Worse than they thought.. on the Economy

Economy is worse than they thought

By Michael Burke

First posted on Socialist Economic Bulletin

The latest GDP release from the Office for National Statistics was accompanied by a set of revisions to previous data. These now show that the downturn was more severe than had previously been estimated and that the British economy is even further away from recovery.

Previously, ONS data had shown that six years into economic slump the economy was still 2.6% below its pre-recession peak in the 1stquarter of 2008. Now it shows that the economy is actually 3.9% below its peak.

The economy is still £61bn below the peak level. Yet it remains the case that the fall in investment more than accounts for the entirety of the recession, as shown in Fig. 1. Investment (Gross Fixed Capital Formation) has fallen by £68bn. The other main component of GDP which has contracted is household consumption, which is down by £28bn. This demonstrates the effects of falling real wages on living standards. It effectively accounts for half the recession, but it is not as severe as the decline in investment.

By contrast government spending is £20bn higher, despite all the propaganda about the absolute priority of deficit reduction. This is because government policy is not primarily aimed at curbing spending at all, otherwise PFI, Trident and subsidies to corporations would all go. The aim is to boost profits, which means cutting wages, cutting government investment in areas where the private sector can return profits and redirecting the social surplus towards capital.

Fig. 1

Net exports are also £32bn higher. The government and its supporters are inclined to blame Europe, or foreigners in general for their own failed economic policy. It should be noted that the rise in net exports has very little to do with the increased sale of goods and services overseas. Despite a very large devaluation for Sterling exports are only £6bn higher at the beginning of 2013 than at the beginning of 2008. By far the larger component of the rise in net exports has been the fall in imports, down £26bn over the same period. It seems that both households and firms in Britain are being priced out of world markets. It should be clear from the much greater fall in imports that it is Britain which is a drag on the world economy, not vice versa

In fact the British economy has been one of the worst performers in the G7, which itself has performed very poorly. As a whole the G7 economy is just 1.1% above its pre-recession peak at the beginning of 2008. The British economy’s performance still 3.9% below its prior peak placing it in the rear of the G7, on a par with Japan and ahead only of Berlusconi’s Italy

Fig 2

The slump has been followed by stagnation. The effect of the downward revisions to GDP is to increase the gap between the economy’s previous trend rate of growth and its current level. As a result the economy is already nearly 20% below its previous trend rate and even on official forecasts that gap is set to widen over the next period. The economy is about £350bn below its previous trend. This gives a measure of the scale of the crisis facing an incoming Labour government, which cannot be remedied without a commensurate level of investment in the economy.

Fig 3

The Tory-led government has no intention of increasing investment. The much-hyped infrastructure investment plan was entirely fake. As the chart from the Institute for Fiscal Studies reproduced below shows, government investment is being cut.

Fig 4

The Tories regard the returns available from this investment as belonging to the private sector. The cut to investment is to allow the private firms to invest and so reap the benefits. But there is no evidence that the private sector regards these as sufficiently profitable. As a result the cuts to government investment are simply exacerbating the slump in private investment. A Labour government would need to break this investment strike through a very large increase in government investment.

Cut out Cuts – Leave the Eton Mess Behind


Jim Grundy

The 0.7% second-quarter fall in GDP in 2012 brings a calamitous verdict on George Osborne’s policy, with the UK economy now smaller than it was in 2010, and double-dip recession longer than in the 1970s.

The latest bad news on the economy will surprise no-one (I hope, other than your average BBC journalist). Isn’t it time that we adopt the line that all the talk of cutting spending to lower borrowing, to cut the deficit and lower the national debt was, and remains, a simple lie? Who in their right mind could fail to see that sucking billions out of the economy could have any other impact than shrinking the economy, lowering revenue from taxation and increasing costs through higher welfare payments (even if these are being cut)? And what do we see now – rising borrowing, a deficit that is not being cut and debt that is not being paid off!

In 1997 Labour inherited a national debt (as a % of GDP) lower than that seen in 2010, so the narrative that “all the money has gone” was always nonsense. It was and remains a simple pretext for the demolition of the public sector, the NHS, pensions, welfare programmes, anything and everything that has been gained through struggles going back generations. The Tories are our ‘Tea Party’ who are capable of delivering one thing and one thing only – blind ideological obedience to the interests of large corporations.

The “cutting too fast and too soon” line has won us no friends – quite the opposite, I would argue. It’s time we put the case for investment, for growing our economy, for delivering the new jobs, homes and for better public services so desperately needed now more than ever. To do anything else risks the unkindest cut of all – a reduction in voter turnout and growing voter antipathy to the whole process. And we all know whose interest that serves.

It’s time to change the record. Cuts are not the answer – well, they are but the question is not how we make sure we can live in a fair society, where people pay their way, get support when it’s needed and the interests of the many come way ahead of the private profits of a few. Time to leave the Eton mess behind. Time to give people hope that a real alternative exists.

