Socialist Economic Bulletin

Trump’s consequences for the US economy explained in 3 charts

.914ZTrump’s consequences for the US economy explained in 3 chartsBy John Ross

There has been much discussion on the likely effect of Trump on the US economy. But some of this discussion fails to distinguish clearly between short term and long term effects of Trump. This can lead to wrong interpretations of events and trends as they unfold. The aim of this article is therefore to set out the fundamental parameters of the US economic situation as it confronts Trump. This can be clearly shown in three charts showing the fundamental features of the US economy which are given below. These show:

  • There should be a short-term acceleration of growth during the early period of the Trump presidency, for the simple statistical reason that in 2016 the US economy was growing significantly below its long-term average. A move of the US economy up towards its long-term average growth rate will therefore create the illusion that the US economy is improving during the early period of Trump’s administration – when it is in reality a predictable statistical effect.
  • Trump, however, cannot accelerate the long-term US growth rate without fundamental changes in the US economy which are very unlikely for reasons analysed below. Therefore, over the long-term Trump will not accelerate US economic growth.

Analysing these most fundamental trends in the US economy also identifies which key US data must be watched carefully to assess the success or failure of Trump’s economic policy in both the short and long term.

The long-term slowing of the US economy

To start with the most fundamental trend of US long term growth, Figure 1 shows US annual average GDP growth using a 20-year moving average to remove all purely short term fluctuations due to business cycles. This data shows clearly the most profound trend in US growth is a half century long economic slowing – the peaks of US growth progressively falling from 4.9% in 1969, to 4.1% in 1978, to 3.5% in 2003, to 2.3% by the latest data for the 3rd quarter of 2016.

Figure 1


 The cyclical situation of the US economy

Turning to short term developments, the trend of US growth shown in Figure 1 is a long-term average. This necessarily means that short term economic growth is sometimes above and sometimes below this average. Figure 2 therefore shows the short-term trend in US growth, the economy’s year by year growth rate, compared to the long-term average.

It may be seen from Figure 2 that the US economic growth in the year to the 3rd quarter of 2016 was only 1.7%. That is, the US economy in the recent period leading up to Trump’s election was growing at significantly below its long-term trend. For this reason, purely for statistical reasons, it is probable that the US economy may accelerate in the short term.

As this would coincide with the initial period of Trump’s presidency this would lead to the claim ‘Trump is improving the US economy’. But this is false, such acceleration would be expected purely for statistical reasons.

Figure 2


The determinants of US growth

Finally, if the reasons for the US long term economic slowdown are analysed these are simple. The most fundamental of all features of the US economy is that it is a capitalist economy. This means when there is a high rate of capital accumulation the US economy grows rapidly, when there is a low rate of capital accumulation the US grows slowly.

In terms of economic statistics net capital accumulation is equal to net savings. Figure 3 therefore shows the long-term trend in the US savings rate/capital accumulation rate since 1929. The curve of long term development of the US economy can be seen to be clear:

  • During the crisis creating the beginning of the Great Depression in 1929-33 US capital accumulation was negative – that is the US economy was creating no capital. This necessarily produced a deep crisis of the US economy. After this the rate of US savings/capital creation rose, with a powerful acceleration during World War II, to reach a long-term peak as a percentage of the economy in 1965.
  • After 1965 US net savings/capital creation steadily fell as a percentage of GDP until it once again became negative during the ‘Great Recession’ in 2008-2009. This declining trend of US capital creation of course explains the long-term growth slowdown that was shown in Figure 1.

This trend therefore shows the fundamental issue confronting Trump which he would have to overcome to accelerate the long-term growth of the US economy. He would have to increase the percentage of capital creation in the US economy. Without this, while a short-term speed up in the US economy is to be expected for the statistical reasons given earlier, no long term acceleration of US economic growth will take place. Without such a sharp increase in the level of capital accumulation claims by Trump that he will accelerate the US rate of growth are purely ‘hot air’.

Figure 3


It is clear that the first effect of Trump’s policies will not be to increase but to reduce US savings/capital accumulation. This is due to the fact that an economy’s savings are not only household savings but company savings plus household savings plus and government savings – government savings in most economies being negative because the government runs a budget deficit.

Trump has announced policies that will clearly increase the US budget deficit – tax cuts focussed on the rich and increased military spending. This increased budget deficit will necessarily reduce the US savings level.

In the purely short term Trump could lessen the effect of low US savings/capital creation by borrowing from abroad. But historical experience shows that over the medium/long term in major economies it is domestic capital creation which is decisive. Therefore, Trump has so far announced no policies which will increase the long-term US growth rate. Therefore, in summary:

  • A short-term speed up of the US economy is likely for the statistical reasons already given – but does not indicate any increase in long term economic growth.
  • Trump has no put forward policies that will accelerate US long term economic growth.

Finally, these trends show which data must be closely watched to see success or failure in Trumps economic policies. The short term shifts in the growth rate must not be seen in themselves but compared to the long term trend of US growth: the key variable for judging long term US growth is whether the level of capital formation in the US economy is rising or falling.

*  *  *
This article was originally published in Chinese by New Finance.

John Ross

The world will be listening to Xi Jinping at Davos

.419ZThe world will be listening to Xi Jinping at DavosBy John Ross

Xi Jinping is the first Chinese president to speak at the Davos World Economic Forum. This visit has attracted even greater international media attention than the normally high levels of interest in a trip by China’s leader. As the Financial Times chief foreign affairs columnist Gideon Rachman put it, “The big star of this year’s forum is certain to be Xi Jinping.”

The reason for this is well understood. China’s unequivocal support for open economies and globalization is now clearly in contrast to the protectionism embraced by U.S. President-elect Trump and that was manifested on a smaller scale in the U.K. Brexit referendum.

In terms of declared positions on globalisation, a definitive turning point has already been made. Every U.S. president since World War II has at least verbally committed to free trade and globalisation. Trump explicitly broke with this historical U.S. position with threats to impose a 35 percent tariff on Mexico, a 45 percent tariff on China, to impose a U.S. “border tax”, to renegotiate the North American Free Trade Agreement (NAFTA), by his pressure for U.S. companies not to invest in Mexico despite it being a NAFTA partner and by his clear overall policy statements. In parallel, while the reality of the Trans Pacific Partnership (TPP) was not a move for freer trade – being in reality an anti-China bloc – nevertheless its unilateral abandonment by Trump made the U.S. appear an unreliable negotiating partner.

Whatever happens in the future, there can never again be 100 percent certainty that the U.S. remains committed to globalisation. This fundamental pillar on which the post-World War II global order was built is no longer solid. It is widely understood that of the world’s two largest economies, only China remains unequivocally committed to globalisation.

This directly and powerfully affects other countries in addition to China – hence the wide international interest in Xi Jinping’s Davos visit. Other countries well understand, both factually and theoretically, the decisive importance of the international trade and globalisation.

Factually, numerous studies demonstrate the positive correlation of an economy’s international openness and its development speed. Growing internationalisation by almost all countries was a decisive trend during the long period of relative global international economic stability and growth after World War II – a marked contrast to 1929-39 global economic fragmentation, marked by the infamous U.S. Smoot-Hawley protectionist tariff, which led to the greatest economic crisis in modern history.

