tag:blogger.com,1999:blog-54848388886889944102024-03-06T00:38:27.061-08:00Economic BulletinA Bulletin Economicgretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.comBlogger273125tag:blogger.com,1999:blog-5484838888688994410.post-71387671127065839362012-09-25T14:20:00.001-07:002012-09-25T14:20:34.550-07:00Photovoltaic Panels Installation<div style="text-align: justify;">
The installation of solar roof panels normally relies around the utilization of some type of mounting programs that keeps the photovoltaic devices in place. A competitive choice energy system produced from an regular quantity of photovoltaic panels may be the correct choice in terms of conserving money and creating heat and electrical power in a very clean and environment friendly way. Photovoltaic panels are generally additional towards the home construction after the constructing in the home but the present day tendency is to incorporate the method within the roof throughout the extremely constructing approach so regarding guarantee a longer lasting construction.</div>
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The inclination angle with the <a href="http://www.bakerelectricsolar.com/start.htm">photovoltaic panels</a> is normally a standard 1 but the primary concern right here is the method to make the panels remain exposed to the sun to get a lengthier time frame. Most authorities inside the field claim that the south oriented photovoltaic panels obtain more sun coverage and when you buy some west or east oriented ones a larger quantity of panels will likely be required. Nonetheless not all roofs allow south orientation along with the architecture from the residence as these does possess a excellent phrase to say inside the make any difference.</div>
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Most photovoltaic panels will likely be positioned at a distance of three or 4 inches in the roof there lightweight to ensure you shouldn't fear in regards to the strain they are going to add for the home structure. The attachment is protected and durable and also the matching with the residence architecture and layout is out of the query. When the building and installation with the photovoltaic panels is total you'll be able to take pleasure in from the comfort and ease of ones home without any maintenance costs whatsoever. Most property owners from around the globe favor such merchandise due to their prolonged durability and large conserving potential.</div>
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Ahead of choosing on what kind of photovoltaic panels to put in its recommended to create a straightforward investigation so regarding discover what choices you have really got. You do not should obtain one of the most pricey photo voltaic method but an intermediate 1 need to be adequate for just about any regular household. The governmental policy certain in your nation could also work to your benefit but the very best method to make a selection would be to get all the data you'll be able to. All in all photovoltaic panels need to be paid from your warmth and energy savings about a period of time of three to five several years after which it is possible to contemplate that all your property utilities operate for free.</div>
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gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com1tag:blogger.com,1999:blog-5484838888688994410.post-43936334600316996852012-09-04T11:58:00.003-07:002012-09-04T11:58:41.839-07:00Sofa Factory<div style="text-align: justify;">
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gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-413481390261191152012-07-15T08:19:00.007-07:002012-07-24T21:50:29.739-07:00A Organization Directory Can Be an Effectual Marketing and advertising Instrument<div style="text-align: justify;">Acquiring enumeration in a business directory, under a strongly ideal classification, is one of the best alternatives to offer for your organization.<br />
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The paid solutions of publicity (wages by click, banner and so on) and the organic and natural sale of <a href="http://litthevih.blogspot.com/" target="_blank">Look up Motor</a> is really critical so that <a class="zem_slink" href="http://en.wikipedia.org/wiki/Company" rel="wikipedia" target="_blank" title="Company">companies</a> are productive above the Net. It is also crucial that <a class="zem_slink" href="http://en.wikipedia.org/wiki/Corporation" rel="wikipedia" target="_blank" title="Corporation">corporations</a> are enumerated in the honorable business directories.<br />
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Despite the fact that the customers look for merchandise or the service on lookup engines, b2b customers also use the organization directory as a database to accumulate distinct and thorough info of a business, compare products, review and evaluate solution specifications and functions.<br />
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Range of a enterprise directory: A basic organization directory listing corporations from far more than a single market. Each directory has its clean object and variety. Beneath a common picture of the websites is given which the company directory can enumerate:<br />
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*Sites of producer, distributor, purchaser, salesmen.<br />
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* Web sites of the partnerships, institutions of formation and teaching plans, businesses and the news, events, etc economic.<br />
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* Web sites of the support companies who supply services to the businesses like accountancy, finances, human sources, management, marketing, and so on<br />
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Indicated beneath are some of the characteristics Organization directories can provide<br />
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Regular listing: To add a enterprise is by the comprehensive framework of class is the principal services of the delivers of a directory. Currently being enumerated companies can increase its liner traffic. The crucial company directories can send the traffic really suitable to corporations.<br />
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Featured listing: Comprised enumerating a specific directory also called it sponsored listing. So businesses are additional although comprised with the best of the group it is demonstrated to him is enumerated. The device gives an opportunity of record to be noted at first when the group is visited. An lively record will send more targeted traffic than a basic record.<br />
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Publicity: The enterprise directories also supply the service of publicity like the wages by countryside of click, publicity of banner, publicity etc of bulletin. Some directories also supply remote publicity in their bulletin or keep of impression. Companies can draw aside the phrase taking additionally the support from publicity of the company directories.<br />
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Industry: Several company directories also provide the industry to get or offer merchandise or the support. By the participation in the marketplace which a organization directory delivers of the organizations can improve its income.<br />
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Other devices: The company directories also offer news of sector, details regarding the market place research, how to manual and other services innovating.<br />
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Indirect advantages that a enterprise directory can provide:<br />
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Most of the these directories provide search motor friendly listing. When a Internet internet site of corporations is additional in a directory, it will get a hyperlink. The website link commencing from a business directory is with one way and significantly appropriate. It is a single of the major forms of hyperlink which a website can have. This kind of foremost bond starting up from company directory of authority aids to boost the row of Look up Motor which will result in addition to targeted traffic of the search engines.<br />
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Companies need to think about a enterprise directory critical instrument of sale to help corporations previously mentioned Internet with its other countryside in line of sale and promotion Seattle Business Directory.</div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-48273268843832523872012-07-06T08:18:00.003-07:002012-07-24T21:51:22.233-07:00A Positive Attitude and the Right Plan Can Help You Succeed in a Recession<div style="text-align: justify;">The recession has hit everyone hard. Small <a class="zem_slink" href="http://en.wikipedia.org/wiki/Business" rel="wikipedia" target="_blank" title="Business">businesses</a> are having a tough go at meeting their overhead expenses. <a class="zem_slink" href="http://litthevih.blogspot.com/" rel="wikipedia" target="_blank" title="Independent contractor">Independent contractors</a> are seeing their revenue streams drying up. Long time employees are losing their jobs while <a class="zem_slink" href="http://en.wikipedia.org/wiki/Student" rel="wikipedia" target="_blank" title="Student">college students</a> are having a hard time finding entry level employment. The overall mood surrounding career opportunities is a bleak one. So, what is the proper way to approach this situation?Ignore all the negative stuff.No, that is not said in a flippant manner designed to "blow off" the seriousness of the situation. Rather, it is an effective serious approach that is needed in order to navigate the difficult financial challenges one may be facing in a recession. A recession is a financial situation that exists due to empirical economic facts. Emotions need to be curtailed to survive in a recession. A negative, self-defeated outlook will never set the stage for overcoming adversity. This is not to say being unrealistically optimistic is advised either. No, what is needed is a realistic, detached approach to dealing with the current economic situation you may be in.Does this undermine the previously mentioned notion that you have to remain positive? No, you always need to maintain a positive outlook to navigate through a recession.<br />
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When your attitude is negative or downbeat, however, success is never going to be likely. Positive attitudes help fuel the approach needed to be successful. Ultimately, such an outlook is one built in belief. If you believe in the process, you will find it much easier to navigate for success.Belief, of course, needs to be rooted in feasibility. You cannot employ illogical <a class="zem_slink" href="http://en.wikipedia.org/wiki/Strategy" rel="wikipedia" target="_blank" title="Strategy">strategies</a> to reverse a negative trend. You could believe in such strategies and hope that they work, but if the process is not a viable one then it is never going to deliver the desired outcome.Generally, the best way to "kick start" the reversal of negative trends would be to employ simple incremental steps towards achieving small - yet demonstrable - goals. For example, launching a <a class="zem_slink" href="http://en.wikipedia.org/wiki/Business_card" rel="wikipedia" target="_blank" title="Business card">business card</a> <a class="zem_slink" href="http://en.wikipedia.org/wiki/Marketing" rel="wikipedia" target="_blank" title="Marketing">marketing</a> program over the course of a month could be the first step towards improving your fortune.Business card marketing is just one example and it is used here for illustrative purposes.Business card marketing is a nice way of saying you are going to give away business cards wherever you can whenever you can. Leaving stacks of them on counters of non-competing businesses, tacking up a business card on public bulletin boards, or any other circulation strategy you could deal with. Then, you need to sit back and see if your business experiences a decent uptick in business over the course of a 30 day period.If the 30 day periods ends and you see a 4% increase in revenue, this would be hugely positive news! It means people are responding to your advertising plans. Clearly, boosting your (low cost) advertising strategy would be a smart move to help reverse a potentially negative scenario.Granted, these tips certainly are not pie in the sky (delusional) strategies for reversing the impact of the recession. However, they illustrate the type of plan that is realistic and doable. Realistic and doable are not minor attributes. They are indicative of goals which can be achieved and built upon. Following workable strategies such as this may be the best steps to employ to reverse the negative impact of the recession.When you can succeed, you have much to be positive about. Never lose sight of this fact because it will help you attain your goals. This will be true even when you need to navigate your goals through a brutal economic climate. </div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-74386147639665420192012-06-29T08:15:00.002-07:002012-07-24T21:51:49.589-07:0010 Things Church Leaders Can Do Now to Survive the Economy<div style="text-align: justify;">Since the economic collapse in 2008, a shift has been taking place in the American consciousness- from a culture of buying and spending, unlimited credit card debt and hefty <a href="http://litthevih.blogspot.com/" target="_blank">mortgages</a> to precisely the opposite of this mindset. Today, a culture of debt elimination has emerged, especially toward credit card debt-but, all debt, too-to a commitment to save more, even downsizing one's lifestyle and the square-footage in personal housing. From a cultural mindset characterized by "more and bigger" today's "New Normal," as it has been called is a mindset characterized by "less and smaller."Church leadership should "tighten-its-belt" as well on spending, debt service, salary increases, etc., and be perceived by members as doing so without resistance or complaint by leaders. In the next decade, churches and church leaders perceived to be addressing the human needs, as well as the spiritual, local, global or "green" needs of planet earth, will find people willing to support it. Those churches and leaders who possess an apocalyptic view of the future that focuses on escaping the challenges faced by humans and the planet will be increasingly marginalized and accelerate their own numerical and financial decline.2. As a matter of practice, make sure you say "Thank You" for member support at least three-times as often as you say things like, "We need your help." Send quarterly "thank you" letters to members that are addressed to them personally (ie., "Dear Bob and Mary..."), along with their statement of giving for that quarter. Make sure the letter highlights a specific ministry/mission accomplishment for the previous quarter (ie., faith conversions, new members, a facility that just went "green" or was painted, updated, or the number of households served by the church's food pantry, a mission team report, etc.). People give to people and to projects they deem worthy in serving the cause of Christianity. Put a "face" on these letters so that members are reminded that their generosity is making a difference in someone's life.3. Make use of "generosity testimonies" throughout the year, not just a budget promotion time. Listen for those stories from members who are facing hard times but remaining faithful in their giving and finding God's presence and provision to be adequate. Enlist them to share their story.<br />
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Guide them in preparing and delivering it to the church/parish. Be sure their story is shared, not only in worship, but through church publications, the church's website, etc. A spirit of generosity is caught more often than it is taught.4. Many churches report their giving totals for the previous week/month in their parish bulletin or newsletter. These churches typically report the AVN "Average Weekly Need" as well (AVN is the total annual budget need divided by 52 weeks or 12 months). As a consequence, often the weekly/monthly receipts appear to be short of the average weekly/monthly need.In time, this reporting method creates the perception that the church is always behind in its giving. Most churches have the best quarter of giving during the final quarter of the year and will often "catch up" and close out the year at or near budget projections. However, by reporting weekly receipts against the average weekly need, the perception is nurtured that church is always behind. And perceptions, once fixed in people's minds, are hard to change.Here's what to do. Church expenses are not equally distributed throughout the year. The utility bills, for example, are likely to be higher during those months of intense cold or heat than at other times of the year. Instead of reporting the average weekly receipts against the average weekly need, why not calculate the average weekly expenses based on the last five year's expenses for that same week?This will take a little time. Once set up, however, in an Excel spreadsheet, or some other program, it will be easy to maintain. Simply average all weekly or monthly expenses for the last five years. This will give you a weekly/monthly average of expenses that is much more realistic and accurate. Then, when you report the weekly receipts with THIS average, the receipts will more often meet or exceed the weekly average need. In time, the perceptions, as well as the congregational attitudes, will change and become more positive, accurate, and optimistic about the church's financial health.5. Teach generosity, and do so regularly. Consider opening a <a class="zem_slink" href="http://en.wikipedia.org/wiki/Financial_adviser" rel="wikipedia" target="_blank" title="Financial adviser">Financial Counseling</a> Center. Most churches have one or more lay persons who have skills and training in this area, as in bankers, accountants, investors, insurance and financial advisors, etc. Offer classes in financial planning, debt and money management, and <a class="zem_slink" href="http://en.wikipedia.org/wiki/Planned_giving" rel="wikipedia" target="_blank" title="Planned giving">planned giving</a>. Invite a speaker who specializes in <a class="zem_slink" href="http://www.amazon.com/Motivating-People-Barrons-Business-Success/dp/0812098986%3FSubscriptionId%3D0G81C5DAZ03ZR9WH9X82%26tag%3Dzemanta-20%26linkCode%3Dxm2%26camp%3D2025%26creative%3D165953%26creativeASIN%3D0812098986" rel="amazon" target="_blank" title="Motivating People (Barron's Business Success Guides)">motivating people</a> to live beyond fear and anxiety and more by faith and generosity. It is true that generous people are the happiest people. Teach and preach on Biblical giving. Consider a teaching series or a series of homilies/sermons designed to expose the myths about giving prevalent in virtually every church in America. Try reading and or teaching a book like The Giving Myths.6. Ask the right questions...Since people give to vision, or human and spiritual needs; What is your church's vision? How well are you communicating it? If it is unclear, or cannot be stated by most members in the pew, it may be time to lead them to discover a new vision for the future, a re-defined mission and vision for the church's future.Is your financial support declining, or flat; Why? Do local unemployment and other economic factors explain the decline or are there other reasons for it? (ie., No vision? <a class="zem_slink" href="http://en.wikipedia.org/wiki/Low_vision" rel="wikipedia" target="_blank" title="Low vision">Low Vision</a>? Fear? Internal conflict? Distrust, suspicion, or a lack of confidence in leadership?)Whether real or perceived, are more of your church's resources being spent within the church walls than on missions and mission projects beyond the church walls? According to Empty Tomb, Inc., an Illinois-based Christian research organization, most churches spend 85 percent or more of their financial resources on salaries, utilities, and brick-and-mortar maintenance. If so, this trend will likely be protested, either verbally or quietly, and a turn-around necessary if giving trends are to ever change.What counsel, guidance, and active prayer support is your church offering to members, as well as those within the community, who are unemployed and/or under-employed? What about debt counseling or financial counseling? Has your church hosted a "Jobs Fair," or a "Resume-Writing" Seminar? Does the church offer guidance to those completing applications for unemployment assistance? In other words, how do your members "perceive" the level of your concern as a church for the difficulties they are facing?7. Before undertaking a new building or expansion campaign, renovation project, or capital campaign, it is imperative to conduct a pre-campaign readiness assessment (or, feasibility study) by a third-party professional firm. This will help church leadership evaluate whether members are willing support the effort (that is, how they really feel about it beyond any church vote) and, equally as important, whether their financial support will be great enough to prevent the church from mortgaging its future with an unmanageable debt.8. If your church has a large debt, it would be wise to consider conducting a capital campaign for <a class="zem_slink" href="http://en.wikipedia.org/wiki/Debt" rel="wikipedia" target="_blank" title="Debt">debt reduction</a>/elimination, even if you have just completed a capital campaign for new construction. Why? Remember, people are becoming more and more debt conscious. At first, the suggestion of "another" capital campaign for debt reduction will meet with resistance from some. But, this is due mostly to campaign fatigue. Once members see that, if the church does not reduce debt, it will pay $________ (this amount can be calculated from the amortization schedule on the church loan) in interest money alone over the next three years. Merely seeing this number is generally enough to lead them to reconsider. Interest money spent on debt service is really ministry money the church is needlessly throwing away.Normally, a capital campaign for debt service will yield only about one to one-and-one-half times a church's annual budget in three-year commitments. In other words, a church with an $800,000 annual budget will likely receive $1.2 million in revenue for debt elimination/reduction over a three-year giving period. This example assumes the church is using the services of a professional fundraising firm. Normally, those churches attempting capital campaigns for debt reduction without the assistance of a professional fundraising/stewardship firm will not do as well. They can guide you in avoiding pitfalls and in designing a successful campaign for debt reduction/elimination that will make sense - even in today's economic climate.9. If your church/parish has conducted a capital campaign in recent months, when was the last time information on the status of the campaign, as well as the progress of the worthy cause, was shared with members? While many churches conduct successful annual and capital campaigns, too often what happens after the campaign concludes could be summarized in one word: Nothing. In an annual stewardship campaign, for example, some aspect of the church's ministry