As he analyses the state of the economy, Michael Roberts finds that the capitalist sector of the British economy has failed to deliver for the needs of the people
Last Thursday the Bank of England’s Monetary Policy Committee decided to raise its so-called base rate from 0.50% to 0.75%. The Bank’s officials said this was necessary to curb any likely inflation in prices. You see, the idea is that central banks like the Bank of England, by raising the interest rate it charges for commercial banks to borrow money ‘overnight’ (short-term borrowing), will cause the cost of borrowing to rise for commercial loans and mortgage. Higher interest rates across the board then deter borrowers from taking out more debt and so reduce spending and overall ‘demand’.
But this is terrible economics. Contrary to the conventional view, central banks really do not have much influence over the overall level of demand for buying goods and services or for that matter in controlling levels of debt – at least not by raising interest rates from a very low level to a slightly higher one.
And anyway, the UK economy is hardly bursting at capacity and ‘overheating’. As Mark Carney, governor of the Bank of England, admitted last Thursday, “investment growth is subdued; Brexit uncertainty remains; consumption growth is modest and below trend.”
While prices in the shops may be rising at annual rate above the Bank’s target of 2% a year, wages are hardly matching that. Indeed, according to the Bank of England, UK workers are suffering from the lowest real wage growth in 160 years!
The UK is the only major OECD country where GDP has risen since the Great Recession, but wages have still fallen. The UK is only one of six countries in the 30-nation OECD bloc where earnings after inflation are still below 2007 levels and the UK is the worst of the top seven G7 economies. Real disposable income per head has not risen since the end of the Great Recession. Indeed, if you allow for population growth (mainly immigration), the UK has barely seen any economic growth, with GDP per person only just above the level of 2007 and real consumer purchasing power still lower than in 2007.
Why is the UK’s unemployment rate so low and how is it possible that wages are not keeping up with prices when the labour market is supposedly at its tightest for over 40 years, causing the Bank of England to argue it needs to raise interest rates?
Well, British employers, rather than invest in new technology that could replace labour, have opted for cheap ‘unskilled’ labour, both British and immigrant, with the full knowledge that with little employment protection and weak trade union backing, they can hire and fire as they please. Union membership has fallen to its lowest level since the government started counting in the 1970s. At the same time, much of the employment increase since the Great Recession has been in low-paid self-employment as people set up themselves online or take jobs as taxi drivers etc that do not involve wage employment.
As a result, British workers are increasingly employed in low wage sectors (or self-employed), particularly for those regions outside London and the South East. Britain has a distorted economy, relying on finance over technology and concentrated in the south-east.
The irony is that, since the Brexit vote, there has been a sharp reduction in immigration from the EU. With ‘full employment’ now achieved and the UK-born population no longer increasing, if EU labour stops coming to the UK, then serious shortages will appear in important sectors like hospitals, education, farm work, leisure staff etc. And these ‘low-skilled’ jobs won’t be filled by British citizens or even those from outside the EU.
When you run out of more workers, then growth in output is dependent on raising the productivity of each worker. In the UK, output per worker is hardly rising. UK productivity is 13% below the average for the richest G7 countries and has stalled since 2008. Real output per hour worked rose just 1.4% between 2007 and 2016. Within the G7, only Italy performed worse (-1.7%).
The reason that productivity has stalled is because British capital won’t invest in new technology. Overall business investment languishes at the bottom of the 34 OECD economies. UK businesses have invested not in productive capital that could boost productivity and sustain economic growth and rising living standards, but in speculative non-productive capital. The UK’s output of high-technology industries has fallen by an average of 0.4% y/y over the past ten years.
The capitalist sector of the British economy has failed to deliver for the needs of people, although it has delivered more profits for companies, rocketing house prices and a booming stock market.
What is needed is a massive programme of public investment in transport, education, health and housing. The Labour leadership plans increased spending financed by a National Investment Bank. But this will be wholly inadequate. The ratio of investment in the capitalist sector is five times larger than public sector investment. Surely the obvious conclusion from the defects of British capital exposed above is that the major banks and strategic sectors of the British economy (transport, pharma, aerospace, autos, telecoms and utilities) need to be brought into public ownership to make any investment plan really work in delivering higher productivity and well-paid secure jobs?
That is not the programme (yet) of the Labour leaders. That is a risk. If a Corbyn-led Labour government should come to office in the next year or so, it will be faced with the wrath of the right-wing media and the City of London, but without the economic programme to defeat them.