Clear theoretical understanding of economic openness’s advantages has existed for over two hundred years. The first sentence of the founding work of modern economics, Adam Smith’s The Wealth of Nations, is, “The greatest improvement in the productive powers of labour… have been the effect of the division of labour.” But division of labour in a modern economy has reached a point where it is necessarily international in scale. International supply chains, which alone ensure the cost efficiency of modern production, flow from the reality that different countries have different advantages in different parts of production. Attempts to create self-contained national economies necessarily make economies less efficient. Therefore, every strategy of “import substitution” or attempt to create an efficient national self-contained economy necessarily fails.

U.S. protectionism’s negative effects, with its inevitable international reciprocal retaliation, would hit even the U.S., the world’s largest economy – increasing prices of imported goods for consumers and costs for U.S. producers while restricting export markets. Even for the U.S., three quarters of the world market in economic terms and 95 percent of the world’s customers in population terms lie outside its borders. A protectionist U.S. economy cannot match the advantages of orientation to a global economy.

But for Germany, 95 percent of its potential market is outside its borders, for Brazil 97 percent, for Australia 98 percent, for Thailand over 99 percent. Protectionism would be more damaging for them than the U.S. Such countries therefore applaud Xi Jinping’s unequivocal defence of globalisation – not because of deference to China, but out of national self-interest because globalisation really is “win-win.”

Sometimes in the media there is loose talk of a “rise of protectionism and populism.” But this imprecise expression conceals a precise reality. In some European countries, there certainly is an increase in support for protectionist populist parties – for example, in France Marine Le Pen’s National Front or the Alternative in Germany. But these are minority parties who are not in power and who in most cases have no realistic prospect whatsoever of forming governments. Only in the Anglo-Saxon economies have protectionist forces actually come to office or been able to determine government policy.

The overwhelming majority of countries, including traditionally firm U.S. allies such as Germany or Australia, have expressed opposition to Trump’s protectionist policies. When Germany’s Chancellor Merkel recently said, “We see protectionist tendencies,” she was naturally discreet enough not to mention the U.S. But most people were well aware that the U.S. was included in the countries she was speaking of. A large majority of other countries listening will strongly agree either publicly or silently with Xi Jinping’s clear statements in support of open economies and globalisation at Davos.

Maintaining an internationally open economy is vital not only for governments but for the world’s population. Globalisation has brought immense benefits to the majority of the world’s people, strongly confirming economic theory. Certainly, socialist countries were most able to take advantage of globalisation’s benefits. The world’s four fastest growing economies in the last 30 years have been socialist – China, Laos and Vietnam, together with a Cambodia whose economic policies are decisively influenced by China. China experienced the world’s most rapid rise in living standards. Eighty-three percent of the people in the world lifted out of internationally defined poverty were in China, and a further 2 percent were in Vietnam – only 15 percent were in capitalist countries.

But while socialist countries made the most efficient use of globalisation, other countries also strongly benefitted. India under Modi has consciously moved closer to China’s economic model, and India is now the world’s other major rapidly growing economy. Several African countries, basing themselves on globalisation, have achieved growth rates of 6-8 percent a year.

Certainly the political crisis in the Anglo-Saxon countries, which has produced support for the protectionist dead ends, was created by a failure to improve their population’s living standards. U.S. median household incomes are lower than 16 years ago, U.S. inequality has soared. In the U.K., real incomes in the last eight years experienced their most prolonged decline for a century. But this was not inherent in globalisation, as demonstrated by the dramatic improvements achieved by most countries, but a result of the specifically neo-liberal paths launched by Reagan and Thatcher. It is for this reason, not globalisation, that a protectionist political dead end has become strongest in the Anglo-Saxon economies.

China’s support of globalisation, symbolised in Xi Jinping’s Davos visit, corresponds to China’s national self-interest. But it also corresponds to the national self-interest of other countries and peoples. Mutual self-interest is the firmest of all foundations for cooperation.

It is for this reason Xi Jinping’s visit to Davos has attracted such intense international interest.

*   *   *

This article originally appeared at Ross

British economic crisis is deepening

.232ZBritish economic crisis is deepeningBy Tom O’Leary

2017 has begun with some upbeat economic survey evidence although the majority of economic forecasters are cautious about whether this will be sustained. Leading stock market are also at or close to all-time highs. The reality is that the UK economic outlook is deteriorating. This will have both important economic and political effects over the course of the year.

Chart 1 below shows the nominal growth rate of profits for UK companies, quarter-on-quarter. Profits (more accurately the gross operating surplus) of firms have fallen marginally before inflation is taken into account. Once the effect of price rises is included, the fall in profits becomes more substantial.

Chart 1. Quarterly growth of UK companies, quarter-on-quarter
Source: ONS
Quarterly growth rates can be misleading, in part because they also reflect the impact of immediately preceding growth rates. If these were substantial, as in Q1 2016, then the effect is to depress subsequent quarterly growth. In a less erratic measure, the moving average of the last 5 quarters year-on-year growth rate in profits is 0.8%. This is extremely weak, and turns negative in real terms, once inflation is taken into account. It is much weaker than the long-run average growth in profits for the UK economy, which has effectively been slowing down since the early 1970s, with cyclical fluctuations.
Chart 2. UK companies’ year-on-year growth rate of profits, 1956 to 2016
Source: ONS
Profits matter. The creation of surplus value and accumulation as profit is the motor force of any capitalist economy. While every individual firm will continue to seek to maximise profits, if the total accumulation of profits is close to zero, then firms as a whole will primarily seek to maintain their capital rather than to expand it. Capital preservation is the priority.

This is exactly what has happened in the recent period. Firms have stopped investing, and are generally content to hire workers only as an alternative to capital investment or where they can enforce limited hours, low pay, zero hours or other increases in exploitation. In each of the first 3 quarters of 2016 the total level of business investment was below the equivalent period in 2015. In the quarter to October there was no growth in employment, while full-time employment fell by 50,000, made up by a similar rise in part-time work.

These trends represent the acceleration of longer-term tendencies in the UK economy. Chart 3 below shows the contribution of the different sectors of the UK economy to the total accumulation of the capital stock. From 1997 to 2015 UK companies increased their net capital stock by less than 1.5% per annum.

Chart 3. Net capital stock growth 1997 to 2015
Source: ONS
In absolute terms the company sector increased its capital stock by £390 billion over the period. But the combined increase in the capital stock from the household and government sectors significantly exceeds this total, rising by a combined £600 billion! The UK has not been able to rely on the private business sector to lead productive investment for a long time.

But this long-term trend has become more pronounced since the crisis. Private companies’ net capital stock has risen by little more than 1% on average per year since 2007. This profit-induced weakness of business investment is the primary cause of the Great Stagnation in the UK and in other advanced industrialised economies since the crisis.

Brexit effect

Since the Brexit vote profits have declined outright and so has business investment. Manufacturing has declined by 1% since June and industrial production has fallen by 2%. The trade gap has widened by £8 billion compared to the same period in 2015, an increase of almost 20%. The forecasts of sunny uplands by the Brexiteers are purely delusional.

