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Crisis hasn’t gone away. Corbynomics will be increasingly necessary

Corbynomics1One of the most widely repeated falsehoods about the British economy is the assertion that it is growing strongly and that the crisis is over. This is not borne out by even a perfunctory economic analysis but it serves a political purpose. In the first instance the assertion was important in order to blunt any criticism of renewed Tory austerity policies, which will begin again earnest with the Comprehensive Spending Review in December. Now that Jeremy Corbyn has won the leadership of the Labour Party the same falsehood is pressed into slightly different service- with the idea that his policies represent a threat to the current recovery, or are at least unnecessary.  In reality, the extremely limited upturn in output is already giving way to renewed weakness. UK industrial production and manufacturing fell in July. Monthly data can be erratic but this is the second consecutive fall for industrial production and manufacturing peaked in March, shown in Fig. 1 below.  

Fig.1 Industrial production and manufacturing index from April 2013 to July 2015

Source: ONS

This is not the boom that is repeatedly claimed. The recovery to date is primarily based on consumption not investment. Since the beginning of the recession to the 2nd quarter of 2015 consumption has risen by £70bn, a modest rise of 5%. But investment has risen by just £4bn, a cumulative rise of just 1.3% over 7 years, less than 0.2% annually.  In terms of output and investment, the notion of a boom amid austerity is entirely misplaced. There is only stagnation. In fact, the levels of industrial production and manufacturing are effectively unchanged since the Coalition took office in May 2010, despite inheriting a mild recovery. In May 2010 the index levels of industrial production and manufacturing were 100.2 and 97.6 respectively. In the most recent data they were 99.2 and 100.6. The trends in output are shown in Fig.2 below. They clearly show that under austerity production has stagnated.

Fig.2 Output trends from January 2008 to July 2015


Far from a boom the current economic situation is best characterised as stagnation. In one form or another this also characterises the Western economies as a whole. Since the recession began in the OECD as a whole, the average annual level of GDP growth has been under 1%. Consumption has risen by US$2.5 trillion over that time. But Gross Fixed Capital Formation has declined by $200bn over the same period.  For the British economy, this continued reliance on consumption holds a particular threat. The relative weakness of investment and hence the relative weakness of productivity is a chronic one in Britain. The current crisis has deepened these severe long-term problems. Output has fallen back to levels last seen in the 1980s, as shown in Fig.3 below. This represents a combination of both the long-term weakness of manufacturing and the decline in the output of North sea oil, a financial windfall that has been almost entirely wasted.

Fig. 3 Industrial production over the long-term

As it is not possible to consume that which is not already in existence, consumption must follow output. It cannot lead it. As the output of the British economy is experiencing both a structural and a cyclical decline, its increased consumption has been funded by its surplus on ‘financial services’, the money British banks extort from the rest of the world, and on increasing indebtedness.  As the revenue from financial services has now also gone into decline, so the resources for consuming without producing are increasingly through borrowing. The broadest measure of Britain’s overseas borrowing requirement is the balance on the current account. The current account includes both the trade balance and the balance on all current payments , primarily company dividends and interest payments by borrowers. Any deficit on the total current account must be met by increased borrowing from overseas (or asset sales to overseas). The latest 3 quarters have seen the worst current account deficits as a proportion of GDP since records began, as shown in Fig.4 below.

Fig.4 Current account blance as a proportion lof GDP

The financing of this deficit depends on the willingness of overseas investors to buy UK assets. It is impossible to predict the precise point or catalyst for them to stop doing so. But what is known is that the British economy has faced a number ‘balance of payments’ crises before when the relative level of overseas borrowing was far lower. One possible way of reducing the current account deficit is to impose higher savings rates on the household sector, raising the taxes and reducing the wlefare transfers to them from government, which is one effect of renewed austerity. But even austerity Mark II will be unable to close the current account gap of this magnitude entirely.  Therefore the British economy is facing a series of interrelated crises, of production, slow growth and unsustainable borrowing. In reality they are key products of a single crisis- the crisis of weak investment. Contrary to the Tory propagandists, the supporters of austerity and their apologists, the crisis of the British economy has not at all gone away. As a result Corbynonics, a state-led increase in investment, is vital to end it.

This article first appeared at Socialist Economic Bulletin

10 Comments

  1. A problem with the above article is that it concentrates just on industrial production. Services actually make up a larger share of GDP nowadays, while industrial production as a percentage of GDP continues to decline. Thus I suggest it’s risky to take the industrial production figures as any guide as to whether the crisis is over.

    1. J.P. Craig-Weston says:

      I disagree and I would argue that broadening the definition of manufacturing to include vaguely defined ancillary; services is a characteristically dishonest way to pad out the numbers and inflate apparent their importance.

      Training and services for example and I would suggest particularly most of the government funded and privately administered schemes such as the Modern Apprenticeships, the Government Work Program, etc and all the various partnerships are probably of little or no real value to either a company or to an employee in most cases, certainly that has been my own experience anyway.