accomplishments should be shared at least every six weeks.Generally speaking, all that most churches do is post in the weekly/monthly bulletin the giving totals from the previous week (or, month). In capital campaigns, there are few churches that successfully implement a Follow-Up program that keeps members abreast of campaign/project progress. These same churches often do little to introduce and encourage new members to participate. Good communication will keep the campaign momentum and contributions going forward.10. In the end, make sure that the church, and its lay and professional leadership, is practicing what it preaches. Jesus said, "Seek first the Kingdom...and these things will be given as well" (Luke 12:32). Know that the Kingdom is not the church. Nor is it some future place or destiny. The Kingdom, as Jesus referred to it, is within you (Luke 17:21); that is, within each follower of Christ. In other words, it is that deepest place within every follower, where none other than God himself dwells. So, what does this mean when applied to the economy?The central thought in a capitalist economy is the "principle of scarcity," where it is assumed there are not enough resources to produce all the goods and services people need and want. The central thought in a Kingdom economy, however, is the "principle of abundance." Where God is, there is plenty.The problem in today's world is not a deficit of resources but the distribution of resources. On one hand, a scarcity mentality creates fear and competition. This, in turn, fuels greed, ego-based decision-making, and a misguided, competitive bigger-is-better philosophy. This collective leadership ego has led churches to over-build, over-extend, and mortgage their future in excessive debt. A Kingdom mentality, on the other hand, creates trust. It nurtures sound, God-based not ego-based decision-making. In this leadership environment, there is confidence in the church's leaders, joy among its members, and a spirit of generosity.Since there is no such thing as scarcity in God's Kingdom, members should feel the church's decisions are not being dictated by the economy but by leaders who are wise, spiritual, in-touch with the God within, and interested only in building the "real" Kingdom-the Kingdom within each follower. Where this prevails, the church prospers. </div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com1tag:blogger.com,1999:blog-5484838888688994410.post-76956264193746526782012-06-21T08:14:00.004-07:002012-07-24T21:52:06.901-07:003 Ways to Improve Your Church Bulletins<div style="text-align: justify;">If your church has been around for a while and you are reading this article, chances are your church bulletin needs a bit of an updating. Bringing new life to your church bulletin can benefit your church in many ways. Follow these tips below to make some quick, but good improvements to your bulletin.1. Keep it Fresh The simplest, yet most important part of bulletins is to keep them fresh. <a href="http://litthevih.blogspot.com/" target="_blank">Bulletins</a> should always have exciting new content such as news, events, facts and so on about the church that members would be highly interested in. The more relevant and useful your bulletin the better it will do.A good idea would be to publish a new church bulletin before the beginning of each month so members can prepare for upcoming events. This gives you a bit of <a class="zem_slink" href="http://en.wikipedia.org/wiki/Overtime_%28sports%29" rel="wikipedia" target="_blank" title="Overtime (sports)">extra time</a> to hand out the bulletins and it gives the members time to read up and plan ahead. Always be sure to collect old bulletins before you put out the new ones and make sure everyone knows that each month new content will be in the bulletin.Like a blog, people expect to see something new and useful each time they read it.2. Get Feedback The quickest way to make accurate improvements is to go directly to the members of your church and ask for feedback. An easy way to do this would be to hand out a survey, do an online survey or ask members individually.<br />
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You could even have the survey on the most recent bulletin and ask people to hand in the bulletin after they complete it. Do it anonymously so people feel more comfortable with giving honest input.You can then take this feedback and apply it to your future bulletins. Collecting feedback should be an ongoing process because you never know when someone might have a great idea for your church.3. Print Higher Quality If people seem to lack interest in your bulletins and even toss them away, consider upgrading the quality. A higher quality church bulletin will stand out more and will be naturally harder for people to throw away because of the increased perceived value of the item.Printing higher quality church bulletins can be more expensive, but it can work wonders for any church. It will give the bulletins a more professional <a class="zem_slink" href="http://en.wikipedia.org/wiki/Look_and_feel" rel="wikipedia" target="_blank" title="Look and feel">look and feel</a> and allow you to add more color, images and even special printing effects that will wow your members. The nicer your church bulletins, the more likely people will be to interact with them and participate based on the content inside.If you are ready to improve your church bulletins, start by simply making a list of all the improvements you want to make and tackle them one by one. Then, all you need to do is find a printer! </div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-31873499561241024282012-06-16T02:42:00.004-07:002012-07-24T21:53:04.201-07:00Cancel The Greek Debt<div style="text-align: justify;">The Greek general election on June 17 presents a clear political choice on whether to continue with the ‘austerity’ measures imposed by the Troika of the ECB, EU and IMF which have caused a disastrous economic slump. Greek GDP fell by over 13 per cent between 2007 and 2011 and contracted sharply again in the 1<sup>st</sup> quarter of 2012. In real terms the compensation of employees has fallen by approximately 15%. The cause of the slump is the investment strike by capital, down nearly 47 per cent since the slump began and accounting for nearly 90% of the entire fall in output.</div><div style="text-align: justify;">Yet Greece is just the sharpest expression of the European crisis, which at the very least is likely to see the continent as a whole remain in a depression. This is a <a class="zem_slink" href="http://en.wikipedia.org/wiki/Europe" rel="wikipedia" target="_blank" title="Europe">Europe</a>-wide crisis and it requires continent-wide solutions.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">As the first step, it is necessary to address the claim that the ‘austerity’ measures (which are actually designed to cut wages and non-wage benefits) are necessary to close the deficit in <a href="http://litthevih.blogspot.com/" target="_blank">public finances</a>. As EU Commission projections show, the <a class="zem_slink" href="http://en.wikipedia.org/wiki/Politics_of_Greece" rel="wikipedia" target="_blank" title="Politics of Greece">Greek government</a>’s ‘primary balance’ is a deficit of just 1 per cent of GDP (see table below). The primary balance is the balance on government finances once debt interest payments are excluded. The very large total public sector deficit arises because of interest payments amounting to 6.3 per cent of GDP. The EU projection is that the <a class="zem_slink" href="http://en.wikipedia.org/wiki/Primary_deficit" rel="wikipedia" target="_blank" title="Primary deficit">primary deficit</a> will rise to no more than 2 per cent of GDP in 2013.</div><div style="text-align: justify;"><br />
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</div><div style="text-align: justify;">Table 1</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc98833016767937691970b-pi"><img alt="12 06 16 Table 1" border="0" height="128" src="http://ablog.typepad.com/.a/6a00e554717cc9883301676793769c970b-pi" style="background-image: none; border: 0px none; display: inline; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="12 06 16 Table 1" width="440" /></a></div><div style="text-align: justify;"></div><br />
<div style="text-align: justify;">Therefore a key component of the Greek crisis could easily be resolved simply by cancelling the debt. The interest payments would no longer be made. This is necessary as it is widely recognised that the debt is unsustainable and a default is inevitable. The EU estimates that the level of public sector is currently over 160 per of GDP. The formula used for assessing debt sustainability is that the real growth rate must exceed the real interest rate multiplied by the debt as a proportion of GDP. More succinctly, government revenues must be growing at a greater rate than the interest payments on existing debt.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Using that formula, if Greece were growing in real terms at 2.4 per cent per year (the average of the 10-year period 1992-2001) then the real interest rate would need to be 1.5 per cent to be sustainable, given the current level of debt. Instead the <a class="zem_slink" href="http://en.wikipedia.org/wiki/Economy_of_Greece" rel="wikipedia" target="_blank" title="Economy of Greece">Greek economy</a> is contracting, at a rate of over 6 per cent a year, and market interest rates are close to 30 per cent.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Previously, the claim was that ordinary citizens in the rest of Europe would suffer through their pension and other funds if there were a cancellation of the debt, or if any Greek government abrogated the debt. Whatever the previous merits of that argument it has been nullified by the exit of most private sector investors from the Greek government bond market. Any private sector investors who remain cannot be ordinary pension funds, as these are not allowed to invest in such high-risk, lowly-rated bonds.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The public sector, through the ECB and through Greek institutions are now the majority holders of Greek government debt. The ECB, as the central bank which stands behind the Euro, cannot possibly go broke as a result of a <a class="zem_slink" href="http://en.wikipedia.org/wiki/European_sovereign_debt_crisis" rel="wikipedia" target="_blank" title="European sovereign debt crisis">Greek default</a>; it has unlimited recourse to Euros. It has in any event made significant profits on its previous purchases of Greek government debt.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The main negative impact would be felt on <a class="zem_slink" href="http://en.wikipedia.org/wiki/List_of_banks_in_Greece" rel="wikipedia" target="_blank" title="List of banks in Greece">Greek banks</a> who remain holders of their government debt. But these are rapidly heading towards insolvency in any case as the effects of the economic contraction takes hold. Whatever the outcome of the election Greek banks are facing nationalisation at some point As a result there will be a pressing need to recapitalise the banks under public ownership, which is a process that has already begun in Spain under the auspices of the ECB and EU.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Apart from the impact on hedge funds, vulture funds and other speculative vehicles, no disaster follows a Greek default if there is a recapitalisation.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In Britain, the equivalent of US$7.8bn in total Greek debt is held by these speculators. Less than US$3bn is held by British banks or public bodies (mainly the Bank of England). No negative consequences follow from writing this down to zero.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Cancelling the debt would remove one of the huge burdens on the population of Greece. It would not lead to any disastrous financial consequences for the ordinary citizens of the rest of Europe. For those who oppose ‘austerity’ across Europe, cancelling the Greek debt is the main practical contribution that can currently be made in support of those leading that struggle in Greece.</div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-24929325389478202472012-06-10T03:57:00.004-07:002012-07-24T21:54:02.846-07:00To get out of its economic crisis Europe needs to learn from China<div style="text-align: justify;"></div><div style="text-align: justify;">Four years into the <a class="zem_slink" href="http://en.wikipedia.org/wiki/Late-2000s_financial_crisis" rel="wikipedia" target="_blank" title="Late-2000s financial crisis">international financial crisis</a>, it is clear that the economic policies followed in Europe to deal with it have failed to do so. For a long time, there was a refusal to examine the real facts of Europe's economic situation and take the appropriate policy measures. Once Europe does start to analyze its economic problems correctly, however, it will see that it has a lot to learn from China. Naturally this does not mean that Europe can mechanically copy China's approach, but there are important trends which Europe can study.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The fundamental trends in Europe's economy are illustrated in Figure 1. This shows the changes in different components of the <a class="zem_slink" href="http://en.wikipedia.org/wiki/European_Union" rel="wikipedia" target="_blank" title="European Union">European Union</a> (EU)'s GDP since the first quarter of 2008 – the peak of the last business cycle and immediately before the onset of the financial crisis. It may be seen that the negative trend in the <a class="zem_slink" href="http://en.wikipedia.org/wiki/Economy_of_the_European_Union" rel="wikipedia" target="_blank" title="Economy of the European Union">EU economy</a> is entirely dominated by its fall in investment. The EU's trade balance has improved during the financial crisis, government consumption has risen, and the fall in personal consumption is relatively small. But the fall in fixed investment is huge, amounting to 150 percent of the total decline in GDP. This fall far more than offsets the performance in other economic sectors. <a href="http://litthevih.blogspot.com/" target="_blank">The economic</a> situation in Europe is therefore entirely dominated by this investment fall.</div><div style="text-align: justify;"><br />
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</div><div style="text-align: justify;">Figure 1</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc988330176153a5d16970c-pi"><img alt="12 05 13 EU" border="0" height="289" src="http://ablog.typepad.com/.a/6a00e554717cc988330176153a5d6c970c-pi" style="background-image: none; border-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="12 05 13 EU" width="445" /></a></div><div style="text-align: justify;"></div><br />
<div style="text-align: justify;">After four years of failing to look at the real situation, an identification of this actual core problem in Europe's economy is beginning to emerge. European Parliament President Martin Shulz recently wrote on Europe's crisis: "…what is to be done? First, targeted investment should be given priority." José Manuel Barroso, the European Commission president, and Olli Rehn, the European commissioner charged with dealing with the euro crisis, have now said it is likely that EU leaders will agree next month to increase the capital of the European Investment Bank by €10bn ($13 billion), which could be used as collateral to start large infrastructure "pilot projects" on a pan-European scale.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">These policy changes, while a step in the right direction, are too small to turn the situation around. The EU is a US$16 trillion economy. The idea that a $13 billion program, only 0.06 per cent of the EU GDP, can offset the US$343 billion decline in EU investment since the first quarter of 2008 is clearly unrealistic.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The European Commission admits that there is €82 billion (US$106 billion) in unused structural funds in the EU's medium-term budget. This could theoretically be used to tackle the investment decline. But firstly, even the use of this entire sum is less than one third of the decline in investment which has taken place in Europe. Secondly, national governments have not yet agreed that these funds can be used for a European investment program.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Therefore four years after the beginning of the crisis, EU governments are beginning to discuss the right issues, but the practical measures they are proposing are still much too small to deal with the scale of problems that Europe faces.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The difference with China can be seen clearly in Figure 2, which shows the results of the stimulus program launched by China in 2008 to counter the international financial crisis. This stimulus program directly targeted raising investment – in particular infrastructure and now housing. The results are evident. Far from falling sharply, as in Europe and the US, China's investment rose. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Consequently, compared to the situation on the eve of the financial crisis, China's economy expanded by over 40 per cent in four years compared to growth of 1 per cent in the <a class="zem_slink" href="http://maps.google.com/maps?ll=38.8833333333,-77.0166666667&spn=10.0,10.0&q=38.8833333333,-77.0166666667%20%28United%20States%29&t=h" rel="geolocation" target="_blank" title="United States">US and a</a> contraction of 2 per cent in Europe. China's stimulus program was $586 billion, or about 13 per cent of China's 2008 GDP – the majority part directly targeted investment.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Figure 2</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc988330176153a5da1970c-pi"><img alt="12 05 13 Change in components of GDP" border="0" height="289" src="http://ablog.typepad.com/.a/6a00e554717cc9883301676744c21c970b-pi" style="background-image: none; border-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="12 05 13 Change in components of GDP" width="445" /></a></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">China's stimulus, in terms of proportion of GDP, is equivalent to a program of US$2 trillion in the EU today. An investment program on that scale would be substantially too large in the EU at present – the situation is not as critical as in 2008. Nevertheless it is only necessary to compare this number to the $13 billion discussed by EU commissioners today, to see how inadequate is the scale of the proposed EU response to the present situation.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Jens Weidman, president of Germany's Bundesbank, has complained about the lack of policy tools available in Europe: "Now that fiscal stimulus has reached the bounds of feasibility in many countries, monetary policy is often seen as the 'last man standing'…However…contrary to widespread belief, monetary policy is not a panacea and central banks' firepower is not unlimited." But Weidman's conclusion exists only because Europe, somewhat arrogantly, refuses to study the country which passed most successfully through the international financial crisis – China.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Two years ago I wrote: "The dispute… between the US and Europe over'economic stimulus' versus 'deficit reduction' convincingly demonstrates the superiority of China's system of macro-economic regulation. China has faced no similar dilemma. It has simultaneously carried out the world's biggest economic stimulus package while running a budget deficit which is entirely sustainable – under 3 percent of GDP. China has therefore not had to face the choice between continuing fiscal economic stimulus measures and placing the priority on budget consolidation."</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">This remains the key problem. Unless Europe is prepared to grasp the nettle of a large "China style" program, one based on state-led investment, Europe is likely to face, at best, years of economic stagnation.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">China's authorities have always rightly clarified that it is not arguing for its economy to be a model for others. It rightly insists every country is specific and therefore no country can or should mechanically copy another. But nevertheless China learned many things from other countries. For its own sake, Europe should start to learn from China</div><div style="text-align: justify;">* * *</div><div style="text-align: justify;">This article originally appeared at Key Trends in Globalisation.</div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-62640302327622099962012-05-27T03:45:00.002-07:002012-07-24T21:59:31.716-07:00The economic consequences for Germany of the crisis in the Eurozone<div style="text-align: justify;"></div><div style="text-align: justify;"><a class="zem_slink" href="http://maps.google.com/maps?ll=52.5166666667,13.3833333333&spn=10.0,10.0&q=52.5166666667,13.3833333333%20%28Germany%29&t=h" rel="geolocation" target="_blank" title="Germany">Germany</a> derives enormous benefits from the existence of the Euro. As Europe’s most productive major economy, it has a ‘home’ market where currency risks have been eliminated, along with the possibility of competitive devaluations. Its trade with the rest of the world also benefits from the existence of the Euro. This is because the Euro is comprised mainly of economies that are less productive than Germany, and so the Euro is weaker on the currency markets than a Deutschemark would be.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Germany is even deriving immediate benefits from the current crisis. The yield on 2-year German debt (‘Schatz’) offered at the latest auction of <a class="zem_slink" href="http://litthevih.blogspot.com/" rel="wikipedia" target="_blank" title="Government bond">government bonds</a> was zero. Germany is able to borrow in the international markets for free as capital is switched away from government bonds in the crisis-hit economies. Some in the financial markets believe this also heralds a renewed fall in the Euro versus <a class="zem_slink" href="http://maps.google.com/maps?ll=38.8833333333,-77.0166666667&spn=10.0,10.0&q=38.8833333333,-77.0166666667%20%28United%20States%29&t=h" rel="geolocation" target="_blank" title="United States">the US</a> Dollar, which would provide a further boost to German exporters (although also raising the cost of imported goods and raw materials). In the chart below the US Dollar/Euro exchange rate is shown on the orange line, while the 2-year Schatz yield is shown on the yellow line.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Figure 1</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc98833016305dfa567970d-pi"><img alt="01 05 27" border="0" height="266" src="http://ablog.typepad.com/.a/6a00e554717cc98833016766d3927c970b-pi" style="background-image: none; border-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="01 05 27" width="440" /></a></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"></div><a name='more'></a><br />
