Post-election reflections: how the Tories wrecked the economy and why Labour couldn’t take advantage

cats

Now the election is over, it seems time to take stock of the last 5 years. A lot has been written about the horrific social reforms of the Tory-Lib Dem coalition government, on tuition fees, workfare, sanctions, privatisations and cuts - but the mainstream analysis, and public opinion, seems to be that for all that the Tories were at least competent from a macroeconomic perspective. This couldn't be further from the truth.

Deficit

Let's start with the deficit, the conservatives' preferred measure of the success of the government. When the previous coalition government came to power in 2010 the deficit stood at £153 billion and public sector debt around £1 trillion. In his first year George Osborne pledged to elimate the deficit by 2015. At each subsequent budget this promise was slowly relaxed, so that by the time of the most recent election campaign the Tories were boasting of having reduced the deficit by half (as a percentage of GDP, the deficit will be around £90 billion this year, a reduction of around 40% in nominal terms). The Office of Budgetary Responsibility (OBR) now predicts the deficit will be eliminated by 2018, though other predictions are less optimistic.

Of course when bonds are as cheap for the government as they are today (a ten year gilt pays around 2% interest) reducing spending this quickly is almost certainly a bad idea, purely from an economic perspective - let alone from a social one. Indeed, although you wouldn't know it from most of the media coverage, the treasury itself accepts that the Tories' original plan was a failure; although punitive social reforms continued, austerity per se was put on hold in 2012, though is likely to return with a vengeance in the coming years.

Growth

Although most of the media won't inform you that austerity was delayed, they will be quick to trumpet its success, usually in terms of restoring GDP growth.

The normal narrative is that although Labour profligacy/the Global Financial Crisis led to a deep recession, austerity has been justified by a return to growth in the final years of the previous parliament. GDP is back above the pre-crisis peak and is on the rise.

The truth is that rises have been mediocre by historical standards. In 2014 GDP rose by around 3%, around average for the post-war period but lower than would be expected for a "strong recovery", whilst in the last few months GDP growth has fallen again.

Even that growth is in fact simply a reflection of a growing population. Real GDP per capita, remains around 1.5% below the pre-crisis peak and is not expected to overtake that level until next year, a full 8 years after the crisis.

Productivity

Fundamental to long-term growth is productivity growth - the ability to produce more goods and services with the same labour input. Productivity in the UK has fallen off a cliff since the crisis. GDP per hour worked is 27% lower than in France and even worse when compared to the G7 average excluding the UK.

The "productivity puzzle" is a key point of discussion in economic circles, but barely registers amongst politicians or the political media. Whether this is a reflection of cyclical factors from the crisis which will disappear by themselves, or of longer term secular (and global) trends remains an open question, but one of pivotal importance for economic prospects.

Unemployment

Lower productivity can be partially explained by higher employment in the UK. Unemployment has fallen considerably from its peak and is lower than in much of Europe. But underemployement is still high: people may have jobs, but many of them are part-time and around 3 million people, or around 11% of the workforce, currently work fewer hours than they want - by an average of around 11 hours per week. Workfare schemes also reduce the official employment statistic and may be contributing to low productivity.

These caveats aside, total hours worked has risen, so let's examine the unemployment-productivity hypothesis. The theory goes that rather than fire employees and increase unemployment, companies instead held on to workers and, as demand, and hence output, fell, so did productivity - lower output with the same workers means lower output per worker. This fits the macroeconomic data, to a degree, but does it fit with anyone's subjective experience? Who feels like they've had less work to do while at work over the last five years? And why would companies in the UK, with its far more 'flexible' labour market (for which read precarious, casualised and lacking labour protection), adopt that policy compared to other countries?

Wages

Regardless of the reasons for higher employment, capital has nevertheless found ways to reduce costs, primarily by simply paying us less. Real wages have experienced their longest continual fall in decades. From January 2010 to January 2015 average weekly earnings (excluding bonuses, which are negligible for most workers) fell in real terms every single quarter (using RPI to measure inflation). This year wages have finally started to edge up, however even this is due almost entirely to falling inflation rather than higher nominal increases.

If we consider the way in which headline inflation numbers, whether CPI or RPI, mask the problems of inequality, the impact is even starker. Inflation for essentials such as housing, food and energy has been much higher than for electronics or clothing - so disposable income for people on low wages has fallen even further than average real earnings suggests.

