Socialist Economic Bulletin

Trump is already imposing new tariffs on this country – and what he wants from them

By Tom O’Leary

Despite the claims of the Tory party and other supporters of a No Deal Brexit that a new golden age of trade awaits with the US, the Trump administration has just imposed new trade tariffs on British producers.

This is important for two reasons. It reveals the falsehoods underlying the entire No Deal project. It also sheds light on the global perspective of Trump, and how he aims to address the US economic crisis at the expense of the rest of the world.

New tariffs

The US Treasury has issued a series of new 25% tariffs on UK producers and others in the EU (pdf).  This list is 8 pages long and includes a wide range of goods, from aircraft, to whiskies, to woollens to pipe cutters and many more goods besides.  The tariffs are due to come into effect on October 18.

The tariffs are allowed under the WTO rules (which are themselves skewed towards the US) because it has found that the EU’s Airbus production receives state subsidies.  However, experts suggest that a similar finding will be made against Airbus’s big rival Boeing in a matter of weeks. 

Both entities receive state support. In fact, it is inconceivable that any private corporation would undertake the vast investment required for large-scale aircraft production without state financing and subsidies.  Inadvertently, the free market ideologues of both the US and the EU make the case for socialised investment.  In the case of the aircraft makers, the investment would simply not take place without state intervention. Airbus is also partly owned by European governments.

Boeing and Airbus are the two main global rivals for the demand of airlines’ new carriers. They are at each other’s throats for decades, and the cases against each other at the WTO have rumbled on almost as long.  This has taken a new twist with Trump’s aggressive imposition of tariffs on a number of countries (including ‘allies’ in Europe, as well as Canada and Mexico).  There is too the issue of the disastrous roll-out of the Boeing Max 737, which has led to crashes, huge numbers of fatalities, lawsuits and a threat to the company.

The imposition of the tariffs has received very little coverage in the mainly Brexit-supporting press. Tariffs on existing production destroy jobs and raise prices. If they are sustained these sanctions will raise prices for US consumers (and EU tariffs will do the same in the EU) and destroy jobs in the sectors concerned.

The sanctions have a strategic aim and reveal Trump’s approach to the problems of the US economy.

Trump’s strategy

The US economy is slowing – and the Presidential election is now little more than 12 months away. GDP growth in the 3rd quarter slipped to 2.1%, from 3.1% in the 2nd quarter. But the US is also experiencing a long-term slowdown.  As John Ross has shown elsewhere, the medium-term trend in the US economy, removing the effect of business cycles, is towards slower growth.

Therefore Trump has two problems. The immediate issue is to raise the growth rate to a level that gives him a better chance of re-election. The most recent poll shows his approval rating at -16, which is normally far too low for an incumbent to be re-elected. But he also has a strategic task in his role as the representative of the general interests of US big business as a whole.  This is to ensure that the US growth rate can recover over the medium-term, or at the very least that other countries do not continue to gain ground on the US.

That strategic aim, and the country whose advance most threatens US global dominance, explains the aggressive US trade tariffs against China. This is despite the fact that the tariffs are imposed on goods to the US and so raise prices in the US and destroy US jobs, just as economic theory predicts.  Trump’s replacement for the North America Free Trade agreement (NAFTA) is the US-Canada-Mexico Trade Agreement (USMCA) is remarkable similar to NAFTA.  The key change is a series of measures that effectively prevent both Canada and Mexico striking any new deals to improve their trade with China without US approval.

China is clearly the main target of Trump’s trade policy but is certainly not the only target. Taken together, and making no judgement on its likely success, from Trump’s perspective this amounts to an entirely new trade policy for the US in the post-World War II era. Historically the superior productivity of US industry and agriculture meant that it was an advocate for free trade. While there were general benefits, the US would always be the biggest winner.

Trump has turned that outlook on its head. The US slowdown will be addressed by a re-ordering of the global trade system in US interests. Specifically, other countries will be subordinated to the US, providing it with unfair advantages and crimping the growth of non-US industries where they are in direct competition with major US companies.

In this light, the attack on Huawei (which leads on 5G telecoms technology) should be seen as driven by the same policy as the attack on the makers of Airbus (Boeing’s sole global rival).

Airbus attack

Airbus had sales of €31 billion the first half of 2019. It employs 136,000 people worldwide, 14,000 of them in the UK, where production of the high value-added wings and part of the engines takes place.

Because of the integration of production across Europe, Airbus has already publicly stated that any Brexit outcome which includes leaving either the Single Market or a customs union would pose the company with enormous challenges, which could require relocation in the EU.

The Trump/Johnson No Deal project does mean leaving both the Single Market and the customs union.  This is also true of the latest Johnson proposal, which means that Britain would leave both.  The major Airbus plant is based in North Wales.

There is clearly an advantage to the US from severely disrupting the production of Boeing’s only global rival. But it should be equally clear that there is no advantage to producers in the UK to accepting such a deal. Unions and business groups here have been right to highlight this.

This country will have to operate under WTO rules if it crashes out without a deal. Under those rules, the trade tariffs are allowed once an unfavourable ruling is made. In fact, there are few other mechanisms available under WTO.  But, until recent years, the US was the by far the largest economy in the world. So, any system allowing bilateral trade tariffs massively favoured the US.  That will still be the case between the UK and the US, with Trump holding all the cards in any negotiations or in any subsequent trade dispute.

At the same time, it is futile to protest that Trump should have targeted other countries instead, if he wants to get a US-UK trade deal.  This is the approach of some business groups in this dispute.

Trump’s aim is firstly to attack Airbus so that it does not gain an insurmountable advantage over Boeing.  But he also rejects any soft-pedalling in his aggressive trade policy, even for ‘allies’.  Outside of the EU’s Single Market and customs union, Britain will have to accept whatever Trump offers.  And what he offers, or at least intends, is a complete restructuring of the global trade system in US interests.

70 years of China’s social miracle

By John Ross

Socialism’s aim is to improve the well-being of humanity. And nothing in history has remotely improved the condition of such a large part of humanity in such a small period of time as the development of the People’s Republic of China since 1949 – the 70th anniversary of the founding of which occurs on 1 October 2019.

China’s was one of the two greatest socialist revolutions of the 20th century – the other was the October 1917 Russian revolution. The international impact of the Russian revolution, overthrowing the weakest link in the imperialist system, among its other enormous achievements, played a decisive role in smashing to pieces the colonial empires which had oppressed the great majority of humanity for centuries. China’s was the greatest revolution within the developing countries, those oppressed by imperialism, within which the great majority of humanity still live.

In 1949 China, oppressed by a century of foreign invasion in which around 100 million Chinese people were killed, was almost the world’s poorest country – the details are in the article below. Angus Maddison, former head of statistics of the OECD, and the world’s most renowned analyst of long term growth, calculates that at the time of the creation of the People’s Republic of China (PRC) its per capita GDP was not only lower than 130 years previously but far lower than Western Europe or England in 1500 – that is lower than in the late European Middle Ages and far lower than at the time of Shakespeare. Reflecting this fact average life expectancy in China was only 35. But by 2019 China’s people, almost 1.4 billion or nearly a fifth of humanity, had been lifted from poverty to a living standard to the verge of becoming a high-income economy by international standards. Nothing approaching such a rapid improvement of the life of such a large proportion of humanity has ever taken place anywhere else in human history. That is the measure of the literally incredible achievement of the PRC since 1949.

The article below examines that improvement in the life of China’s people via the most direct of all measures – life expectancy, which is well known to be the most sensitive measure of overall social well-being. The figures are staggering. Leaving aside China itself, China’s life expectancy has increased by more than that of 99.2% of humanity! This is in addition to China being responsible for lifting over 850 million people out of internationally defined poverty – three quarters of the reduction of world poverty. China has lifted out of poverty far more people than the entire population of the European Union or the entire continent of Latin America.

Capitalism naturally lies regarding China

To anyone who can think seriously about the well-being of humanity what is reflected in these ‘dry statistics’ about China is such a gigantic improvement in the lives of people that for anyone understanding it they must almost be moved to tears. Therefore, naturally capitalism does everything it can to make sure such realities are known to as few people as possible in the world. Nothing else is to be expected from capitalism, because if such realities were widely known it would be a gigantic blow to the standing and hegemony of capitalism. As China becomes still more successful, and the life of the 1.4 billion Chinese people improves further, all that will happen from capitalists and the media they control is that the amount of distortion and lying will increase – because it is vital for capitalism to prevent the rest of the world knowing how much the life of the Chinese people has improved in the 70 years since China’s socialist revolution. Because if that truth is known more people, particularly at present in developing countries, would want to follow that route. 

Any serious progressive individual or media, let alone socialists, would, of course, hail the gigantic step forward for humanity which has taken place in China – while doubtless making whatever were their liberal qualifications or critiques of it. But capitalism and liberals long ago ceased to be progressive. If you read newspapers such as the Guardian or the New York Times around the 70th anniversary of the PRC you will see not analysis of what a huge step forward for humanity this is but suppression of the real facts regarding China’s development – liberals long ago ceased not only to be progressive but to pay any attention to the truth.  

In addition to the overall lies against China there are of course specific ones which any examination of the facts disproves. One is related to the gigantic support for Mao Zedong in China. Supposedly this is inexplicable given that it is claimed by capitalism Mao Zedong was a vile oppressor.  In reality in China during the period of Mao Zedong, despite the huge mistakes of the Great Leap Forward and Cultural Revolution, China experienced the most rapid improvement in social conditions, reflected in increase in life expectancy, in human history – a reflection of China’s emphasis on health care and education. As the article notes: ‘In the 27 years between the establishment of the People’s Republic of China in 1949, and the death of Mao Zedong in 1976, life expectancy in China increased by 31 years – or over a year per chronological year…. Far from being negative, China’s record in this period was one of history’s most extraordinary social achievements.

‘Instead of engaging in factual falsification and myth making, foreigners can more accurately understand the support for Mao Zedong in China, even leaving aside other issues, such as the achievement of real national independence, merely by the lived experience of this fact. If someone leads you to live an extra 31 years it is unsurprising you hold them in esteem! ‘

The fact that capitalism systematically lies about China of course makes it incapable of understanding the real dynamic in that country.

Confusion in parts of the left

But if rejection of reality is to be expected from capitalism and its apologists what is ridiculous is that sections of the left refuse to face such a gigantic reality as China’s social achievements – these ‘left’ criticisms in fact only repeat capitalist propaganda. At the most absurd they spread capitalist lies such as that Chinese workers life in ‘slave like’ conditions – something which is refuted in 1 second by looking at the figures on China’s life expectancy dealt with in this article. The idea that a ‘sweatshop’ produces a more than 40 year increase in life expectancy, more than every major country in the world, is an absurd joke, or more precisely ‘leftist’ repetition of capitalist propaganda.

Illustrating even more lack of seriousness about socialist and Marxist theory is left repetition of the claim that China is capitalist. This is refuted by any Marxist analysis of China’s economic structure – see ‘Why China is a socialist country – China’s theory is in line with Marx (but not Stalin)’. For those who claim China is capitalist it is then necessary to explain why these gigantic and measurable steps forward for humanity took place in a country which declares itself socialist and no such step forward was taken in countries which declare themselves capitalist. But it is also necessary to understand the profound consequences. If ‘capitalism’ is capable of lifting more than 850 million people out of poverty then capitalism is not reactionary but is a profoundly progressive system. This foolish so called ‘left’ criticism of China therefore turns out to be…. a justification for the progressive role of capitalism!

But the practical consequences of confusion on the left on this issue are extremely serious. China has an economic system which demonstrably delivers in practice, not merely in theory, enormous improvements in the living conditions for the overwhelming majority of the population and in particular the poorest sections of society. It is based on the socialisation of the dominant sectors of China’s economy – that is the ability of the state to control the level of investment in China. As it was stated at the 3rd Plenum of the Central Committee of the 18th Congress of the CPC, the latest comprehensive statement of China’s economic policy: ‘We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector.’ Any study of how China’s economy is regulated confirms that decisive role of the state sector.

The left should be using this model to explain that it is the most effective method to raise living standards and eliminate poverty. In Latin America, for example, where the left was unable to deal with the consequences of the downturn in commodity prices after 2014, this is decisive. As Brazilian socialist Elias Jabour put it recently: ‘The rise of China means that Brazil and Latin America has a real alternative to neo-liberalism. It provides the possibility for greater economic integration outside the orbit of imperialism. It is impossible to imagine the existence of progressive governments in Latin America without the existence of socialist China.’ This applies both to the support that economic interaction with China can give to Latin American, and other developing, countries and to how the Chinese economic model provides a proven practical alternative to neo-liberalism within Latin American countries.