<div style="text-align: justify;">But these are crisis effects and are unlikely to be sustained over time. Two other important factors are likely to weight heavily in the deliberations of German policymakers. The first is shown in the chart below, which is the share price of Germany’s leading bank Deutsche Bank.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is widely asserted that the EU and the Euro Area can contain any ‘contagion’ effects arising from a Greek exit from the Euro. This is mainly, but not exclusively, argued by those currently threatening the voters of Greece against voting for anti-austerity parties. The argument runs that this is a referendum on the Euro (when it is clearly a referendum on ‘austerity’) and that, if the bailout terms are rejected, Europe is strong enough to withstand the impact of a Greek exit. An obvious rejoinder is that the so-called firewall of €750bn to protect the private sector from a Greek exit is not in place and that crisis-hit countries such as Italy, Spain, Ireland and Portugal are supposed to provide one-third of that fund between them. They are clearly in no position to do so.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">But Deutsche Bank’s share price provides its own verdict. Half of its value has been lost since April 2010, and one third has been lost in the last 3 months. It seems likely that Deutsche Bank holds significant levels of government bonds in the crisis countries. It also continues to have very significant loans and other exposures to the crisis countries in the areas of consumer credit, mortgages and business loans.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Figure 2</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc988330168ebd4f6cc970c-pi"><img alt="12 05 27 Chart 2" border="0" height="277" src="http://ablog.typepad.com/.a/6a00e554717cc988330168ebd4f6de970c-pi" style="background-image: none; border-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="12 05 27 Chart 2" width="440" /></a></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Germany is also not immune from the economic crisis engulfing the rest of Europe. Given that approximately two-thirds of its exports go to Euro Area economies this would be impossible. The latest estimates for output in the whole of Europe are grim, Germany included. This is shown in the chart below, which is the latest Markit/PMI survey for Gemany. The equivalent April survey for the Euro Area as a whole shows a sharp contraction and the lowest level of activity in nearly 3 years. In Germany that reading on this survey has fallen to 49.6, and anything below 50 signals <a class="zem_slink" href="http://en.wikipedia.org/wiki/Recession" rel="wikipedia" target="_blank" title="Recession">economic contraction</a>. The chart shows the Markit/PMI survey versus GDP (orange line), where the correlation seems to be reasonably strong and points to recession.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Figure 3</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc988330168ebd4f6f2970c-pi"><img alt="12 05 27 Chart 3" border="0" height="299" src="http://ablog.typepad.com/.a/6a00e554717cc98833016766d392a7970b-pi" style="background-image: none; border-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="12 05 27 Chart 3" width="440" /></a></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><b>Conclusion</b></div><div style="text-align: justify;">The strategic benefit that Germany derives from the existence of the Euro is being augmented currently by plummeting yields on government bonds and the currency’s weakness. But this loosening of monetary policy can only a partial offset the contraction in export markets, which looks as though Germany too may head back into recession. The notion that Germany can be immune from the ‘contagion’ effects of the crisis in Greece and elsewhere is dangerous self-delusion. The performance of its leading banks already demonstrates the negative impact on German capital, while surveys show the negative impact on German output.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Parties across Europe who argue against austerity are right to do so. If the Euro breaks up the factors providing a loosening of German monetary conditions would go into reverse. Germany would be a very big loser in the event of Euro break-up and threats to engineer that collapse are reckless and ill-founded.</div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-8861901175745453702012-05-18T05:25:00.002-07:002012-07-24T22:00:48.654-07:00Deng Xiaoping and John Maynard Keynes<div style="text-align: justify;"></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc98833016761bbec0b970b-pi"><img alt="12 02 05 Deng & Keynes" border="0" height="183" src="http://ablog.typepad.com/.a/6a00e554717cc988330168e6bd27df970c-pi" style="background-image: none; border-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="12 02 05 Deng & Keynes" width="341" /></a></div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"></h3><h3 style="text-align: justify;"><span style="font-size: 10pt;"><b>Introduction</b></span></h3><div style="text-align: justify;">The international importance of China’s economy is twofold. The first is practical - the scale of China’s economic growth, its global impact, and the consequences for the improvement of the social conditions of China and the world’s population. The second is theoretical, including the potential international applicability of conclusions drawn from China’s <a class="zem_slink" href="http://en.wikipedia.org/wiki/Economic_policy" rel="wikipedia" target="_blank" title="Economic policy">economic policies</a>.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Regarding the latter it is necessary to clearly state that no country can mechanically copy another. As China’s political leaders and <a href="http://litthevih.blogspot.com/" target="_blank">economic</a> theorists stress its economy has unique ‘Chinese characteristics’. This was formulated as a cardinal principle by the initiator of China's economic reform, <a class="zem_slink" href="http://en.wikipedia.org/wiki/Deng_Xiaoping" rel="wikipedia" target="_blank" title="Deng Xiaoping">Deng Xiaoping</a>: ‘To accomplish modernization of a Chinese type, we must proceed from China’s special characteristics.’ (Deng, 30 March 1979) Therefore China must: ‘blaze a path of our own.’ (Deng, 21 August 1985). As recently reiterated by Justin Yifu Lin, Chinese Chief Economist and <a class="zem_slink" href="http://en.wikipedia.org/wiki/Vice_president" rel="wikipedia" target="_blank" title="Vice president">Senior Vice President</a> of the World Bank: ‘<i>we can never be too careful when it comes to the application of a foreign theory, because with different preconditions, no matter how trivial they seem, the result can be very different</i>.’ (Lin, 2012, pp. 66 - emphasis in the original) In that sense, therefore, there is no ‘Chinese model’. However as Lin simultaneously states: ‘Some may think that the performance of a country as unique as China, with more than 1.3 billion people, cannot be replicated. I disagree. Every developing country can have similar opportunities to sustain rapid growth for several decades and reduce poverty dramatically if it exploits the benefits of backwardness, imports technology from advanced countries, and upgrades its industries.’ (Lin, 2011)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">There is, however, no contradiction between these different statements. The fundamental structural elements of which an economy is composed (consumption, investment, savings, primary industry, secondary industry, tertiary industry, trade, money etc.) are universal. However the particular way in which these elements combine and are interrelated in any economy is unique and entirely specific both in place and time – which is why no country can copy another’s economic policy, while it can learn from other economies. As analysed below, China has solved in practice problems stated in general macro-economic theory. For that reason such elements, in very different forms and combinations, are of major importance for economic policy elsewhere. However the specific forms and combinations in which such policies are applied are entirely unique both in each country and at different points in time.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The practical impact of China’s economic rise have been considered extensively elsewhere.<sup>1</sup> The focus of this article is on the theoretical economic issues. In particular it aims to relate China’s economic performance to Western economic theory which will be more familiar to most readers.</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">China and macro-economic theory in Keynesian and Marxist terms</span></b></h3><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">China’s ‘reform and opening up’ process under Deng Xiaoping was, of course, formulated in a Marxist economic framework. It can indeed be clearly outlined in those terms – see the appendix below, for a more detailed account of Chinese discussions on these issues see (Hsu, 1991), but an alternative statement in Western economic terms, those of Keynes, is considered here.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Stated briefly in Marxist terms, China’s reform policy included a critique of Soviet economic policy that this had made the error of confusing the ‘advanced’ stage of socialism/communism, in which the regulation of the economy is ‘for need’, and therefore not market regulated, with the socialist, or more precisely ‘primary’ developing stage of socialism, during which the transition from capitalism to an advanced socialist economy takes place and in which market regulation takes place. This transition should be conceived as extending over a prolonged period. The final formulation arrived at was that China’s was a ‘socialist market economy with Chinese characteristics’. Contrary to suggestions by some writers, for example (Hsu, 1991), such an analysis is in line with Marx’s own writings although, as shown below, it is not necessary to be a Marxist understand it - a more detailed analysis is given in the appendix.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">This debate was framed in Chinese terms, without primary reference to previous economic theory in other countries other than Marx himself. The approach, in a Chinese phrase emphasised by Deng, was to ‘seek truth from facts’ (Deng, 2 June 1978). In practical terms in China, such analysis meant abandonment of an administratively planned economy and substitution of a market economy in which the state would control certain key macroeconomic parameters. In terms of ownership it led to ‘Zhuada Fangxiao’ – maintaining large state firms and releasing small ones to the non-state/private sector.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><b>Restatement of Chinese economic policy in terms of <a class="zem_slink" href="http://en.wikipedia.org/wiki/Keynesian_economics" rel="wikipedia" target="_blank" title="Keynesian economics">Keynesian economics</a></b></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Most people in the US and Europe are unaware of, or disagree with, Marxist economic categories. To make the essential economic policies clear, therefore, this article will put them in more familiar terms of Western economics – those of Keynes. The proviso is that this is the actual Keynes of <i>The General Theory of Employment Interest and Money - </i>not the vulgarised version in economics textbooks. Geoff Tily’s <i>Keynes Betrayed</i> (Tily, 2007) is one of the best in a series of works outlining the difference between the two.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">However, there is no substitute for reading Keynes <i>General Theory </i>itself, which differs sharply from the presentation of what is frequently presented as ‘Keynesian’ economics. For example, budget deficits play only a secondary role in both Keynes <i>General Theory</i> and in China’s stimulus packages – even during 2009’s maximum anti-crisis measures China’ s budget deficit was only 3% of GDP. The core of Keynes’ <i>General Theory</i> itself, unlike vulgarisations, centres on factors determining investment. It is therefore through this optic that both Keynes and Chinese <a class="zem_slink" href="http://en.wikipedia.org/wiki/Economics" rel="wikipedia" target="_blank" title="Economics">economic strategy</a> can be best approached.</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">The rising proportion of the economy devoted to investment</span></b></h3><h3 style="text-align: justify;"><b><span style="font-size: 10pt;"> </span></b></h3><div style="text-align: justify;">In the founding work of classical economics, <i>The Wealth of Nations</i>, Adam Smith identified division of labour as the fundamental force raising productivity, stating as the opening sentence of the first chapter: ‘The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seems to have been the effects of the division of labour.’ (Smith, 1776, p. 13) Smith concluded that a necessary consequence of the increasing division of labour was that the proportion of the economy devoted to investment rose with economic development: ‘accumulation of stock must, in the nature of things, be previous to the division of labour, so labour can be more and more subdivided in proportion only as stock is previously more and more accumulated… As the division of labour advances, therefore, in order to give constant employment to an equal number of workmen, an equal stock of provisions, and a greater stock of materials and tools than what would have been necessary in a ruder state of things must be accumulated beforehand.’ (Smith, 1776, p. 277) A more comprehensive treatment of Smith’s views may be found in (Ross, 2011). Marx reached the same conclusion as Smith, concluding that the contribution of investment rose as an economy developed, which he termed the rising ‘organic composition of capital’ (Marx, 1867, p. 762).</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Keynes similarly analysed that the proportion of the economy devoted to investment rose with economic development. His explanation was, however, somewhat different to Smith’s as Keynes rooted this in rising savings levels accompanying development. As the percentage of income consumed fell with increasing wealth, the proportion devoted to saving necessarily rose proportionately: ‘men are disposed… to increase their consumption as their income increases, but not by as much as the increase in their income… a higher absolute level of income will tend… to widen the gap between income and consumption.’ (Keynes, 1936, p. 36) As total savings necessarily equals total investment, a rising proportion of saving therefore necessarily means a rising proportion of investment.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">A necessary consequence of an increase in the proportion of the economy devoted to investment is that any investment decline will have increasingly serious consequences: ‘the richer the community, the wider will tend to be the gap between its actual and its potential production… For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak… the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.’ (Keynes, 1936, p. 31)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><span style="font-size: 10pt;"><b>Failure of attempts to refute Keynes on the rising proportion of investment</b></span></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In the mid-20<sup>th</sup> century attempts were made to dispute this conclusion of classical economics, originally deriving from Smith, of a rising proportion of investment in the economy - Milton Friedman devoted a book, <i>A Theory of the Consumption Function</i>, to attempting to refute Keynes on this (Friedman, 1957). However modern econometrics findings are conclusive in support of Smith and Keynes and against Friedman – the definitive demonstration, as frequently on matters of long term economic growth, being given by Angus Maddison. (Maddison, 1992) Factually, as classical economics and Keynes analysed, the trend is for the proportion of the economy devoted to investment to rise. To illustrate this, Figure 1 shows the percentage of fixed investment in GDP of the leading economies of successive periods of growth over the 300-year period for which meaningful statistics exist.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Figure 1</div><div style="text-align: justify;"><a href="http://ablog.typepad.com/.a/6a00e554717cc98833016300c6cd64970d-pi"><img alt="12 02 05 Figure 1" border="0" height="323" src="http://ablog.typepad.com/.a/6a00e554717cc98833016761bc576f970b-pi" style="display: block; margin-left: auto; margin-right: auto;" title="12 02 05 Figure 1" width="452" /></a></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">A reason Friedman attempted, unsuccessfully, to refute Keynes over the rising proportion of investment in the economy is that such a trend, as will be seen, is potentially destabilising - Friedman noted: ‘the central analytical proposition of the [theoretical] structure is the denial that the long-run equilibrium position of a free enterprise economy is necessarily at full employment.’ (Friedman, 1957, p. 237)</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">Effective demand</span></b></h3><h3 style="text-align: justify;"><b><span style="font-size: 10pt;"> </span></b></h3><div style="text-align: justify;">There is a parallelism between Keynes’s analysis and Marx’s regarding the role of profit and investment. The latter noted that without offsetting factors, a rise in the proportion of investment in the economy would led to a falling rate of profit as a necessary consequence of a rise in capital relative to the profits stream – i.e. Increasing division of labour, through its effect in raising investment as proportion of the economy, as analysed by Smith, created a tendency to a declining rate of profit (Marx, 1894, pp. 317-375).</div><div style="text-align: justify;">Keynes also approached economic fluctuations via profit: ‘The trade cycle is best regarded… as being occasioned by a cyclical change in the marginal efficiency of capital.’ (Keynes, 1936, p. 313) However, Keynes specific development was to approach the potentially destabilising consequences of the rising proportion of investment in the economy via effective demand.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Effective demand is composed of both consumption and investment, with the latter, as noted, tending to rise relative to the former over time. Keynes therefore noted: ‘when aggregate real income is increased aggregate consumption is increased but not by as much as income… Thus to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level… It follows… that given what we shall call the community’s propensity to consume, the equilibrium level of employment, i.e. the level at which there is no inducement to employers as a whole either to expand or to contract employment, will depend on the amount of current investment.’ (Keynes, 1936, p. 27)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Keynes noted no automatic mechanism ensures a necessary volume of investment to maintain effective demand: ‘the effective demand associated with full employment is a special case… It can only exist when, by accident or design, current investment provides an amount of demand just equal to the excess of the aggregate supply price of the output resulting from full employment over what the community will choose to spend on consumption when it is fully employed.’ (Keynes, 1936, p. 28) Put aphoristically: ‘An act of individual saving means – so to speak – a decision not to have dinner today. But it does <i>not</i> necessitate a decision to have dinner or buy a pair of boots a week hence or a year hence.’ (Keynes, 1936, p. 210). In more technical terminology: ‘The error lies in proceeding to the … inference that, when an individual saves, he will increase aggregate investment by an equal amount.’ (Keynes, 1936, p. 83)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Any investment shortfall would be amplified by the well known economic ‘multiplier’ into much stronger cyclical fluctuations: ‘It is… to the general principle of the multiplier to which we have to look for an explanation of how fluctuations in the amount of investment, which are a comparatively small proportion of the national income, are capable of generating fluctuations in aggregate employment and income so much greater in amplitude than themselves.’ (Keynes, 1936, p. 122) Such fluctuations in investment, combined with consumption, in turn determined employment: ‘The propensity to consume and the rate of new investment determine between them the volume of employment.’ (Keynes, 1936, p. 30)</div><div style="text-align: justify;">From this analysis Keynes derived key policy conclusions.</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">Budget deficits</span></b></h3><h3 style="text-align: justify;"><b><span style="font-size: 10pt;"> </span></b></h3><div style="text-align: justify;">One, well known, is countering recession with budget deficits, which Keynes dealt with as ‘loan expenditure’ – vulgarisation of Keynes lies in <i>reducing</i> his theories to support for budget deficits, not in the fact that he supported deficit spending. Keynes noted: ‘”loan expenditure” is a convenient expression for the net borrowing of public authorities on all accounts, whether on capital account or to meet a budgetary deficit. The one form of loan expenditure operates by increasing investment and the other by increasing the propensity to consume.’ (Keynes, 1936, p. 128)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Therefore, in a famous passage: ‘If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines… and leave it to private enterprise… to dig the notes up again... with the help of repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater… It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.’ (Keynes, 1936, p. 130)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Such a view of deficit spending naturally did not mean Keynes was indifferent to what deficits should be spent on - today environmentally sustainable investment would be added to his existing list. He had scathing contempt for double standards regarding when deficits were justifiable: ‘Pyramid-building, earthquakes, even wars… may serve to increase wealth, if… our statesmen… stands in the way of anything better… common sense… has been apt to reach a preference for wholly “wasteful” forms of loan expenditure rather than for partly wasteful forms, which because they are not wholly wasteful, tend to be judged on strict “business” principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest…wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable.’ (Keynes, 1936, p. 129)</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">Interest rates</span></b></h3><h3 style="text-align: justify;"><b><span style="font-size: 10pt;"> </span></b></h3><div style="text-align: justify;">While Keynes supported deficit spending, the causes of recession lay in more fundamental factors affecting investment, which in turn were affected by interest rates: ‘the succession of boom and slump can be described and analysed in terms of the fluctuations of the marginal efficiency of capital relatively to the rate of interest.’ (Keynes, 1936, p. 144) This was because marginal efficiency of capital was ‘equal to the rate of discount which would make the present value of the series of annuities given by returns expected from the capital-asset during its lift just equal to its supply price.’ (Keynes, 1936, p. 135) Consequently, ‘inducement to invest depends partly on the investment-demand schedule and partly on the rate of interest.’ (Keynes, 1936, p. 137)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">As investment was affected by interest rates, therefore, a crucial issue to maintain investment at a sufficient level to sustain effective demand was a low interest rate. This problem, in turn, tended to become more acute because of the rising proportion of the economy devoted to investment: ‘Not only is the marginal propensity to consume weaker in a wealthy community, but owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate; which brings us to the theory of the rate of interest and… reasons why it does not automatically fall to the appropriate levels.’ (Keynes, 1936, p. 31)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The aim of low interest rates was to relaunch investment by ensuring that the return on investment was above the rate of interest plus whatever was the required premium to overcome liquidity preference. But, as Keynes openly acknowledged, such low term interest rates destroy the ability to live from income from interest – which is why, in his famous phrase, Keynes foresaw ‘euthanasia of the rentier.’ (Keynes, 1936, p. 376) He concluded: ‘I see… the rentier aspect of capitalism as a transitional phase which will disappear.’ (Keynes, 1936, p. 376)</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">‘A somewhat comprehensive socialisation of investment’</span></b></h3><h3 style="text-align: justify;"><b><span style="font-size: 10pt;"> </span></b></h3><div style="text-align: justify;">Nevertheless, despite support for low interest rates Keynes, did not judge these would be likely by themselves to overcome the effects of an investment decline. It would therefore be necessary for the state to play a greater role: ‘Only experience… can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment… I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… I expect to see the State… taking an ever greater responsibility for directly organising investment.’ (Keynes, 1936, p. 164) Consequently Keynes believed that regulating the level of investment would have to be undertaken by the state and not by the private sector: ‘I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands.’ (Keynes, 1936, p. 320) It was necessary, therefore, to aim at ‘a socially controlled rate of investment.’ (Keynes, 1936, p. 325)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">If, however, the state were to determine ‘the current volume of investment’ then this led Keynes to the conclusion: ‘It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.’ (Keynes, 1936, p. 378)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Keynes noted that this ‘somewhat comprehensive socialisation of investment’ did not mean the elimination of the private sector, but socialised investment operating together with a private sector: ‘This need not exclude all manner of compromises and devices by which public authority will co-operate with private initiative… the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society… apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest there is no more need to socialise economic life than there was before…. The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government.’ (Keynes, 1936, p. 378)</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">The conclusion</span></b></h3><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is now possible to clearly see the structure of Keynes’s argument. The rising proportion of the economy devoted to investment meant any downturn in the latter would have increasingly destabilising consequences. Budget deficits could deal with this to some degree, but as the key element was investment, which was determined by interaction between profits and interest rates, low interest rates was necessary. This would lead to the ‘euthanasia of the rentier’. However it was unlikely interest rates would be sufficient themselves and therefore the state would need to step in with ‘a somewhat comprehensive socialisation of investment’ which would however work alongside a private sector.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Tracing this argument one has now arrived at a ‘Chinese’ economic structure - although approaching it via a Keynesian and not a Marxist framework. ‘Zhuada Fangxiao’, grasping large state firms and releasing small ones to the non-state/private sector, coupled with abandonment of quantitative planning, means that China’s economy is not being regulated via administrative means but by general macro-economic control, including centrally of the level of investment – as Keynes advocated.</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;"> </span></b></h3><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">Implications</span></b></h3><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">What is the overall significance of this? Deng Xiaoping’s most famous economic statement is ‘cats theory’ – ‘it doesn’t matter whether a cat is black or white provided it catches mice’. But ‘cats theory’ can be applied to economics itself – it doesn’t matter whether something is described in Marxist or Western economic terms provided the same economic policies exist. ‘Zhuada Fangxiao’ may be arrived at from either a Keynesian or a Marxist framework.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">But while one may be indifferent to the colour of theoretical cats it is not possible to be indifferent as regards the policy measures to be taken – steps in budget deficits, interests rates, investment etc are material and precise. Here there is a radical difference in between the US and Europe on one side and China on the other.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In the US and Europe budget deficits have been utilised – although they are under increasing attack. Low central bank interest rates have been pursued and some forms of quantitative easing, driving down long term interest rates through central bank purchases of debt, have been used. But no serious programmes of state investment have been launched – let alone Keynes’s ‘somewhat comprehensive socialisation of investment’.</div><div style="text-align: justify;">In China, in contrast, relatively limited budget deficits have been combined with low interest rates, a state owned banking system (‘euthanasia of the rentier’) and a huge state investment programme. While the West’s economic recovery programme has been timid, China has pursued full blooded policies of the type recognisable from Keynes <i>General Theory </i>as well as its own ‘socialism with Chinese characteristics.’ Why this contrast and why has China’s stimulus package been so much more successful than the West’s?</div><div style="text-align: justify;">Because in the US and Europe, of course, it is held that the colour of the cat matters very much. Only the private sector coloured cat is good, the state sector coloured cat is bad. Therefore even if the private sector cat is catching insufficient mice, that is the economy is in severe recession, the state sector cat must not be used to catch them. In China both cats have been let lose – and therefore far more mice are caught.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The recession in the Western economies, as foreseen by Keynes, is driven by decline in investment – in most countries decline in fixed investment accounted for two thirds to more than ninety per cent of the GDP fall (Ross, Li, & Xu, 2010). Keynes’s calls for not only budget deficits and low interest rates but also for the state to set about ‘organising investment’ are evidently required. But this is blocked because the state coloured cat is not allowed to catch mice.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">To put it another way, the US and Europe insist on participating in a race while hopping on only one leg – the private sector. China is using two legs, so little wonder it is running faster.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">To turn from metaphors to economic measures, a large scale state financed house building programme, or large scale expansion of transport, of the type China is following as part of anti-crisis measures not only delivers goods that are valuable in themselves but boosts the economy through macro-economic effects in raising investment. But in the West such state investment is blocked as it creates competition for the private sector. As the top aim in the US and Europe is not to revive the economy, but to protect the private sector, therefore such large-scale investment must not be undertaken.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is an irony. Keynes explicitly put forward his theories to save capitalism. But the structure of the US and European economies has made it impossible to implement Keynes’s policies even when confronted with the most severe recession since the Great Depression. The anti-crisis measures of China’s ‘socialist market economy’ are far closer to those Keynes foresaw that any capitalist economy. Whereas in the US, for example, fixed investment fell by over twenty five per cent during the financial crisis in China urban fixed investment rose by over thirty per cent. Consequently, there is no mystery why China’s economy has grown by 41.4 per cent in the four years since the peak of the last US business cycle, in the 4<sup>th</sup> quarter of 2007, while the US economy has grown by 0.7 per cent.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Deng Xiaoping famously said his death was ‘going to meet Marx’. But Deng may also be having an intense talk with John Maynard Keynes. And Keynes would be interested to discuss with Deng’s two cats – who appear to have read the <i>General Theory</i> more closely and accurately than any administration in the West.</div><div style="text-align: justify;">Put in more prosaic terms, China’s economic structure, because it allowed ‘a socially controlled rate of investment’ and a ‘somewhat comprehensive socialisation of investment’, could utilise policy tools developed by Keynes but the US and European economies could not. Although Keynes explicitly wished to save capitalism it turned out that Western capitalism could not use his tools, but China’s ‘socialism with Chinese characteristics’ could. Deng Xiaoping could not fit in the framework of Keynes, but Keynes could fit rather neatly within the framework of Deng Xiaoping.</div><div style="text-align: justify;"><br />
</div><h3 style="text-align: justify;"><b><span style="font-size: 10pt;">Appendix – the issues restated in Marxist terms</span></b></h3><h3 style="text-align: justify;"><b><span style="font-size: 10pt;"> </span></b></h3><div style="text-align: justify;">In the article above an account has been given of China’s macro-economic policy in terms of a theoretical framework derived from Keynes. Deng Xiaoping, however, as a Communist naturally explicitly formulated China’s economic policy in Marxist terms - China’s economic reform policies were seen as the integration of Marxism with the specific conditions in China. More precisely Deng stated: ‘We were victorious in the Chinese revolution precisely because we applied the universal principles of Marxism-Leninism to our own realities.’ (Deng, 28 August 1985) Consequently: ‘Our principle is that we should integrate Marxism with Chinese practice and blaze a path of our own. That is what we call building socialism with Chinese characteristics.’ (Deng, 21 August 1985)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Authors, including (Hsu, 1991), have contended that Deng’s economic policies were not in accord with those of Marx. However while China’s economic policies clearly differed from those of the USSR after the introduction of the First Five Year Plan in 1929, which introduced comprehensive planning and essentially total state ownership, it is clear that China’s economic policies were in line with those indicated by Marx. Whether people wish to formulate Chinese economic policy in Keynesian or Marxist terms may be left to them. What is most crucial is not the colour of the cat but whether it catches mice – that is, the practical policy conclusions drawn. This appendix therefore briefly shows that Deng’s essential concepts in launching China’s economic reform in in 1978 corresponded to Marx’s.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><b>The primary stage of socialism</b></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Regarding China’s economic reform policies Deng noted, as stated in Marxist terms, that China was in the socialist and not the (higher) communist stage of development. Large scale development of the productive forces/output was the prerequisite before China could make the transition to a communist society: ‘A Communist society is one in which there is no exploitation of man by man, there is great material abundance, and the principle of from each according to their ability, to each according to his needs is applied. It is impossible to apply that principle without overwhelming material wealth. In order to realise communism, we have to accomplish the tasks set in the socialist stage. They are legion, but the fundamental one is to develop the productive forces.’ (Deng, 28 August 1985) More precisely, in a characterisation maintained to the present, China was in the ‘primary stage’ of socialism, which was fundamental in defining policy: ‘‘The Thirteenth National Party Congress will explain what stage China is in: the primary stage of socialism. Socialism itself is the first stage of communism, and here in China we are still in the primary stage of socialism – that is, the underdeveloped stage. In everything we do we must proceed from this reality, and all planning must be consistent with it.’ (Deng, 29 August 1987)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The fundamental characterisations by Deng have been maintained to the present – thus for example in July 2011 President Hu Jintao stressed that ‘China is still in the primary stage of socialism and will remain so for a long time to come’ (Xinhua, 2011), while speaking to the UN premier Wen Jiabao noted ‘Taken as a whole, China is still in the primary stage of socialism’ (Xinhua, 2010). The conclusion flowing from this as noted by Hsu, was that: ‘From this perspective, a serious error in the past was the leftist belief that China could skip the primary stage and practice full socialism immediately.’ (Hsu, 1991, p. 11)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The conclusion of such a contrast between a primary socialist stage of development and and the principle of a communist society (which, as noted by Deng above, was regulated by ‘from each according to their ability to each according to each according to his needs’) was that in the present 'socialist' period the principle was ‘ to each according to their work’: ‘We must adhere to this socialist principle which calls for distribution according to the quantity and quality of an individual’s work.’ (Deng, 28 March 1978) In Marxist theory, outlined by Marx in the opening chapter of <i>Capital (Marx, 1867)</i>, economic distribution according to work/labour is the fundamental principle of commodity production – and a commodity necessarily implies a market. In this socialist period a market would therefore exist – hence the eventual Chinese terminology of a ‘socialist market economy.’ As presented by Deng Xiaoping and his successors above such Chinese analysis is highly compressed but clearly in line with Marx himself.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is clear Marx envisaged that the transition from capitalism to communism would be a prolonged one, noting in <a href="http://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch02.htm">The Communist Manifesto</a>: ‘The proletariat will use its political supremacy to wrest, by degree, all capital from the bourgeoisie, to centralise all instruments of production in the hands of the State, i.e., of the proletariat organised as the ruling class; and to increase the total productive forces as rapidly as possible.’ (Marx & Engels, 1848, p. 504) The ‘by degree’ may noted – Marx therefore clearly envisaged a period during which state owned property and private property would exist. China’s system, after Deng, of simultaneous existence of sectors of state and private ownership is therefore clearly more in line with Marx’s conceptualisation than Stalin’s introduction ‘all at once’ of essentially 100 per cent state ownership in 1929.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Regarding Deng’s formulations on communist society being regulated by ‘to each according to their need’ versus the primary stage of socialism regulated by ‘each according to their work’ Marx noted in the Critique of the Gotha Programme of the post-capitalist transition to a communist society: ‘What we are dealing with here is a communist society, not as it has <i>developed</i> on its own foundations, but on the contrary, just as it <i>emerges </i>from capitalist society, which is thus in every respect, economically, morally, and intellectually, still stamped with the birth-marks of the old society from whose womb it emerges.’ (Marx, 1875, p. 85)</div><div style="text-align: justify;">In such a transition Marx outlined payment in society, and distribution of products and services, necessarily had to be 'according to work' even within the state owned sector of the economy:‘Accordingly, the individual producer receives back from society - after the deductions have been made - exactly what he gives to it. What he has given to it is his individual quantum of labour. For example, the social working day consists of the sum of the individual hours of work; the individual labour time of the individual producer is the part of the social working day contributed by him, his share in it. He receives a certificate from society that he has furnished such-and-such an amount of labour (after deducting his labour for the common funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost. The same amount of labour which he has given to society in one form, he receives back in another.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">‘Here obviously the same principle prevails as that which regulates the exchange of commodities, as far as this is exchange of equal values…. as far as the distribution of the latter among the individual producers is concerned, the same principle prevails as in the exchange of commodity equivalents: a given amount of labour in one form is exchanged for an equal amount of labour in another form.</div><div style="text-align: justify;">‘Hence, <i>equal right</i> here is still in principle - <i>bourgeois right</i>… The right of the producers is <i>proportional</i> to the labour they supply; the equality consists in the fact that measurement is made with an <i>equal standard</i>, labour.’ (Marx, 1875, p. 86)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In such a society inequality would necessarily still exist: ‘one… is superior to another physically or mentally and so supplies more labour in the same time, or can labour for a longer time; and labour, to serve as a measure, must be defined by its duration or intensity, otherwise it ceases to be a standard of measurement. This <i>equal</i> right is an unequal right for unequal labour... it tacitly recognises the unequal individual endowment and thus the productive capacities of the workers as natural privileges<i>. It is, therefore, a right of inequality in its content like every right</i>. Right by its very nature can consist only as the application of an equal standard; but unequal individuals (and they would not be different individuals if they were not unequal) are measurable by an equal standard only insofar as they are made subject to an equal criterion, are taken from a <i>certain</i> side only, for instance, in the present case, are regarded <i>only as workers</i> and nothing more is seen in them, everything else being ignored. Besides, one worker is married, another not; one has more children than another, etc. etc.. Thus, given an equal amount of work done, and hence an equal share in the social consumption fund, one will in fact receive more than another, one will be richer than another, and so on. To avoid all these defects, right would have to be unequal rather than equal.’ (Marx, 1875, pp. 86-87)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Marx considered only after a prolonged transition would payment according to work be replaced with the ultimately desired goal, distribution of products according to members of society’s needs.</div><div style="text-align: justify;">‘Right can never be higher than the economic structure of society and its cultural development which this determines.</div><div style="text-align: justify;">‘In a higher phase of communist society… after the productive forces have also increased with the all-around development of the individual, and all the springs of common wealth flow more abundantly - only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his abilities, to each according to his needs!’ (Marx, 1875, p. 87)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is therefore clear that post-Deng policies in China were more in line with Marx’s prescriptions than post-1929 Stalin policies in the USSR. Given the essentially 100 per cent state ownership of industry in China in 1978 'Zhuada Fangxiao' – maintaining the large enterprises within the state sector and releasing the small ones to the non-state sector – together with the creation of a new private sector created an economic structure clearly more in line with that envisaged by Marx than the essentially 100 per cent state ownership in the USSR after 1929. Deng’s insistence on the formula that in the transitional period reward would be ‘according to work’ and not ‘according to need’ was clearly in line with Marx’s analyses. It is notable that in the USSR itself a number of economists opposed Stalin’s post-1929 policies on the same or related grounds – including Buhkarin (Bukharin, 1925) , Kondratiev (Kondratiev), Trotsky (Trotsky, 1931) and Preobrazhensky (Preobrazhensky, 1921-27) (Preobrazhensky, 1921-27). Their works were, however, almost unknown as these issues were ‘resolved’ by Stalin killing those economists who disagreed with him and banning their works - although several accounts have been published outside the USSR – see for example (Jasny, 1972) (Lewin, 1975). China’s economic debates therefore appear to have preceded with reference to China’s conditions and Marx and not any preceding debates in the USSR.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is therefore clear that China’s post-reform economic policy is in line with Marx’s analysis and that, as stated in Chinese analysis, post-1929 Soviet policy departed from Marx’s analysis – the argument that the converse is true, by Hsu and others, is invalid.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">As China’s economic policy and structure can be understood in either Keynesian or Marxist terms it is a more general issue which is to be preferred. ‘It doesn’t matter whether a cat is black or white provided it catches mice’ might appear an appropriate response.</div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-69676778150260368992012-05-16T00:31:00.001-07:002012-07-24T22:02:01.149-07:00Three Speeds In Europe, All Slower<div style="text-align: justify;"></div><div style="text-align: justify;">The latest publication of the GDP data for the EU shows three distinct trends but one unifying theme - slower growth.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In an important but dwindling group are those economies which are still expanding, led by Germany where GDP grew by 0.5% in the first quarter of 2012. In a larger group are those countries where the economy is stagnant. This now includes France which recorded zero growth in the quarter. The largest numerical group are those countries in recession, which includes Britain, Italy, Spain, Ireland, Portugal and Greece. The net result was that both the <a class="zem_slink" href="http://en.wikipedia.org/wiki/Eurozone" rel="wikipedia" target="_blank" title="Eurozone">Euro Area</a> group of 17 countries and the EU group of 26 recorded zero growth in the quarter.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">If the focus shifts to the 12-month growth rates, comparing the first quarter of 2012 to the same quarter in 2011, the picture is even more stark. Outside of the Baltic States, which are still <a href="http://litthevih.blogspot.com/" target="_blank">recovering</a> from a 1930s-style Depression with the aid of substantial EU investment , only two countries recorded growth above 1.0%. These were Finland at 2.9% and Germany at 1.2%. The fact that the German motor of the <a class="zem_slink" href="http://en.wikipedia.org/wiki/Economy_of_the_European_Union" rel="wikipedia" target="_blank" title="Economy of the European Union">EU economy</a> is sputtering close to 1% growth is cause for alarm. It suggests that the entire EU economy is decelerating, and that the risk of renewed recession is increasing. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In fact this is the EU Commission’s forecast for 2012; a contraction of 0.3% for the Euro Area and zero growth in the EU as a whole. For the Euro Area 12-month growth is also now zero, and for the EU as a whole it is just 0.1%.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Even for the group of countries where growth has been strongest, growth is clearly slowing. The deceleration of the German economy is important for the entire <a class="zem_slink" href="http://en.wikipedia.org/wiki/Economy_of_Europe" rel="wikipedia" target="_blank" title="Economy of Europe">European economy</a>. These trends are shown in Figure 1.</div><div style="text-align: justify;">Figure 1 <br />