Private Debt

It should be no surprise that with falling wages private household debt has increased for many people. The government and the media like to talk about public sector debt, but the flip side to that equation is private debt, both corporate and household. One party's liability is another's asset. If the public sector reduces its net debt, someone else is probably increasing theirs.

Another early claim of the previous government was that "export-led growth" would power the UK out of recession. Rising exports and a positive current account for the UK would mean government debt could be reduced without burdening the UK population (though at the expense of people elsewhere). Osborne wanted exports of £1 trillion a year by 2020. Currently exports are around half that, and would have to grow by over 10% a year to meet his target. In 2012 they grew 0.5% and in 2013 just over 2%. The UK's trade deficit (export minus imports) is staunchly negative and the current account deficit (which also takes into account capital transfers) is at a record high. An export-led recovery seems a long way off.

So how does Osborne plan to grow the economy if not by exports and not by government investment? An examination of the OBR projections shows that household debt is expected to expand by nearly £800 billion over the next 5 years - to put that in perspective that's over £30,000 for every household in the UK. Largely that debt growth will be in "secured debt", mostly mortgages, but unsecured debt is also expected to grow by £239 billion. So pray house prices keep increasing by 6% a year, fuck anyone who can't afford that and saddle them with more credit card, student and personal loan debt. A sustainable future.

The Alternative

Given the perilous state of the UK economy and the dire projections for the years ahead, Labour should have achieved a landslide. But instead of presenting a clear critique of the Tories, they vacillated presenting a few token suggestions on rent control and taxes but refusing to tackle to central logic of austerity, pledging instead to continue the cuts and ruling out reversing any measures for Osborne's budgets.

Labour lost because they have no alternative, they have no solution to falling productivity or secular stagnation. A real "export-led recovery" would mean competing with East Asia and require currency deflation and further real wage cuts. Autarky, or self-sufficiency, and re-industrialisation is barely possible in a world of global logistics and freely movable capital and would in any case require its own form of severe austerity for many years. A return to post-war compromise social democracy is no longer possible. Capitalism is reverting to type, revanchist, openly hostile to the working class, highly unequal and crisis prone. A real movement to abolish the present state is necessary if we want a different future.

Posted By

Alasdair
May 12 2015 22:13

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  • A return to post-war compromise social democracy is no longer possible. Capitalism is reverting to type, revanchist, openly hostile to the working class, highly unequal and crisis prone. A real movement to abolish the present state is necessary if we want a different future.

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Comments

no1
May 13 2015 12:18

Thanks, I find this blog post pretty useful, esp when chatting to workmates. Isn't it quite contradictory though to say that the Tories have "wrecked" the economy and then to point out that Labour don't have an alternative?

Steven.
May 13 2015 17:31
no1 wrote:
Thanks, I find this blog post pretty useful, esp when chatting to workmates. Isn't it quite contradictory though to say that the Tories have "wrecked" the economy and then to point out that Labour don't have an alternative?

not sure how that's contradictory? Basically it seems like it's accurate.

Good piece, thanks for writing (although a couple of graphs would have been good!)

no1
May 14 2015 08:31
Steven. wrote:
not sure how that's contradictory? Basically it seems like it's accurate.

Saying that the Tories "wrecked" the economy suggests that there exists a rational and sensible way of managing the economy that would produce 'healthy' growth based on increasing productivity rather than debt and population increases etc., and that the last government rejected this and instead embarked on a more destructive course. But the last paragraph says that there is no way of producing a 'healthy' economy because capitalism is simply reverting to type, crisis prone and destructive. You can't accuse the government of "wrecking" the economy if there is no alternative.

I'm not trying to split hairs here or criticise the choice of words, I think that this question affects how we should organise. If Western economies have reached a stage of secular stagnation and permanent wage decreases, then that obviously severely limits what class struggle can hope to achieve. In this case we should probably stress that abolishing capitalism is a practical proposition for improving our living standards. It used to be that libertarian communism was utopian and social democracy practical, but I feel that increasingly social democracy is utopian, and libertarian communism practical.