The left in China

But also, internationally, it is necessary to understand that the biggest left in the entire world is in China. The best way to understand that is to read Weibo, the Chinese equivalent of Twitter, or to follow websites such as Guancha.cn – something it is entirely possible for anyone who does not read Chinese to do with modern translation software. And for those who do not trust anything produced in China, or find it too tiring to use translation software, they can get a distorted but not wholly inaccurate vision by reading Jude Blanchette’s China’s New Red Guards. No where else but China do you find obviously left-wing leaders who have 3 million, 5 million, 6 million followers on social media. And these huge left-wing forces are unequivocal in their support of the overall path, naturally not every specific policy, of the CPC. They are ‘Maoist’ in their overall world outlook. The Fidelista left in Latin America is undoubtedly the other mass socialist/Marxist current in the world, but even that is much smaller than the left in China.

Understanding the actual reality of China, and the impact this has on its population, will immediately lead to realities the ‘Western left’, in particular the left in Europe and North America, finds very hard to immediately understand. But they are based on the social realities analysed below. For example, this is the evaluation of Fidel Castro, the greatest Marxist/socialist leader ever to have lived in the Western hemisphere, of China: ‘If you want to talk about socialism, let us not forget what socialism achieved in China. At one time it was the land of hunger, poverty, disasters. Today there is none of that. Today China can feed, dress, educate, and care for the health of 1.2 billion people.

‘I think China is a socialist country, and Vietnam is a socialist nation as well. And they insist that they have introduced all the necessary reforms in order to motivate national development and to continue seeking the objectives of socialism.

‘There are no fully pure regimes or systems. In Cuba, for instance, we have many forms of private property. We have hundreds of thousands of farm owners. In some cases they own up to 110 acres. In Europe they would be considered large landholders. Practically all Cubans own their own home and, what is more, we welcome foreign investment.

‘But that does not mean that Cuba has stopped being socialist.’

Of China’s current president Xi Jinping this was the evaluation of Fidel Castro: ‘‘Xi Jinping is one of the strongest and most capable revolutionary leaders I have met in my life’. The left in China clearly supports Xi Jinping – naturally not without abandoning their specific views but clearly as regards the overall course of China. For exactly the same reason the capitalist press in the West is particularly full of bile and hatred against Xi Jinping – innumerable articles spewing out attacks on him as the 70th anniversary of the creation of the PRC approached.

It is not necessary for the Western left to become involved in detailed assessment of China’s leadership – although for China this is extremely important. What the international left does have to understand is that the greatest rapid improvement in the condition of the greatest proportion of the world’s population in human history has taken place in the 70 years of the PRC.

The role of the socialist left

For the mass of the population who live in Europe or North America it is difficult for them to imagine what it meant to make a socialist revolution, and to commence constructing a new society, from an economic starting point lower than their own countries in the Middle Ages and in only 70 years to achieve a standard of living and a life expectancy that is on the verge of high incomes economies. Only China’s continued development will convince the mass of hundreds of millions of people. That is why there is a much wider and more understanding of China’s stupendous achievements in Africa, developing Asia, and Latin America than there is in Europe or North America. But what there is no excuse for is that parts of the so called ‘intelligentsia’, who are supposed to understand the course of human history, do not grasp such facts.

The following article, written for China for the 70th anniversary of the creation of the People’s Republic, focuses not on the data on GDP but on the most important factor or all – the impact of the 70 years of the Peoples Republic of China on the life of the Chinese people.

*   *   *

‘The Chinese people have stood up,’ the title of this famous speech by Mao Zedong in 1949 embodied a promise made by the Communist Party of China to the people of China. This promise was that if China adopted the socialist programme and methods of the CPC the Chinese people would be progressively lifted from more than a century of poverty, foreign invasion, foreign oppression, and humiliation by foreign powers to regain a position in which no country or people in the world was superior to China.

Measuring China’s social progress

There are numerous ways to measure whether the promise by the CPC was kept. A number specifically relate to China’s specific national identity and its situation in 1949. For example, in a total transformation of China’s position from the preceding century, no country any longer dares militarily attack China – due to the strength of the People’s Liberation Army (PLA) and the economic and technological power that now sustains it. China has now also completely regained its territorial integrity – all former foreign concession territories in China have been abolished, Hong Kong and Macao have reunified with China, only US controlled Taiwan province still remains to be regained practical control of and that is only a matter of time. Numerous foreign countries now seek friendly and equal relations with China. That the socialist path of the CPC has delivered its 1949 promise on the field of China’s national integrity is beyond doubt.

But it is also legitimate to make international comparisons by more universal and less specifically national criteria – those regarding the development of the overall social position of the Chinese people compared to other countries. Fortunately, since 1949 the situation of humanity as a whole has advanced – the old colonial empires have been destroyed, living standards have improved, life expectancy has increased. How has China developed in comparative terms? Has China improved its social conditions more rapidly than other countries – justifying the CPC’s promise that its programme and methods, based on Marx-Lenin-Mao Zedong, were the best to achieve China’s rejuvenation – or do the facts show that other countries have achieved superior social progress in the 70 years since the creation of the PRC?

Why life expectancy is the most sensitive measure of social progress

Among the different potential criteria that could be used to measure China’s relative social progress compared to other countries one is in reality decisive. The declared aim of the CPC is to ‘Serve the People’. In policy terms its framework is ‘people centre development’ – which is necessarily integrated with China’s national rejuvenation because China’s people are overwhelmingly its greatest power and resource. How much, therefore, in overall terms has the overall condition of the ordinary people of China improved since 1949? Has the CPC delivered on its promise that its methods would deliver improvement in the conditions of the ordinary people of China in a way superior to any other? 

One single criterion is in reality sufficient to dramatically demonstrate the superiority of the socialist path China embarked on 1949 compared to alternatives. This is the increase in the life expectancy of the Chinese people compared to other countries. This fact also entirely adequately demonstrates that the slogan of the CPC, ‘Serve the People’, is not empty words but is the precise result of the party’s activity.

The reason the criterion of life expectancy is decisive and chosen for analysis is not simply, or even primarily, that increase in life expectancy is a universal wish of human beings – although it certainly is! It is because it is well known to economists that life expectancy is the most comprehensive and sensitive measure for judging the overall impact of changes in social and environmental conditions. This is due to the fact that average life expectancy summarises in one single figure the effect of all positive social developments (high quality consumption, good health care, improvements in education, environmental protection etc.)  and subtracts the negative ones (poverty, poor health care, lack of education, environmental degradation etc. Life expectancy is therefore a more adequate measure of social well-being than purely per capita GDP – significant as the latter is, and despite per capita GDP being the single biggest determinant of life expectancy. As Nobel Prize winner Amartya Sen summarized regarding the relation between these variables:

‘Personal income is unquestionably a basic determinant of survival and death, and more generally of the quality of life of a person. Nevertheless, income is only one variable among many that affect our chances of enjoying life… The gross national product per head may be a good indicator of the average real income of the nation, but the actual incomes enjoyed by the people will also depend on the distributional pattern of that national income. Also, the quality of life of a person depends not only on his or her personal income, but also on various physical and social conditions… The nature of health care and the nature of medical insurance – public as well a private – are among the most important influences on life and death. So are the other social services, including basic education and the orderliness of urban living and the access to modern medical knowledge. There are, thus, many factors not included in the accounting of personal incomes that can be importantly involved in the life and death of people.’

By studying the development of life expectancy during the 70 years of the People’s Republic of China therefore in fact what is being studied is the overall development of the Chinese people’s standard of life compared to trends in other countries.

The conclusion of such comparative study of international facts is simple and clear. The CPC has delivered on its promise that its methods and programme would create results superior to any other – in particular China’s socialist path of development has achieved results which are superior to any capitalist alternative. These are not empty boasts, or purely nationalist rhetoric, but are simply the objective results of the study of global development since 1949.

Resolving historical debates on China’s development

Carefully establishing the facts on this question also casts a clear light on key issues in China’s own history, on international discussion regarding China’s success, on understanding of China’s perception of itself, and in grasping the role of the CPC and the socialist path of development that flows from it.

It is extremely important internationally to establish this fact regarding the unparalleled increase in China’s life expectancy compared to other countries and the conclusions that flow from it. While, as will be seen, the scale of China’s economic and social development in the 70 years since the establishment of the PRC is unequalled this is frequently not shown in China’s research in  presentation of its own achievements – particularly as presented internationally. Too often systematic comparison of China’s achievements compared to other countries is not carried out, which allows excessive international circulation of slanders against China and also even allows the spreading of false analyses within China.

To attempt to contribute to a more widespread understanding of the truly enormous scale of China’s social achievement this article therefore carries out a systematic study of the development of life expectancy in China compared to other countries since the establishment of the PRC. This establishes clearly that the increase in life expectancy since 1949 shows that China’s is by far the greatest social miracle in any country in the last 70 years, and probably the greatest social miracle in the entire history of humanity. It will be shown that such a conclusion is not overheated nationalist rhetoric, but simply follows from an objective and impartial study of the facts.

China’s extraordinary achievement in life expectancy

Turning to the overall comparative results of China’s increase in life expectancy compared to other countries these are summarised in Table 1. Ideally a comparison would be made of life expectancy for all countries starting in 1949, but systematic World Bank data is not available before 1960 – a specific study of China for the period 1949-1960 is given below. However, from 1960 to 2017, the latest available data, systematic World Bank data covering 189 countries exists, accounting for 99.3% of the world’s population. That is, from 1960 entirely comprehensive international comparisons can be made – systematic international comparative data therefore exists for 57 out of the 68 years of the existence of the PRC. Furthermore, as will be demonstrated, there is no indication of countervailing data for the period 1949-1960. There is, therefore, no doubt as to China’s performance compared to other countries.

The comparative international results are overwhelming and conclusive.

  • In 1960-2017 China’s average life expectancy increased by 32.7 years – from 43.7 years to 76.4 years.
  • By 2017 China’s 1,386 million people had enjoyed a higher increase in life expectancy than 6,027 million people, living in countries with a lesser increase in life expectancy than China, and only 46 million people living in countries with a greater increase in life expectancy than China.
  • China’s increase in life expectancy was therefore higher than that of 99.2% of the population of the world’s countries excluding China.
  • Only 0.8% of the world’s population, excluding China, lived in countries with a longer increase in life expectancy than China – this was purely in six small countries, Bhutan, the Maldives, Tunisia, Timor-Leste, Nepal, Oman.

To show clearly how overwhelming is China’s increase in life expectancy compared to other countries, Figure 1 shows graphically the percentage of the world’s population living in countries with higher and lower increase in life expectancy than China in 1960-2017- including China in the calculation.

Figure 2 shows the percentage of the world’s population living in countries with higher and lower increase in life expectancy than China in 1960-2017 excluding China.

The social impact of China’s increase in life expectancy

This fact that China’s increase in life expectancy exceeded that of almost all other countries, and far exceed that of all other major countries, is itself a decisive vindication of the superiority of China’s socialist path of development. There are today literally hundreds of millions of people in China alive because of China’s far superior performance in increasing life expectancy. But in addition to this direct effect on China itself this overwhelming comparison is also is decisive in deciding other issues.

The claim made in rabid anti-China Western media that the people of China live in ‘misery’ is entirely laughable – the life expectancy data shows the Chinese people have experienced a greater improvement in their overall social conditions than countries representing over 99% of the world’s population.

The claim that China has pursued economic development at the expense of its people is evidently untrue. On the contrary, as seen, China’s increase in life expectancy is superior to all except 0.8% of world’s population excluding China.

It is well known that China’s achievement in world poverty reduction is completely unequalled – as is confirmed by the latest World Bank data shown in Table 2. Taking the World Banks’ extreme poverty criteria of expenditure of $1.90 a day, measured in 2011 PPPs, China was responsible for 74% of the reduction in the number of people in the world living below this level of poverty in 1981-2015 (the latter year being the latest available data). Taking the alternative, slightly higher, World Bank criteria of poverty of expenditure of $3.20 a day, measured in 2011 PPPs, China was responsible for 138% of the reduction in the number of the people in the world living at this level of poverty –  i.e. the number living below this level in China fell by 889 million while in the rest of the world it increased by 245 million. But while data for poverty shows the improvement in life conditions for the poorest in society, the data for life expectancy are, of course, an average – with the dramatic increase showing that the improvement in China’s social conditions applied to the overwhelming majority of China’s  population.

Having established the overall framework of the development of China’s life expectancy the light this throws on resolving some specific issues of controversy will now be analysed in more detail 

China in 1949

As a starting point for analysis it is crucial to understand China’s position in 1949. After more than a century of foreign invasions China was almost the world’s poorest country. Systematic international data does not exist for 1949, which was the last year of China’s civil war, but it does for 1950 – the PRC’s first year of peace. This will therefore be taken as the comparative starting point for analysis.

Of systematic international analyses that have been made, Maddison, former head of statistics of the OECD and the world’s most renowned analyst of long term growth, concludes that in 1950 only 10 countries in the world had a lower per capita GDP than China – two in Asia (Myanmar and Mongolia), eight in Africa (Botswana, Burundi, Ethiopia, Guinea, Guinea Bissau, Lesotho, Malawi, Tanzania). The Conference Board, using a slightly different method of analysis, concludes that only six countries in the world in 1950 had a lower per capita GDP than China – two in Asia (Cambodia, Myanmar), four in Africa (Burkina Faso, Ethiopia, Malawi and Mozambique).  On Maddison’s data, in 1950 only 2.4% of the world population lived in countries with a lower per capita GDP than China. These detailed differences in conclusions are clearly entirely insignificant compared to the overall finding. At its starting point the PRC was established in a country which was almost the world’s poorest.