There are many single markets in the world. The British economy is itself one, with minor exceptions there are common laws, freedom of movement for goods, capital firms and people, and a unitary currency and fiscal policy. The benefit of the EU Single Market in the making is that it is one of the world’s three largest single markets, alongside China and the US. This provides a powerful magnet for capital seeking profits. 

Of course it is possible for small amounts of capital to make very large profits investing in a small market, such as the UK would become with Brexit. But it is impossible for a large mass of capital to make large returns in a small market. And Britain needs large capital inflows simply in order to finance its external deficits.

British firms are struggling to realise profits. Ever since the crisis their level of investment has been abysmally low. This deepened the long-run negative trends in the UK economy. These have become sharply worse since the June 23 referendum. In any Brexit scenario, the less the access to the EU Single Market, the lower the attractiveness of the UK to international capital. Without a dramatic change in Brexit policy, there is little reason for optimism about UK economic prospects in 2017.

Migrants don’t drive down wages (once more)

.430ZMigrants don’t drive down wages (once more)By Tom O’Leary

A false argument can become an established truth by a process of constant repetition. But it is still false. This is now the main method used in the ongoing debate about the effects of immigration to the UK. One of the key false assertions widely made is that immigrants have driven down wages. 

Chart 1 below is based on a TUC analysis on the effect of the recession on real wages in selected countries. Contrary to Government propaganda, the UK economy is not booming. On some measures it is among the worst-performing countries coming out of the crisis. By contrast, while there are many other advanced industrialised countries that have been badly hit by the crisis, only Greek real wages have fallen as far as those of British wages over the period 2007 to 2015.

Chart 1. Change in Real Wages in Selected Countries, 2007 to 2015

Source: TUC

This collapse in UK wages has coincided with the continued growth in net migration to the UK. But coincidence is not even correlation, let alone causality. 

In reality, no-one outside the far right ever dreamt of linking wages to immigration levels until the Tory Government introduced a net migration target in 2011. This was a blatant attempt to distract from its own unpopularity because of its austerity policy. Labour had started to pull ahead of the Tories in the opinion polls for the first time in 4 years (data here). Blaming migrants for low wages, poor public services, the housing crisis and other issues is classic scapegoating.

The assertion that migrants drive down wages rests on general truisms; that migrants are willing to work for lower pay, they undercut wages and so on. If any of this were true, it would be generally true. There cannot be a unique mechanism which only applies to the UK which does not apply to other advanced industrialised countries. Yet this is one of the more obvious ways in which this argument falls down.

In Chart 2 below the total level of migration to the UK and to Germany from 2000 to 2014. It should be noted that over the period 2007 to 2015 German real wages rose by 13.9% while UK real wages fell by 10.4%, as noted in Chart 1 above.

Chart 2.

Yet this is almost exactly the period in which migrant inflows to Germany and to the UK diverge dramatically. In effect, just as German real wages were advancing migrant inflows were soaring towards 1.4 million per annum. At the same time, while UK real wages were declining the level of migrant inflows was more or less steady at approximately 500,000 per annum. As a proportion of the total population German migration was also much higher than that of the UK.

If the general proposition were true that migrants drive down wages in advanced industrialised economies, it would be true across those economies. It is patently untrue. German wages rose in real terms while its immigration rate and totals were far higher than that of the UK.

In reality, the German economy is a much more highly productive economy than the UK, about 30% higher. This is based on much greater openness to the world economy and much higher levels of investment over a prolonged period. This allows both higher wages and higher wage growth than the UK. It is the exceptionally low level of UK investment combined with the economy’s long-term structural weaknesses which have caused the depth of the crisis here and the fall in real wages. Migrants have not cut British wages. British bosses have.

RBS shows left must think for itself

.576ZRBS shows left must think for itselfBy Tom O’Leary

Royal Bank of Scotland (RBS) is a publicly-owned bank. The overwhelming majority of its shares are in state hands, 73% of the equity. Yet it was the only major bank to fail outright the recent ‘stress test’ of its balance sheet conducted by the Bank of England. The bank is a basket-case. It is costing all of us money, and yet it could be a key contributor to economic recovery.

For many years the left has called for the nationalisation of the banks. This happened as a result of the financial crisis. But with very few exceptions the left had very little to say about what the public sector could do with its newly-acquired and deeply damaged assets. That was an error. Now that the left leads the Labour party and could be in position to lead the next government, it should use every lever at its disposal to produce an investment-led recovery. RBS should be seen as one of those levers.

Financial snapshot

The financial position of RBS is deteriorating, highlighted by the Bank’s stress tests. The stress tests themselves have four fundamental elements, related to the earlier global financial crisis. In the Bank’s stress scenario, world GDP falls by the same amount as in the global financial crisis and UK GDP falls by a lesser amount. But UK unemployment rises more than previously and UK property prices fall by a significantly greater amount. The stress test assumptions compared to the global crisis are shown in Chart 1 below.

Chart 1. Stress test scenarios compared to 2007/08
Source: Bank of England
The specific problem for RBS is revealed by this fundamental test. RBS is a loss-making bank, incurring a pre-tax loss of £2.7 billion in 2015. But it is also particularly unprepared to withstand a downturn in the housing market. This is despite the fact its so-called capital cushion against losses has increased. In 2010 its Tier 1 capital ratio was 10.7% while in 2015 it had risen to 15.5%.

This is a startling outcome, which completely belies the idea that banks can be insulated against shocks simply by increasing their spare or cushion Tier 1 capital. These are economic shocks outlined by the Bank of England, with perhaps severe financial consequences. The answer lies in economic policy, and its financial implementation.

RBS has become a more risky bank since the crisis, not a less risky one under its private sector management even while it has been in public ownership and its Tier 1 capital ratio has risen. This is because it has increased its dependence on lending to the housing market. Between 2010 and 2015 RBS increased mortgage loans on its balance sheet from £90.6 billion to £104.8 billion, and the proportion of its total balance sheet from 83.6% to 86.4% of the total.

This completely lop-sided dependence on mortgages means that any projected decline in house prices has an even greater damaging effect on RBS’s balance sheet than previously. RBS has in effect been cutting its lending to the productive sectors of the economy from already abysmally low levels. Business loans now account for just 4.4% of the total RBS balance sheet.

Of course, if private sector businesses are unwilling or unable to borrow for productive investment then it would be foolish for RBS or any bank to chase business by offering uncommercial business lending. But thankfully, even in the UK, there are large parts of the economy which are in public sector hands and which could easily increase their productive borrowing for investment. 

These include local authorities and universities. There is too still a host of companies in public sector hands. Local authorities own, or have significant holdings in a series transport networks, bus services, rail networks and even airports. In addition, they could all usefully increase and upgrade local authority housing. Universities own research facilities and share in science parks which can be expanded. They own publishing enterprises, which could be upgraded and digitised. Large scale companies remain in public hands, from broadcasting companies, to research facilities, the NHS, the Post Office, water companies, network rail and air traffic control. 

All of these could be expanded with investment and in the process would increase the level of productivity and prosperity for the economy as a whole. The publicly-owned National Grid could undertake its own large scale investment in renewable energy projects. The return on them would be on average very high, and RBS itself would be rebalanced away from the housing market.