Spikymike
May 14 2015 09:22

no1 makes a valid point. I'don't think it was Alasdairs intention but the text does have that possible interpretation. Better just to be clear that the Tory strategy doesn't deliver what it claims in terms of working class benefits and isn't either able to solve the more fundamental underlying problems of the capitalist economy to which there are no national solutions. There will still be ups and downs in the economy and some regions of the world will do relatively better or worse in capitalist terms in succession. The point being that in the medium to long term it is the 'economy' that determins politicians actions not the other way around. Capitalism can always emmerge from it's periodic economic crisis but the increasing scale of globalisation makes that a harder task each time and at greater cost to both capital and the working class.It seems to me that in the current global crisis we have yet to see the necessary depth of capital devaluation and destruction and associated human suffering that would allow for a genuine new cycle of capital accumulation to emmerge on a world scale which is truly scarry. If I'm right about that no1's conclusion is more urgent to stress but guarantees no success.

Chilli Sauce
May 14 2015 10:04
Quote:
A return to post-war compromise social democracy is no longer possible.

So, I clicked on this link because, well, I'm just not convinced.

The overall argument in the linked article seems to be that we don't have the necessary levels of growth to sustain the factors that enabled the post-war social democratic settlement. That does slightly feel to me that it ignores the role of class struggle. My feeling is that capital would accepts lower levels of growth/significantly higher levels of taxation/a more equal distribution of growth if it feared for it's existence.

I mean, after all, simply having high levels of growth in no way guaranteed social democracy, it came as a result of a real upsurge in class activity. And even now is generally quite squeezed industries - I'm thinking of cinemas, for example - workers have gained concessions.

Anyway, I also find it a bit odd that the article supports that 21 hour workweek report as a preliminary step which is like a super, super social democratic initiative.

Alasdair
May 14 2015 13:53

no1, you're right there is a tension there between the title and the conclusion. I guess a less contentious way to put it would be to to say that, counter the dominant narrative, the Tories didn't improve the economy and it isn't currently sustainable or well performing.

There's two options open then, one to say that an alternative is possible within capitalism and the other to say that there wasn't. If there is, then we can say the Tories are to blame for the current state. One could still argue that Labour, specifically, were incapable of offering that alternative, however. Perhaps a "Green New Deal" is a realistic proposal which could create jobs and boost growth through Keynesian demand stimulus, but to propose that would require at least a break with orthodox neoliberalism which Labour aren't prepared to make. I would have expected the Green Party to make that argument this election, although for some reason they didn't seem to.

Personally, I'm not convinced that does solve the underlying structural issues of secular stagnation or productivity. Joseph Kay made some good points on that here a couple of years ago, and I still think that's basically right. In that case, whoever was in charge of the country for the last 5 years would have had serious problems whatever their policy.

Spikymike is right to say that some regions can do relatively better or worse. I think there's a reasonable case we've done relatively worse than was strictly necessary given the underlying dynamics. But at best a social democratic "solution" would only be a displacement of the problem, either temporally or geographically. The only real solution, for capital, would be massive devaluation, destruction of capital and even further real wage cuts to boost profitability.

Alasdair
May 14 2015 13:54

Steven, I did actually graph some data but I didn't get time to format it very nicely. If I do I'll add a couple of charts in.

Spikymike
May 14 2015 14:17

Chilli, Yes - if it feared for it's existance that is CAPITALISM not just a particular capitalist national government. Something (in our much more globalised system today) at a more significant level than previously experienced and presumably going beyond the kind of resurected 'transitional demands' promoted by Bastani (and after a fashion by Plan C for instance). Doesn't deny the possibility of concessions to more militant sections of the working class by sections of capital here and there but these on there own do not mark any significant shift in the current trajectory as I see it.

Chilli Sauce
May 14 2015 14:49

That's all fair enough - although I do think particular capitalist states could, largely on their own, implement serious social democratic reforms - but even your argument is different argument from "no longer possible".

And here's the thing: I get why people make that argument: if capital can't offer concessions, then it becomes easier to argue for abolishing capitalism. But, if even a potentially revolutionary movement develops (whether conscious or its revolutionary potential or not) reforms and concessions on the industrial and social level are going to inevitably play a part in the ruling class response. Seems to me that we should include an understanding of that in our arguments.