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<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4QHUKrDS1gJGV5oUA6nIlc0ZMH_MSbmL0Zij9u5hr1g-4fqwscHJkkJD_8PBsH01jE3TNmXy2MpZ9GuXb40Rqx3pTVl_vnpQQHv2FcUDVOg9Pnj4LbR-RTgSoRBmJQlfhg11C8a83fH0/s1600/15+05+16+Chart+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="194" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4QHUKrDS1gJGV5oUA6nIlc0ZMH_MSbmL0Zij9u5hr1g-4fqwscHJkkJD_8PBsH01jE3TNmXy2MpZ9GuXb40Rqx3pTVl_vnpQQHv2FcUDVOg9Pnj4LbR-RTgSoRBmJQlfhg11C8a83fH0/s400/15+05+16+Chart+1.jpg" width="400" /></a></div><div><br />
But there are a growing number of countries that have headed back into recession, including Britain, Spain and the Netherlands – Figure 2. France has grown by just 0.1% in the last 6 months and maybe headed in the same direction. There is little to suggest that growth can accelerate with current policies. </div><div>Figure 2 <br />
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<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgLL-1vGoPq6ird7zzwsJjM5w88qkcrM64vCJOjRz79c1CHhJpp0lqbpaTVHY-4NUG4kkNPm-lKxy0oyRAlxC4w_fJ9gL-IM9fzw3wNlffitbtL2-rMfzqNyaBlW8yehqJGLHbUBIcFVo/s1600/15+05+16+Chart+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="243" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgLL-1vGoPq6ird7zzwsJjM5w88qkcrM64vCJOjRz79c1CHhJpp0lqbpaTVHY-4NUG4kkNPm-lKxy0oyRAlxC4w_fJ9gL-IM9fzw3wNlffitbtL2-rMfzqNyaBlW8yehqJGLHbUBIcFVo/s400/15+05+16+Chart+2.jpg" width="400" /></a></div><div><br />
The Euro Area has contracted by 0.3% in the last 6 months as has the EU as a whole. The crisis countries continue to contract sharply, led by Greece – Figure 3. However, the much greater weight of the Italian economy, seven times larger than the Greek economy, means that its clear slump is even more significant for the European crisis.</div><div>Figure 3 <br />
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<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHsezcrS5DfGX21rsCxKWs7Znl2fV_rAwHKypAW2Cpm4ibxP6-uz7mzoNdgm6-r2yc9F5IAcXRlMcvwBXVPuGmO5G_KilLq7qygEnch7FupImDA4AFHgwqJkfJNodyYT2qUKLM3uFVZLE/s1600/15+05+16+Chart+3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="201" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHsezcrS5DfGX21rsCxKWs7Znl2fV_rAwHKypAW2Cpm4ibxP6-uz7mzoNdgm6-r2yc9F5IAcXRlMcvwBXVPuGmO5G_KilLq7qygEnch7FupImDA4AFHgwqJkfJNodyYT2qUKLM3uFVZLE/s400/15+05+16+Chart+3.jpg" width="400" /></a></div><div><br />
Formerly stronger economies are experiencing a slowdown in growth. Crucially this includes Germany. Other countries, such as Britain where growth had been stagnant have gone back into recession. This is also true for Spain and the Netherlands. France may be headed in the same direction. Significant falls in output are still occurring in the crisis-hit countries. These may now appear to be joined by Italy, where the crisis is deepening.</div></div></div></div><div class="zemanta-pixie" style="height: 15px; margin-top: 10px;"></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-76110328930914491272012-05-15T23:54:00.001-07:002012-07-24T22:02:44.153-07:00What do bond markets think of ‘austerity’?<div style="text-align: justify;"></div><div style="text-align: justify;">The victory of Francois Hollande in the French Presidential contest provides a further insight into the operation of the bond markets. It is frequently argued that there can be no retreat from ‘austerity’, which in reality is simply the transfer of incomes from labour and the poor to capital and the rich, because the bond markets will recoil and long-term interest rates will soar. This is important as significantly higher long-term interest rates could, unchecked, choke off recovery.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">As the new French President has made some gestures in the direction away from ‘austerity’, then it should be expected that at least French long-term interest rates would rise as a result. But French government bond yields <u>have fallen</u> since the Socialist victory, by 18bps (basis points, equivalent to one hundredth of a percentage point, or 0.18 per cent). Ten-year French government bond yields declined to 2.79 per cent<sup>1</sup>, lower than before the election.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It could be argued that financial markets do not believe Hollande will carry through a genuine alternative to cuts in wages and public spending programmes. He was certainly cautious enough in his pronouncements to support that idea. Even so, he is not Sarkozy who directly <a href="http://litthevih.blogspot.com/" target="_blank">promised</a> further cuts and some uncertainly remains among financial market commentators about whether, or how quickly, the new President will change course. At the very least his commitment to verbal support for austerity is less than his predecessor. Clearly, the assertion that the bond markets will punish any slight step away from ‘austerity’ is incorrect. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In fact, the German powerhouse has increased economic divergence within the EU because it has not adopted itself the prescription it has insisted on for others. The latest departure from orthodoxy is the call for higher German wages from Finance Minister Schauble.<sup>2</sup> Yet German yields also fell to 1.55 per cent and remain the lowest in the Euro Area.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><b>Role of bond markets</b></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is important to distinguish between the views expressed nightly on our TV screens by ‘experts’ from the financial markets and the actions of the main bond investors, pension, insurance, sovereign wealth funds and others. The most famous ‘expert’ in the world is Bill Gross, Chief Investment Officer for one of the world’s largest bond funds PIMCO. Previously, he very publicly announced he was selling all US government debt holdings because of quantitative easing in the US and Obama’s fiscal stimulus. He was later forced to apologise to investors and buy back US government bonds he had sold, having missed a huge rally in bond prices (which leads to lower yields).</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is necessary to explain briefly the role of bond investors. The creation of a national debt is one of the primary ways in which financial capital establishes its dominance over the rest of the economy. Debt interest is supplied by diverting income from the productive sectors of the economy. Since all value is created by labour, labour is also the ultimate source of all debt interest. This entails a transfer of income from labour to capital. In fact, given the regressive tax changes that have taken place in many industrialised countries including Britain, labour and the poor are also the direct source of that transfer of incomes, as they supply the bulk of all tax revenues (income tax, VAT, etc.).</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">For any sector of capital the main motivation, its raison d’être is the maximisation of capital. Ordinarily this means the expansion of capital at the maximum sustainable rate. But in a crisis where losses are anticipated, maximisation can mean simply preservation. Industrial capital is currently being hoarded via the investment strike. It is being preserved. For finance capital, specifically the portion that is allocated to government bonds, the main important indicators are usually, growth, inflation, government deficit levels and so on. All of these are gauged in order to optimise the sustainable expansion of capital through interest payments.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">But in a crisis the focus will switch to the preservation of capital. This is why Germany, with its large external surpluses and falling budget deficits remains the strongest borrower in the EU even while increasing investment and wages. Investors believe they are certain to get their money back. In an extreme crisis, these investors may even been willing to accept the prospect of small losses in order to preserve the bulk of their capital, and interest rates have occasionally been negative in countries like Switzerland and Japan .</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The very modest changes in French government bond yields are evidence of this dominant factor. The possibility of even a very modest adjustment in the drive towards ‘austerity’ has increased the likelihood that French bond investors will be repaid, that there will be no default on French government debt. The productive sectors of the economy, which finance the debt interest, may be in a slightly stronger position to do so if they are faced with slightly fewer cuts.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><b>Varied Responses</b></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Not all EU government bond markets rose in the wake of the French Presidential poll. Those countries where bond prices fell, so pushing up interest rates, include Greece (with its own inconclusive election), but also Ireland, Italy, Portugal and Spain. They have all adopted a programme of public spending and other cuts, with different degrees of severity.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Their policies are the opposite of the verbal gestures Hollande has made in the direction of stimulating growth. The most extreme case is Greece where ten-year yields are over 23 per cent. But in a country like Ireland, which is routinely held up as the example of successful ‘austerity’, yields on some debt have risen by 50bps in the last week alone.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In the current crisis, bond market investors are obliged to consider whether they will preserve their capital, not just how they may be able to increase it. They have already experienced final losses of a partial default in Greece. In many of the crisis-hit countries current bond prices are considerably below where they were issued. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">They have been faced with a new choice of at least a verbal commitment to growth from France, and persistent ‘austerity’ in many other countries. The response has been to buy French government bonds and sell those where the governments, via the ‘Troika’ in some cases, are committed to further cuts. This is because the judgement is that the investors’ capital is more likely to be preserved via growth than through austerity. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The repeated assertion that pro-growth policies cannot be adopted because of the negative reaction of the bond markets is a false one.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><b>Notes</b></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><sup>1 </sup>All yields taken from Financial Times, benchmark government bond yields, 9 May 2012</div><div style="text-align: justify;"><sup>2</sup> ‘Schauble backs wage rises for Germans’, Financial Times, 6 May 2012</div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-42332745455588700692012-04-06T08:45:00.001-07:002012-07-24T22:03:27.302-07:00The campaign to prevent Londoners knowing they will be £1,000 better off with Ken Livingstone as Mayor<div style="text-align: justify;">During the last month an extraordinary media campaign has been waged to attempt to persuade Londoners that the main issue which confronts them at the election for Mayor is not how much they, that is Londoners, will be better off with either of the two candidates for Mayor – that is which candidates policies will best protect Londoners living standards from the effects of the economic downturn. Instead, in circumstances when most Londoners are facing the most difficult economic times they have ever experienced, the main issue confronting London is supposed to be the personal tax arrangements of candidates.</div><div style="text-align: justify;">What is the purpose of this frenetic campaign? It is to attempt to divert Londoners attention from knowing that most of them will be £1,000 or more better off with Ken Livingstone, due to his fares reduction and other policies, and that they will be £1,000 or more worse off with Boris Johnson. To check these figures, and to calculate how much you would save personally yourself, simply go to http://www.betteroffcalculator.com/. </div><div style="text-align: justify;">Why is such a strange campaign waged? Evidently because if Londoners realize that they will be £1,000 or more better off with Ken as Mayor then Ken will win the election easily. The only way to try to prevent them knowing this to attempt to make a great noise about something else to try to distract attention from this fact. </div><div style="text-align: justify;">As it happens the reality on the tax, as the published figures show, is Ken Livingstone has paid 35% in tax and Boris Johnson 40% - as Boris Johnson earned eight times as much as Ken Livingstone if he didn’t pay a higher rate there would be something wrong with the tax system! But the whole issue, whatever happens, leaves Londoners not one penny better off. </div><div style="text-align: justify;">This really is the critical issue of the next four weeks until the Mayoral election. There are few things Londoners can do that will make them and their families £1,000 better off – and quite a lot will be more than £1,000 better off. That they can be £1,000 better off in half an hour by going to vote, and thereby making their families significantly better off, is one of the easiest things they can do.</div><div style="text-align: justify;">Ken Livingstone has four weeks to make sure Londoners know they can be £1,000 or more better off if he is Mayor. The media supporting Boris Johnson, by campaigning on tax or any other issue they can think of, has four weeks to attempt to prevent Londoners knowing they can be more than £1,000 better off with Ken as Mayor and £1,000 worse off with Boris Johnson.</div><div style="text-align: justify;">Which of these two campaigns is successful will decide the outcome of the Mayoral election.</div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-67412865828381534302012-04-06T01:35:00.001-07:002012-07-24T22:03:51.790-07:00Calculate how much money you will be better off by if Ken wins on 3 May - for readers in London<div style="text-align: justify;">Ken Livingstone's campaign for Mayor of London has published a calculator which allows you to find out how much better off in money terms you will be if you live in London and Ken is elected Mayor on 3 May. You can calculate the result for yourself here. Why not find it out for yourself and encourage those you know to also find out? If you want to pass on the link it is http://www.betteroffcalculator.com/</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><a href="http://bit.ly/HPnwGkhttp://"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5728204734473221634" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmiRF3oeRB4YW-KBx11agSUfm04qxuA_mgvvun_Ri-DAhp2SueaJVq1DHAY-5nbczry4goFOMn41oZtZmjR2t9crMZb9sqSUKW0sWstigTUCMo2lWm0keLms8-exA_DPxjivsM19UwvxQ/s400/12+04+06+Calculator.jpg" style="cursor: pointer; display: block; height: 258px; margin: 0px auto 10px; text-align: center; width: 454px;" /></a></div><div class="MsoNormal" style="text-align: justify;"><br />
<span id="formatbar_CreateLink" title="Link"></span></div><div class="MsoNormal" style="text-align: justify;"><span id="formatbar_CreateLink" title="Link"><br />
</span></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-68340292662095560162012-01-15T00:56:00.000-08:002012-07-02T20:57:00.636-07:00The incredible shrinking UK economy<div><p><b>By John Ross</b></p><p>The magnitude of the blow suffered by the UK economy since the beginning of the financial crisis is very considerably minimized by not presenting it in terms of a common international yardstick. Gauged by decline in GDP, using a common international purchasing measure, dollars, no other economy in the world has shrunk even remotely as much as the UK (Figure 1 and Table 1).</p><p>As most countries produce only annualized GDP data it will be necessary to wait before a comprehensive global comparison can be made for 2011. However it is clear no substantial growth in dollar terms took place in the UK economy during that year – GDP at national current prices rose only 1.4 per cent between the 1<sup>st</sup> and 3<sup>rd</sup> quarters and the change in the pound’s exchange rate against the dollar during the year was a marginal 0.3 per cent. Therefore there will have been no significant recovery from the UK data set out in Table 1 below, and the gap between the UK and other European economies, which form the next worst performing major group, is too great to have been qualitatively affected by changes in the Euro’s exchange rate – the Euro declined against the pound by only 3.3 per cent in 2011.</p><p>Table 1 shows that the fall in UK GDP in 2007-2010 was $562 billion compared to the next worst performing national economy, Italy, with a decline of $65 billion – i.e. the decline in UK GDP in the common measuring yardstick of dollars was more than eight times that of the next worst performing national economy. Table 1 shows the 10 national economies suffering the greatest declines in dollar GDP.</p><p>It is also extremely striking that the UK’s decline was more than two and a half times that of the entire Eurozone. The UK accounted for a somewhat astonishing 77 per cent of the EU's decline.</p><p style="text-align: center;">Table 1</p><p><a href="http://ablog.typepad.com/.a/6a00e554717cc988330162ff90314d970d-pi"><img style="display: block; margin-left: auto; margin-right: auto;" title="12 01 13 Table 1" src="http://ablog.typepad.com/.a/6a00e554717cc988330162ff90315a970d-pi" border="0" alt="12 01 13 Table 1" width="450" height="296" /></a></p><p style="text-align: center;">Figure 1</p><p><a href="http://ablog.typepad.com/.a/6a00e554717cc988330168e58ec256970c-pi"><img style="background-image: none; padding-left: 0px; padding-right: 0px; padding-top: 0px; border-image: initial; display: block; margin-left: auto; margin-right: auto; border: 0px initial initial;" title="12 01 13 UK GDP decline in dollars" src="http://ablog.typepad.com/.a/6a00e554717cc988330168e58ec25d970c-pi" border="0" alt="12 01 13 UK GDP decline in dollars" width="452" height="332" /></a></p><p>Expressed in percentage terms the situation is no better. of all economies for which World Bank data is available only Iceland, with a decline in dollar GDP of 38.4 per cent, suffered a worst percentage fall than the UK - even bail out economy Ireland, with a fall of 18.4 per cent, outperformed the UK economy.</p><p>Two trends intersected for the UK's performance to be so much worse than that of any other economy. First, contrary to the government's anti-European rhetoric, UK economic performance in constant price national currency terms has been significantly worse than the Eurozone during the financial crisis (Figure 2). Up to the latest available data, for the 3rd quarter of 2011, UK GDP was still 3.6 per cent below its pre-financial crisis peak compared to the Eurozone's 1.7 per cent below. Second, between the beginning of 2008 and the beginning of 2012, the pound's exchange rate has fallen by 21.0 per cent against the dollar compared to the Euro's 11.4 per cent drop in the same period. The multiplicative effect of the severity of the relative drop in constant price GDP and the fall in the pound's exchange rate accounts for the unequalled decline in UK GDP in dollars.</p><p style="text-align: center;">Figure 2</p><p><a href="http://ablog.typepad.com/.a/6a00e554717cc9883301676084f4c4970b-pi"><img style="display: block; margin-left: auto; margin-right: auto;" title="12 01 14 UK & Eurozone GDP" src="http://ablog.typepad.com/.a/6a00e554717cc988330162ff903197970d-pi" border="0" alt="12 01 14 UK & Eurozone GDP" width="452" height="300" /></a></p><p>As at present the UK economy shows no substantial sign of recovery, the present UK government, which maintains a steadfastly ostrich like attitude towards Europe in particular, and most other countries in general, may argue that a measure in terms of dollars at current exchange rates is irrelevant – the UK currency is the pound and what counts is constant price shifts. Such an argument is false and an attempt to disguise the true scale of the decline of the UK economy.</p><p>The internationally unmatched decline in UK dollar GDP is a huge fall in real international purchasing ability. The far higher than targeted inflation in the UK during the last two years, which has substantially eroded the population's living standards, is itself in part a reflecton of the decline in the UK's exchange rate and consequent raising of import prices. In short, the decline in the international purchasing power of the UK's economy translates into a direct fall in real incomes. The decline in the UKs ranking among world economies in terms of GDP, being recently overtaken by Brazil, statistically reflects the same process .</p><p>It may also be seen that the government's claim that the UK is outperforming Europe and the Eurozone is entirely without foundation even in constant price national currency terms. But when measured in terms of real international comparisons, i.e. in dollars, the UK's performance is incomparably worse than Europe's.