The Tory government has presided over the longest fall in living standards in the UK on record. It has produced the Brexit car crash simply in order to manage its own internal divisions. It is utterly incapable of lifting the economy out of its morass. Inevitably, it has no idea how to lead RBS out of its crisis. The only reason a fire sale has not been conducted is that outstanding legal cases, primarily in the US, mean that some parts of RBS are still burning.

Labour cannot take its lead from the Tories on any of these issues. One of the most difficult tasks in politics is to arrive at an objective perspective on key issues, overcoming the weight of prejudice fostered by the enemies of workers and the poor. But RBS is a practical example of how the left must learn to think for itself, and use every lever at its disposal to deliver an investment-led recovery.

Autumn Statement shows Brexit makes us poorer

.030ZyesAutumn Statement shows Brexit makes us poorerBy Tom O’Leary

The ever-optimistic Office for Budget Responsibility (OBR) has come under sustained fire from the Brexiteers for its gloomy prognosis and forecasts for the Autumn Statement. This criticism is entirely misplaced. The OBR has underestimated the negative impact of Brexit.

The OBR has loyally served successive Tory or Tory-led administrations having been created by them in 2010 and has routinely forecast much stronger growth than has occurred, along with rising living standards that have failed to materialise. However, what the OBR cannot do is ignore economic reality. Its forecast weaker growth over the next two years, that is before Brexit is enacted, chimes with almost all private forecasts. The Brexiteers want to shoot the messenger, who brings news of the downturn they have created.

The OBR repeatedly emphasised that it cannot make any substantive forecasts about the Brexit period itself as the government would not provide any information on the post-Brexit economic regime, not even in the widest parameters. Instead, the OBR focused on the immediate negative impact of the Brexit vote and the deterioration of the economic outlook, and even assumed a resumption of slower but steady growth from 2019 onwards. Give the disruption that is currently scheduled for 2019 when the UK is scheduled to leave the EU, this seems implausible.

Worse outlook because of Brexit

The most important OBR forecast changes are shown in Table 1 below (taken from Table 1.1 of the OBR’s November 2016 Economic and Fiscal Outlook). GDP growth falls by a cumulative 1.1%. Household consumption is down by 1.8%. Crucially business investment falls by 12.75%. In terms of living standards average earnings fall by a cumulative 2.8%.

Table 1. Changes in OBR forecasts for key economic variables since March 2016

Source: OBR

Not all of this deterioration is due to Brexit. The OBR specifies that around 60% of it is. In the OBR’s ‘counterfactual’ scenario, as if there had been no referendum, shows that 61.25% of the deterioration by the end of this parliament is due to Brexit (Table 1.4 of the OBR document). 

The remainder is the customary downward revision to forecasts as the OBR’s rose-tinted view gives way to reality. But this can hardly provide much comfort to the Brexiteers on the right or left. The OBR has only really taken account of the turmoil of the next two years and its previous track record suggests the forecasts will be markedly lower over time.

It is clear from Table 1 above that the biggest single casualty over the next few years is business investment. This is entirely predictable and predicted. As the level of investment is in part determined by the scope of the market, the UK’s withdrawal from the world’s largest market will inevitably deter investment. Contrary to government propaganda and much easily-led commentary, there will be no attempt to replace this new slump in business investment with increased public sector investment, as shown in Chart 1 below. Contrary to Tory propaganda there is no ‘National Productivity Investment Fund of £23 billion’, it is simply the relabelling of existing government spending on road, rail, housing and so on.

Chart 1. UK Pubic Sector Investment as Proportion of GDP

Brexit may have been sold as an opportunity to ‘get our country back’, but no vote can overcome the forces of global capitalism, or abolish the laws of economics. Irrespective of the ideas those who supported Brexit, the effect of the vote is to prolong the longest period of falling real wages in recorded UK history, as shown in Chart 2. Real wages had been falling since the end of 2014, when they were 5.7% below where they were when Labour lost office in 2010. But Brexit postpones the wage recovery primarily through flat wages and higher prices, so that they are not now officially forecast to recover until Q3 2019. This lost decade in wages is prolonged by Brexit.

Chart 2. Index of Real Wages

Overall the crisis of the British economy is demonstrated by the change in Consumption and Investment since the beginning of the crisis. The OBR has forecast the outturn for the remainder of this year. The changes in Consumption and Investment are shown in Chart 3 below. The change in aggregate Consumption since the beginning of the crisis has been just over £135 billion, led by rising private Consumption. The cumulative rise in Investment is just £0.8 billion, effectively zero.

It is this rise in Consumption without any rise in Investment to sustain it which has led to enormous overseas borrowings to cover the current account deficit. Consuming without Investment is also responsible for flat or falling living standards for the overwhelming majority.

Chart 3. UK Consumption and Investment Q1 2008 to Q4 2016 (Forecast)
 Unsurprisingly, the notion that exports will boom because of Brexit is revealed as pure fantasy. With zero investment the economy can only decline competitively if there is zero investment, once the one-off boost from Sterling’s devaluation fades. This is shown by the OBR in terms of export market share, that is exports divided by imports, in Chart 4 below. In fact, the OBR forecasts showing the relative decline of export performance accelerating post-Brexit compared to the previous trend.
Chart 4. UK Export Market Share

Economic objectives

As noted above, the OBR sought but was not given any meaningful advice from the government about its aims in the Brexit negotiations, or what policy outcome it expected. Instead it was given two statements by Theresa May. Below is a key section from the statements they were given.

Theresa May said, “I want it to give British companies the maximum freedom to trade and operate in the Single Market and let European businesses do the same here. But let me be clear. We are not leaving the European Union only to give up control of immigration again.”

The OBR requested guidance on economic policy. What it got was bombast on immigration. This must be assumed to override economic policy, or supersede it.

Yet the OBR is clear, the objective of reducing immigration will itself reduce both growth and living standards for all. There are 70 references to migration in the OBR document. It states that potential growth will be 2.4% because of lower net migration by 2021. To be absolutely clear, this is not simply an effect which reduces GDP, it also reduces living standards for the entire population, measured as per capita GDP. The OBR states, “On a per capita basis, cumulative growth would have been 0.3 percentage points higher because net migration adds proportionately more to the working-age population than to the total population, thereby boosting the employment rate too” (p.45).

It should be the goal of all economic policy to maximise the greatest sustainable increase in the living standards of the population. The Brexit vote and the Brexit government have overturned that strategic aim, replacing it with immigration-reduction. Chancellor Philip Hammond told the Tory party conference that ‘no-one voted to be poorer’. Yet his own government acts as if they did. It is what they will deliver.

The reason the Cabinet Brexiteers are in uproar is that their reactionary fantasies cannot survive contact with the real world. Even the perennial optimists at the OBR must be attacked. But this is in the nature of Brexit, a reactionary project propelled by distortions and outright lies. Because Brexit erects barriers between the UK economy and the world’s biggest market, living standards will be much lower than otherwise. Curbing immigration will compound this effect.

Of course, it is quite possible for political movements and even nations to sustain themselves on reactionary fantasies for a whole period. But they tend not to survive contact with the outside world. The Autumn Statement is probably just a small foretaste of what is to come as the Brexit fantasy meets reality.