Sue Davies adds:

We are fed a lot of nonsense about ‘there being no money left’.  This is a complete misunderstanding about the fundamentals of money and taxation. There is no limit to government spending other than in its capacity to cause inflation if the UK is operating on full throttle .. but at the moment, the real fear is of deflation, and there is plenty of spare capacity in the economy with the current high levels of unemployment.  This lack of inflationary effect is evidenced by the fact that £325 billion of QE has had little impact.

Labour should be aiming for full employment, not only by investing in a new green deal but also by lowering the pension age and shortening the working week.  A new green deal could be aimed at reducing energy demand and boosting renewable energy production. This would create new jobs, apprenticeships, new manufacturing, which in turn would cut the benefits bill, raise tax receipts, create demand and reduce the structural deficit. 

The UK desperately needs more social or council housing to be built, and this offers the perfect opportunity to provide sustainable homes, with heat/water conservation measures and the capacity for the microgeneration of renewable energy. Furthermore, a mass insulation programme of the existing housing stock would cut ordinary people’s heating bills and, with the declining cost of renewable energy, their electricity bills.  It would reduce cold-related illness/deaths, cut climate-changing gases and mitigate oil dependency.  On a political level, it would usefully break the power of the big six energy companies, who currently hold government to ransom over the development of renewable energy sources.

Steve Keen’s debt jubilee is an ingenious solution because it would both massively curtail the casino arm of the banks whilst also relieving the enormous debt problems of individuals/small businesses and creating demand in the economy.

Labour must abandon ‘too far and too fast’.  There is no rational argument for even a partial programme of austerity.  It doesn’t make any sense.

As Michael Meacher writes:

So why is this madness still continuing?   When the IMF, not normally a trendy lefty organisation, says the UK government must kickstart the economy with a boost to spending and increased investment in order to avoid a long depression and a “permanent loss of productive capacity”, even this bunch of far-right Tory ideologues should take notice and discover they have a reverse gear.  

 So why not?   Saving Osborne’s face?   Never under-estimate politicians’ vanity, but no Cabinet will hang on to a loser.   But caught between the markets still demanding death-defying cuts and the IMF now on the side of growth, Osborne can still Houdini-like find a way through.   With no increase in public borrowing, launch a big jobs and growth programme, funded by taxing the near-half trillion pounds amassed by the top 1% in the last 3 years.  


We need investment in a new green deal, in new housing, to create employment and to fully nationalise (at least) the bailed-out banks.

Think Left April 2012: Double Dip Recession: Don’t say you weren’t warned George

Think Left: How to End the Recession: A Modern Jubilee (CJ Stone)

Think Left: Gordon Brown did not spend all the money – the Banks did

Ed Balls Responds

Larry Elliot: Guardian: Osborne’s Blundering Incompetence made UK sicker

BBC: UK Recession Deepens after 0.7% Fall 

The Independent Shock as GDP shrinks by 0.7% 

Guardian in worst UK Recession for 50 years


A Modern Jubilee: How to End the Recession.


A Modern Jubilee: How to End the Recession 

According to Economist Steve Keen

By CJ Stone, previously published on HubPages

As we all know, this was the year of the Queen’s Jubilee. How can anyone have failed to notice?

Have you ever wondered where the word comes from? Obviously it denotes a celebration, a time of jubilation. But the question is, what is it we are supposed to be celebrating exactly?

Originally the word represented the ancient practice of debt forgiveness (1). In the Bible this took place at the end of seven times seven years, that is in the fiftieth year, when all debt was cancelled, all slavery was ended, and all property returned to its original owners.

As it says in Leviticus 25:10 (2): “Consecrate the fiftieth year and proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee for you; each one of you is to return to his family property and each to his own clan.”

The practice was also undertaken by Bronze Age kings (3) and the Roman State. Whenever the debt burden became too great, the kings would declare an end to debt, thus ensuring the loyalty of the people. The debt ledgers would be burned and a clean slate declared.

Often this was done on the King’s anniversary. This was something seriously worth celebrating. No wonder they called it a “jubilee”.

In case you haven’t figured it out yet, this is precisely our problem now. The world is so deeply in debt that it would take several lifetimes to pay it back. Meanwhile, the people we owe it to – the bankers – are so wealthy that it would take them several lifetimes to spend it.

The debt is greater now than at the onset of the Great Depression (4).

We have seen a massive redistribution of wealth, from the less well off to the wealthiest. The people who created the banking crisis have been rewarded, while the rest of us are suffering.

And, meanwhile, nothing is being added to the world’s wealth. Bankers are not engaged in manufacture, in innovation, or in research and development. Really they are little more than administrators who happen to have the keys to the safe.

They are administering our money, and then gambling with it for their own profit. Or as the title of a famous book by William K Black (5) has it: “The Best Way to Rob a Bank Is to Own One.”

There was a story (6) in the Daily Mail recently about self-employed auto-electrician Daniel Bond who converted a double-decker bus into a home.

This is not new, of course. It’s exactly what New Age travellers were doing over thirty years ago: turning buses, lorries, horse boxes, vans, trailers, army trucks and other vehicles into mobile homes. It was one of the reasons the travellers got so comprehensively trashed back then.