</p><p>It appears extremely unlikely that the UK's economy will escape from this circle of decline in the next period. The austerity policies pursued by the present UK government have substantially slowed the economic recovery that was taking place in 2009 and the first part of 2010 - between the 3rd quarter of 2010 and the 3rd quarter of 2011 the UK economy grew by only 0.5 per cent. The opposition Labour Party has recently also endorsed essentially the <a href="http://bit.ly/xPSVtQ" target="_blank">same</a> austerity policies which have failed not only in the UK but in other European economies, such as Greece and Ireland, where they have been pursued.</p><p>Even if any partial recovery takes place, for example by some increase in the exchange rate of the pound against the Euro, the sheer magnitude of the decline in the UK economy makes it implausible that this could be on a scale sufficient to reverse the fall in its relative international position.</p><p style="text-align: center;">* * *</p><p style="text-align: left;">This article originally appeared on <a href="http://ablog.typepad.com/keytrendsinglobalisation/">Key Trends in Globalisation</a>.</p></div>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-45049827210500962372011-12-30T01:22:00.000-08:002012-07-02T20:57:00.656-07:00UK stagnation turns to risk of double-dip recession<p><strong>By Michael Burke</strong></p> <p>The Construction Products Association (CPA) is <a href="http://www.constructionproducts.org.uk/newsdesk/page.aspx?Id=578">forecasting</a> a ‘double-dip’ UK recession for the construction industry in 2012 and compares the latest slump to that of 10 years ago - the last Tory recession under Major when 600,000 construction industry jobs were lost. The CPA is well-placed to judge the near-term outlook as it comprises all the main suppliers to the construction industry. </p> <p>For most of 2011 the majority of commentary on the British economy veered between expectations of a strong boom and, more recently projections for a double-dip recession. The reality was more prosaic - with the economy stagnating, growing by just 0.5% over the latest 12-month period. </p> <p>This is because most commentators ignored the actual cause of the prior recovery and the key factor which would reverse it. SEB has previously <a href="http://socialisteconomicbulletin.blogspot.com/2011/10/gdp-data-show-uk-stagnation-is-home.html">shown</a> how the recovery was caused by the increase in government spending, both current spending (mainly increased welfare payments but also the Labour government’s cut in VAT) and increased government investment (Building Schools for the Future, etc.). </p> <p><b>Reversal of Government Spending </b></p> <p>The renewed economic stagnation arises because both parts of government spending have now been cut. Welfare benefits have been cut, which is disastrous for many recipients but also undermines household consumption as does the hike in VAT. Household consumption is the biggest single category of GDP. The policies that supported household consumption added 1.2% to GDP growth during the recovery and until Labour left office. In the period since the Tories took office the decline in household consumption has reduced GDP by 0.6%. Similarly government investment increased under Labour and directly added 0.8% to GDP over the course of the recession. Government investment fell immediately the Tory-led Coalition took office and has subtracted 1.0% from GDP over that period.</p> <p>Taken together the combined effects of Labour’s increased spending added 1.8% to GDP, while the policies of this government have subtracted 1.6% from GDP.</p> <p><b>Effects of Changing Fiscal Stance</b></p> <p>The March 2011 Budget detailed a ‘fiscal tightening’, that is tax increases (except for companies) and spending cuts amounting to £41bn. By the 3<sup>rd</sup> quarter approximately half of that tightening will have taken place as it is 6 months into the Financial Year. £41bn is approximately equivalent to 2.7% of GDP. The previous recovery saw the economy expand by 2.8% over 5 quarters. Therefore the direct effect of the fiscal tightening currently under way is to remove growth almost entirely from the economy, hence stagnation.</p> <p>Unfortunately the extent of the damage does not end there. The fiscal tightening is only half-complete this year and yet there is already stagnation. This is because each sector of the economy is connected to the other. So, declining government spending in the form of firing public sector workers will lead to falling household consumption, and both will affect business investment. </p> <p>Since each economic sector responds variably to a change in another sector’s activity, and often with a time lag, it is impossible to assign a precisely distributed causal effect of a change in fiscal policy. But we have noted above that Labour’s increased spending of 1.8% of GDP led to a recovery which added 2.8% to GDP. This demonstrates the way the state can lead economic activity in total. This is what Keynes called the ‘multiplier effect’ as the private sector responds to increased government spending. In this case the multiplier is 1.56 (the ratio of 2.8% to increased spending equal to 1.8% of GDP). </p> <p>In reality the multiplier is probably considerably higher as there is a pronounced time lag while the business sector responds to changes in government spending. SEB has previously <a href="http://socialisteconomicbulletin.blogspot.com/2011/11/desperate-osbornes-subsidies-to.html">shown</a> that private sector investment has consistently risen or fallen 6 months after changes in output. So, the private sector continued to invest for 6 months after the Coalition took office, and this was in response to the increased spending by the Labour government.</p> <p>Therefore, without taking account of other factors such as net exports or an unwanted build-up of inventories, the direct and indirect impact of the current government’s cuts should be multiplied by 1.56. This would subtract 4.2% from GDP and almost certainly lead to renewed economic contraction. The government also plans £61bn of fiscal tightening in the next Financial Year, beginning in April. </p> <p><b>Construction Investment</b></p> <p>The construction sector is highly responsive to the business cycle as it relies on a high level of current investment. The CPA estimate that it is headed for a double-dip recession is therefore highly significant. This will sharpen the already acute shortage of affordable homes, either to buy or rent at a time when 300,000 construction workers have already been made unemployed. Local authorities throughout Britain are desperate for funds to build new homes, from which they could derive an income way above the cost of borrowing even with affordable rents. Instead of providing funds to them, George Osborne has provided £40bn in ‘credit easing’ to small and medium sized enterprises. They will not build homes, provide decent affordable housing and employ workers with these funds. </p> <p>But the State could because it is a vastly more efficient provider of large-scale housing as well as infrastructure projects. The government and its supporters like to promote the falsehood that ‘there is no money left’. But £40bn of loans to local authorities and public bodies could go a long way to easing the housing crisis. It would also go some way to averting the likelihood of a double dip recession.</p> <p>From the government’s perspective the only stumbling-block is that it would remove the main responsibility for construction from the hands of the private sector and place it in the hands of the public sector. This is of course what happened to most of the shareholder-held banking sector in Britain during the last crisis. It seems that nationalisation is only permissible when bondholders and shareholders are being rescued. But it is not allowed if it is to rescue the unemployed, those paying extortionate rents for substandard homes or even the economy as a whole. </p> gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-43839970292471730242011-12-22T05:40:00.000-08:002012-07-02T20:57:00.670-07:00When British thieves and French thieves fall out - the Anglo-French governmental dispute in perspective<p><strong>By Michael Burke</strong></p> <p>The French and British authorities are engaged in a war of words over which country will be first to be downgraded by the credit ratings agencies. At least the hostilities are purely verbal - these ‘heroes’ of Tripoli are prepared to use other methods when the odds are overwhelmingly in their favour.</p> <p>The immediate cause of the dispute was initially the remarks of French central bank governor Noyer. In <a href="http://www.telegraph.co.uk/finance/financialcrisis/8958251/UK-should-be-downgraded-before-France-says-ECBs-Christian-Noyer.html">response</a> to the threat from Standard & Poor’s (S&P), one of the credit ratings agencies, that France would be downgraded, he argued that Britain should be downgraded first because its economic fundamentals are worse than those of France. </p> <p>The remarks caused predictable uproar in Britain. Even the leadership of the LibDems, the main representatives of the pro-EU business class in Britain discovered its nationalist roots and <a href="http://www.bbc.co.uk/news/uk-politics-16222988">criticised</a> the remarks. But Noyer argued that, ‘they [S&P] should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping’. Essentially, Noyer is correct on the relative ‘fundamentals’. But this focus on the ‘fundamentals’ also demonstrates a shared and thorough misunderstanding of the nature of the crisis. </p> <p>The table below shows the relative levels for each of the indicators specified by Noyer. The estimates are taken from the EU Commission Autumn forecasts.</p> <p align="center">Table 1</p> <div style="text-align: center;"><a href="http://lh5.ggpht.com/-F-L78DJ9HvY/TvMzY2Pu3uI/AAAAAAAAAG8/a4vL7Xs_BuQ/s1600-h/11%25252012%25252022%252520Table%2525201%25255B10%25255D.jpg"><img style="background-image: none; border-right-width: 0px; padding-left: 0px; padding-right: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px; padding-top: 0px" title="11 12 22 Table 1" alt="11 12 22 Table 1" src="http://lh6.ggpht.com/-NHf79UB5JFI/TvMzZnw40-I/AAAAAAAAAHE/qC5W1bIv80U/11%25252012%25252022%252520Table%2525201_thumb%25255B6%25255D.jpg?imgmax=800" border="0" height="73" width="450" /></a></div> <p>It is clear that the Noyer observations are correct. The British government’s credit rating is also under <a href="http://www.telegraph.co.uk/finance/debt-crisis-live/8967232/Debt-crisis-as-it-happened-December-20-2011.html">threat</a> as the economy weakens. Yet France’s downgrade seems likely to happen even sooner. More importantly, the French government is currently paying over one per cent more for 10 year government debt than the UK so that its effective market rating is already lower than Britain’s. This is despite the lower deficit, lower inflation and higher growth in France. </p> <p>This demonstrates that Noyer is looking in the wrong place for the determinants of bond yields. Bond yields are not primarily determined by the nominal level even of important economic variables. Ultimately the price of any given financial market asset is determined by the real level of savings that are directed towards it. In countries such as Britain, the US and Japan the very high level of corporate savings must ultimately be held in some financial asset, and in the current circumstances of weak or stagnant growth government bonds have looked far more attractive than their only main alternative, which is stocks. 10 year debt yields are currently below 2% in the US and below 1% in Japan. This is true even though government debt and deficit levels are even higher in the US and Japan than either France or Britain. UK companies cannot invest in financial instruments in another currency without exposing themselves to exchange rate risk.</p> <p>For investors in French government bonds the situation is different. There is an easy alternative - German government bonds also denominated in Euros. The rising premium on French yields represents the increased perceived risk of the Euro breaking up, in which case investors prefer to hold the debt of the strongest economy in the Euro Area. </p> <p>The key relevant ‘fundamental’ for the Eurozone is that investors may choose between different governments’ credits. That is, there is a market mechanism for redirecting savings towards one country - and there is no fiscal mechanism to transfer savings in the opposite direction. Just as in other Eurozone economies, bond yields started to rise in France as soon as ‘austerity’ measures were introduced. Investors based in the Euro have greater prospects of being repaid if they invest in government bonds where the economy will grow, not stagnate or decline.</p> <p><b>French and British Both Wrong</b></p> <p>The growth outlook is sharply deteriorating in both France and Britain. In the Spring Forecast the EU Commission was projecting 2% growth for both Britain and France in 2012. In the Autumn Forecast the Commission is forecasting just 0.6% growth. Both governments are pursuing ‘austerity’ policies which are clearly not working. </p> <p>They have both also invested an enormous political capital in the maintenance of the AAA rating for their government debt and argued that their policies would reduce their budget deficits. As we have seen, both governments debt ratings are likely to be downgraded in 2012. And both countries are projected to have a deficit in 2013 which, five years after the recession began, is still double the level it was in 2007, before downturn began.</p> <p>The failure of their policies has led not to a re-think, but in both cases to blaming foreigners. The unwillingness to correct a failed policy is the cause of the diversionary war of words between the two governments.</p> <p>The most ridiculous aspect of their policy is that both governments claim that their policy is driven by the demands of financial markets. Yet the government bond markets are sending a very clear signal. Long-term interest rates are either at the current inflation rate as in France, or below it in Britain. They are so low because businesses are saving, not investing. Businesses feel more confident lending to the government than investing on their own account. But both governments insist on cutting spending. If that leads to renewed recession the effect will be to cut further the level of savings in the economy - and bond yields may start to rise. </p> <p>Corporate savings are being lent to the governments at exceptionally low interest rates. This glut of corporate savings could be used to invest for recovery. Since businesses themselves refuse to do this, only the state can end the company investment strike. </p>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-61927694686716046832011-12-11T23:14:00.000-08:002012-07-02T20:57:00.768-07:00EU Summit Is Another Failure for ‘Austerity’<p style="font-weight: bold;">By Michael Burke</p> <p>The outcome of the EU summit has widely been hailed in the British media as a triumph for David Cameron. It is rare that a complete rupture and isolation in multi-party negotiations is regarded as a triumph – but this is a function of the dominant and still growing xenophobia of the British press.</p> <p>The EU Commission will now impose further spending cuts and rules to enforce deficit limits across the whole of the EU. David Cameron did not oppose these measures because they lead to public spending cuts- he is cutting public spending by a greater proportion of GDP than any major country which has not been in receipt of EU/IMF funds for its creditors.</p> <p>Cameron’s stated objective was a defence of the interests of the City of London. There is a question mark over whether he has even be able to achieve that. Angela Knight, former Tory MP and chief spokesperson for the British Bankers Association guardedly told <i>The Times</i> that she hoped that City’s interests would not be harmed by Britain’s isolation.</p> <p><b>Holding Back the Tide</b></p> <p>‘Let all men know how empty and powerless is the power of kings’. So said King Canute in demonstrating to sycophantic courtiers the impossibility of instructing the advancing tidewaters to retreat. But it seems that the thinking of the EU Commission has retreated behind even that of Dark Age monarchs.</p> <p>In response to the economic, fiscal and balance of payments crises in Europe, the EU summit in Brussels agreed to issue a series of regulations- to prevent these crises being manifest at the level of government deficits. A new <a href="http://finance.yahoo.com/news/document-eurozone-eyes-0-5-215620991.html">rule</a> that so-called structural deficits will not exceed 0.5% of GDP has been introduced . The EU Commission will be given prior oversight of the national Budgets. Given the <a href="http://socialisteconomicbulletin.blogspot.com/2011/03/structural-deficit-denial.html">impossibility</a> of factually establishing the level of the structural deficit (which depends on extremely approximate estimates of potential output) then the combination is a recipe for complete control by the EU Commission - the economic geniuses who have led Greece and Ireland to disaster.</p> <p>While it is impossible to precisely quantify the structural deficit it is practically impossible to determine the level of the government deficit simply by controlling spending. This is because the deficit reflects the gap between government spending and income. Government incomes are overwhelmingly taxation revenues and these are determined by the spending of consumers and the spending of businesses (primarily investment). </p> <p>To achieve the precise control over its own income, as demanded by the new agreement, the European governments would have to determine the incomes and spending of both other main sectors of the economy, consumers and businesses. And, in a currency union it would also have to ensure that the overseas sector was not a significant net lender or borrower (through large trade or current account deficits/surpluses). Otherwise, if the other domestic sectors remained in broad balance, a large trade deficit could only result in a large government deficit.</p> <p>This is show in Figure 1 below. The chart shows the sectoral balances in leading EU economies and the EU as well as the change between 2006 and 2009. The chart is taken from the Financial Times and is based on OECD data.</p> <p style="text-align: center;">Figure 1</p> <p style="text-align: center;"><a href="http://lh4.ggpht.com/-mSsiIKWd_mA/TuWpvnwYUCI/AAAAAAAAAGs/JssI6CB0Nb8/s1600-h/clip_image002%25255B5%25255D.jpg"><img style="background-image: none; border-right-width: 0px; padding-left: 0px; padding-right: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px; padding-top: 0px" title="clip_image002" alt="clip_image002" src="http://lh4.ggpht.com/-K3g3ptoDkE0/TuWpx1dPoPI/AAAAAAAAAG0/iIPZUpveg7E/clip_image002_thumb%25255B2%25255D.jpg?imgmax=800" border="0" height="453" width="452" /></a></p> <p> </p> <p>Simple national accounting identities mean that the increased savings of one sector of the economy must be reflected in the increased deficit of another. In all cases the balances shown below, the government balance (the public sector deficit/surplus), the private sector balances (the savings/consumption of the private sector) and the overseas sector (the current account balance) sums to zero, as they must.</p> <p>Within each national economy of the EU it is impossible to legislate for the deficit of the public sector without determining the savings, consumption and investment decisions of all other sectors of the economy.</p> <p>It is also entirely impossible in a single currency area for all other economies to maintain government balances if one or more key countries have large current account surpluses, as is presently the case with Germany and others. Other countries must then run current account deficits and to simultaneously maintain a government balance they are faced with two unacceptable alternatives. They must either hugely increase household savings even though incomes are declining; that is, household spending must fall even faster than incomes. Alternatively, businesses must reduce investment to well below the level of its income, which could only lead to a further reduction in competitiveness and a renewed widening of the current account deficit. This is the downward spiral that countries like Greece have already entered.</p> <p><b>The Tory Position</b></p> <p>David Cameron did not object to any of this because he is a champion of increased government spending, or a defender of the welfare state. Nor has his government shown any appreciation of the fact that reduced government spending will also reduce the incomes of other sectors of the economy.</p> <p>Instead, his objection was to the threat to the City’s ability to siphon off funds from other businesses in Europe. He may not have been successful even in that limited aim. Ed Miliband writing in the <i>Evening Standard</i> argued that Cameron was ‘a prisoner of the Tory Right’ and had isolated himself and Britain from the continuing evolution of policy in Europe.</p> <p>While willing the other EU national leaders to act decisively to halt the crisis, Cameron himself acted to prevent that happening. Defending the sectional interest of the City and relying on some of the most backward political forces in Britain, Cameron has finally crossed a line that even Thatcher only threatened to do. There will be no benefit to the British economy from this decision and the consequences could prove extremely negative. If, for example, overseas multinationals decide they want a base in the EU, will they choose semi-detached Britain or one of the other 26 countries who continue to have a common regulatory regime? If the British economy suffers as a result, it should be remembered this was done to benefit the City of London and to appease the Tory Eurosceptics and Union Jack-wavers.</p>gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-89248865934424477262011-12-04T22:33:00.000-08:002012-07-02T20:57:00.872-07:00George Osborne Shows He’s Learnt Nothing from Greece or Ireland<p><strong>By Michael Burke</strong></p> <p>The Autumn Statement was widely <a href="http://www.bbc.co.uk/news/uk-politics-15952413">presented</a> as facing up to harsh realities of slower growth, but with George Osborne <a href="http://www.bbc.co.uk/news/business-15945465">offering</a> a series of cunning schemes in order to resolve the crisis .</p> <p>The stagnation of the British economy is a <a href="http://socialisteconomicbulletin.blogspot.com/2011/11/latest-uk-gdp-data-even-worse-than-it.html">function</a> of government policy and plans to increase investment by increasing the credit available to smaller firms will founder because they will not <a href="http://socialisteconomicbulletin.blogspot.com/2011/11/desperate-osbornes-subsidies-to.html">invest</a> when they don’t expect to make profits .</p> <p><i>SEB</i> has long argued that government needs to increase investment in a series of areas. Surely, the government’s plans to increase investment in infrastructure should be welcome? But the government’s planned increase amounts to less than £3.8bn spread over four years, or less than 0.1% of GDP in each year. In addition, most of the wish list for infrastructure and capital projects is dependent on investment in the private sector. So, George Osborne and Boris Johnson stood outside Battersea power station in London and talks of new tube lines, enterprise zones and 25,000 jobs. Just two days later the private developer central to the project collapsed into receivership.