keynesian fiscal stimulus can resolve the crisis, which is one of overproduction fuelled by credit/debt. The solution will be a severe depression (failing a socialist revolution).
    My question is how much of this credit explosion has been due to a reaction to the long-term downward trend in profit rates (as Kliman demonstrates with US data) & how much is due to a realisation problem, whereby finance capital has got workers buying things on credit (claims on future labour time) because they have insufficient purchasing power in the present?
    (If you’re on facebook you may be interested in the ‘Marxist Crisis Theory’ group: http://www.facebook.com/#!/groups/457920714226660/)

    • michael roberts Says:

      Hi
      The question you raise is a matter of continual dispute among Marxists on crisis theory. I have a whole lot of posts that explain where I stand on the issues of profitabilty versus realisation and on the empirical issue of inequality as the cause of crisis. I recently responded to a similar question from Professor Mike Lebowitz in the following way. “Clearly, value must be realised in the market. The market for goods and services is either from workers or capitalists. Capitalist expenditures are just as important as workers consumption, otherwise capitalism would be impossible, not just subject to ‘underconsumption’, as the crude version of that theory goes. The issue with the Keynesians is which comes first, profit or realisation?, both in theory and in reality. I think Marx says it starts with exploitation and generation of value in the capitalist mode of production. Thus for Marx it goes: from profit to investment to consumption, but NOT from consumption to investment to profit (or income), as Keynesians would have it.

      Investment and consumption still have to take place (thus realising value through the market), but ‘effective consumption’ is NOT the aim of the capitalist mode of production as Keynesians think. Instead it is ‘money to make money’ first through exploitation and the through realisation on the market. Uncertainty and instability in realising value in the market are inherent for individual capitalists. But what leads to a general failure to realise value is Marx’s law of profitability. The crisis starts when the weaker, less productive capitalists cannot realise their production in the market except at a loss and so eventually go bust. The power of socially necessary labour time is thus exerted through the average rate of profit to market realisation. If this is the right way of looking at it, it means that trying to boost ‘realisation’ with ‘purchasing power’ will not allow capitalism to exit any crisis, although it may help labour. Exiting the crisis under capitalism depends on raising the rate of profit.

  3. Eleuter Prado Says:

    someone has translated one of your paper in portuguese. See http://eleuterioprado.files.wordpress.com/2012/07/taxa-de-lucro-mundial.pdf

  4. Qrops Says:

    Useful write up, you invariably prepare the
    most useful ones and of course UK economy: no Plan B Michael Roberts Blog is absolutely no
    different.

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