Saturday, 28 March 2015

Liberal-Tory Lies – Labour Wrecked Growth and We Restored It

In the previous post, Liberal-Tory Lies - The Deficit and Labour Profligacy, I demonstrated that, at the heart of the Liberal-Tory narrative, was the lie that the coalition government had been necessary because of the dire state of the economy.

Indeed, the Liberals always justify their merger with the Tories on the basis that the country was facing some kind of almost wartime national crisis that had to be dealt with, rather than the truth, which is that they got the whiff of Ministerial leather, and their natural ideological affinity with the Tories led them to snap up the chance of government posts, they thought they would never achieve.

I set out that the narrative, they present, is based on the idea that the financial crisis was the result of Labour profligacy, in running up huge government debts, and this led to the seriousness of the economic crisis they had to deal with. But, I illustrated that this central argument, about Labour profligacy and debt, was a lie. The average deficit to GDP ratio under Labour had been half what it had been under Thatcher and Major, and significantly less than it has been under the Liberal-Tories. In fact, the debt to GDP ratio under the Liberal-Tories has soared, as they failed to get rid of the deficit as they promised, and in the meantime they have cratered the economy.

In this second post, I want to look at the second lie the Liberal-Tories tell, as part of this narrative, therefore, that Labour had somehow wrecked the economy, that it was on its knees, and that the Liberal-Tories have rescued it.

A look at the period of Labour Government, from 1997 up to the financial crisis of 2008, shows that the economy was far from being wrecked, or on its knees. Not even the Liberal-Tories try to pretend otherwise. Rather, they claim that this growth was based upon Labour profligacy, an encouragement of private debt, and that it was this that led to the financial meltdown, and the subsequent economic crisis. Like every good lie, there are elements of truth within it.

Labour could not claim any great credit for the growth in the UK economy for the period after it came in to office, and prior to the crash of 2008. In fact, as Marx points out in relation to bank legislation, although governments can certainly adopt policies that can cause economic crises, they cannot pursue policies that actually create economic growth out of thin air. The upturn that arose after 1999, was a consequence of the onset of the new global long wave boom. 

The weakness of its effect in the US and UK, was a consequence of the government economic policies that had been pursued in those economies since the late 1980's, which boosted profits by depressing wages, and which borrowed from future demand, by promoting an explosion of private debt, to compensate for the lower wages. Those same policies, by promoting a low wage/high debt economy, also thereby kept capital locked up in low value, inefficient, low productivity employment that relied on the continuation of those low wages, and increasing levels of state support, in the form of various in-work benefits.

In a sense, Labour also could not be blamed for a continuation of those policies, because what had been built up over the previous decade, could not be easily reversed overnight, and as the onset of the long wave boom brought the prospect of a period of more sustained growth, the large profits and success of the UK Financial Services industry, which was itself also a consequence of those policies, appeared to be a cash cow that could be used to finance a repair of the nation's infrastructure, which had been largely left to rot under the Tories. In fact, the Liberal-Tory claims, about Labour not fixing the roof whilst the sun was shining, are rather laughable, because in 18 years of Tory government after 1979, it was they that sold off the family silver, that not only left the schools and hospitals to suffer from leaking roofs, but also who allowed the roads, the railways and everything else to fall into disrepair. One reason Labour, after 1997, had to spend more, was to make up for this blatant neglect by the Tories, who had acted like Rachmanite landlords in their curating of the economy.

It was, therefore, true that the economy had high levels of debt, but this debt was private debt, which had mostly been created as a consequence of the policies of Thatcher during the 1980's, which saw the real explosion in property prices, and in the prices of fictitious capital such as shares and bonds, and other financial assets derived from them. A similar thing happened in the US under Thatcher's co-thinker Reagan, as both brought about a deregulation of credit and finance, in the late 1980's, that stoked these bubbles.

In both the UK and US, those policies adopted under Thatcher and Reagan from the late 1980's, locked the economy into a straitjacket that required a continuation of these policies, because any attempt to tighten monetary policy led to financial crashes, a bursting of the property and other bubbles, and consequently of the basis of the private debt, which underlay both the financial stability of the banks, and a large part of the consumer demand element of aggregate demand. At the same time, these very policies raised the value of labour-power.

The property bubble, meant that workers needed higher wages to be able to buy houses, or to be able to afford ever rising rents. That again was another reason that government spending on in-work benefits like Housing Benefit had to rise inexorably, as the growing proportion of workers employed by low paying employers, would otherwise have found it impossible to survive.

At the same time, the astronomic rise in the prices of shares and bonds, meant that workers' pension contributions bought fewer and fewer of them, whilst the same process caused the yields on these financial assets to drop to near zero, so they found it increasingly difficult to finance pension payments from the funds. That is the real basis of the pension black holes that have developed.

In fact, if the hyper inflation of property prices, and of the cost of financing pensions was taken into account, it would be seen that the real drop in worker's real wages since the late 1980's has been far greater than the official data suggests. But, as I've set out  elsewhere, another consequence of this is that, potential money-capital that could be used for productive investment itself, tends to get drawn instead into speculation in property, and into fictitious capital, because so long as these asset classes appear to be underpinned by the state, they are a one way bet, whereby the capital gains to be obtained, far outweigh the potential rate of profit that might be made from investment in real capital.

The problem that both the UK and US have with growth – besides the fact that both are relatively declining economies as new more dynamic economies in Asia, Latin America and Africa come to challenge them – is that the legacy of the policies of Thatcher and Reagan has been this development of a casino economy, based on short term speculative gains. Its no wonder so many people consider that their main hope of improving their position depends on winning the lottery, becoming a celebrity, or getting a big compensation payment. In fact, a large part of the growth in the economy over the last couple of years has come from an increase in consumption due to the payment of several billion pounds of compensation payments for PPI misselling.