As would be expected, China’s extreme poverty in 1949 was reflected in very low life expectancy. As already noted, comprehensive comparative World Bank data on life expectancy is not available for 1950, it begins in 1960. However, the most relevant comparison is to India, which with China is the other largest developing country. This is because India is the only country comparable in size to China in terms of population, because India achieved independence from Britain in 1947 at almost the same time as the creation of the PRC, and because India’s life expectancy at that time was close to China’s. Studying not only the 1950-1960 period but also the pre-1978 reform period in China’s history compared to India therefore casts a clear light on numerous issues.

In 1947, the year India achieved independence, its life expectancy was 32. China’s life expectancy in 1949, the year of the creation of the People’s Republic of China, was 35 – a gap of three years compared to India. By 1978, the last year of pre-reform China, China’s life expectancy was 67 and India’s 55 – a gap of 12 years. This is shown in Figure 3.

This sharply growing difference was not because India had a bad record – as an increase of 22 years in life expectancy over a 31-year period graphically shows. It is simply that China’s performance was sensational – life expectancy increasing by 32 years in a 29-year chronological period. This means that in pre-reform China life expectancy increased by more than a year for every chronological year that passed – an annual average increase of 2.3%.

To understand the true scale of such an achievement in comparative terms, it need simply be noted that China’s rate of increase of life expectancy in the three decades after 1949 was the fastest ever recorded in a major country in human history. For comparison:

  • The US in the thirty years after 1880, a period of sharp increase due to recovery from the Civil War, saw a 0.9% annual increase in life expectancy.
  • Life expectancy in the UK after 1871, a period of rapid growth, was under 1.0% a year.
  • Japan, a country considered to have an outstanding record in increasing life expectancy, and enjoying a rapid increase due to recovery from World War II, raised life expectancy by 1.3% a year in the 29 years after 1947.

China’s 2.3% increase in life expectancy in 1949-78, therefore, far outperformed all these countries whose records, by normal standards, are considered exceptional.

When did life expectancy increase?

The period in which this spectacular increase in life expectancy was concentrated is highly interesting and casts a strong light on debates concerning the continuity of the PRC’s development  – and in particular shows clearly the falsity of ‘historical nihilism’, the claim that trends in China only became favourable after 1978. During the 1950s China made very creditable progress – life expectancy increasing by an average of slightly over nine months in each chronological year. India’s performance in this period was comparable – between 1947 and 1960 its life expectancy increased by slightly less than nine months for each chronological year. India continued this progress in the period up to 1978, with life expectancy rising by slightly under nine months for each chronological year. But after the 1950s China’s life expectancy began to rise extremely rapidly. Between 1960 and 1970 China’s life expectancy increased by a dramatic one year and nine months per chronological year. Over the entire period 1960-78 China’s life expectancy grew by an average one year and three months per chronological year.

This spectacular, indeed historically unprecedented, social achievement during 1949-78 does not overturn any analysis of economic developments in this period, nor of political judgements concerning the Great Leap Forward and Cultural Revolution. But it shows clearly that attempts to present the pre-1978 period in an overall negative social light, as ‘historical nihilism’, and as represented in the West by a series of books attempting to present pre- reform China as socially disastrous, is, to put it straightforwardly, a blatant falsification. In the 27 years between the establishment of the People’s Republic of China in 1949, and the death of Mao Zedong in 1976, life expectancy in China increased by 31 years – or over a year per chronological year. In comparison, in the 27 years after India’s independence average life expectancy increased by 19 years. Far from being negative, China’s record in this period was one of history’s most extraordinary social achievements.

Instead of engaging in factual falsification and myth making, foreigners can  more accurately understand the support for Mao Zedong in China, even leaving aside other issues, such as the achievement of real national independence, merely by the lived experience of this fact. If someone leads you to live an extra 31 years it is unsurprising you hold them in esteem!

Historical accuracy certainly means clearly noting that China’s economic growth was superior after 1978, but this should not lead to underestimation of the astonishing social achievements of the preceding pre-reform period. Xi Jinping put it precisely on these two periods of China’s post-1949 development, that is from 1949-1978 and 1978 to the present:

The two phases – at once related to and distinct from each other – are both pragmatic explorations in building socialism. … Although the two historical phases are very different in their guiding thoughts, principles, policies, and practical work, they are by no means separated from or opposed to each other. We should neither negate the pre- reform-and-opening-up phase in comparison with the post-reform-and -opening-up phase, nor the converse.

Systematic international comparison

While India is the most relevant single comparison for China there could be an accusation that it is selectively chosen. From 1960 onwards however, as already noted, such an accusation cannot be made as systematic World Bank data exits and leaves no doubt as to China’s performance.  It is therefore useful to expand further on the overall results after 1960 noted above.

Due to China’s very low starting point in life expectancy in 1949, by 1960, despite the progress made in the 1950s, it was still the case that 55% of the world’s population lived in countries with a higher life expectancy than China and only 23% in countries with a lower life expectancy than China. The astonishing transformation is that by 2017, due to the very rapid increase in China’s life expectancy, only 19% of the world’s population lived in countries with a higher left expectancy than China and 62% of the world’s population lived in countries with a lower life expectancy than China. This is shown in Figure 4

To understand the significance of this still more clearly, it may be noted that in 2018 only 15.6% of the world’s population lived in countries which were high income, that is advanced, economies by World Bank classification. Therefore, less than 4% of the world’s population lived in developing countries with a longer life expectancy than China – out of 84% of the world’s population which lives in developing countries. In short, from being one of the world’s poorest countries in 1949, with a low life expectancy, in 1949 China has already achieved a longer life expectancy than almost all every other developing economy.

The increase in human well-being and real human rights which is reflected in those simple figures is truly staggering – precisely because average life expectancy is the best overall indicator of overall social and living conditions. It means the Chinese people, almost one fifth of humanity, has enjoyed by far the greatest improvement in social conditions, reflected in their average life expectancy, of any major country in the world. Literally over a billion people have enjoyed a greater improvement in their standards of life than that by any other means. It precisely means that Marxism in China has delivered its promise, made in 1949, that its programme and methods would achieve the national rejuvenation of China in a way superior to any alternative. The facts show that what was a promise in 1949 was delivered as a reality in the 70 years that followed.

Conclusion

In conclusion, the fact that after 1949 China’s increase in life expectancy outperformed any other major country is of course of the greatest significance to China’s people – it shows the unparalleled increase in living and social conditions that has occurred due to China’s socialist path. But it also decisively settles a number of other issues.

  1. Those in who apologize for capitalism are simply wrong – it is clear China’s socialist path has achieved a greater improvement in overall living conditions, reflected in the increase in life expectancy, than any capitalist path of development over the last 70 years.
  2. Attempts to essentially counterpose the two periods of development of the PRC, between 1949-78 and 1978-2019, are wrong. The fundamental task in both periods was to ‘serve the people’, to achieve ‘people centred development’ – which was successful achieved as shown in the sharp increase in life expectancy in both periods.
  3. The theory of ‘historical nihilism’, the claim that China’s development prior to 1978 was negative is the purest nonsense. Economic growth was faster after 1978 but the increase in life expectancy, reflecting the overall improvement in social conditions, in 1949-78 was unparalleled in human history. Therefore, the attacks made on Mao Zedong in the West simply mean that those making them cannot accurately understand China or understand its dynamic. The period of Mao Zedong saw an increase in life expectancy which was unparalleled in human history – which in no way contradicts negative judgements on the Great Leap Forward or the Cultural Revolution. What is involved is the overall course of China during the Mao period, which the data on life expectancy proves saw an unprecedented step forward in the overall social conditions of the China people. By denying the facts of this reality the West, among other things, renders itself incapable of understanding China and its dynamics.
  4. The facts on the development of life expectancy in China since the founding of the PRC confirm in a single decisive and verifiable figure that the CPC delivered on its promise that its socialist methods and programme would be superior for the rejuvenation of China to any other method. They show that the improvement in the conditions of the Chinese people since 1949 is the greatest ever achieved in a major country in a 70-year period in the whole of human history.

These are the fundamental facts of the truly staggering scale of China’s ‘social miracle’ during the last 70 years.

The myth of Japan’s lost generation – and lessons yet to be learnt

By Tom O’Leary

Japan remains an important economy, the third largest in the world behind China and the US. If the EU Single Market is considered as a single economy it is the fourth largest in the world, although considerably smaller than each of these.

But it is a much less important economy than it used to be.  A period of extraordinary growth in real GDP in the post-War period gave way to recession and then virtually complete stagnation from 1990 onwards. From 1950 to 1990 the Japanese economy increased by over 13 times, much faster than the world economy (Angus Maddison data). But in the 28 years since the Japanese economy has expanded by less than a third (OECD data).

In 1990 Japan accounted for 8.6% of world GDP (Maddison). By 2018 this had fallen to 4% of world GDP (World Bank). This period of economic stagnation was first known as ‘Japan’s lost decade’. But it has dragged on to become the ‘lost generation’.

This period bears closer scrutiny, being the most recent period when an advanced industrialised country stagnated over such a prolonged period, not least because the G7 economies as a whole have been effectively stagnating since the crash of 2008.

The myth of Japanese investment

One of the abiding myths about the period of the Japanese crisis from 1990 onwards is that the government tried to revive the economy with a sharp increase in public works spending.  It is further frequently asserted that the governments were so useless that it mainly built ‘bridges to nowhere’ and that they eventually ran out of money.  It is also asserted that China’s public works investment will go the same way, and that no government in the West should be so foolish to emulate it now, and that the Corbyn/McDonnell investment programme is therefore bound to fail too. 

This Thatcherite morality tale is very widely repeated. But it is completely untrue.

What is true is that the Japanese governments frequently announced large new public works spending, often with great fanfare. But it is not true that they increased public sector investment.

Chart 1. below shows both Japanese total Gross Fixed Capital Formation (GFCF) as a percentage of GDP, as well as the private sector’s GFCF as a percentage of GDP.  There is a clear downtrend trend in total Investment, or GFCF.

Chart 1.

The decline in the contribution of Investment to GDP is exactly as would be expected in a period of outright stagnation, given the decisive contribution of Investment to GDP growth.   In 1990 (not shown in the chart) total Japanese GFCF amounted to just over 34% of GDP.  This was not massively below the post-World War II peak of 38.7% in 1973.  But by 2010 total GFCF had fallen to just 21.3% of GDP. From accounting for just over a third of Japanese GDP, GFCF slipped to little more one-fifth of GDP and has not recovered fully since that time.

To be clear, this is quite separate from the Consumption of the Japanese public sector which did rise sharply in response to the crisis. This is shown in Chart 2. Below. Government Consumption rose throughout most of the crisis period, at least until 2010. But increased Consumption cannot sustainably lift production because it provides no new means of production. That requires Investment to create new productive capacity. Put another way, attempting to use Consumption to drive GDP higher over a sustained period will end in failure on both counts.

Chart 2. Japanese Government Consumption, % GDP

Returning to Chart 1 once more, it should be noted that the decline in Investment was not driven solely by the private sector. In 1994 (the earliest available date for the disaggregated private sector data), private sector GFCF accounted for 20.4% of GDP.   By 2015 (latest available data) this had slipped to 18.3% of GDP.

This is highlighted in Chart 3. below.  This shows the calculated level of general government GFCF as a percentage of GDP, arrived at by subtracting private sector GDP from the total GFCF.

Chart 3.  Japan General Government GFCF as % of GDP

Over the period general government GFCF as a percentage of GDP fell from 9.1% in both 1994 and 1996 to a low-point of 4.8% of GDP in 2007 and 2008. It has only recovered to 5.5% in 2015. Therefore the total loss in terms of public sector Investment has been 3.6% of GDP, while the total cumulative loss in private sector Investment has been 2% of GDP over the same period.

Far from Japanese government assertions, echoed by a wide array of analysts and pundits, that public Investment was increased but it proved useless in reviving the economy, the opposite is the case. The Japanese public sector slashed its own Investment, almost cutting it in half.  The cut in public sector Investment was mainly responsible for the decline in total Investment.

This cut in public Investment was much greater than the simultaneous cut in private sector Investment – despite being a much smaller initial value.  Throughout the process, it was the fall in public sector Investment which also led the way, and private sector Investment did not reach its own low-point until three years after the public sector (spurred on by the fall in the level of profits in 1992, which have never properly recovered).

A public investment diversion

As noted above, the change in Japanese public Investment was a fall of 4.3% of GDP from its 1994 (and 1996) level to its low-point in 2007. Even the most strongly growing economies would struggle if any factor was reduced by 4% of GDP.  But the decisive role of Investment in accounting for GDP growth means that slump and stagnation was effectively unavoidable.