After Trump’s victory China is the main strategic pillar for globalisation

.387ZAfter Trump’s victory China is the main strategic pillar for globalisationBy John Ross

Trump’s election as US President means 2016 is ending with a stark public contrast between the positions of China and the US on global trade. The US has its first president proclaiming support for protectionism since World War II, while China states its support for increased international trade and economic globalisation.

December 2016 also marks the first anniversary of China’s major free trade agreements (FTAs) with South Korea and Australia – so far China has signed 14 free trade pacts with 22 countries and regions in Asia, Latin America, Oceania, and Europe. In contrast Trump, far from calling for extending FTAs, has called for revision even of the existing North American Free Trade Agreement – the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investors Partnership (TTIP) are different issues as analysed below.

This reality that China is now the largest economy supporting progress towards free trade, while the US moves towards protectionism, is therefore a key event in the world economy. It is consequently crucial to analyse both the fundamental issues involved, that is the most powerful forces driving the process, and the immediate practical consequences for China in pushing for FTAs and to understand the consequences of the contrasting strategic approaches of China and Trump.

The importance of trade

First, analysing the most powerful forces in economic development, international trade is one of the clearest issues where economic theory and the facts of economic development completely coincide. Economic theory states that international trade will aid economic development: numerous and repeated factual studies show a positive correlation between the trade openness of an economy and its speed of economic development. Nevertheless, to understand developments in the world economy given the now contrasting policies of China and Trump it is crucial to understand the reasons for the firmly established positive correlation of trade and the rate of economic development in the modern globalised economy.

Trade and division/socialisation of labour

Trade’s importance does not arise from some ‘magic effect’ of crossing national borders. The distance from Shanghai to Beijing and from Shanghai to Osaka is approximately the same, but the importance of trade does not mean that there is some extra benefit from Shanghai’s trade with Japan rather than another part of China.

International trade’s importance follows from the proven fact of the first sentence of the first chapter of the founding work of modern economics, Adam Smith’s The Wealth of Nations: ‘The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is directed, or applied, seem to have been the effect of the division of labour.’ Marx used the term ‘socialisation of labour’, rather than ‘division of labour’, but entirely agreed with Smith’s conclusion.

Modern econometrics fully confirmed the Smith/Marx analysis. Modern econometrics finds, in economic ‘growth accounting’ terminology, that the most powerful factor in economic growth is the increase in ‘intermediate products’ – that is the output of one industry (e.g. a steering wheel, a hard drive) used as an input into another industry (e.g. a car, a computer). But the increase in ‘intermediate products’ is merely a measure of increase in division of labour.

Modern econometrics also finds that the second most powerful factor in economic growth is fixed investment. But fixed investment is again simply another form of division/socialisation of labour – the use of the outputs of capital goods industries to produce other products.

The key role of international trade follows directly from this decisive role of division/socialisation of labour. As Smith immediately noted: ‘the division of labour is limited by the extent of the market’ – increasing division/socialisation of labour required an increasing market size. It was for this fundamental economic reason that Smith advocated free trade and Marx was a fierce critic of the founder of modern ‘protectionist’ theory Friedrich List

It is this increasing division/socialisation of labour, not of crossing national borders, that is decisive for economic development and which therefore allows the unfolding economic processes involved with Trump and China’s current policies to be understood.

‘Opening up’

These fundamental economic forces evidently explain the success of China’s ‘reform and opening up’ process since 1978 – and why China seeks new FTAs. A key reason for China’s more rapid economic than other major economies is that it makes greater use of international division of labour than the other two of the world’s three largest economies. China’s trade in goods and services in 2015 was 41.2% of China’s GDP compared to 36.8% in Japan and 28.1% in the US. Given the success of the ‘opening up’ policy it corresponds to China’s national self-interest to press forward with proposals for freer trade and FTAs.

But the fact that this advantage of division/socialisation of labour in economic development is the foundation of trade means equally means that developing this is in the interests of other countries as well as China. The statements that in economics ‘one plus one can be more than two’, and the concept ‘win-win’, are not pleasant but empty words but correspond to this decisive economic advantage of division/socialisation of labour. This is why China has been able to secure its free trade agreements with South Korea, Australia and other countries, and why it wants more.

It is also the beneficial effects of such globalisation that has helped produce rapid economic growth in China, India and other developing countries, thereby helping lift hundreds of millions of people out of poverty. Globalisation is consequently decisively important for countries, but particularly developing countries and the world’s poorest people, to achieve economic development.

US economic history

If China since 1978 dramatically illustrates the advantages of open trade US history provides one of the most dramatic examples of the negative nature of protectionism. The passing of the Smoot–Hawley act raising US tariffs in 1930, against the advice of huge numbers of US economists, was a decisive factor in the depth of the Great Depression. Trade’s share in US GDP dropped from 11.0% in 1929 to 6.6% in 1932 and was still only 7.6% in 1938 on the eve of World War II. US GDP fell by 26% between 1929 and 1933, and was only 2.0% above 1929 levels by 1938.

Following this devastating experience of the Great Depression after World War II the US turned policy through 180 degrees and actively built a globalised world trade order. The US played a decisive role in seven rounds of negotiations under the General Agreement on Tariffs and Trade (GATT) each of which further liberalised world trade. This culminated in 1995 in the creation of the World Trade Organisation (WTO). Every US President from Truman to Obama declared support for freer trade and many acted on it. It is this 71 year old at least verbal commitment to freer trade that Trump’s campaign broke with.


To fully understand the present stark contrast between China and US positions on global trade it is important to realise that the US already began to break with the goal of an increasingly globalised world economy in reality if not in rhetoric under Obama. The TPP and TTIP differed decisively from previous trade agreements under GATT and in creating the WTOs. Their real content was regionalised protectionism for the US beneath mere words on support of freer trade.

This real content was shown extremely clearly in the TPP. The US and China are the world’s first and second largest trading nations and overwhelmingly the largest Pacific trading nations. The foundation of a genuine US orientation to freer trade in the Pacific would have been to negotiate with China. But instead the US deliberately excluded China from the TPP negotiations – confirming that, as numerous Western analysts noted, the TPP’s real aim was not to liberalise trade but to form a bloc under US dominance against China. As US Secretary of Defence Carter stated: ‘In fact, you may not expect to hear this from a Secretary of Defense, but… passing TPP is as important to me as another aircraft carrier.’

The domestic political problem with the TPP for the US administration, however, was that to enshrine the interests of US corporations it tipped the playing field even further against American workers. As well-known US economist Jeffrey Sachs noted of the TPP’s provisions: ‘Their common denominator is that they enshrine the power of corporate capital above all other parts of society, including… even governments… The system proposed in the TPP is a dangerous… blow to the judicial systems of all the signatory countries.’

As the TPP did nothing to improve the position of the US population, indeed would have worsened it, the TPP became politically toxic. All three candidates with major support during the US presidential election and primaries – Trump, Clinton and Sanders – were therefore forced to declare opposition to the TPP. Huge opposition to the TPP existed in the US because it was an attack not only on China but on the US population.