Alasdair
May 14 2015 15:24

I guess by saying a social democratic compromise is "no longer possible" what I mean is that after world war 2, in parts of world, a political economy could exist where capital saw large rates of overall growth and profits and *at the same time* (some) workers saw rising real wages and living standards. As Joseph points out in the article I linked to in the comments, that relied on previous destruction of capital during the war, a transition to a more globalised economy, global urbanisation and transfers from colonies and former colonies. The lack of equivalent factors today means that such a compromise is no longer possible. Reforms are still possible, if sufficiently large movements exist to create them, but those reforms will come at the expense of capital. Left Keynesians who think they can square the circle and have both higher returns and higher wages are mistaken.

Chilli Sauce
May 14 2015 15:40

That's a really well put argument, Alastair.

Joseph Kay
May 14 2015 15:59

I guess all that leaves is the sort of Ha-Joon Chang argument, that downward redistribution of income would boost aggregate demand and create a virtuous spiral of growth. There may be an element of truth to that; rich people are buying property, fueling a buy-to-let bubble, poor people would spend their income on consumer goods/services. But then many of those would be imports, so it would potentially just worsen the trade deficit.

I think the thing is, the post-war compromise was based on a very unusual configuration of relatively high growth rates, high unionisation in key sectors - and colonial migrants as a low-wage strata, formal colonies allowing material transfers (or at least a colonial monopsony), geopolitical competition with the 'socialist' Eastern Bloc, and a system of capital controls centred on the gold standard.

Then in a relatively short period, the gold standard started to come undone due to its own contradictions, and the post-war boom stalled, and black and asian workers demanded access to the unionised workforce, and the level of strikes etc spiked, and there was a wave of decolonisation struggles leading to formal independence.

I'd agree with Alasdair that this doesn't mean reforms are no longer possible, only that there's no real scope for 'sharing the spoils' type productivity deals. Especially because productivity gains are generally much lower in 'service' industries (a hopelessly vague category). If the class struggle kicks off enough and there's some new compromise, it won't look much like the last one, and is much more likely to be zero-sum (redistributive) than positive-sum (class collaboration for greater productivity). The nightmare is that compromose might be downward pressure on living standards/upward redistribution: 'we'll keep you safe from the migrant hordes if you tighten your belts for permanent austerity'. Who knows, the TUC may still have a role in policing such a grim 'deal'.

Joseph Kay
May 14 2015 16:10

(I forgot to mention the deliberate policy of full employment, which must have enabled higher levels of industrial action).

autogestión
May 15 2015 09:17

My economics is a little patchy. Can someone explain why a destruction of capital would help make post-WW2 style social democracy possible again? Does this literally mean destruction of physical machinery, or is it capital in some more abstract sense? Why is the current level of capital some sort of natural limitation?

Joseph Kay
May 15 2015 09:58

I think the argument is destruction of the value of capital, so it can be physical destruction, or a write-down of assets (like discovering your mortgage derivitives may be worthless because they'll never be repaid). The reasoning is basically that it boosts the rate of profit. An example:

Capital worth 100 units generates 1 unit of profit per year, a 1% return on capital/profit. Something wipes out half the value of the capital advanced, but all the same opportunities for profit are still there. So now: Capital worth 50 units generates 1 unit of profit per year, a 2% return on capital/profit. The rate of profit has doubled! If the destruction was physical, like a war, there's also going to be new opportunities to profit from the reconstruction, which might also boost the rate of profit.

For a New Formulary
May 15 2015 13:37

Also, in terms of try destruction of capital, it affords new opportunities for the absorption of surplus capital.

For example, David Harvey in Rebel Cities argues that urbanisation has been a key tactic used throughout the history of capitalist development to absorb surplus and avoid crises of overproduction. Once Berlin and half of Europe has been bombed to shit, the reconstruction efforts offer ample opportunities for absorption.

Anarcho
May 15 2015 15:12

You may be interested in this article by my goodself which appeared, in part, in the last issue of Black Flag:

Boomtime in Poundland: Has Austerity Worked?

It concludes the same thing -- the Tories failed even in their own terms. Economically, they were a disaster -- and that they quietly changed from "Plan A" to "Plan B" and hoped no one would notice. Sadly, they seemed to be right -- those pointing the facts out were ignored in the mainstream media.