What caused the Japanese public sector to choke off Investment, slow the economy to stagnation and lead the Japanese private sector into cutting its own Investment? According to US Treasury data (pdf) Asian holdings of US Treasuries (government bonds) rose from $84 billion in 1984 to $283 billion in 1989 and upwards to $418 billion in 1994.  As the US Treasury notes, these are overwhelmingly held by Japan.

Low levels of Asian (mainly Japanese) US Treasuries’ holdings in 1984 ballooned fivefold in just 10 years.  In relation to Japanese GDP, total Asian holdings were less than 1% in 1984 and approximately 10% in 1994, even taking into account the surge in the value of the Yen over the same period.

That surge in the Yen did not occur simply as a result of market mechanisms. In 1985 the Reagan Administration, struggling with the accumulated debt of the Viet Nam war and recession of the early 1980s, insisted that other countries, Japan, West Germany, France and Britain sell US Dollars to engineer a depreciation which would make US industry more competitive. The US allies were also obliged to cut their own Investment and increase Consumption, partly to boost US exports. This agreement was formalised in the Plaza Accord of 1985. It also allowed the US to maintain very large budget deficits as it pursued the Cold War arms race to destruction.

The effect on Japan and Japanese industry was profound and dramatic. In February 1985 there were 260 Japanese Yen to the US Dollar but by 1987 the exchange rate had fallen to 121. This was excruciating for Japanese industry, which now struggled to compete internationally because of this more-than-doubling in the exchange rate value of the Yen. 

The Japanese government in particular was obliged to sharply increase its purchases of US Treasuries, under threat of hollowing out Japanese industry via the exchange rate. This demand was later reinforced under the separate Louvre Accord. The author of the policy was the US administration under Reagan.

The widely-repeated claim that Japanese public Investment failed to rescue the Japanese economy is no more true for repetition. The opposite is the case. The cut to public Investment was decisive in causing the slump, being both earlier and deeper than the cut in private Investment.  Instead, the Japanese government followed US demands to ‘stimulate demand’, that is increase Consumption in its own economy.

Both of these policies, the cut in Japan’s public Investment and the increase in public Consumption were the effects of the US measures to support its own economy, fund its budget deficit and hugely increase its military spending.  But it has hobbled the Japanese economy for almost three decades now.

Currently, but for different reasons the US is once more looking to overseas sources of capital to maintain current US living standards and increase spending.  How it is attempting to engineer that inflow this time around will be examined in a follow-up piece.

Only Labour will end austerity – the Tories plan a whole new offensive

By Tom O’Leary

There are widespread claims that the government is ending austerity. The reality is that it is engaged in a pre-election spending spree, just as Osborne and Cameron did in 2014.  Subsequently, it should be clear that the small-state right-wing ideologues in Johnson’s Cabinet intend to use a No Deal Brexit as a platform for another huge assault on living standards, workers’ rights and the public sector. They also have no intention of tackling the climate crisis. It is only the Labour Party of Jeremy Corbyn which has a plan to end austerity, with clear commitments to increase public investment, restore public services and tackle climate change.

What are the Tories promising?

The government and their faithful supporters in the press are touting the real terms increase in both current spending and in public investment. Current spending is set to rise by 2.0% in real terms and public investment set to rise 5.6% on the same basis.

But the first point to note is that this is a promise almost certainly for the next parliament as an election now seems inevitable.  If the Tories win the new government will not be bound by the promise of the last one.  It is also a one-year promise, to get through an election. The widespread consensus is the government departments and all their agencies require a minimum of three years funding so that they can plan ahead. 

Claims that this is the biggest spending spree for decades are false. This plan is similar to the Osborne/Cameron one in 2014/15.  Under them public sector gross investment was increased 8.7% in real terms in 2014/15 compared to the previous financial year, in time for the 2015 general election. The rise in public sector current spending was far more modest, perhaps because Osborne understood the importance of investment to spur growth.  But if we take the whole of increased government outlays together, both consumption and investment in Total Managed Expenditure, the current plan is to raise TME by 2.4% in real terms, while Osborne/Cameron increased TME by 2.3% on the same basis.

The cynicism of the Tories was such that these totals were actually cut in real terms once they had won the 2015 election. There is no reason to suppose that the current Tory Cabinet, which occupies a political position even further to the right, will be any different.

What are the Tories going to do?

The current Cabinet is packed with right wing ideologues. The Health Secretary, who claims to be more moderate than his colleagues, argues for the accelerated privatisation of the NHS, and is putting that into practiceAcademisation is the main weapon in the privatising of secondary education. The teaching union the NEU has highlighted the UK’s role in the privatisation of education globally, including through the aid budget (pdf). Boris Johnson is himself an advocate of privatisation and his Chancellor claims to be an avid fan of the neoliberal guru Ayn Rand.

But the Tory perspective is not determined by the outlook of its key members. It is the objective conditions that will determine their choices. The British economy remains in a crisis. The austerity project has failed it its own terms – which is the transfer of incomes from workers and the poor to business and the rich in order to revive a business-led expansion of the economy.

The transfer of income has been real, and real wages have fallen and the social surplus has been redirected from social security to tax cuts. But the profit share has not risen. In 2008 the Gross Operating Surplus of firms was 39.3% of GDP. In 2018 it had fallen to 37.9% of GDP. Profitability has not revived.

As a result, investment has not revived either.  In 2008 it was plummeting and accounted for just 17.2% of GDP. In 2018 it was 16.9%.

For a sustainable business-led expansion, a decisive defeat of the working class and its allies is required. That has not been achieved. Now, the extremists in the Tory Cabinet, orchestrated by the Trump administration, believe that crashing out with a No Deal Brexit is the opportunity they need to impose that decisive defeat.

This will entail not just a fall in living standards, and loss of well-paid jobs in advanced manufacturing sectors such as cars and pharmaceuticals. But, as British-based businesses will be obliged to compete more directly with US rivals, they will in turn demand far lower union rights, health and safety standards, lower pensions and other entitlements. There will be an Americanisation of the British working conditions.

The Corbyn alternative

The scope of the Corbyn-McDonnell project makes the Tories’ pre-election bribe look like the chicken feed it is. Using the same TME measure, which combines both government current spending and public investment, the Labour plan increases it by 3.4% of GDP. Crucially, this is not a one-off, but a sustained increase over each and every year of the next 5-year parliament.

This is about 7 times what Johnson’s Cabinet promises. And it does not include the additional effects of the National Investment Bank on raising investment, nor does it include the probability of some businesses being obliged to increase their own investment, to provide the inputs for the increased investment from the public sector.

The Corbyn-McDonnell plan is a sustained effort to raise the growth rate of the economy, contribute to the global effort to tackling climate change and genuinely ending austerity.

What the Tories plan is not an end of austerity. Instead they plan a whole new attack on workers and the poor.

I have witnessed three coups – power not only protest is needed to stop them

By John Ross

I have witnessed three coups and attempted coups – two in Russia and one in Britain. One was ended politically, one with tanks, the present coup attempt is still not settled. There are decisive lessons on how to deal with them which precisely apply to the present attempted coup by Johnson.

These three coups were in March 1993 in Russia – ended by political means, October 1993 in Russia – ended by tanks. August 2019 in Britain – which will be ended by political means. But each had the same key lessons.

To summarise the events in these three coups each of which I witnessed first hand.

  • In March 1993 Yeltsin attempted to overthrow the Russian constitution, in order to concentrate power in his hands and continue the implementation of economic shock therapy. He was successfully defeated in this by the Russian Congress of People’s Deputies and ministers in the government. However, having defeated the coup, the Congress of People’s Deputies then made the disastrous mistake of compromising with Yeltsin to hold a referendum, in which Yeltsin used his control of the courts and electoral fraud to determine the outcome of. This gave to Yeltsin the political initiative to prepare the coup of October 1993.
  • In the October 1993 coup Yeltsin unconstitutionally declared the dissolution of the Congress of People’s Deputies – the highest authority of the Russian state. This was opposed by massive street mobilisations of Moscow’s population. Yeltsin then ordered the Parliament to be surrounded by armed police which were under his control. The armed police were prevented from taking control of the Parliament by armed resistance by numerous people inside the Parliament building, some with sub-machine guns and similar weapons. The police action was simultaneously opposed by even larger mobilisations of Moscow’s population until the police blockade of the Parliament was broken after several days – the armed police had been demoralised by the steadfast opposition of the Moscow population. But then, instead of consolidating this victory, the leadership of the Parliament made the disastrous decision to launch an attempt to take control of the main television station. Pro-government armed forces stationed there, who had not been subject to popular pressure, obeyed orders to open fire on the crowd carrying out a massacre. Following that the Parliament was attacked by heavy weapons, notably tanks, which the defenders of the Parliament were not able to resist. Yeltsin therefore was successful in this coup d’etat.
  • In August 2019 Johnson attempted to force through a No Deal Brexit through suspending Parliament. The outcome of this struggle remains to be determined.

Each of these coups, however, has the same key lessons which totally apply to Johnson’s attempted coup.

In a coup the issue of state power is what is ultimately decisive – not just protest

The first key lesson is that in confronting a coup it is the issue of state power which is decisive – everything else has to focus on this or it is ineffectual. Everyone who opposes the coup is on the right side and an ally, but there is confusion. As an example on this at present, for example in Britain faced with Johnson’s coup various MPs have proposed so called ‘alternative Parliaments’, MPs occupying Parliament if it is suspended etc. These are beside the point and are in reality to accept Johnson’s coup. MPs have to do something much more powerfu and important than this – simply vote legislation that there will be no prorogation of Parliament, and then, in the present situation, there will be no prorogation and Johnson’s coup will be blocked for the reasons clearly outlined below.

Similarly, writers such as Owen Jones and Paul Mason have called for ‘protests’. Momentum has said it will block streets and bridges. Mason has even made a supposed arithmetic calculation on the percentage of the population that has to be involved in protests for them to stop the government: ‘What we need now is a mass peaceful movement of civil disobedience. Protest theory tells us that if around 4 percent of the population simply refuses to comply with the powers that be, we win.’

But Mason’s look at the possible steps does not even mention Parliament legally blocking its prorogation: ‘The parliamentary options are now limited. Phase one is for MPs to take control of the parliamentary agenda… Phase two – being prepared right now – is to publish legislation stopping No Deal. Phase three is preventing Johnson and his allies from filibustering or sabotaging that legislation.’ Mason declares: ‘Parliamentary options to protect democracy are limited, but we can use mass civil disobedience to create a situation politically unbearable for the Tories.’

The truth is the exact opposite. Protests will not stop Johnson’s coup, only action by the state will – which in the present situation (not all situations) means laws passed by Parliament.

Protests must demand changing the law

The largest possible popular protests are indeed very necessary. They will influence the political dynamics. But in defeating a coup protests cannot be sufficient to decide it. Bluntly, demonstrations so far in Britain are very small compared to the enormous ones in Moscow to confront Yeltsin’s  coup of October 1993. But protest demonstrations will not stop a coup – only something which affects the state power will.

In Moscow there were there truly gigantic demonstrations against Yeltsin’s October 1993 coup, there were hundreds of armed people many of whom were willing to die, and a significant number of whom did die, to defend the Russian Parliament. But they were simply overwhelmed by the greater power of the state – in this case by tanks.

In Britain neither people with machine guns nor tanks will be involved in the fight to block Johnson’s coup. But the state, whether using the police, the riot police, or even the armed forces if necessary [which won’t be in the present situation] can overwhelm by force any protests which challenge its power. The strongest possible protests are necessary to put pressure on the state power, and to determine the political situation, but they cannot defeat the state power – which in the present situation will be expressed in the law.

These decisive points are not meant in any sectarian sense. To use the Chinese formula, because it is the most precise, it is necessary to carefully distinguish between contradictions among the people and contradictions between the people and the enemy. The ‘enemy’ in the present situation are all those who support Johnson’s coup, the ‘people’ are all those who oppose it. MPs proposing occupying parliament/alternative parliaments etc are unequivocally against Johnson’s coup, part of the ‘people’. It is necessary to stand with them shoulder to shoulder in fighting this coup. But because they do not understand the issue of state power, which is what is decisive in a coup, they have tactics for fighting against it which are not sufficiently effective. Therefore, it is necessary to show the conditions which can stop the coup – which in the present circumstances can only be legal action by Parliament. Protests are absolutely necessary and important, but they must aim at securing that legal change.

Why preventing proroguing Parliament is vital

Blocking Johnson’s No Deal Brexit is certainly vital but it is also absolutely crucial to prevent the proroguing of Parliament – which is entirely possible legally. Johnson cannot be trusted on anything. Under the British constitution Parliament is the supreme authority – but if Parliament is not in session the highest authority will be the government and the Prime Minister. For example, once Parliament is prorogued there is nothing legally which prevents Johnson advising the Queen to extend the prorogation beyond 31 October, the date for Brexit. No assurance by Johnson/Cummings this will not be done can be relied upon one inch – they have already shown they are prepared to disregard any of their previous statements.