While Trump has in words turned the US from support for free trade and globalisation to protectionism, Obama had already done it in practice with the TPP and the TTIP.

China as the champion of a globalised economy

Trump famously declared during the presidential election campaign he would put a 45% tariff on Chinese imports in the US and would declare China a currency manipulator on ‘day one’ of his administration. As, however, Trump made several wholly impractical proposals during his campaign, such as that Mexico would pay for a wall along its entire border with the US, what Trump will actually do is not yet clear. As the US Peterson Institute noted: ‘If implemented, these proposals [of Trump] would provoke retaliation by US trading partners, unleashing a trade war that would send the US economy into recession and cost millions of Americans their jobs.’ In particular: ‘Industries that manufacture machinery used to create capital goods in the information technology, aerospace, and engineering sectors, which depend on exports, would be the most intensely affected. But the trade shock would also damage sectors not engaged in trade, such as wholesale and retail distribution, restaurants, and temporary employment agencies, particularly in regions where traded commodities are produced. Millions of American jobs that appear unconnected to international trade—disproportionately lower-skilled and lower-wage jobs—would be at risk.’

Putting a tariff on China’s exports to the US would also raise prices for US consumers and thereby reduce US living standards. By being inflationary such price increases would also increase pressure on the Federal Reserve to raise interest rates creating downward pressure on US economic growth. Undoubtedly the very large size of the US economy, which allows great domestic division of labour, and the fact that even Trump does not propose a return to protectionism on the scale of the 1930s, means that the negative effects of protectionism might develop more slowly in the US than in other well-known examples of the failure of protectionism in a modern globalised economy (pre-1990s India, Argentina etc). Nevertheless, turning its back on the advantages of international division of labour would necessarily lead to a slow path of growth of the US economy, and lower living standards, than if it pursued the path of an open economy.

The current problems in the US economy do not stem from its globalisation, on the contrary this has helped prevent any decisive economic decline of the Great Recession type, but of underinvestment in the US economy – a process analysed in detail in my book 一盘大棋?中国新命运解析 (The Great Chess Game?).


There is no doubt that one of Trump’s most popular pledges in the election was to oppose the TPP. The problem for Trump is that the majority of US big capital precisely wants a deal like the TPP. Possibly Trump will conclude that anger over his reneging on a pledge to oppose the TPP would be so unpopular it cannot be done openly. But that merely means that Trump will try to secure the same anti-China results as the TPP through other means.

Nevertheless, Trump’s goal is easier to decide upon than to achieve. It took tremendous efforts to get other countries to agree to the TPP. Abe was desperate for the TPP to be adopted – Japan’s parliament ratifying it even after Trump’s election. Difficulties in the TPP therefore create the opportunity for China to promote for a genuine agreement in the Pacific which expands trade rather than the protectionism which was embodied in the TPP.

China has become the main pillar of globalisation

It is the above processes which create the strategic fact that it is China that has now become the world’s largest single economy committed to free trade and globalisation – although the EU is also at least in theory a supporter of this process and the EU’s most powerful economy, Germany, is an enormous beneficiary of globalised trade. The world rapidly growing major economy with China, India, is also sharply increasing its economic openness. The percentage of India’s economy devoted to trade is, at current exchange rates, now even slightly above China’s. The powerful positive effect of foreign trade is once more confirmed by the fact that the world’s five most rapidly growing non-oil dominated economies since the early 1990s with populations of more than five million – in descending order China, Cambodia, Vietnam, Laos and India – all have high percentages of trade in GDP. Therefore, even if the US moves towards protectionism other rapidly growing economies remain committed to globalisation and China’s decisive task is to place itself decisively among and help lead the process of the rapidly growing economies seeking the advantages of international and globalisation.

China’s policy and RCEP

China’s strategic policy of supporting freer trade and globalisation can be broken down into a series of initiatives which in present circumstances give it key advantages to play a still greater global role – particularly compared to Trump’s approach in the US.

The most important proposal of China is of course to support the Regional Comprehensive Economic Partnership (RCEP) – the proposed FTA between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia. China is arguing for them to be concluded as rapidly as possible.

RCEP has numerous advantages over the TPP. In particular, key proposed participants in RCEP are rapidly growing economies (China. India, Vietnam, ASEAN as a whole etc.) whereas the TPP is based on slowly growing economies (Japan, US).

Like China’s existing FTAs RCEP builds on real trading relationships – China takes about one third of Australian exports and over 20% of South Korea’s. With full implementation of the FTA agreement with Australia, for example, 95% of Australian exports to China will be tariff free.

Unlike the TPP and TTIP, which were primarily based on giving international jurisdiction to institutions which would be controlled by a single country (the US), China’s existing FTAs, like RCEP, emphasise harmonisation of national standards with international supervision and interference reduced to an absolutely necessary minimum.


Finally, China has shown its ‘thought leadership’ on globalisation by initiatives which go beyond the approach of the US in GATT and the WTO. These initiatives were based primarily on tariffs, legal changes, regulation etc. They did not address the actual question of creating the material basis for trade. China’s initiatives in One Belt One Road (OBOR) and the Asian Infrastructure Investment Bank (AIIB) go beyond this by laying the basis for practical development of trade, in particular by infrastructure investment. It is for this reason that even before Trump came to office the AIIB and OBOR were attracting great international attention even from traditional allies of the US such as Britain and Germany.


To summarise, in very important matters, such as Trump becoming US president, it is necessary to be precise and not exaggerate. It remains to be seen how much Trump’s protectionist rhetoric is translated into protectionist practice. Nevertheless, even the change in rhetoric is important. China has now publicly become the world’s largest nation supporting and acting as a pillar of globalisation. As globalisation is the process which has brought immense benefits to the world economy, and particularly to developing countries, this creates key international strategic openings for China.

* * *

This article was previously published here on Key Trends in Globalisation and originally appeared in Chinese on Sina Finance.

Don’t believe Tory anti-austerity propaganda

.353ZyesDon’t believe Tory anti-austerity propagandaBy Michael Burke

In a year of unpleasant political surprises, what are the chances that this Tory government will surprise us by abandoning austerity? In reality, they are vanishingly small.

There has been a concerted effort by the mainstream media to portray this government as radically different from its predecessor, even to suggest that it will reverse austerity. But the evidence we have so far suggests exactly the opposite:

  • A lobby to provide the NHS with extra funds as it faces potentially its worst winter ever has been brushed aside
  • Philip Hammond has offered £2 billion of extra funding for housing (as well as soft loans to small builders) over 4 years, when £30 billion a year is needed to meet the housing shortage
  • The planned cut in the cap on social security from £26,000 to £23,000 has just been implemented, and down to £20,000 outside London
  • A large number of other cuts to pensions, to social security and working tax credits have also been implemented
  • The government has just announced the postponement of work to electrify the Great Western rail network in south-west England, a £2.8 billion project. 
  • The Northern Powerhouse remains a slogan, not a project
  • Hammond did announce £2 billion package to combat cyber-crime, specifically motivated as ‘this could lead to war’
This summary of measures could have been taken straight from the Osborne playbook, with cuts to social security, pensions and other entitlements that all hit working people again combined with further cuts to investment. The only thing that is new is this security and immigration-obsessed government has provided a small amount of funding to conduct cyber-warfare because it feels it is falling behind. If the Osborne approach was completely mimicked in the upcoming Autumn Statement, there would also be a new tax giveaway for big business.