</p> <p>Worse, the government’s planned increase in capital spending is paid for by taking money from the pockets of the poorest and most vulnerable in society. These will bite much harder in later years, long after the pathetically small planned increased in investment has come to an end. This is <a href="http://www.hm-treasury.gov.uk/as2011_documents.htm">shown</a> in the table below, from the Autumn Statement.</p> <p align="center">Table 1</p> <p><a href="http://lh5.ggpht.com/-3X0Dh55BrJs/TtxlwB30spI/AAAAAAAAAGk/5zbKDJpzFAg/s1600-h/11%25252012%25252005%252520Table%2525201%25255B4%25255D.jpg"><img style="background-image: none; border-bottom: 0px; border-left: 0px; padding-left: 0px; padding-right: 0px; display: block; float: none; margin-left: auto; border-top: 0px; margin-right: auto; border-right: 0px; padding-top: 0px" title="11 12 05 Table 1" border="0" alt="11 12 05 Table 1" src="http://lh4.ggpht.com/-gz2zIab7PeI/Ttxlw6WgaCI/AAAAAAAAAGo/ov9zXZmQTfs/11%25252012%25252005%252520Table%2525201_thumb%25255B2%25255D.jpg?imgmax=800" width="450" height="130" /></a></p> <p> </p> <p>So, there are total cuts in current spending in 2012/13 of £910mn and total cuts over the next 3 years of £3.8bn, shown as a positive sign in the Treasury bookkeeping method. This is in order to pay for tax cuts (fuel duty) and a projected increase in capital spending. But in the two following years the projected cuts to current spending increase dramatically for a total of over £27bn cuts in all. Although these are mostly unspecified, the itemised cuts include child tax credits, working tax credits, real public sector pay cuts and the breaking of the promise to uphold overseas development aid at 0.7%. </p> <p>This is a very damaging but much milder version of the same logic that has led Greece and Ireland to disaster - every failure to meet budgetary targets because of the impact of ‘austerity’ is met by further ‘austerity’ measures. But the deficit is and borrowing totals are likely to go higher still as the economy stagnates- or worse. It may only be a matter of time before this same logic produces comparably savage cuts in spending- with the same economic consequences.</p> <p>Politically, by pre-announcing needed cuts for the next Parliament Osborne hopes to bind all parties to further ‘austerity’ measures. For the LibDems, Danny Alexander has already proved obliging, signing up to Tory cuts of £23bn in the next Parliament. The key question is whether Labour will go down the same path in accepting the need for cuts even when they have demonstrably failed to deliver economic growth or even deficit-reduction. It is the path that leads to Athens and must be resisted.</p> gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-71256227941705032392011-11-27T23:59:00.000-08:002012-07-02T20:57:00.967-07:00Desperate Osborne's Subsidies to Businesses Won't Work<br /><b>By Michael Burke</b><br /><br />George Osborne has <a href="http://www.bbc.co.uk/news/uk-politics-15907249">told</a> the BBC that there will be £40bn in ‘credit easing’ so that small firms can obtain both cheaper and more readily available loans. Osborne has called the scheme a ‘game-changer’. If the funds had the stated impact, of increasing investment by small and medium-sized enterprises (SMEs), then it would certainly provide a significant lift to the economy. £40bn is equivalent to 2.8% of GDP.<br /><br />The strength of this overblown rhetoric may be judged by the fact that there are widespread <a href="http://www.huffingtonpost.co.uk/2011/11/27/obr-expected-to-slash-projections_n_1114817.html?1322389430&ref=uk">reports</a> that the Office for Budget Responsibility is set to slash its growth forecasts for 2012 to just 1% from 2.5% previously.<br /><br />How is it that significant funds for new investment by business will actually lead to no improvement in the outlook for growth, even on the usually over-optimistic forecasts from the OBR?<br /><br />There are to be at least two, possibly three funds. The first will be guarantees to increase the availability of credit. The second will be a fund to lower the cost of that credit to SMEs. Since<i> SEB</i> continually argues for increased investment, surely this is a good thing?<br /><br /><b>Private Sector Failure</b><br /><br />Even official forecasts do not assume that growth will significantly improve as a result of this policy. This highlights the fallacy that underlies all current attempts to persuade, cajole, demand or bribe private firms to increase their investment. The fallacy is that those firms are struggling under the burden of insufficient funds to invest. Of course certain individual firms may have such difficulties. But in aggregate that is not the case.<br /><br />In a previous bulletin <i>SEB </i><a href="http://socialisteconomicbulletin.blogspot.com/2011/11/profits-and-austerity-in-industrialised.html">showed</a> that in 2010 the total Gross Operating Surplus of the business sector in Britain was £475bn. These are akin to profits. Yet the entire level of investment (Gross Fixed Capital Formation) was just £214bn in 2010. As this includes the investment by both private individuals and government, it is clear that businesses have vast resources already from which they could increase investment.<br /><br />The chart below shows the decline in total Gross Fixed Capital Formation (GFCF) and corporate sector GFCF. Both these measures of investment began falling one quarter before the recession itself began. The fall in both at their low-point in the 4<sup>th</sup> quarter of 2010, of over 20%, is approximately three times as great as the fall in GDP of at 7.1%. Both chronologically and arithmetically the decline in investment, led by declining business investment, led the recession.<br /><br /><div style="text-align: center;">Figure 1</div><a href="http://ablog.typepad.com/.a/6a00e554717cc988330162fd00f06c970d-pi"><img alt="11 11 28 Chart 1" border="0" height="266" src="http://ablog.typepad.com/.a/6a00e554717cc988330162fd00f094970d-pi" style="background-image: none; border: 0px none -moz-use-text-color; display: block; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 11 28 Chart 1" width="452" /></a><br /><br />Both measures of investment have experienced a small recovery. Business investment began to rise in the 1<sup>st</sup> quarter of 2010. This was two quarters after both total investment and GDP began to rise in the 3<sup>rd</sup> quarter of 2009.<br /><br />Private sector investment led the recession. But it cannot lead the recovery. This is demonstrated in the chart below, which shows corporate GFCF and GDP.<br /><br /><div style="text-align: center;">Figure 2</div><a href="http://ablog.typepad.com/.a/6a00e554717cc988330162fd00f0bb970d-pi"><img alt="11 11 28 Chart 2" border="0" height="251" src="http://ablog.typepad.com/.a/6a00e554717cc988330162fd00f13e970d-pi" style="background-image: none; border: 0px none -moz-use-text-color; display: block; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 11 28 Chart 2" width="452" /></a><br /><br />The recovery in business investment occurred two quarters after the economy as a whole began to recover. This is because the increase in investment did not depend on the availability of resources, as profits have exceeded investment by some distance throughout the entire crisis.<br /><br />Corporate investment rises and falls in line with expected returns. The purpose of capital is the preservation or expansion of capital. If the economy is not growing a main motive will be to preserve capital. If the economy is expanding, it will be increase capital through profitable returns on investment.<br /><br />This is what happened in 2009-10. GDP began to expand in mid-2009 and six months later corporate GFCF began to increase. Precisely the same time lag operated in the reverse situation. Corporate GFCF fell once more in the 1<sup>st</sup> quarter of 2011. This was six months after the modest recovery peaked n the 3<sup>rd</sup> quarter of 2009.<br /><br /><b>Public Sector Leadership</b><br /><br />The new factor which caused the recovery was the increase in public sector investment (both by general government and the remaining public sector corporations). At its highpoint in the 4<sup>th</sup> quarter of 2009, public sector investment was over 20% higher than its pre-recession level.<br /><br />This led directly to the increase in GDP which in turn eventually prompted the private sector to increase its own investment. The Tory-led Coalition immediately cut public investment on taking office, and six months afterterwards private investment began to contract once more.<br /><br />Instead of subsidising the private sector to invest, the proven means of achieving that end is for government to increase its own investment. It could divert the support for borrowing costs to agents who are willing to invest, such as local authorities who want to invest in housing, infrastructure, transport and education.<br /><br />Even on official forecasts the borrowing subsidy to SMEs will not work. But the recent history of the British economy shows that investment by the public sector will have the effect of restoring growth which in turns leads o a revival of corporate investment. Subsidies and bribes to businesses to invest will not work while there is no growth. Increasing, not cutting, the investment of the public sector will lead to recovery.gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-17894279959471314332011-11-27T05:07:00.000-08:002012-07-02T20:57:01.067-07:00Latest UK GDP data even worse than it looks<br /><b>By Michael Burke</b><br /><br />The latest release for British GDP in the 3<sup>rd</sup> quarter was unrevised – but the composition of that growth was awful. GDP rose by 0.5% in the quarter and is just 0.5% higher than a year ago. But analysis of the components of growth suggests the outlook is deteriorating.<br /><br />Household consumption did not grow at all in the quarter and contracted by 1.5% over the course of the year. Investment (gross fixed capital formation) fell by 0.2% in the quarter and by 1.8% from a year ago. In terms of domestic expenditure only government spending rose in the quarter, up 0.9% on the quarter and 2.9% over the year. This is testimony to the multiplication of ‘austerity’ measures: If unemployment and poverty are increasing at a faster rate even than you cut welfare benefits your total welfare bill will rise.<br /><br />Taken together UK domestic expenditure rose by £3bn in real terms in the quarter. But inventories rose by £2.9bn at the same time and therefore account for almost the entirety of domestic growth in the quarter. Since GDP rose by just £1.8bn in the 3<sup>rd</sup> quarter, the rise in inventories indeed exceeds the growth in GDP as well as accounting for almost the entirety of growth in domestic spending.<br /><br /><b>Inventory Build-Up</b><br /><br />Inventories are a cyclical and erratic component of growth. But a persistent rise in inventories over a number of quarters only occurs if businesses are receiving new orders and are restocking as they become increasingly confident about a sustained upturn. This is sometimes called a voluntary rise in inventories. But this is not at all the situation presently. Domestic demand is stagnant and exports have also fallen in the last two quarters. It seems unlikely that order-books are filling up and businesses becoming more confident about future prospects. In fact the respected Market Purchasing Managers’ Index shows that new orders have been slowing dramatically, as shown in the chart below.<br /><div style="text-align: center;"><br /></div><div style="text-align: center;">Figure 1 – PMI New Orders, National & London</div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><a href="http://ablog.typepad.com/.a/6a00e554717cc98833015393a357f2970b-pi" style="display: inline;"><img alt="11 11 27 PMI" class="asset asset-image at-xid-6a00e554717cc98833015393a357f2970b" src="http://ablog.typepad.com/.a/6a00e554717cc98833015393a357f2970b-450wi" style="display: block; margin-left: auto; margin-right: auto; width: 450px;" title="11 11 27 PMI" /></a></div>Therefore the current build-up in stocks is likely to be an involuntary. Inventories are most likely rising because sales have not met expectations. If so, businesses will tend to meet new orders by depleting those existing inventories rather than increasing output. At the very least this rise in inventories is unlikely to be repeated over several quarters. The addition to growth in the 3<sup>rd</sup> quarter arising from rising inventories is unlikely to be repeated over several quarters.<br /><br />As we have seen domestic demand would have been close to zero and GDP would have contracted without rising inventories. To avoid that fate in subsequent quarters some other component(s) of growth will have to begin to grow once more. Otherwise the British economy will begin to contract once more.gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-72180764436567014642011-11-14T00:06:00.000-08:002012-07-02T20:57:01.160-07:00Profits and Austerity In the Industrialised Economies<br /><b>By Michael Burke</b><br /><br />A previous <i>SEB</i> <a href="http://socialisteconomicbulletin.blogspot.com/2011/10/relation-of-profits-and-austerity.html">article</a> examined the profit rate in the Irish economy which is rising even though the economy continues to contract. Yet at the same time Ireland’s level of investment is falling. Corporate incomes – profits - are rising even though total economic activity is falling. Arithmetically, this can only occur by reducing the income of labour - wages are falling both in absolute terms and as a proportion of total economic activity. It happens that the Irish Department of Finance set this out with some clarity. This is indeed is the thrust of the entire ‘austerity’ policy – a transfer of incomes from labour to capital across the industrialised economies of Europe, as well as in the US and Japan.<br /><br /><b>Who Is Paying for the Crisis?</b><br /><br />The table below shows the Gross Value Added (GVA) of selected economies, and how this is divided between the compensation of employees and the gross operating surplus of the corporate sector. GVA is a measure of all the value created in an economy. It is the same as GDP except that it excludes the impact of taxes and subsidies. With some important qualifications the Compensation of Employees (CoE) is akin to labour’s share of that value added, while the Gross Operating Surplus (GOS) is akin to the level of profits in each economy. This provides an approximate measure of economic activity and its distribution as income: Value-Wages-Profits. In the table blow the profit rate is calculated as the share of GOS in Gross Value Added.<br /><div style="text-align: center;"><br /></div><div style="text-align: center;"><b>Table 1. GVA, Compensation of Employees, Gross Operating Surplus and the Profit Rate, €bn in 2010 (unless otherwise stated)</b></div><a href="http://ablog.typepad.com/.a/6a00e554717cc9883301539304ae40970b-pi"><img alt="11 11 13 Table 1" border="0" height="193" src="http://ablog.typepad.com/.a/6a00e554717cc98833015436d85136970c-pi" style="background-image: none; border: 0px; display: inline; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 11 13 Table 1" width="450" /></a><br /><br />The general tendency has been that the crisis-hit countries have the highest profit rates. This was an important factor in the build-up to the crisis. In nearly all countries the crisis was characterised by reduced investment by the corporate sector, which remains the <a href="http://ablog.typepad.com/keytrendsinglobalisation/2010/11/index.html">driving force</a> behind the economic crisis. In these higher profit countries the fall in investment had a greater impact on aggregate demand as the corporate sector takes a bigger share of GVA. In turn, the fall in investment had a bigger negative impact on household incomes, especially through rising unemployment.<br /><br /><b>Profits and deficits</b><br /><br />The profit rates should also be seen in relation to the public sector deficits that have caused so much turmoil. In all cases the public sector deficits are a fraction of the level of profits. In Greece the 2010 deficit was €25bn, in Italy it was €70bn, in Ireland it was €19bn (excluding an extraordinary bank bailout), and so on. The deficits could easily be covered in their entirety simply by extracting a fraction of the profit level from the corporate sector in each country. The same is true of Britain, where the profit level in 2010 was £475bn compared to a deficit of £137bn. (The British profit level is depressed and consequently the profit rate is lower because of the slump in the financial sector – a factor which also applies to a lesser degree in the US and even to France).<br /><br /><b>Who can pay for the crisis?</b><br /><br />There are effectively three destinations for profits. These are investment, which raises future prosperity, or dividends for shareholders which are not invested or huge executive compensation and bonuses, both of which do not. The table below shows the level of profits, the level of public sector borrowing and the level of gross fixed capital formation (investment). In the last column the difference is shown between the level of profits and the level of public borrowing and investment combined.<br /><div style="text-align: center;"><br /></div><div style="text-align: center;"><b>Table 2. Gross Operating Surplus, Public Sector Borrowing and Investment, €bn in 2010 </b><b>(unless otherwise stated)</b></div><a href="http://ablog.typepad.com/.a/6a00e554717cc9883301539304ae5b970b-pi"><img alt="11 11 13 Table 2" border="0" height="195" src="http://ablog.typepad.com/.a/6a00e554717cc988330162fc5a189f970d-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 11 13 Table 2" width="450" /></a><br /><br />Table 2 shows that in all cases the current level of both the public sector borrowing and the current level of investment can be funded by the level of profits in each country and in the Euro Area. In most cases there is scope to fund both the deficit and significantly increase the level of investment. But the opposite has been happening.<br /><br /><b>The struggle over distribution of national income</b><br /><br />In most recessions capital’s share of income falls. This is not because wages rise, but because profits fall at a faster rate than the fall in output. What then usually occurs is a struggle by capital to regain its lost share of income. It does this by cutting wages and benefits, by increasing unemployment and by reducing its tax burden - financed by reducing social welfare benefits. This is the content of ‘austerity’ measures.<br /><br />Figure 1 below shows how this has operated in the Euro Area as a whole. Between 2008 and 2009 GVA in the Euro Area fell by €254. Confirming the idea that profits fall at a faster rate than output, Euro Area profits (GOS) fell by €227bn. Profits fell by over 6%, twice as fast as the fall in output. Wages (CoE) fell by €17bn.<br /><div style="text-align: center;"><br /></div><div style="text-align: center;"><b>Figure 1</b></div><a href="http://ablog.typepad.com/.a/6a00e554717cc988330162fc5a18b5970d-pi"><img alt="11 11 13 Figure 1" border="0" height="266" src="http://ablog.typepad.com/.a/6a00e554717cc98833015436d851a7970c-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 11 13 Figure 1" width="452" /></a><br /><br />However, this natural tendency for profits to fall at a greater pace than the fall in output is interrupted and diverted by a series of interventions, including rising unemployment, wages and benefit cuts as itemised above. In the period 2009 to 2010 Euro Area GVA rose by €188bn. Of this increase in output €139bn went to profits and just €53bn accrued to wages.<br /><br />Because of inflation the real level of both wages and profits has fallen sharply – all these data are in nominal terms and do not take account of inflation. The ‘austerity’ offensive to increase the profit share has partly been successful, but the wage share of national income has not undergone any strategic reversal.<br /><br />This is contrasted with Greece. Greek nominal GVA did not fall in 2009 at all as the Greek recession was shallower than most. GVA fell in 2010 by €6bn. This is shown in chart 2. The massive offensive against Greek workers and the poor means that the natural tendency for profits to fall faster than output has not operated. The level of wages fell by €4.4bn and profits fell by just €1.8bn. The wage share of national income has suffered a reversal.<br /><div style="text-align: center;"><br /></div><div style="text-align: center;"><b>Figure 2</b></div><a href="http://ablog.typepad.com/.a/6a00e554717cc9883301539304ae8f970b-pi"><img alt="11 11 13 Figure 2" border="0" height="272" src="http://ablog.typepad.com/.a/6a00e554717cc9883301539304aeba970b-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 11 13 Figure 2" width="452" /></a><br /><br />Readers will be interested to know where Britain stands in relation to these examples, one of them the extreme case of Greece (and previously, Ireland). In 2009 British GVA fell by £38bn, shown in Chart 3 below. This was exceeded by the fall in profits, down £43bn and wages rose by £5bn. The entirety of policy since has been to reverse those trends. GVA rose in 2010 by €40bn. (It should again be stressed that these are nominal data, in real terms output is still over 4% below its peak and real wages have fallen).<br /><div style="text-align: center;"><b>Figure 3</b></div><a href="http://ablog.typepad.com/.a/6a00e554717cc98833015436d851e1970c-pi"><img alt="11 11 13 Figure 3" border="0" height="272" src="http://ablog.typepad.com/.a/6a00e554717cc9883301539304aed2970b-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 11 13 Figure 3" width="452" /></a><br /><br />As a result of initial ‘austerity’ measures, £18bn of the increase in output has been claimed for profits. But it is widely understood that the real offensive in Britain only began in the new Financial Year, which began in April this year. What is being attempted is a decisive reversal of the wages’ share of national income.<br /><br /><b>Conclusion</b><br /><br />Countries like Greece are experiencing a qualitatively sharper crisis than the European average. There is a high correlation between the likelihood of economies falling into this type of extreme crisis and their exceptionally high level of pre-crisis profits. Because the income of the corporate sector is a much greater factor in the economy, their investment strike hass a proportionately greater impact on total output and/or government finances.<br /><br />Profits remain exceptionally high, so much so that they could finance the deficit while simultaneously increasing the level of investment.<br /><br />Under normal working of a market economy the tendency is for profits to fall faster than output. The entire ‘austerity’ policy is to prevent this tendency from operating, and to reverse it by reducing wages even faster than the decline in output. In the Euro Area, to date this has only been achieved in Ireland and Greece.<br /><br />In Britain, it’s too early to say whether a similar ‘austerity’ drive will achieve the same disastrous results. But it is clearly the aim of government policy to drive up profits even while the economy is stagnating. This can only be achieved by driving down wages.