Three government ministers – Johnson in his interview with the Sunday Times, Gove and Gavin Williamson – have already taken the unprecedented step of saying that the government will not necessarily obey a law passed by Parliament (which could include advising the Queen not to sign a law) – an unprecedented violation of Britain’s constitution. Any such step by the government would normally be countered by a vote of No Confidence and removing the Prime Minister with a replacement who would carry out the law including advising the Queen not to refuse to sign Acts of Parliament or prorogue Parliament. But if Parliament is not sitting, if it has been prorogued, this cannot be done. There would, therefore, be no way to overturn the advice given to the Queen.

If legislation is passed Johnson will set about ‘discovering’ ‘loopholes’ in it.

There are also numerous other steps which Johnson/Cummings could doubtless dream up.

In short to allow Parliament to be prorogued would create an ultra-dangerous situation removing control of the situation.

Therefore, while measures to prevent a No Deal Brexit must certainly be passed by the House of Commons over this coming week it is also absolutely essential to pass a law blocking the proroguing of Parliament. It is imperative that, in addition to any measures on No Deal, Parliament remains sitting – that is it is not prorogued. This can be done by Parliament passing short legislation preventing it being prorogued in the present situation.

Defeating a coup

Defeating a coup means starting off by understanding that the outcome of this will be determined by state power, and determining this means a precise analysis of the relation of forces.

The first key step was been taken by Jeremy Corbyn and the joint statement by opposition parties when the said they did not accept the prorogation of Parliament. For reasons outlined below there has to be a laser like focus on maintaining this.

On 28 August Jeremy Corbyn stated:  ‘Suspending Parliament is not acceptable, its not on. What the Prime Minister is doing is a sort of smash and grab on our democracy in order to force through a No Deal Brexit… So when Parliament does meet, on his timetable very briefly next week, the first thing we’ll do is to attempt legislation to prevent him doing what he’s doing and second we’ll challenge him with a motion of confidence at some point.’

On 29 August Jeremy Corbyn repeated: ‘We’re back in Parliament on Tuesday  to challenge Boris Johnson on what I think is a smash and grab raid against our democracy where he’s trying to suspend Parliament in order to prevent a serious discussion and a serious debate the prevent a No Deal Brexit.

‘What we’re going to do is try to politically stop him on Tuesday with a Parliament process in order to legislate to prevent a No Deal Brexit and also to prevent him shutting down Parliament during  this utterly crucial period.’

Later on 29 August there was the joint statement by the Labour Party, SNP, Lib Dems, Plaid Cymru, For Change Now, and the Green Party.

‘We condemn the undemocratic actions of Boris Johnson following his suspension of Parliament until 14 October….

‘In our view there is a majority in the House of Commons that does not support this prorogation, and we demand that the Prime Minister reverses this decision immediately or allows MPs to vote on whether there should be one.’

This statement had only one ambiguity which should be removed. It is not necessary for Johnson to ‘allow’ MPs to vote on prorogation. Parliament is supreme. It can decide, but this is just an ambiguity in the statement not a wrong position.

Reliance cannot be placed on the courts. In Russia in March 1993 one of the disastrous mistakes made by Congress of People’s Deputies was to attempt to compromise with Yeltsin by stating that a referendum supporting him had to receive support of 50% of the electorate and not just 50% of those voting. Yeltsin used his control of the courts to overrule this.

Parliament, the law and the monarchy

In Britain at present, as Chris Daw QC reminds us: ‘The first thing they teach in law school – The Queen-in-Parliament is sovereign. Not the Government, not the Prime Minister.’  That means it is the action by Parliament which is decisive because it determines the law. Protests are extremely important but will only prevail if they help influence the decisions of Parliament.

As for the Queen, naturally socialists have no illusions in the monarchy. If what was threatened was the end of capitalism she might well act illegally and outside Parliament. But Brexit, either way, will not end capitalism and in these circumstances she will act in a way to strategically preserve the monarchy. And that means not going outside the law set by Parliament because to do so would for the first time endanger the monarchy.

The decisive issue is therefore that Parliament pass legislation preventing itself being prorogued. That legislation is the key issue, not challenges in court. If Parliament has not passed legislation to stop itself being prorogued the Queen will act on the Prime Minister’s advice as she has done so far. But if Parliament passes legislation she will act in accord with that law in order to preserve the monarchy from strategic threat. And if a Prime Minister advises her not to sign an Act of Parliament that Prime Minister can be removed, and the advise reversed, by Parliament – but only if Parliament is sitting!

Johnson cannot be trusted – therefore Parliament must remain in session

Jeremy Corbyn’s statements on 28 and 29 August, and the joint statement by opposition parties on 29 August, were spot on regarding the impact of a coup. But a broader picture is that a number of people cannot rapidly adjust to standing up to power and they accept the framework of the coup while ‘protesting’ about it. This is inevitable because as Marx says the ruling ideas of society are the ideas of the ruling class. It takes a serious struggle for people to break with obeying authority. Therefore, the first reaction of many people to a coup is to accept its framework and only attempt to take measures within its framework.

This was seen in March 1993 and October 1993 in Russia when Yeltsin, with the full weight of the US behind him, and with US advisers, acted illegally, rapidly, and decisively.

In contrast was the fatal mistake made by the Russian Congress of People’s Deputies in March 1993. By the time the Congress had finished its first session the coup had been decisively defeated. The head of the so called ‘power ministries’, that is the forces of repression, refused to carry out Yeltsin’s unconstitutional action. The Congress of People’s Deputies, the supreme constitutional authority of Russia, not only did not accept Yeltsin’s unconstitutional steps but voted by 60% for the impeachment of Yeltsin – only 7% short of the necessary two thirds majority to remove him. Yeltsin coup attempt was stopped dead in its tracks.

But instead of simply consolidating Yeltsin’s defeat, standing up to Yeltsin having blocked his coup, the Congress instead set about seeking a compromise with Yeltsin – agreeing to a referendum but attempting to set its own conditions. Naturally Yeltsin, in contrast, had no intention of ‘compromise’. As soon as the Congress of People’s Deputies was not in session Yeltsin used his control of the courts to overturn the conditions set by the Congress and then used his control of the electoral system to falsify the referendum.

The present situation in Britain shows a similar dynamic. Johnson is acting in a centralised, illegal and decisive way.  Talk of protests, alternative parliaments and so on will not stop such actions. Passing of a law which decides that Parliament cannot be prorogued in the present period is the decisive measure. This is vital to pass alongside legislation blocking a No Deal Brexit.

The fate of Parliament lies in the hands of the House of Commons – as this House of Lords will not support Johnson on prorogation. If the House of Commons immediately passes legislation, as soon as it sits, that Parliament cannot be prorogued at present Johnson’s will be defeated. If the House of Commons does not pass such a law Johnson’s attack will roll on.

If Parliament is prorogued it will only be due to the wrong judgement or cowardice of MPs. The fate of Parliament lies entirely in its own hands not those of Johnson. That is the lesson of three coups.

‘Boosterism’ and economics, or exposing the lies of Boris Johnson

By Tom O’Leary

All good jokes summarise or tell us something new about our society, or the times we live in, or about human nature. There is a very old, and very bad joke (repeated by Margaret Thatcher, among others) that, ‘The problem with socialism is that you run out of other people’s money’. It is a bad joke because it relies on a number of falsehoods.

There never has been a genuinely socialist government in Britain, and the largest and most famous economic crashes in this country have nearly all taken place under Tory or Tory-led governments. These were the depression of the 1930s and Churchill’s return to the gold standard, the Barber boom of the early 1970s, the Lawson boom of late 1980s and the imposition of austerity in 2010. The sole exception to this pattern was the crash under New Labour in 2008, which had adopted the Tory mantras of privatisations, PFI and bank deregulation.

Now, the new Prime Minister has adopted an economic policy he describes as ‘boosterism’. Boris Johnson as PM, or even as an architect of economic policy is itself a joke in poor taste. But the definition of boosterism under Johnson is simply promising anything in order to gain popularity.

This is important to grasp, as Johnson is not simply continuing Cameron/Osborne austerity. First, he has to get elected and is willing to scatter promises to achieve that.

Boris Johnson has form in this area. There is no garden bridge over the Thames, there is no ‘Boris Island’ airport, firefighter numbers were reduced and fire stations closed despite pledges to the contrary, and police cuts were only reversed when it threatened his re-election. The pledges were false, even where significant amounts of public money were spent.

Johnson’s current lies

Boris Johnson has effectively come to office after a coup against the previous Tory leadership. The electorate have not endorsed as Prime Minister, even indirectly, and pollsters have noted that his ‘bounce’ in the polls is far lower than Theresa May’s and is already fading – Labour is once again frequently marginally ahead in national opinion polls.

Under these circumstances, and leading a government which is supported by a bare majority that is the result of bribes to the DUP, Johnson does what comes naturally. He lies. He has promised:

  • £1.8 billion for the NHS. This is a tiny amount compared to what the NHS needs and it has emerged since that £1 billion is not new money, and the source of the remainder has yet to be identified
  • A total of £6.3 billion (£2.1 billion of which is new money) to prepare for No Deal Brexit, despite claiming it was a ‘million to one chance’ against happening
  • 20,000 extra police officers, which is nearly as many as the Tories have cut since 2010, but says nothing about the similar numbers of police community support officers, and police admin staff that have also been cut over the same period
  • More prison places and longer sentences, even though there are no new prisons and they would take years to build
  • Full-fibre broadband across the country by 2025 – but no plan to achieve it, not even in outline, and no suggestion of the resources it would require
  • To ‘level up’ per pupil funding in schools (which is aimed at Tory voters in the shires who complain about the greater funding for inner cities’ schools). The estimated cost for secondary schools alone is just £50 million per annum, a pittance compared the £4.6 to 5 billion needed simply to reverse Tory cuts to schools
  • A tax giveaway to the higher paid, raising the higher tax band threshold from £50,000 a year to £80,000 (which benefits someone earning close to £80,000 or more much more than the benefit to those just above £50,000). There is no indication of the cuts elsewhere, to fund this giveaway, or a justification for the higher borrowing it would entail.

Politically, his agenda is aimed squarely at his own base, ‘with law and order’ measures to the forefront. Random stop and search will certainly increase the number of black and Asian boys harassed by police, but will do virtually nothing to halt crime, as Home Office analysis shows.

Boosterism and economic fundamentals

This string of false promises, untrue claims and distortions are widely believed to be associated with a planned general election campaign around the time of the Tories’ central project of a No Deal Brexit. As No Deal itself and the likely plans of a hard right Tory Cabinet represent a double blow to living standards, this will be discussed below.

Yet, even before these two new blows to the economy and living standards, it is important to recall that the British economy is already in a crisis. The main source of this crisis is highlighted in Fig.1 below, reproduced from the Office for national Statistics (ONS). It shows that a weak recovery in business investment following the crisis of 2007 to 2008 has given way to outright stagnation and even decline. The economy has also begun to contract once more in the 2nd quarter of this year, in the recently-released preliminary data.

Chart 1. UK Business Investment

One way to illustrate how the weakness of business investment has been the main brake on growth and prosperity is by comparison. Fig.2 below shows that business investment has been far weaker than GDP growth since the beginning of the crisis. For illustration, business investment has also been far weaker than the growth in household consumption.

Chart 2. UK Real GDP, Household Consumption and Business Investment from Q4 2007 to Q1 2019

Since real Business Investment peaked in the 4th quarter of 2007 it has risen by just 3.25% to the 1st quarter of 2019. This is much weaker even than the growth in real GDP, which has risen cumulatively by 13% over the same period. In addition, it is often incorrectly asserted that the source of the crisis is the absence of ‘demand’, which is primarily Consumption. But real Household Consumption, which is the bulk of domestic demand has largely kept pace with the rise in GDP over the same period, increasing by 12.6%. In simple arithmetical terms, it is shown that the weakness of Business Investment is the main drag on UK growth.

But it is also possible to highlight this point in a more fundamental way. Consumption requires production – for most of us, even the apples we eat don’t just fall from the trees. They are commercially picked, processed, transported and sold by retailers. The main means of sustainably increasing that production is to add to the means of production through net investment, or to increase the number of hours worked.

Fig.3 below shows the growth rate in what the ONS calls the level of the capital stock (the means of production) over time, as well as changes in the net capital stock once the consumption of capital is taken into account. The consumption of capital is simply the capital that is used up in the production process, whether that is a rubber washer, a machine tool or a factory, which are each consumed or depreciated over different time periods.

Chart 3. Percentage change in growth rate of capital stock, net capital stock and capital consumption

The ONS summarises these trends as follows, “The UK’s net capital stock was estimated at £4.6 trillion at the end of 2017, increasing by 1.1% compared with 2016. Prior to the economic downturn, net capital stock increased on average by 2.0% per year, slowing to an average of 1.3% per year since 2010.”

Over the medium-term from 1997 onwards the annual growth rate of the capital stock has slowed from fractionally under 3% to just over 1%. As business is responsible for the bulk of the growth in the capital stock it is this prolonged deceleration in the growth of the means of production of the private sector that is the decisive factor in the medium-term slowdown and stagnation of the economy.

To raise the annual growth rate of the capital stock to 2% would require an additional £46 billion of fixed investment (which would itself need rise over time as this additional new capital itself depreciates).