  2. Martin Read says:

    Thanks for this. The gist is occasionally obliquely alluded to, in some kind of dismissive ‘also-ran news snippet’ way, by some of the less rabid media establishments. It’s helpful to have the fleshed out version.

    Of course, ‘boom and bust’ are where the really big money is made. So there will be hidden string-pullers very much wanting to prolong austerity, a time of huge transference of wealth, into the stuffed pockets of the mega-wealthy where taxes are generally avoided.

  3. J.P. Craig-Weston says:

    Oh I think that it’s probably fair to say that many people aren’t experiencing any real pain from the recession whatsoever, (for example if you happen to be a multi millionaire property speculator.) Generally speaking these are the same people who are part of the parasitic academic/quango/consultancy culture that are generally producing these agenda driven and unbelievable analysis.

    For example take the government’s latest scam the Automotive Industrial partnership, (“by working collaboratively and taking an innovative and sector wide approach, blah, blah, blah, we are ensuring that the UK’s, (actually mostly foreign owned and now relatively minor anyway in comparison with most other countries,) automotive sector can continue to grow and to retain the skills and talent that are so vital for the, (actually declining,) industries continuing success,”

    Basically this seems to me to be just an excuse to throw another £30 million quid at all the, “usual suspects,” (the joint government, industry partnership.)

    For example; Following a successful bid, Not-for-Profit, (yet another of these shabby commercial operations purporting to be some sort of faux charity,) employer skills organization led Sempta, Industry trade association SMMT, and Industry Forum working through the Automotive Council also support the Automotive Industrial Partnership, in conjunction with the Department of Business Innovation and Skills, (BIS,) and the UK commission, (UKCES,) for employment and Skills.

    In other words this looks and once again; like nothing more one god almighty, government funded mess, (certainly organizationally,) intended only to fund more fat cats jobs for the people on the taxpayer funded gravy train and unlikely to create, (or support,) even a single real new job, (certainly not for anyone outside the closed loop of client funding, often for nothing very much, as long as you can make a convincing case to few old mates,) of any real importance or consequence to the UK..

    Just how much other funding is being thrown at other similar, bureaucratic contrivances to no good or useful end ?

  4. Marie Lynam says:

    Hello to J P Craig-Weston

    Funding thrown at other similar bureaucratic contrivances:

    Should we include the new Hinkley nuclear power station, underwritten by the State, ie, the taxpayer, without so much as an attempt at consulting those in the State who pay, the taxpayers.

    Be sure that the huge amount of hot capital that floats overhead in search internationally of reliable ways to speculate, is not involved! Not in the least! It keeps being bigger and bigger – and more determined to avoid risk. And so, it is the taxpayer who underwrites the venture with EDF/China.

    I am not making a value judgement about a nuclear power station in this comment. I wish to underline the fact that hot money capital did not put a foot in the venture. Just as it keeps away from anything socially useful. Much more lucrative is to lend to Greece, and get back the blood, the sweat and the flesh of the Greek people turned into interest re-payments.

    Admitting that the Cameron government is actually planning ahead to keep the lights on, which would surprise me a lot, the reality of the matter is that the Cameron government cannot think of this in terms of making hot capital advance the funds and take the risks.

    Be sure of one thing. This kind of thing is not sustainable. Maybe this will work, who knows, but the principle of capital not investing in society, and only looking for more murderous gambles, shows that capitalism is finished.

    Capitalism is not going to say: ‘oh, I am finished, off I go.’. No! It will launch further wars, wars and civil wars – until the war (and civil war) is total. In the total war, and perhaps before that, its financial system will crash, be sure of that. Because its financial system is fictitious already.

    Forward with the organisation of the Labour and trade union Left around Corbyn, to sustain him and show him the way.

    Marie Lynam, LRC, individual initiative

    1. David Ellis says:

      Unfortunately Corbyn is a busted flush having already capitulated on Cameron’s EU Referendum which basically means capitulating on austerity i.e. he has prioritised continued membership of the EU above fighting austerity. This is the danger of rallying around an individual as opposed to a manifesto. In actual fact I can see another Corbyn capitulation coming up the pipeline in that he will fail to impose a whip on Labour MPs instructing them not to vote for Cameron’s proposed extenstion of bombing of ISIS into Syria in order to keep his shadow cabinet stuffed with New Labour morons and because basically the bombing will aid Putin’s ally Assad.

      1. J.P. Craig-Weston says:

        Completely barking.

        1. David Ellis says:

          We will see.

  5. Jim Denham says:

    JC has done the right thing over the EU and come up with the only principled and realistic policy conceivable: to fight for workers’ rights from within and pledge to reverse whatever anti-working class “reforms” Cameron might achieve in his negotiations.

    This is *not* a “capitulation” but an advance from his previous ‘Morning Star’ little-England idiocy.

    1. David Ellis says:

      How very decent of you.

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