There is a fundamental reason for this. The Tories have not implemented austerity because they are ‘the Nasty Party’, although they are. The entire austerity programme, the cuts to public services and pay, cuts to social welfare, cuts to business taxes, further privatisation and cuts to public sector investment all have one central purpose. This is not, as stated, to eliminate the deficit, otherwise the Corporation Tax rate would not have been cut and costly privatisations made, such as Royal Mail or the sale of Lloyds Bank shares.

The purpose of austerity is to restore profitability and this has been a failure. Economic weakness from Brexit is sure to hit profits too. In all likelihood the main effort to restore them will be through increasing the rate of exploitation.

Brexit will make matters worse. Last March the Office for Budget Responsibility forecast (pdf) that GDP growth would be effectively 2.1% per year over the next 5 years and that the public sector deficit would become a surplus by 2018/19. Public sector debt was forecast to fall every year as a proportion of GDP, beginning this year. The real costs of Brexit should be reflected in much more pessimistic forecasts from the OBR on all these fronts.

Even before taking rising prices into account, the level of profits in the second quarter of this year was lower than it was in the third quarter of 2014. Profits are not sufficiently recovering to allow any major reversal of austerity for a government wholly committed to driving down wages and the social wage while giving big handouts to big business.
Of course, some tinkering and publicity-seeking measures are likely, as the government pretends to be on the side of working people. No doubt it will be aided by the extremely compliant media. But anti-austerity activists should be clear. This will be the same old austerity Tories as before, and with new motivation to extend it.
A version of this piece has previously appeared on the People’s Assembly Against Austerity website.

Who are ‘the left behind’?

.690ZWho are ‘the left behind’?By Tom O’Leary

Following the Brexit vote here and the victory of Trump in the US Presidential election there has been much ill-informed discussion of the ‘left behind’, sometimes spuriously described as the white working class who have not benefitted from rising living standards, or even globalisation in general.

It is not the purpose of this article to untangle the web of half-truths, distortions and falsehoods that comprise those statements. To take one example, the first great political and social exposition of the effects of ‘globalisation’ can be found in the Communist Manifesto. This sets out the enormous capacity of capitalism to dominate the globe by raising production up to a new, much higher level and so increase the exploitation of both natural resources and labour. It has nothing in common with radical ‘anti-globalisation’, that is protectionist and increasingly anti-immigrant movements in the Western countries.

Instead the focus here is narrowly on who are the ‘left behind’ in the UK. They are not the old white workers of the former industrial north, as is commonly portrayed. They are youth, dsiproportionately Asian and black youth. These are the very people who oppose Trump and who largely voted to Remain (71% of them).

Table 1 below is taken from a House of Commons Briefing paper ‘Unemployment by ethnic background’ from April 2016. A section of the briefing’s explanatory text is also included. The Table shows that the unemployment rate for people aged 16 to 24 is 14.4%, which compares to an unemployment rate of 3.3% for all those aged over 50 years. But in every age category Asian people are nearly twice as likely to be unemployed and in every age category black people are more than twice as likely to be unemployed. Put another way, if you are young and black you are more than nine times as likely to be unemployed as if you are old and white.

Table 1. Unemployment by ethnic background. Source: House of Commons

There is a gender element too to who is in fact left behind. Table 2 below is taken from the same briefing. In aggregate the unemployment rate for women is lower than for men. But this is somewhat misleading, as the sample size is lower, 610,000 for women versus 750,000 for men. This reflects the fact that women are more likely to be discouraged from the workforce, or are obliged to be carers within the family. So the lower unemployment rate for women shown here needs to be seen in that context.

On this basis, the unemployment rate for women is lower than for men. However, contrary to the general trend the position for Asian women is worse. For them, unemployment is even higher than it is for Asian men. Yet again, the highest rates for unemployment among both women and men is to be found among black women and men.

Table 2. Unemployment by ethnic background and gender. Source: House of Commons

On pay, it is also the case that workers who are not white are paid less than their white counterparts and colleagues, and that this pay discrimination increases with qualifications. Table 3 is taken from a TUC report into black workers’ pay gap. There is a considerable pay gap for workers from all non-white ethnic groups, on average 75 pence an hour. But this rises to a pay gap £1.72 an hour for black workers on average. This pay gap also increases up the qualifications’ scale, so that black workers with a degree earn nearly a quarter less than their white counterparts, £4.30 less an hour.

Table 3. Average earnings by ethnic background and qualifications. Source: TUC
It is a fiction to suggest that the votes for Brexit and for Trump are the ‘left behind’ votes, the victims of deindustrialisation or even its opposite, globalisation. In Britain, the real left behind, much more likely to be unemployed and low paid are youth and especially black and Asian youth. Black people and Asian people in general are also more likely to be unemployed and, if in work, face pay discrimination. Women are also more likely to be discouraged from the workforce, yet Asian women are the sole category of women whose unemployment rate is higher than their male counterparts, even after taking this obstacle into account.

These are the primary victims of the third great capitalist slump and they are the ones bearing the main brunt of its effects. Of course, the overwhelming majority of workers and the poor are all worse off because of the crisis. But the by far the biggest victims are youth, especially Asian and black youth, as well as women. They are the real left behind.

Brexit cannot have a favourable outcome

.850ZyesBrexit cannot have a favourable outcomeBy Tom O’Leary

There is no realistic possibility of Brexit resulting in a favourable outcome. Following Brexit, the living standards of the population will be lower. In addition, the capacity for government spending on public services will fall along with its capacity to invest. As a result, it is likely there would the continuation of current trends, where there is a government-sponsored rise in racism, hate crime and xenophobia, in order to distract from the crisis created by government policy.

Forecasting Brexit effects

Economic forecasting is an inexact science. But its findings are also often presented and understood inexactly too. Forecasts can be presented as a range of probabilities but should nearly always be conditional, as outcomes depend on a series of factors outside the main elements of the analysis. So, for example, it is certain that prices will rise much higher than they otherwise would because of the Brexit-induced slump in the value of the pound. But the precise level of consumer price inflation in 2 years’ time must be an unknown without foreknowledge of the level of global commodities’ prices, knowledge of the ability of firms to reduce profit margins, the response of consumers and so on. Yet there is still the certainty that prices will be higher, and that any tariffs will make prices much higher still. Real incomes and living standards will fall.

So it is with GDP forecasts. There are two main documents setting out the central projections for the economy if Brexit goes ahead. The first is the analysis from the UK Treasury, the second is from the grouping Economists for Brexit. Both have been subjected to critique and readers interested in those can find them here and here.

There are some surprising similarities in the analyses and some huge differences. There are also some important omissions.