Of course, set against this fundamental problem Boris Johnson’s ‘pledges’ of tax cuts for the rich and more spending on No Deal are simply another joke in poor taste. Failing to address this problem (unlike Labour, which promises to increase public investment) means that none of Boris Johnson’s pledges can possibly lead to economic growth or rising living standards over the medium-term. That is even without the damage from his central project, No Deal Brexit.

The threat of No Deal

A No Deal Brexit entails the severing of Britain’s close economic relationship with the EU, for the assumed benefits of a closer economic relationship with the US. But this is fool’s gold. In 2016, total UK trade with the EU (goods and services) amounted £554 billion, compared to £166 billion in total trade with the US (source, ONS).

There is no conceivable improvement in the trade relationship with the US that could even compensate for the likely fall in trade with the EU. At the same time, much of the country’s trade with other countries in the rest of the world is currently governed by trade agreements with the EU, and many of those are reluctant to offer the same terms to this country when it leaves.

More importantly, production in many sectors in the UK economy is closely linked through highly intricate supply chains to output in the EU. For many reasons, including geography these cannot be reproduced in supply chains connected with the US. Therefore any sector that has either tariff or non-tariff barriers will be faced with series of painful adjustments, including closure and relocation, with all the consequent loss of jobs.

There is too the obvious negative impact of the terms of any likely trade deal with Trump (and many of his possible successors). These range on everything from environmental standards to workers’ rights to food regulations and the accelerated privatisation of public services, including the NHS. In addition to China, Trump has already imposed tariffs and trade restrictions on neighbouring Mexico and Canada (effectively tearing up NAFTA), as well as India and the EU. This is in addition to the growing list of countries sanctioned for purely political reasons, such as Venezuela, Cuba, Iran, Syria and Russia.

But it is probably an error to assume that this government is even mildly uncomfortable with a US trade agreement that will increase fracking, sell off the NHS, reduce rights at work and allow US agri-business unregulated access to UK markets.

This is an ideologically hard right Tory Cabinet, many of whom, for example have explicitly advocated private health insurance or have financial links to it. Privatisations, fracking, ignoring the catastrophic risk of climate change and reducing workers’ rights can all contribute to an increase in labour exploitation and have the potential to boost profits.

For this government, and a small number of sectors, Trump’s demands can be seen as an opportunity, not a threat. The domestic beneficiaries of No Deal can include hedge funds and other speculative capital, private health insurers, private school owners and managers, frackers, sweatshop employers and landlords, as well as their apologists and PR agents.

For the overwhelming majority of the population a No Deal Brexit would have a very serious negative impact on living standards. It is also true of large sections of British capital. The fall in living standards has already been renewed with the fall in the pound leading to higher inflation and lowering real wages, as well as the job losses which have already begun simply from the threat of No Deal. No Deal will also reverse even the limited contribution to date of addressing the climate crisis.

Conclusion

Boris Johnson’s is a political campaign, where false promises are designed to win an election. They will do nothing to improve the economy or living standards for the vast majority.

Worse, his central project of a No Deal Brexit will deepen the economic crisis, by severing the closely inter-connected production supply chains within the EU. The replacement free trade deal with the US will only exacerbate the crisis and widen it to include policies which will add to the climate crisis, worsen public services and worker’s pay and conditions.

Labour already has the economic weapons to fight Johnson. Its fully-costed programme of measures to begin reversing austerity for the 2017 election amounts to £48.6 billion (pdf). This is massively greater than anything Johnson will ever promise, because it benefits workers and the poor the most. More importantly, as shown above, Johnson has nothing to say about raising the growth rate of the economy and living standards in a sustainable fashion. Labour does, with increased public investment and the National Investment Bank. It is also possible that Labour could build on its own successes of 2017, with additional funding for both, especially as interest rates are so low. But the defeat of No Deal is the next decisive step in Labour’s anti-austerity fight.

Why the US economy is slowing – how it will affect the trade war and China

By John Ross

The following article was written before the announcement of the latest US GDP figures, which showed the US economy slowing from an annualised 3.1% growth in the 1st quarter of 2019 to 2.1% in the 2nd quarter. This new data clearly confirms the analysis in the article. The Chinese version of this article originally appeared in Chinese in China Finance.

The Federal Reserve’s shift towards cutting interest rates

The US Federal Reserve’s sharp turn in summer 2019 towards cutting US interest rates immediately affects China and the global economy via numerous channels. But in addition to short-term effects, the reasons for the Federal Reserve’s policy change casts a clear light on the US economy’s medium- and long-term growth perspectives. Both aspects will affect China-US trade negotiations. This article therefore examines the fundamental growth trends in the US economy leading to the presidential election.

Why did the Federal Reserve make a sharp policy turn?

The Federal Reserve’s summer 2019 shift was an abrupt reversal of the Fed’s previous policy. During 2018 the Fed carried out four interest rate rises, clearly reflecting an estimation that the US economy had strong upward momentum and it was necessary to take prudent steps to head off overheating. Even as late as May 2019 Fed Chairman Powell said weak inflation was transitory – implying there was no reason to cut interest rates.

By June 2019, in contrast, the Federal Reserve press conference was universally interpreted as indicating the Fed would cut rates – the Fed funds futures market pricing in three quarter-point cuts in 2019, including 100% odds for a quarter-point cut this summer. A 0.25% rate cut was duly carried out at the July Fed meeting.

There are two interpretations of this radical policy change. The first is that it was a response to temporary non-fundamental trends in the US economy – short-term effects of the trade war, loss of momentum by US share markets etc. In that case the US economy may be anticipated to rapidly recover from such problems. The second interpretation is that the Fed was responding to much deeper trends slowing the US economy in 2019 – in which case the question becomes how deep is this slowing likely to be?

This difference overlaps with the fact that throughout the recent period two different perspectives for the US economy in 2019-20 have been put forward. The first, that of the Trump administration, argued that due to US tax cuts the US economy would accelerate in 2019. In March 2019, in its official budget forecasts, the administration projected 3.2% US GDP growth in 2019 and 3.1% in 2020 – both faster than 2018’s 2.9% and in line with President Trump’s claim that the US economy would grow at least 3% a year during his presidency.

The second perspective, held by the IMF, the present author, and others, was that the US economy would experience downward pressure in 2019. In that case, of course, the Fed’s policy shift was a response to deeper more powerful trends in the US economy.

Recent negative trends in the US economy

Recent US data is clearly in line with this second perspective. US total industrial production, including oil and gas, stalled after the end of 2018 – by May 2019 it was 0.9% below December 2018’s level. The decline in US manufacturing production, 1.5% in the same period, was sharper. In April 2019 US manufacturing production was 4.8% lower than its level more than 11 years previously in December 2007 – Trump’s policy to strongly revive US manufacturing production had failed.

Taking PMIs, the US Composite PMI was  51.5 in June 2019 – the second lowest since 2016. The US manufacturing PMI in the same month fell to its second lowest level since 2009 – 50.6… By the 1st quarter of 2019 the annualised growth of US fixed private investment had fallen from 9.9% when Trump was inaugurated to 1.5%.

President Trump demands the Fed cuts interest rates

These negative economic trends, in addition to direct effects, created strong political pressure on the Fed – President Trump launching a public campaign to force the Federal Reserve to cut US interest rates. The reasons for these attacks were clear. Opinion polls for Trump, leading to the official launching of his re-election campaign in June, were unfavourable. Leaks of his internal campaign polling showed the President had for several months been trailing Democrat Joe Biden. Recent polls showed President Trump trailing nine percent behind Democrat Bernie Sanders. Given negative poll ratings the prospects for the US economy in 2019-2020 were crucial for Trump’s re-election chances.

A recession in 2019?

Some major Western analysts believe that US economic slowing was so severe it indicated a US recession – two quarters of negative growth. For example, John Authers, Senior Bloomberg Editor for Markets, analysed under the self-explanatory headline ‘Markets Are Acting Like a Recession Is Unavoidable’:

‘would it be possible to explain what is going on in markets without making reference to the deteriorating U.S.-China trade relations? I am beginning to suspect that it would. Bond markets may be behaving as though they are bracing for something terrible to happen because traders are, indeed, scared that something terrible is going to happen.’

Quantitative analysis, however, indicates that any view the US economy will enter recession in 2019 is exaggerated. US growth in 2018 was 2.9%. Since the immediate aftermath of World War II, the largest deceleration in US GDP in one year compared to the previous one was 2.5% in 2009, under the impact of the international financial crisis.

However, in the 1st quarter of 2019 US GDP growth was 3.2%. For a recession to occur in 2019, between the 1stquarter and the 3rd quarter US GDP growth would have to fall from 3.2% to less than zero in only six months – a slowdown worse than during the greatest economic crisis for 80 years. Such a scale of economic deceleration is not indicated by domestic or international US economic imbalances.

Claims 2019 will see a US recession are therefore exaggerated, but there are clear reasons why the US economy will slow in 2019 and US growth will remain low in the medium/long term. This provides the background to Federal Reserve decisions.

Inaccurate claims by the Trump administration

To analyse accurately US economic dynamics, merely electoral propaganda claims by the Trump administration may be dismissed. Trump has claimed that ‘America’s economy is booming like never before’ but the reality is that under President Trump the US has experienced the slowest peak economic growth during any presidency since World War II. As demonstrating this casts a clear light on fundamental US economic trends, Table 1 shows peak growth under all US Presidents since World War II presented both in the way the US publicises economic growth, one quarter’s growth compared to the previous quarter presented at an annualised rate, and China’s method of comparing a quarter in one year with the same quarter in the previous year. Both show peak economic growth under Trump is lower than under every previous post-World War II US President. Taking 21st century presidents:

  • Using the US method of presenting data, peak growth under Trump of 4.2% was lower than 5.1% under Obama, George W Bush’s 7.0%, or Clinton’s 7.5%.
  • Calculated using real year on year growth, 3.2% peak growth under Trump was slower than 3.8% under Obama, 4.3% under George W Bush, and 5.3% under Clinton.

But peaks under 21st century presidents were much lower than under 20th century post-World War II US presidents. For example, peak growth under Nixon was 11.3% using the US method of presenting data. Peak post-World War II growth was under Truman at 16.7% using the US method of presenting data. Slow peak growth under Trump, of course, helps explain his relatively unfavourable position in opinion polls.

The slowing of the US economy

Turning to fundamental US economic trends, accurately analysing these requires distinguishing short-term business cycle fluctuations from medium/long term economic trends. The most accurate way to do this is to take a medium/long-term moving average of US growth – which eliminates effects of purely short-term fluctuations. Such measures show that taking either a 7, 10- or 20-year moving average gives the same fundamental result that long term US growth is slightly above 2% – a 7 year moving average shows annual average 2.3% GDP growth, a 10 year average shows 2.2%, and a 20 year average shows 2.1%.

Taking the longest-term moving average, 20 years, Figure 1 clearly shows that the fundamental trend of US economic growth in the last 50 years is significant deceleration. Annual average US growth fell from 4.4% in 1969, to 3.5% in 2002, to only 2.1% in 2019. In the last fifty years average annual US growth rate has fallen by more than half, explaining why US growth under Trump is the slowest under any US president since World War II but also showing that the deceleration under Trump is part of a longer-term US slowing.

This decelerating trend also demonstrates that 2.9% growth achieved by Trump in 2018, while slow by historical standards, was above current US annual average growth – with business cycle consequences analysed below.

Why is US slowdown occurring?

Given this long-term US economic slowdown, to understand US economic perspectives it is evidently crucial to analyse why this is occurring.

  • One explanation ascribes deceleration merely to specific contingent events – trade wars, European economic slowdown etc. If that is correct action by the US authorities, such as Federal Reserve interest rate cuts, may prevent any slowing and create strong US medium/long term growth.
  • The second explanation is that US economic slowing is due to deeper structural features. Indeed, that the US economy in 2018 grew faster than its medium/long term economic potential, and therefore the business cycle upturn in 2018 would be likely to be followed by a business cycle downturn. In that case, measures such as Federal Reserve interest rate cuts might sustain or increase US share prices, but they would be unlikely to halt downward pressures on US economic growth during 2019-2020.

To determine which perspective is correct, it is necessary to analyse the fundamental forces determining US economic dynamics.

Can Trump accelerate the US economy?

To ascertain the reasons for the US economic slowing Table 2 shows all major components of US GDP which are positively correlated with US economic growth during the last fifty years – i.e. factors which, if their structural weight in the US increased, would be expected to be accompanied by higher growth. This shows:

  • US government consumption has a positive but negligible correlation with US GDP growth – the highest correlation is 0.09.
  • US private inventory accumulation is strongly correlated with economic growth, but this merely reflects their strong correlation with the US business cycle. Private inventories are too small a percentage of US GDP to play a key role in US growth in anything other than the short term – in the 50 years 1968-2018 private inventory accumulation averaged only 0.4% of US GDP.

Leaving aside inventories, in the short term no component of US GDP has a strong correlation with US growth – i.e. in the short-term numerous factors affect US GDP growth with no single one playing a decisive role. Over a one to two-year period the highest correlation is only 0.26.