<br />gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-63242615177184476062011-10-25T00:22:00.000-07:002012-07-02T20:57:01.260-07:00The relation of profits and 'austerity'<br />By Michael Burke<br /><br />In what may be an important development the <i>Financial Times</i> reports that, in return for accepting much larger ‘haircuts’ (imposed losses on the value of the bonds they own) bondholders are demanding that there must be a growth strategy for Greece.<br /><br />In a piece <a href="http://www.ft.com/cms/s/0/519af674-fcbf-11e0-9f53-00144feabdc0.html#axzz1bS9FqYxG">headlined</a> ‘Bondholders Demand Greek Growth Plan’ the paper quotes the Managing Director and chief negotiator for the Institute of International Finance, which represents the largest bondholders mainly the banks. The call for a growth plan is not given much substance in the article.<br /><br />But there is a logic to the demand. Bondholders are most concerned about cash flow from interest payments and the final repayment of debt principal. In all the Euro Area economies where severe ‘austerity’ measures have been applied bond yields have risen - Greece, Ireland, Portugal, Spain and now Italy. This implies that the bondholders’ risk of not receiving those cash flows and principal has risen, and that a higher interest rate is demanded to compensate. ‘Austerity’, a generalised attack on the living standards of the overwhelming majority, has failed to provide reassurance to bondholders that they will get all the bond repayments. Instead, the reduction in incomes and economic crisis that has followed has increased the risks that the governments will default. If it proves to be the case now that the bondholders are demanding not more austerity, but growth, this would reflect the accurate judgment on their part that the risk of default has increased because of massive cuts in government spending. It is a demand that the European governments provide funds to Greece to help the economy recover, not impose more cuts.<br /><br /><b>Can ‘Austerity’ Work?</b><br /><br />Of course the bondholders, mainly the banks but also increasingly other <a href="http://www.economist.com/blogs/freeexchange/2011/06/greek-sovereign-debt">parasites</a> such as hedge funds and ‘vulture funds’, had no qualms about massive assaults on pay, jobs, pensions, services and welfare benefits while they thought it improved their own prospects of being repaid by EU governments. But even at an earlier stage it was clear to some that cuts in government spending would not work. This is shown in the actions of the credit ratings’ agencies – who effectively represent the interests of the bondholders – and have repeatedly <a href="http://www.forbes.com/2011/10/14/sp-downgrades-spains-credit-rating-marketnewsvideo.html">campaigned</a> for large cuts in government spending, only then to downgrade countries such as Greece, Ireland, Portugal and Spain because of the negative economic impact of those same cuts.<br /><br />By now it is increasingly clear in the case of Greece that any further cuts will be equally counter-productive in restoring the growth required to service debt. But the IMF, ECB and EU Commission are holding up another <a href="http://www.imf.org/external/np/sec/pr/2011/pr11374.htm">example</a> of how their impositions can be made to work - Ireland. The ‘Troika’ argue that successive Irish governments (the current coalition of the rightist Fine Gael and Irish Labour Party having replaced the populist right of Fianna Fail) have stuck to the measures agreed, that growth has resumed and that therefore the deficit is falling.<br /><br />In fact, the previous government imposed cuts in 2008 and before any international agency demanded them. The current government is set to announce its own first Budget, which will also impose greater cuts than demanded by the Troika. It is also widely understood, if not by the Troika, that Irish GDP is artificially inflated by the activities of (mainly) US multinationals booking activity and profits in Ireland to avail of its ultra-low corporate taxes. This has seen GDP rise in the latest two quarters. But domestic demand fell again by 1.1% in the 2<sup>nd</sup> quarter of this year, a 3 ½ year-long slump collapse and is now 24.8% below its level at the end of 2008. According to the IMF the Dublin government’s deficit will be 10.3% of GDP this year, having been 7.3% before the cuts began to bite in 2008.<br /><br />Even so, the Troika are increasingly determined that the deficit will decline and prove their case. They point to the fact that, excluding enormous bank bailouts equivalent to over 20% of GDP last year, borrowing fell from €23.5bn in 2009 to €19.3bn in 2010, an improvement of €4.2bn. Yet this is simply because the value of bonds redeemed in 2010 was €4bn lower. Otherwise there is no underlying improvement in the level of borrowing at all.<br /><br />But there is an important difference with Greece. Following big tax increase Athens’ taxation <a href="http://www.minfin.gr/portal/en/resource/contentObject/id/6070015a-dded-4fb1-83a9-d6fab8d319a3">revenues</a> have fallen by 4.2%in the first 9 months of this year whereas Dublin’s tax <a href="http://www.finance.gov.ie/viewdoc.asp?DocID=6995&CatID=5&StartDate=1+January+2011">revenues</a> are 8.4% higher reflecting the imposition of new income taxes. The key difference is that Ireland was a much more prosperous country than Greece prior to the crisis. Per capita incomes were 50% higher, even adjusted for Purchasing Power Parities. Therefore, while the cuts have certainly had a negative impact on Irish growth, and the domestic economy continues to contract, the level of impoverishment of the entire economy is not in the same category as Greece, where even bondholders may now accept that further cuts are counter-productive. Instead, the impact of the cuts in Ireland might be said to be Greece in slow-motion.<br /><br /><b>Who Benefits?</b><br /><br />The new caution in imposing further cuts in Greece is the worry of the loan-shark that the borrower may go bankrupt. But while there is still blood that can be squeezed in countries like Ireland cuts remain the sole policy agenda. The effect of this policy is clear from the recent publication of the sectoral accounts for the Irish economy.<br /><br />This is shown in the chart below, which shows that as Gross Value Added continues to decline, profits have started to recover and therefore the profits’ share of national income has increased.<br /><div style="text-align: center;">Figure 1</div><a href="http://ablog.typepad.com/.a/6a00e554717cc988330153928fdd7f970b-pi"><img alt="11 10 26 Profits 1" border="0" height="298" src="http://ablog.typepad.com/.a/6a00e554717cc988330153928fdd8f970b-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 10 26 Profits 1" width="452" /></a><br /><br />According to the Central Statistical Office (CSO), ‘The operating surplus or profits of non-financial corporations (NFCs) increased from €35.2bn in 2009 to €37.8bn in 2010. The other main component of value added is compensation of employees or wages and salaries which declined from €37.3bn in2009 to €34.9bn in 2010. Therefore the improved profit share relates more to a decline in payroll costs for these corporations rather than to an increase in overall value added.’<br />Yet this increase in the incomes of the corporate sector, wholly achieved by reducing wages, has not led to an increase in investment. It has led to the opposite, as the chart below shows.<br /><div style="text-align: center;">Figure 2</div><a href="http://ablog.typepad.com/.a/6a00e554717cc988330153928fdda1970b-pi"><img alt="11 10 26 Profits 2" border="0" height="360" src="http://ablog.typepad.com/.a/6a00e554717cc988330153928fdda6970b-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 10 26 Profits 2" width="452" /></a><br /><br />In the words of the CSO, ‘Expressing gross fixed capital formation as a percentage of gross value added gives the investment rate. Gross value added is largely unchanged between 2009 and 2010 while investment fell from €7.5bn to €5.8bn in the same period resulting in a fall in the investment rate between 2009 and 2010.’<br /><br />But there is also another way of expressing the investment rate - investment as a proportion of corporate incomes, or profits. On this measure, the investment rate has fallen by €1.9bn even as profits have increased by €2.9bn, by reducing wages by €4.9bn. The total investment rate has fallen on this measure from 21.3% to 15.3%.<br /><br />From the point of the view of the economy as a whole, this transfer of incomes has been disastrous. The corporate sector has €32bn in unspent (uninvested) income from profits. But the household sector – which spends more than 90% of its income – has had its income reduced.<br /><br />The thrust of policy is not to produce an economic recovery. It is to produce a recovery in profitability. In this, it has been a qualified success. The absolute level of profits has recovered from its low and the profit share of output has also increased to more than 50%, even if profits have not recovered their previous peak. The intention is clearly to achieve that goal at the expense of wages.<br /><br />In Ireland it has become commonplace to suggest that, while all sorts of investment projects and welfare provision are desirable, ‘there is no money left’. On the contrary, the €32bn level of uninvested profits in 2010 alone is almost exactly equal to the entire reduction in GDP in the recession which began in 2008, €34bn.<br /><br />This is the thrust of the entire ‘austerity’ policy across Europe, the transfer of incomes from labour to capital in order to increase profitability. In a subsequent blog <i>SEB</i> will examine the effective of this policy in the leading European economies, including Britain.gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-9883645367272993752011-10-09T03:44:00.000-07:002012-07-02T20:57:01.356-07:00GDP Data Show UK Stagnation Is Home Grown & Due to Government Policy<b>By Michael Burke</b><br /><br />Publication of the latest estimate of GDP data shows that the recession was much sharper than previously thought. The revision shows that GDP contracted by 7.1% rather than the 6.4% previously estimated. The recovery which began in the 3<sup>rd</sup> quarter of 2009 was also slightly stronger than previously estimated, the economy expanding by 2.8% until the 3<sup>rd</sup> quarter of 2010. From that time onwards the economy has stagnated completely, with zero growth in the three quarters since. The result is that the British economy is 4.4% below its peak level before the recession, which is now estimated to have begun in the 2<sup>nd</sup> quarter of 2008.<br /><br />George Osborne and other Tories as well as their supporters in the media are now promoting the idea that the stagnation of the British economy is a function of the turmoil in the Eurozone economy and financial markets. The main channel for economic weakness in the Eurozone to be expressed in British economic activity is via exports. But the British economy has not grown over the last 9 months - while the first dip in exports has occurred only in the latest quarter. This is highlighted in the chart below, which shows the level of total domestic expenditure versus exports. Domestic demand began to contract as soon as the current government took office. Evidently, the stalling of British economy has not been caused by the turmoil in the Eurozone.<br /><div style="text-align: center;">Chart 1</div><a href="http://ablog.typepad.com/.a/6a00e554717cc98833015436001c26970c-pi"><img alt="11 10 09 Dom & Foregn GDP" border="0" height="292" src="http://ablog.typepad.com/.a/6a00e554717cc98833014e8c207db7970d-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 10 09 Dom & Foregn GDP" width="450" /></a><br /><br />In fact the opposite is the case. The British economy comprises 14.5% of the entire EU economy, in OECD terms approximately $2trn of a total $13.8trn (in Purchasing Power Parities). Yet even before the latest downward revisions to GDP by the Office of National Statistics are included, the OECD data show that the entire loss in EU GDP was $355bn, of which British economic weakness is 21.4% of the total, equivalent to $76bn. As the chart below shows, the British economy has been a brake on the Eurozone economy, not vice versa.<br /><div style="text-align: center;"><br />Chart 2<br /></div><a href="http://ablog.typepad.com/.a/6a00e554717cc98833015436001c64970c-pi"><img alt="11 10 09 Eurozone & UK GDP" border="0" height="270" src="http://ablog.typepad.com/.a/6a00e554717cc98833015436001c6d970c-pi" style="background-image: none; border: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 10 09 Eurozone & UK GDP" width="450" /></a><br /><br /><b>Stagnation</b><br /><br />Returning to the ONS release, the total loss of output since the UK recession began is £65.2bn. The total loss of investment (Gross Fixed Capital Formation) over the same period was £43.3bn, that is almost precisely two-thirds of the entire recession. But the latest data also represent a turning point. The total loss in household consumption during the recession was larger at £51bn, over three-quarters of the total contraction in the economy. The fall in household consumption began to outstrip decline in investment in the 1<sup>st</sup> quarter of this year.<br /><br />This loss in consumption has therefore not been the catalyst of recession. The decline in investment preceded the recession by 6 months. Declining investment was the driving force of the recession. But it does indicate that there is a new and significant and pressure on household spending in the British recession. Other components of the national accounts have risen over the same period, notably government current consumption and net exports.<br /><br />It is also no longer the case that the private sector fall in investment exceeds the total decline in investment. Previously, this had been the case as government investment had risen. As a result the fall in private sector investment had amounted to 80% of the total lost output through the course of the recession. Now the decline in private sector investment amounts to £36.5bn - 56% of the total decline in output.<br />But government investment is now falling. In total, government investment has fallen since the recession began, down £6.8bn. But this is entirely a function of the current government’s policy. Since the Tory-led government took office, government investment has fallen by £12.2bn, more than reversing the very modest rise in investment of the previous Labour government. The direct effect of the government decision to reduce investment is to cut GDP by 0.9%.<br /><br /><b>Recovery Derailed</b><br /><br />These are only the direct effects of declining government investment. It is now commonplace to speak of a continuous recession from the 1st quarter of 2008. Cameron and Osborne routinely speak of their dire inheritance from the Labour government. The actual inheritance of the Tory dominated government was actually an economic recovery underway, which after the latest revisions is now stronger and longer than previously estimated. The economic recovery lasted 5 quarters and GDP expanded by 2.8%, whereas previously it was estimated at 4 quarters long and a recovery of 2.5%.<br /><br />The Labour government did not begin to increase investment until the 4<sup>th</sup> quarter of 2008. From that time until the new government took office government investment rose by £27.2bn. But this had an indirect effect primarily by encouraging private sector investment so that the economy expanded by £38.7bn in total.<br />On the same ratio the current government’s decision to reduce its own investment will have led to a total decline in output of £17.4bn, or 1.3% of GDP.<br /><br /><b>Conclusion</b><br /><br />The UK economic stagnation is a home-grown one due to the policies of the present government. It began before there were any negative effects from the Eurozone’s turmoil. It is primarily a function of the government decision to reduce its own investment. The British economy is stagnating because of policy made in Downing Street and nowhere else.gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0tag:blogger.com,1999:blog-5484838888688994410.post-14306410635590689292011-10-03T07:54:00.000-07:002012-07-02T20:57:01.460-07:00Economic downturn in the UK now twice as bad as in the Eurozone due to government deficit cutting<br />By John Ross<br /><br />One of the more factually inaccurate pictures being spread by supporters of the policies of the present UK government - with its priority to budget deficit reduction - is that UK economic performance during the financial crisis is superior to that of the evidently crisis hit Eurozone. A typical version of this <a href="http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8802462/Protectionism-beckons-as-leaders-push-world-into-Depression.html">appears</a> in an article on 3 October in the <i>Daily Telegraph</i> by its international business editor Ambrose Evans-Pritchard.<br /><br />Evans-Pritchard states: ‘My sympathies go to the hard-working citizens of Germany, Spain, Italy, Portugal, and Ireland for being led into this impasse [the Eurozone] by foolish elites.’ Presumably Evans-Pritchard's sympathy goes to the inhabitants of the Eurozone, rather than his own country the UK, because he believes the UK has been doing better than the Eurozone.<br /><br />The factual situation is the exact opposite of the impression presented by Evans-Pritchard. Judged by economic performance, the average citizen of the UK far more needs Evans-Pritchard’s sympathy than the average citizen of the Eurozone - i.e. the UK’s economic performance during the financial crisis is much worse than that of the Eurozone. This may be seen in Figure 1 – which shows UK GDP compared to that of the Eurozone since the peak of pre-financial crisis output. Comparison is straightforward as in both the Eurozone and the UK the peak of the previous business cycle was in the 1st quarter of 2008.<br /><br />By the 2nd quarter of 2011, that is 14 quarters after the peak of the previous cycle, Eurozone GDP was 2.0 per cent below its previous peak level whereas UK GDP was 3.9 per cent below its previous peak - i.e. UK economic performance was almost twice as bad as that of the Eurozone.<br /><br /><div style="text-align: center;">Figure 1</div><div style="text-align: center;"><br /></div><a href="http://ablog.typepad.com/.a/6a00e554717cc9883301539208625b970b-pi"><img alt="11 10 03 UK & Eurozone GDP" border="0" height="291" src="http://ablog.typepad.com/.a/6a00e554717cc98833014e8bfc5cf4970d-pi" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 10 03 UK & Eurozone GDP" width="452" /></a><br /><br />Equally striking is the clear way in which present government’s policies made UK economic performance worse than in the Eurozone. It may be seen from Figure 1 that while the initial decline in UK GDP was greater than in the Eurozone - the greatest decline in UK GDP being 6.4 per cent registered in the 3rd quarter of 2009, compared to a maximum Eurozone drop of 5.5 per cent in the 2nd quarter of 2009 - recovery in the UK was also initially more rapid. This may be clearly seen in Figure 2, which shows year on year GDP changes.<br /><br />The UK and the Eurozone reached their 1st quarter 2008 peaks with almost exactly the same economic momentum behind them – 1.9 per cent growth in the previous year in the UK and 2.0 per cent in the Eurozone. However by the 3rd quarter of 2010, the one immediately following the departure of the previous government, UK GDP was rising at 2.5 per cent compared to 2.0 per cent in the Eurozone. Eurozone recovery subsequently slowed somewhat to 1.6 per cent by the 2nd quarter of 2011.<br /><br /><i>However UK GDP growth under the new government, which gave priority to budget deficit reduction, dropped astonishingly, by more than two thirds, from 2.5 per cent to 0.7%</i>. Under the new government the year on year growth of UK GDP therefore fell from being higher than that of the Eurozone to being less than half that of the Eurozone!<br /><br /><div style="text-align: center;">Figure 2</div><br /><a href="http://ablog.typepad.com/.a/6a00e554717cc98833015435dbeeb5970c-pi"><img alt="11 10 03 YK & Eurozone YonY" border="0" height="291" src="http://ablog.typepad.com/.a/6a00e554717cc98833015435dbeeb8970c-pi" style="background-image: none; border-bottom-width: 0px; border-left-width: 0px; border-right-width: 0px; border-top-width: 0px; display: block; float: none; margin-left: auto; margin-right: auto; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="11 10 03 YK & Eurozone YonY" width="452" /></a><br /><br />The present author is not a supporter of the present constitution of the Euro. On the contrary I <a href="http://bit.ly/n28Hv5">predicted</a> the current events unfolding in Greece and other countries in advance due to fundamental weakness in the design of the Euro. Writing in 1996, i.e. fifteen years ago:’ [the Treaty of] Maastricht’s proposals are … disastrous. It proposes to create the most fundamental features of a common state — a single currency and a central bank. But it does not create any state budget which can deal with the huge regional and sectoral implications of this. The process that would unfold with the creation of a single currency by this method may be predicted with certainty. Substantial parts of the EU… will be pushed into severe recession if they join.There will be sharply deepening regional imbalances and inequalities.’There is evidently no reason to revise that analysis.<br />It is therefore all the more striking that UK economic performance is actually <i>worse</i> than in the Eurozone. And a substantial reason it is worse is clearly due to the policies of the present government with their priority to budget deficit reduction.<br /><br />In any discussion of the relative economic performance of the Eurozone and the UK two fundamental facts must be held in mind against unsubstantiated myths:<br /><ul><li>UK economic performance during the financial crisis is substantially worse, almost twice as bad, as that of the Eurozone. </li><li>And the reason it is that bad is because the present government, through its priority to cutting the budget deficit, reduced the UK’s rate of economic recovery from substantially above that of the Eurozone to less than half that of the Eurozone. </li></ul>This factual situation evidently has a more general economic significance than merely for the UK and the Eurozone. For <a href="http://bit.ly/nCgmaT">reasons</a> dealt with frequently on this blog a policy of simply running budget deficits is inadequate to deal with the consequences of the present financial crisis as it does not tackle its driving force - the decline in investment. But under conditions of private sector weakness any rapid reduction in the budget deficit will lead to rapid economic slowdown or contraction. This is sharply illustrated by the fact that the UK government, by such policies, has reduced the UK's rate of economic recovery to less than half that of the openly crisis struck Eurozone.<br /><br />Other countries thinking of embarking on immediate deficit reduction policies, such as those advocated by the Republicans in the US, should look at the UK and draw the appropriate negative conclusions. Do not be totally distracted by financial fireworks: the policies of the present UK government are so bad they have produced an economic recovery which is only half that of the Eurozone!<br /><br />* * *<br />This article originally appeared on <a href="http://ablog.typepad.com/keytrendsinglobalisation/">Key Trends in Globalisation</a>.gretyhttp://www.blogger.com/profile/00052824450656433619noreply@blogger.com0