Taking first a point of agreement, in discussing versions of ‘Hard Brexit’ which would involve the unilateral removal of all trade barriers by the UK, all sides are generally agreed that incomes fall significantly, although the Treasury is the least concerned with this important matter. However, in the model formulated by the principal author for Economists for Brexit Patrick Minford prices will fall much further than incomes, as the UK economy enjoys the fruits of an unfettered and largely unregulated free trade. As a result, in this scenario real incomes rise significantly. This is flatly contradicted by the UK Treasury analysis and the Brexit economists’ critics. Finally, there is widespread confusion about the role of investment in the economy, which means even the most apparently pessimistic scenarios may underestimate the negative effects.

Falling prices?

Patrick Minford did not receive as much publicity as Alan Walters in terms of his influence on the Thatcher governments. This was almost certainly a mistake as his work was crucial in formulating the ‘supply side miracle’ of Thatcher’s efforts to create unfettered markets in goods, capital and labour. Everything from banking deregulation and Big Bang through to privatisations of state -owned industries, the end of the ‘closed shop’ and now zero-hours contracts all owe something to Minford. He is an important figure in recent British economic history. 

He also bears some responsibility for the entire economic debacle of this period and now the crisis caused by the Brexit vote. This is not an ad hominem attack, but is used to show that Minford’s ideas have already been tested in the real world and they have been disastrous. He begins with the reasonable proposition that barriers to trade impose a cost to the idea that the removal of all barriers must be a benefit. This is clearly logically false. There is a cost to imposing fire safety standards on all new homes and public buildings. But there is a far greater cost if buildings frequently burn down and lives are lost.

The Minford claim that prices will be lower after Brexit rests on two spurious propositions. The first is that prices are on average 10% higher in some EU countries (or were 14 years ago when the data Minford relies on was collated!) so that these must arise from non-tariff or regulatory barriers inside the EU, which will no longer apply if his ‘Britain Alone’ model is adopted. Secondly, he argues, ignoring both geography and history, that other countries will supply those same goods or services to the UK at prices equivalent to the non-tariff EU prices. Notably in his view, all of this benefit will lead to the elimination of British manufacturing and the huge growth in inequality, even while the economy as a whole is boosted by 4% over the long run. 

This is nonsense. Minford’s analysis takes no account of the quality of products. Take housing, the single largest component of household expenditure. The UK housing stock is much more dilapidated than the EU average. Approximately half the proportion of homes in the EU are more than 70 years old compared to Britain. Price should be adjusted for quality, and Minford makes no effort to do that. Higher prices can just as easily denote higher quality goods.

But the assertion that other countries will meet the removed EU goods and services is outlandish on two grounds. The British economy is tied through a network of increasingly complex supply chains to the European economy. If those supply chains are severed, it will not be by US or Chinese firms inserting themselves. They cannot under EU rules pass themselves off as EU producers once the UK has left. Nor would they be interested in removing all the non-tariff barriers that protect their firms just to sell into the British economy, which is simply not that important on a world scale.

On this issue, the Economists for Brexit are wrong and their critics are right. Prices will rise post-Brexit. They are rising already. As all analyses accept that incomes will fall, this can only mean that living standards as whole will fall significantly.

Misunderstanding investment

The Economists for Brexit pay almost no attention to investment, despite frequent references and a chapter nominally devoted to it. Instead, it is simply asserted that investment will rise following the (spurious) forecast of vastly improved trade at lower prices. 

But the Treasury analysis, while much more serious in its examination of the effect on investment, is sorely lacking. In effect, the focus is almost exclusively on the negative impact on Foreign Direct Investment of leaving the EU. As FDI is defined as the ownership of 10% of equity or more, FDI conflates two different things, a change of ownership via overseas acquisition of equity and actual fixed capital investment.

The UK economy is in precarious position, with a record current account deficit. FDI inflows offset that, and without it living standards would immediately fall even further. This would be expressed as a further slump in the currency and rising long-term interest rates. 

This is a run-down of UK assets to finance UK consumption that exceeds UK production. It is only possible to begin to reverse that with actual fixed capital investment to raise production. 

However, Brexit itself makes this both less likely and less effective. Private sector investment becomes less likely with Brexit because investment is driven by returns, the key factors being the size and growth of the target market. Outside the EU, the UK economy is a far smaller market than a component of the Single Market. It will also experience slower growth. 

All UK investment also becomes less effective outside the EU. As Adam Smith demonstrated long ago the effectiveness of investment is determined by the size and scope of the market, including, but not confined to well-known factors such as ‘economies of scale’. As the size of the market in which the UK can operate is restricted, the efficiency of investment declines.

As a result, of the two main scenarios outlined by the Economists for Brexit makes little sense, while the UK Treasury analysis underestimates the long-term effects of leaving the EU. Things are likely to be worse than they suggest.

No ‘People’s Brexit’

It would be possible to overcome all of these negative factors if investment were to rise by a large factor. But as we have seen private sector investment will fall.

In effect, in order to offset these negative effects public sector net investment would need to both replace reduced private sector investment and increase the aggregate total to compensate for the lower efficiency of investment outside the EU. From about 1.5% of GDP, public sector net investment would have to rise to something like 20% of GDP. This is not a realistic possibility in the current economic and political circumstances in Britain.

All likely and realistic Brexit scenarios entail a significant diminution in the living standards of the population. This will include rising prices and lower real incomes, job losses especially in manufacturing and high value-added sectors as well as cuts to public services as government finances deteriorate. The Tory government over 6 years has not been able to generate popular enthusiasm for policies that have led to falling living standards. It has deliberately fostered racism, Islamophobia and xenophobia as a distraction, with some effect.

Labour cannot possibly stand on this ground. Aside from the moral bankruptcy and the economic illiteracy this would entail, it could prove fatal. The Tory party can and does subsist on promoting reaction. Labour would risk annihilation as its natural supporters, who overwhelmingly voted Remain, deserted it in droves.

The arguments used to support a ‘Lexit’ are spurious and misleading. Overseas workers cannot possibly drive down wages as on average they are more highly paid then UK workers. They are net contributors to public services, not a drain on them. They are not taking anyone’s jobs; record levels of immigrant numbers coincide with record low unemployment. 

There is no prospect of better protections for workers, greater environmental protections, better health and safety rules under any likely Brexit government. Unwilling to increase public investment to the required level, they will tolerate or even foster a race to the bottom. It is impossible to fight neoliberalism via Brexit. The UK will become an archetype of neoliberalism.

More technical arguments that, for example, EU state aid rules prevent a radical programme of nationalisation are equally spurious. Jeremy Corbyn and John McDonnell do not propose a large-scale programme of nationalisation, for very good reason. There are not the spare funds to purchase the equity of the energy, transport, building and other firms and the banks. And the political situation simply does not allow any nationalisation without compensation. It would just be posturing to suggest that court orders ruling in favour of private property rights would be overturned or physical seizures of property take place.

The limited retrieval of the rail franchises as they fall back into public hands that is planned is realistic and would not at all contravene EU state aid rules. On the contrary, after the Brexit vote the UK is now set to hand out state aid to major manufacturers simply to keep them here.


In the concrete circumstances of the UK economy Brexit can only lead to a fall in living standards. Prices will be higher, real incomes lower, and living standards will fall. All political forces who wish to raise living standards will have to fight against it, or overturn it if necessary. There can be no idea of embracing Brexit as a road to prosperity. That is an impossibility in the actual circumstances of British politics and the British economy.