In the medium and long term, however, a very different picture emerges. There is a very high correlation between both US the percentage of net fixed investment (gross fixed investment minus depreciations) in GDP and net saving with GDP growth. Taking a 10-year period the correlation of the percentage of net fixed investment in US GDP with GDP growth is 0.69 – a very high correlation. Even taking a six-year period the correlation between net fixed investment and US GDP growth is 0.54.

Has Trump provided the basis for a serious US economic acceleration?

Data on the determinants of US growth, therefore, gives a clear picture:

  • Medium/long term US growth is primarily determined by net fixed investment. As Qing Yuan’s article in Quishi, ‘Several Issues That Need to be Further Clarified About Sino-US trade Frictions,’ noted regarding the US economy: ‘whether it will continue to prosper depends on the state of capital accumulation,’
  • In the short term no single factor is decisive in growth.

The standard caveat that correlation is not the same as causation is irrelevant in the present case – as the high correlation between US economic growth and net fixed investment means that it is impossible to substantially increase US economic growth over the medium/long term without increasing the rate of net fixed investment.

Therefore, data shows that only if President Trump could achieve a structural shift in the US economy to increase its level of net fixed investment could a substantial medium/long term US economic acceleration be achieved. But Figure 2 shows this has not occurred – US net fixed investment has fallen from 11.3% of GDP in 1966 to only 4.8% in 2019. This fall provides no basis for a medium/long term acceleration of the US economy – and this decline in net fixed investment explains the long-term deceleration of the US economy.

The state of the US business cycle

Turning from medium/long term developments to shorter-term perspectives for 2019-2020 the pattern of the US business cycle flowing from these fundamental trends is clear. Medium/long term growth, slightly over 2%, is determined by the US economy’s net fixed investment, with short-term business cycle fluctuations taking place above and below this long-term growth rate due to numerous factors. Figure 3 illustrates this short-term pattern of fluctuations. As shorter term fluctuations are simply oscillations around an average, when US growth is substantially above the average for any significant period it falls back towards the average, and when growth is substantially below the average for any significant period it then rises above the average – this process producing ‘reversion to the mean’.

Trump is experiencing a normal business cycle

These processes determine the short-term shifts in the US economy under Trump. To illustrate this Figure 4 shows year on year changes in US GDP under 21st century US presidents. This shows both the slower underlying growth of the US economy under Trump which was already analysed and fluctuations in the current business cycle. In the 2ndquarter of 2016, the US presidential election year, US growth fell to 1.3% – this extremely slow growth significantly contributing to Trump’s election victory. Such growth was far below the long-term US average – the 20-year moving average of annual average US GDP growth in 2016 was 2.4%. As 2016 was an extreme downturn of the US business cycle this was duly followed by a cyclical upturn in 2018. The increase in US growth in 2018 was not a fundamental growth acceleration but a normal cyclical upturn. It may indeed easily be verified that this upturn of the US business cycle under Trump was merely a normal business cycle one. US growth in the 2nd quarter of 2016 was 1.1% below its long-term average at that time. By the latest available data, for 1st quarter 2019, US long term growth had fallen to 2.1%. Merely to maintain a constant long-term average, therefore, a fluctuation upward of 1.1% would be expected. The 3.2% US growth in the first quarter of 2019, 1.1% above the US long term growth rate, is therefore exactly what would be expected for the peak of a normal business circle upturn – and did not represent an acceleration of medium/long term growth.

Trump’s response to economic downturn

That 3.2% year on year growth in the 1st quarter of 2019 indicates the normal expected peak growth in a US business cycle, however, has the conclusion that the beginning of a normal business cycle downturn would be expected – an undesirable development for president Trump given a presidential election in 16 months. The Trump administration will therefore do everything possible to attempt to delay this slowdown. Given that it rejects state intervention in the economy, and is already running a very large budget deficit, the only weapon available to attempt to limit an economic slowdown in the run up to the presidential election is interest rate reductions – hence President Trump’s public demand the Federal Reserve cut interest rates.

The IMF’s projections

It was shown it is unlikely there will be a US recession in 2019 but that, for business cycle reasons, the US economy will slow in 2019. Therefore, by how much will the US economy slow in 2019-2020?

A starting point may be taken as the IMF’s projections in Figure 5, which predict a fall in US growth from 2.9% in 2018 to 2.3% in 2019 and only 1.9% in 2020. This last figure is a whole percentage point below US growth in 2018 and would represent a major economic slowdown. However, this IMF projection looks slightly pessimistic for two reasons. First, it implies that US long term growth slows to only 2.0% by 2020 – there is no indication why this should occur given that US net fixed investment is low but not falling. Second it may be assumed that President Trump will do everything possible to prevent such a sharp slowdown in an election year. For these reasons it would appear reasonable to assume a slightly higher growth figure in 2019, say 2.5% – although the IMF figure is not unreasonable. Either trend, however, indicates that the Trump administration’s claims that US growth will accelerate are false. In summary, the Trump administration will be under downward economic pressure in the period leading to the Presidential election.

Conclusion

The conclusions are therefore clear.

  • The US economic upturn in 2018 was merely a normal business cycle and not any fundamental acceleration of the US economy. The long-term growth of the US economy continues to fall gradually.
  • As 2018 was merely a normal business cycle upturn it will be followed by a normal business cycle downturn – that is, while not facing a recession in 2019, the Trump administration will be under pressure of a slowing economy in 2019-2020.

The abrupt change in policy by the Federal Reserve in summer 2019 was, therefore, not a response to purely peripheral or short-term factors but was a response to deep seated processes slowing the US economy.

This article was previously published on Learning from China.

Gloomy outlook for the British economy – only Labour is willing to rescue it

By Tom O’Leary

The latest surveys from the Purchasing Mangers’ Institute (PMI) show the British economy slowing sharply.

The manufacturing PMI in June fell to 48.0 (from 49.4), the lowest level since February 2013, shown in Chart 1 below.  According to the survey providers IHS Markit, this survey reading is consistent with a contraction in output of 4% from a year ago.

Chart 1. UK Manufacturing PMI Survey, April 2019

This latest downturn in output represents an acceleration of the long-term decline of both manufacturing and industrial production (which includes energy and water supplies). The current reading for the index level of industrial production was 101.4. This is less than 1% higher than when the Tory/LibDem coalition took office in May 2010 and is now 9% lower than the pre-recession peak in May 2007. At the same time, the manufacturing index is now 102 and has recovered by 5.9% since May 2010, but is still 3.6% below its pre-recession peak while the survey evidence from the PMI shows it is heading lower. These medium-term trends are shown in Chart 2 below.

Chart 2. UK Industrial production and Manufacturing Indices, January 2008 to April 2018.

The global context is a negative one. The global manufacturing PMI dived in June to 49.4, the lowest level for 6 years (Chart 3).  Key regional hubs for international production and trade such as South Korea have been badly hit, and the worst-affected country in the June survey was Germany, one of the largest economies most connected to global production chains. Slowing world trade and trade tariffs imposed the US are clearly having a widespread negative impact, with export orders the weakest component of all in the survey.

Chart 3. Global manufacturing PMI June 2019

But the entire British economy is struggling, not just manufacturing.  The June construction PMI plummeted to 43.1 (from 48.6 in May) and the services sector PMI and the services sector PMI slid to 50.2 (from 51), close to stagnation.  All three PMI indices are shown in Chart 4 below.

Chart 4. PMIs for manufacturing, services and construction, June

Construction is the least internationalised of the three sectors, and the least susceptible to changes in international conditions as a result. It is clearly leading the way in the downturn in the British economy. This is a domestic crisis, within a global slowdown.

Clearly, the domestic aspect is Brexit-related.  All three sectors within construction fell, house-building, commercial construction (shops, factories and so on) and civil engineering (public and private infrastructure construction), suggesting the unwillingness to invest is broad-based.

The rising risk of a No Deal outcome will only put further downward pressure on the economy.  Expectations of the next move in official interest rates have done a U-turn as a result, with markets now priced in line with future rate cuts. The National Institute assumes that GDP will have grown by just 0.2% in the 3 months to June.

Perhaps the most startling financial market indicator of the crisis is the fact that the UK government bonds linked to inflation (‘index-linked gilts’) are all offering interest rates lower than minus 2%. This means that the UK government can borrow at negative real interest rates, once CPI inflation is taken into account, for anything between 3 years and 18 years.

But with the two Tory rivals speaking only about tax cuts for businesses and the rich, only a Labour government would be willing to take advantage of this opportunity to increase borrowing for investment.

Trade war – bad polls & bad economic numbers pressure Trump

By John Ross

US share markets rose sharply on news of the announcement that Presidents Xi and Trump would meet at the G20 summit – as the Financial Times simply summarised it ‘Trump plan to meet Xi on trade sends US equities sharply higher’. This was a welcome piece of goods news for President Trump after a period during which he had been receiving bad news both on the opinion polls for his re-election and for the US economy. Naturally there are many aspects of the planned meeting that only those involved in the negotiations will know, but it is worth noting the objective pressures which are now bearing down on Trump.

Negative polls for Trump at the beginning of the Presidential election campaign

The first, and probably most important pressure on President Trump, was that opinion polls leading to the official launch of his re-election campaign on 18 June had been unfavourable for several months. Days before his official relaunch event his campaign dismissed three of his five polling advisers after leaks of internal polling showed the president had been trailing former Democrat Vice President Joe Biden in key states which would decide the outcome of the 2020 election – for example in Minnesota Trump trailed Biden 40% to 54% and in Michigan by 40% to 53%. Analysing 17 states, polling taken in March showed Trump trailing Biden by double digits in key swing states such as Wisconsin, Pennsylvania, Florida and Michigan. More recent polls on 9-12 June, released by Fox News, a strongly pro-Trump TV channel, showed Trump nationally trailing nine percent behind Democrat Bernie Sanders (40% to 49%) and ten percent behind Biden (39% to 49%).

In summary as the Presidential election campaign was launched Trump was trailing badly behind Democratic rivals. In that political situation, evidently, the prospects for the US economy in 2019-2020 were crucial for Trump.

Prospects for the US economy in 2019-2020

Regarding these economic prospects for the US in 2019-2020 two substantially different perspectives for the US economy in 2019-20 had been put forward. The first, that of the Trump administration itself, echoed by some media in China, argued that due to the US tax cuts, or other reasons, the US economy would speed up in 2019 – which would evidently be good political news for Trump. In March 2019, in its official budget forecasts, the Trump administration projected 3.2% GDP growth in 2019 and 3.1% in 2020 – both faster than the 2.9% in 2018 and in line with President Trump’s claim that the US economy would grow at least 3% a year during his presidency.

The second perspective, held by the IMF, the present author, and others, was that the US economy would experience downward pressure in 2019 – not that there would be a recession but that the US economy would slow. The most recent US economic data has clearly confirmed this latter perspective.

US total industrial production, including the oil and gas sector, had stalled since the end of 2018 – by May US total industrial production was 0.9% lower than in December 2018. The decline in US manufacturing production, 1.5% in the same period, was sharper. In May 2019 US manufacturing production was still 4.8% lower than its level more than 11 years previously in December 2007 – the Trump policy to attempt to strongly revive US manufacturing production had been a failure.

In terms of Purchasing Managers Indexes (PMI), the US Composite PMI stood at 50.9 in May 2019 sharply down from 53.0 in April and the weakest expansion in the private sector since May 2016. The US manufacturing PMI in the same month fell to its lowest level since 2009 – a manufacturing PMI of 50.5 vs 52.6 in April, while the services PMI slowed to a 39-month low – at 50.9 at vs 53 in April.

US jobs data showed the same slowing trend. In May the US added only 75,000 non-farm payroll jobs compared to 224,000 in April and an average 144,000 in the three previous months.

Analysts who believe there will be a recession

Some important Western and US analysts believed that this slowing was so severe it indicated the US would enter a recession – that is at least two quarters of negative growth. For example, John Authers, Senior Bloomberg Editor for Markets and former Chief Markets Commentator for the Financial Times, made the following analysis on 18 June under the self-explanatory headline ‘Markets Are Acting Like a Recession Is Unavoidable’ with the subheading ‘It’s not just the bond market that’s signalling a severe economic slowdown.’

‘Would it be possible to explain what is going on in markets without making reference to the deteriorating U.S.-China trade relations? I am beginning to suspect that it would. Bond markets may be behaving as though they are bracing for something terrible to happen because traders are, indeed, scared that something terrible is going to happen.

‘Exhibit A is the Federal Reserve Bank of New York’s Empire State Manufacturing Index that was released Monday. It was terrible, showing the biggest monthly decline since the last recession…  it doesn’t drop this low for long without presaging a true recession to come.

‘Conditions for the U.S. trucking industry, often regarded as a leading indicator for manufacturing, look no better…. the FTR Trucking Conditions Index… combines several different factors about demand for trucking. Figures below zero show a risk of contraction.

‘Industrial metals provide another strong market-based recession indicator. The Bloomberg Industrial Metals Subindex suggests that the optimism on growth that accompanied the first year of the Trump administration has dissipated.