Far from the Liberal-Tories having rescued the economy, and turned it round, the fact is that the growth in the economy that has only now arisen, in the last year or so, after they had been in office for three years, is largely down to these kinds of factors. The growth in the economy has been due to the underlying influence of the Long Wave global boom, but whereas Labour's fiscally stimulative stance worked with that trend, the Liberal-Tory stance of austerity, has worked against it! The reality is that, the UK economy, like all others suffered a severe shock as a result of the financial meltdown of 2008, but as a result of the implementation of additional fiscal stimulus, most of those economies enjoyed the typical sharp “V” shaped recovery, as the graph illustrates.

What characterises the difference between those economies like the UK, and parts of Europe that inflicted austerity on themselves, and the US, and other economies such as China, is that the US continued to rebound from the shock – and would have rebounded even faster had it not been for the attempts of conservatives there to frustrate the fiscal stimulus and impose austerity – whereas, the UK and Europe, stopped rebounding and went into a period of self-inflicted stagnation.

The Liberal-Tory claims that the economy was wrecked before they came to office, and that they have repaired it, are as much a lie as their claim that Labour had been profligate, and thereby caused the economic crisis. A simple look at the figures for growth demonstrate the extent of the lie.

The graph for 2000-2015 demonstrates the effect of the financial meltdown in causing the economic crisis, but it also shows the sharp rebound from it, during 2009. By the end of 2009, the economy was already once again experiencing positive growth; by the beginning of 2010 the economy was growing again at around 1%, or about its average rate over the previous 20 years. Far from the economy being wrecked at the time the Liberal-Tories came to office, it had returned to growth, and the graph shows that it was, in fact, the Liberal-Tories themselves who drove it back into recession.

Having peaked at 1% growth in the second quarter of 2010, the Liberal-Tory narrative, of disaster and austerity, already sent the economy into sharp reverse, even before their first budget in June 2010. The growth rate dropped by 40% in the third quarter to just 0.6%, and by the final quarter of 2010, they had sent the economy into such a nosedive that growth disappeared altogether!

In the following year, they did little better. Its only on the basis of the revised calculation of GDP that includes the earnings from prostitution and drug dealing that any growth whatsoever is now indicated. At the time, on the basis of the previous calculation of GDP, the economy flat lined, and even entered a double and then a triple dip recession. Yet even on the basis of the current method of calculation, the Liberal-Tories failed to achieve the level of growth they inherited from Labour.

As opposed to that 1% growth rate, they returned figures of just 0.5%, in the first quarter of 2011, followed by 0.2%, then 0.7%, which then collapsed again to zero at the end of 2011, as the new three year cycle set in. In 2012, they did no better. In the first quarter, growth came in at a microscopic 0.1%, followed by a 0.2% drop in the second quarter, a 0.8% surge in the third quarter, that was probably a result of increased consumer spending, from the effects of PPI compensation payments, and other temporary factors, was followed by a collapse again to record a 0.3% drop in GDP in the fourth quarter of 2012.

Far from having rescued the British economy from economic stagnation and collapse under Labour, therefore, they collapsed the growing economy they inherited from Labour. The Liberal-Tory policy of austerity brought the growth created under Labour to a halt, and sent it into a period of decline and stagnation. At the end of 2012, the economy benefited from the onset of the upswing in the next three year cycle. Yet, despite that, the Liberal-Tories have failed to achieve a level of growth equal to that they inherited, in any subsequent quarter.

Compared to the 1% growth rate they inherited from Labour in the second quarter of 2010, the best they have been able to achieve in any subsequent quarter has been 0.8%. The average rate under the Liberal-Tories has been just 0.41%.

But, as I pointed out, some time ago, despite all of the financial manipulation that the Liberal-Tories have implemented, with their bribes through the Help To Buy Scheme, which tries to keep the property bubble from bursting, despite all of the temporary boost provided by billions of pounds of PPI compensation payments, even this anaemic growth was set to slow down sharply, because the three year cycle was set to bring a slow down at the end of 2014, and many of those temporary factors were due to run out. Sure enough, the latest data indicates that having peaked at 0.8% in the second quarter, it dropped to 0.7% in the third quarter and to 0.5% in the final quarter, i.e. even the rather low level of growth had more or less halved by the final quarter of 2014.

The economy was growing when the Liberal-Tories took office. They undermined and reversed that growth. At no time since have they been able to achieve an equivalent level of growth, despite their frantic attempts to keep financial and property bubbles inflated. They have failed to shift the economy away from a reliance on private debt, and speculation and towards productive investment and production. Rather they have encouraged the former at the expense of the latter, and that is illustrated by the continued low levels of productivity.

The Liberal-Tories in their last Budget Speech placed great store in the fact of UK growth being higher than that of France. Yet, even the sclerotic French economy has much higher levels of productivity than the UK. The average French worker produces as much in four days as a British worker produces in five days. The Liberal-Tories contrasted the current UK growth with that of France, but failed to contrast the rather poor performance of the UK economy with that of the US, which has continued to grow since 2009, on the basis of a rejection of austerity, and an implementation of fiscal stimulus. That policy in the US has not only enabled it to grow, and to begin to create large numbers of jobs, but also to begin to cut its budget deficit, on the back of rising tax revenues.

The fact is that the US success reflects a continuation of the policies that Labour was following in 2010. The Liberal-Tories not only sent the economy into an unnecessary period of recession and stagnation, but even now the growth in the UK economy compares badly with what might have been expected had Labour continued in office after 2010.

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