It’s exactly what gypsies and Irish travellers are still doing, only their preferred type of live-in vehicle is a highly polished trailer with glittering cut-glass windows and hundreds of knick-knacks all over the place.

Irish travellers and gypsies are also still being comprehensively trashed to this day (7).

Daniel Bond’s double-decker home cost £11,000 to convert and has all the mod-cons, including a fitted kitchen and a fully-functioning bathroom. He did it because of the ridiculous house prices, he said.


Everyone knows that house prices are grossly inflated. Between 1998 and 2007 house prices went up, on average, by 168%. Much of the reason for the current recession has to do with the banks’ aggressive lending over this period, driving up house prices to many times average earnings and fuelling a speculative bubble.

Meanwhile the banks continue to reap the benefit of their irresponsible lending in the form of interest on over-priced mortgages. A mortgage, which once took only one person’s income to service, now often takes two.

Our whole world is creaking under the weight of debt. As economist Michael Hudson (8) said: “Debts that can’t be paid, won’t be paid”. Expect to see more live-in vehicles on our roads as the recession begins to bite and people start to lose their jobs. Not all of the vehicles will be as nice as Daniel Bond’s home.

Famously, at a briefing by academics at the London School of Economics (9) on the credit crunch of 2008, the Queen asked: “Why did nobody notice it?”

Actually, some people did.

One of the most notable amongst them was Steve Keen (10), professor of economics at the University of Western Sydney (12). Professor Keen predicted the credit crunch as early as 2005 but was ignored. He was known as “the prophet of gloom” because of his consistent warnings that levels of debt were getting unsustainably high and that this would inevitably lead to depression.

“Depression” note, not “recession”. Professor Keen argues that we are in a depression now, which is as great, if not greater, than the Great Depression of the 1930s. He also says that if current policies continue it will take at least fifteen years for us to get out of it again.

The reason that conventional economists failed to predict the crisis was that their models of how the economy works are false.

Specifically they have ignored the role of the banks. According to these economists, banks merely transfer the savings of one part of the population, which then become the borrowings of another. Thus savings become debts and cancel each other out.

This is untrue. In fact the banks drive up debt, multiplying the amount they lend by many times the original savings. People borrow because rising asset prices make it seem that they cannot lose; but in fact prices are only rising because demand is rising, pumped up by borrowing.

This is what is known as a bubble, and bubbles always burst in the end. It was the end of the housing bubble in the United States which brought about the credit crunch.

Now, here is the strange thing: Steve Keen wasn’t listened to when he predicted the financial crisis, and he isn’t being listened to now. The very same people who failed to predict the crisis are the one’s prescribing the solution, in the form of austerity.

In fact austerity only serves the banks, as the economy shrinks and companies go out of business, allowing the banks to buy up their assets at rock-bottom prices. In case you haven’t noticed yet, the shift in wealth is all heading in the same direction. The rich are getting richer, while the rest of us are getting shafted.

Currently the government is propping up the banks by creating money out of thin air – “quantitative easing” (12) – and then handing it to the banks in the hope that they will lend it to us. In other words, the government wants us to take on even more debt.

Debt is the fuel that feeds the banking system. Recent revelations (13) have shown us just how corrupt and self-serving the banks are. We don’t want more debt, we want less. If the government can create money out of thin air to give to the banks, then it can create money to pay off people’s mortgages and to build affordable housing instead.

This is Steve Keen’s solution, what he calls a modern Jubilee.

He says that rather than government creating money and then giving it to the banks, it should be giving it directly to us, the people.

We would then pay down our debts, the banks would go out of business, and we could end the depression overnight.

We’ve tried conventional economics and they have failed us.

Isn’t it time we tried unconventional economics instead?


 Steve Keen on Hardtalk

Steve Keen on Capital Account:


Steve Keen’s Debtwatch

Analysis of the global debt bubble and the prospects for a Great Depression

William K. Black

Bill Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007.

Michael Hudson

Michael Hudson’s official website on finance, real estate and the powers of neoliberalism. A critical interpretation of global economic trends through the eyes of Classical Economy.

 Notes and links:

(1)  http://en.wikipedia.org/wiki/Jubilee_(biblical)

(2)  http://www.biblegateway.com/passage/?search=Leviticus+25%3A10&version=NIV

(3)  http://michael-hudson.com/wp-content/uploads/2010/03/HudsonLostTradition.pdf

(4)  http://www.rapidtrends.com/private-debt-is-much-higher-now-than-during-the-great-depression/

(5)  http://www.huffingtonpost.com/william-k-black/

(6)  http://www.dailymail.co.uk/news/article-2166028/Property-developer-spends-11-000-turning-double-decker-bus-new-home-priced-housing-market.html

(7)  http://www.guardian.co.uk/uk/dale-farm

(8)  http://en.wikipedia.org/wiki/Michael_Hudson_(economist)

(9)  http://www2.lse.ac.uk/home.aspx

(10) http://en.wikipedia.org/wiki/Steve_Keen

(11) http://en.wikipedia.org/wiki/University_of_Western_Sydney

(12) http://cjstone.hubpages.com/hub/Useless-Idiots

(13)  http://www.bbc.co.uk/news/business-18847180