‘Looking at the U.S. stock market, we see the type of relative performance that would be expected in the run-up to a recession, even if the overall market continues to show robust performance…  Investors tend not to buy utilities on the scale that we have seen lately unless they are pessimistic. There are technical factors in the bond market that have driven the current deflation scare, but there do appear to be a number of factors pointing toward an economic slowdown.’

A slowdown not a recession

The analysis of the present author is that the view that the US economy will move into recession this year are exaggerated, for reasons which are analysed at length in my book ‘Don’t Misunderstand China’s Economy’.

US growth in 2018 was 2.9% – at the peak of the upswing of a business cycle. It would be an extraordinarily sharp decline, approaching the scale of the international financial crisis of 2008, for the US to fall from the peak of a business cycle to a recession in a single year. Conditions for such a repeat of the greatest financial crisis for 80 years, since the Great Depression, are not indicated at present. Instead a slowdown of the US economy, not an actual recession, will occur in 2019. The IMF itself projects a fall in US growth from 2.9% in 2018 to 2.3% in 2019 – I would estimate that growth could be slightly higher, but the IMF figure is not unreasonable. But what such a trend indicates is that the Trump administration’s claims that US growth would accelerate are false. Instead growth in 2019 would fall. And growth in 2020 would be lower than in 2019 – a serious issue for Trump as 2020 is an election year.

Certainly, information which leaked on the same day that the Xi Jinping – Trump summit was announced indicated clearly the Trump administration felt seriously concerned about the state of the US economy. It was leaked to Bloomberg that, in an unprecedented move, the Trump administration had explored if it was possible legally to dismiss their own appointed Chair of the US Federal Reserve Jerome Powell – who had only take up office in February 2018.  This was immediately understood to indicate that the Trump administration feared the downward pressure on the US economy.

It is important not to exaggerate. It is still 17 months to the US presidential election. This means the bad polling numbers for Trump can still be overcome – but they are clearly a negative for him. While some US analysts project a recession in 2019, for the reasons given here it is much more likely that the US economy will slow in 2019 rather than a recession occur – although if the economy slows significantly in 2019 a recession in 2020 is entirely not impossible, which would clearly be ultra-negative for Trump. But even without an actual recession what this combination of bad polling numbers and economic deceleration does produce is clearly pressure on the Trump administration.

This is not the only factor in the situation, but it is clearly part of the background to the Xi-Trump summit at the G20.

Author’s Note: This article was finished before it was made public that the US side requested the phone call with China which led to agreement on the Xi Jinping-Trump summit. This information is in line with the analysis in the article.

*   *   *

This article was previously published at Learning From China, and originally appeared in Chinese at Guancha.cn.

Public sector finances – new developments highlight why the Corbyn-McDonnell are right on fiscal policy

By Tom O’Leary

The changes to public finances following 9 years of austerity are very significant, and deserve greater attention as they were the purported reason for the attack on the living standards of workers and the poor. The changes also highlight both the superiority of Corbyn’s fiscal policy and the scope to immediately begin its implementation. The beginning of the end of austerity ‘only’ requires the election of a Corbyn-led Labour government.

The cloak of austerity

The hue and cry over the state of public finances at the outset of the economic crisis in 2008 was always a cloak for a transfer of incomes from workers and the poor to big business and the rich. The real content of austerity was an offensive to boost profits at the expense of both wages and the necessary funding for public services.

Like monetarism and ‘shadowing the DeutscheMark’ before it, austerity was a government-led project on behalf of the entire ruling class that was meant to restore profitability by increasing the rate of exploitation.  The rate of exploitation is here meant in the Marxist sense, the ratio between the proportion of total output that are retained by labour and proportion claimed by capital. In mainstream economics this is referred to as ‘share of national income’, but total incomes are equal to total production in aggregate.

As in the previous cases noted above, a spurious reason (inflation, currency stability, public finances) was offered to mask the real content of the project. In all cases, the social surplus generated through taxation was redistributed in favour of business through lower corporate taxes and away from public services and the funding of social security. There was a public sector pay freeze and an outright cut in welfare entitlements.  

The project has only had limited success. Fig.1 below shows the rate of return on capital employed by UK companies, a key component of profitability. This was initially boosted after austerity policies were imposed. But those policies were eased a little in the run-up to the 2015 general election to help engineer a Tory victory, and the boost to profits has dissipated ever since, even as austerity policies continued. The clear implication is that austerity policies will be extended unless and until there is a full-scale recovery in profitability, and that they are now highly unpopular.

Chart 1. Rates of Return on Capital Employed by UK Companies

Public finances now

Yet there has been a significant change in public finances since austerity was first imposed in June 2010 in the Tory/LibDem Coalition emergency budget. As the latest Financial Year (FY) has recently ended, it is possible to make very direct comparisons. The key aspects of this significant change include:

  • Public sector net borrowing (excluding the bank bailout) in FY2018/19 has fallen to £23.5 billion, compared to £136.5 billion in FY2010/11
  • This is a fall in public borrowing from 8.4% of GDP to 1.1% of GDP over that period
  • Within that total borrowing, the public sector current budget balance  (excluding the bank bailout) has switched from a deficit of £90.7bn to a surplus of more than £19 billion in the latest Financial Year
  • Crucially public sector net investment is virtually unchanged in nominal terms, at £45.7 billion in FY 2010/11 to £43.3 billion in FY 2018/19. But this represents a significant fall in net public sector investment from 2.8% of GDP to 2.0% of GDP.

Naturally, Tory ministers and their supporters in the media would suggest that this demonstrates the ‘success’ of austerity and continue to claim it was unavoidable. This nonsense is not widely aired currently, because of the deep unpopularity of austerity.

The project has been an attempt to resolve the capitalist crisis by shifting the burden of it onto the workers and poor.  But, while they have suffered badly and living standards have fallen outright, a resolution of the crisis still seems a distant prospect.

This attack on workers and the poor is shown in the public finances themselves.  Fig.2 below reproduces the chart from the Office for Budget Responsibility (OBR) showing total government receipts and spending as a proportion of GDP.  In 2010, public sector current receipts have risen from 35% of GDP to 36.9% of GDP while total managed expenditure has fallen from 44.9% to 38% of GDP.

Chart 2. Total government receipts and spending

From 2010 public sector receipts have seen their slowest rise in the entire period since World War II. This reflects repeated tax cuts for business and the highest earners, as well as the general stagnation of the economy. At the same time total managed expenditure has seen fallen sharply, only less sharp than the introduction of ‘monetarism’ first by Denis Healey and then taken up with a vengeance by Margaret Thatcher.

Also from 2010, public sector investment has been cut even more severely, falling outright in real terms from £60 billion in Financial Year 2009/10 to £42.5 billion in FY2018/19. This is shown in Fig.3 below.

Chart 3. Real Public sector finances, receipts, expenditure and net investment, £ billion

It is important to note that the rate of inflation has been very high over the period, as repeated falls in the value of the pound have pushed import prices higher. The total rise in prices over the period from when austerity was first implemented (June 2010) has been just under 20% (using the CPI measure). 

This has produced an improvement in government finances in two ways. First, VAT receipts, which account for one-fifth of all government tax revenues have risen as a result of these price increases.  Secondly, the government freeze on public sector pay has produced an extraordinary ‘windfall’, by cutting public sector workers’ pay very sharply in real terms. Of course, in the opposite direction government procurement costs will also have been increased by the surges in inflation over the period.

Corbyn/McDonnell fiscal framework

The British economy clearly remains in a crisis, and is stagnating. A radical change in policy is therefore imperative.

John McDonnell has set out an entirely new fiscal framework for Labour, which is far superior to Labour’s post-World War II policy of ‘keynesian’ demand management.  That policy collapsed with the end of the long post-war boom in the 1970s. Subsequent attempts to recreate it by low interest rates and high government borrowing for Consumption from the turn of this century laid the basis for the banking crash and recession in 2007/08.

Instead, Labour’s fiscal credibility rule (pdf) aims to balance spending and receipts on the current budget, and borrow only for Investment. As Investment is the most important factor in generating economic expansion, this is a decisive shift. It allows Labour to borrow in the most effective way to raise living standards sustainably over the long-term. Enduring rises in prosperity, which are or should be the ultimate aim of all progressive or socialist economic policy are not sustainable unless preceded by an increase in the productive capacity of the economy through Investment.

This important change in Labour’s policy was initially attacked by those wedded to the old, failed ‘keynesian’ framework on the ridiculous grounds that Corbyn and McDonnell were intending to implement austerity.  In fact, Labour’s 2017 election manifesto was accompanied by a separate document itemising a costed commitment (pdf) to increase spending by £48.6 billion. This represents a 5.8% increase over current total government current spending, or approximately 5.3% over projected total current spending by the time of a 2022 general election. The commitments are funded through taxes on big business, tax evaders and the very highest earners. This is not austerity, but the beginning of reversing it.

Crucially, the fiscal framework allows for an increase in borrowing for Investment.  Investment increases the productive capacity of the economy and is defined (in government terms) as providing a financial return on government outlays.  In Labour’s plans, the average annual outlay for this increased Investment is £25 billion per annum, which is equivalent to approximately 1.2% of GDP.  This is in addition to the level of Investment inherited from the Tory government.  As noted above, the average private return on capital is currently approximately 12.5%. There is no reason why public sector returns on capital Investment should not be as least as great.

To be clear, this is not the introduction of socialism, or anything resembling it. But is a series of significant reforms which are feasible and will improve the lives of millions of workers. It runs counter to the entire project of the British ruling class, and so will face extremely determined and powerful opposition.

The new situation

But there are two important developments which have changed backgrounds for the application of this correct fiscal approach.

The first is the state of public finances themselves. As noted above, the balance on current spending has swung into a surplus. Secondly, at the same time, the economic outlook is increasingly gloomy.

This is not simply a short-term or Brexit-related development, although it is clear that firms have been stockpiling produce and cutting Investment over the course of several months.  Instead, it is the slowdown in the world economy, the deceleration in business investment throughout the advanced industrialised economies and the fact that the British economy will suffer prolonged damage from Brexit which together offer a very negative outlook.

Fig.4 below reproduces a chart from the Office for National Statistics (ONS) showing the level of real business investment since the recession began. Business investment has contracted throughout the whole of 2018 and seems set to deteriorate sharply, based on survey evidence. In total, business investment is less than 6% higher than prior to its recession high-point in the 2nd quarter of 2008. On current trends there is a risk that the modest rise in business investment since the recession will dissipate altogether.

This combination of factors provides both a threat as well as an opportunity. Clearly, if profits have not recovered, austerity will be resumed.  But the state of public sector finances means that there is also increased scope for an incoming Labour government to tackle the crisis. The surplus on the current budget for the FY just ended was over £19 billion. The OBR (which admittedly has a poor forecasting record) assumes the surplus on this measure will widen to £77 billion in FY2021/22, the last possible year for a general election.

Certainly, some of this surplus could be used to supplement the £48.6 billion in taxation revenues that Labour intends to spend to reverse austerity.  But not all of it should be.  Because Investment creates new means of production, the higher the sustainable level of funds allocated to Investment, the greater the growth in the means of production and in living standards that will follow.

Of course, no-one in the Labour leadership or elsewhere can know precisely how the economy will fare over the next period, nor how the new Tory leader may change either government current spending or government net Investment before then.  So, any commitments must take account of that uncertainty. But the existence of the surplus on the current budget means that increased commitments are possible without increased borrowing, while still meeting the fiscal rule.

Given its decisive role in creating new productive capacity of the economy, optimising the level of Investment should be the first priority. Taking the lower sum of approximately £20 billion in surplus of the current budget balance, this should be reallocated between current and Investment outlays for an incoming Labour government. In the current framework, the approximate ratio between increased current spending (£49 billion) and increased Investment (£25 billion annually) is 2:1. Using this as ceiling, a rule could be introduced that the ratio of additional spending between the current budget and Investment goes no higher than this.  So, of the latest current budget surplus of over £19 billion, a minimum of £6.5 billion (one-third of the total) should be allocated to additional Investment.

At the same time, the Tory government continues to cut net public Investment.  This is part of the austerity offensive, which includes removing the state from any part of the economy that could be conducted by the private sector, even at much greater cost.  On Labour’s current plans, the additional £25 billion in net investment is in addition to the current government’s £43 billion Investment for a total of £68 billion. This is currently equivalent to approximately 3.4% of GDP. This is the same as at the outset of and in response to the financial crisis in 2007 and 2008.

As the Tories may well cut net public Investment even further, as a safeguard Labour could also commit that its total commitment will not fall below 3.4% of GDP.

In summary, austerity will continue while the recovery in profits remains elusive. What is required is a government with entirely different priorities, ending austerity and raising living standards by a combination of increased taxation and borrowing for Investment. That means a Corbyn-led government. 

The current state of public finances also means that Labour’s plans can be applied in new circumstances, as the current budget is now in surplus. Without any additional increase in public borrowing, the current budget surplus can be used both to take further steps in reversing austerity and in raising the level of Investment.