In July of this year, George Osborne, the British Chancellor, announced that the UK economy had finally reached its pre-crisis level, thanks to economic growth of over 3% in the last 12 months. But, despite this emergence from economic depression, Osborne’s mood was subdued. The Coalition Chancellor, like the more far-sighted bourgeois commentators, understands that this so-called “recovery” has been anything but that for the vast majority of people. Meanwhile, dark clouds are forming on the horizon, threatening to plunge the world economy into an even deeper crisis.
Osborne: not breaking out the champagne just yet
Whilst the headlines of many papers and news websites may have loudly proclaimed the end of Britain’s depression, the more astute economic commentators gave a more sober assessment of the facts. Firstly, despite the fanfare of “recovery”, it must be mentioned that this has been the biggest crisis and the weakest recovery in the history of British capitalism. In total, it has taken 25 quarters (over six years) for the UK economy to reach its pre-crisis level of output, compared to around a total of 16 quarters (four years) for the previous longest recessions, which began in 1930 and 1979 respectively. Of the G7 countries, only Italy has seen a longer depression since the beginning of the crisis in 2008; meanwhile, only Japan saw a deeper recession in terms of the peak-trough fall in GDP.
Furthermore, simply reaching pre-crisis levels is surely a low bar to aim for. What about all the years of potential output lost during these last six years of crisis? If the crisis had not happened, surely we would have a much larger economy now than we currently face? Indeed, if one takes the 1970-2008 trend for growth (of 2.8% per year) and extrapolates, the result is that the UK economy is still 15% lower than it would be had there been no crisis. This equates to a cumulative loss of output of over £1trillion – some two-thirds of one year’s GDP. “Lest we forget,” comments Robert Peston, the BBC’s economics editor, “this has been the mother of all modern depressions.”
Secondly, whilst the Tories would like to boast that they have fixed UK’s broken economy, the reality is that the current “recovery” has done nothing to change the balance of Britain’s economic activity. Osborne and Cameron once claimed to be leading the “march of the makers”, promising to restore Britain’s manufacturing base – that had been hollowed out by the policies of their late idol, Margaret Thatcher – and remould the UK as an export-led economy along the lines of the Germany model. But again, facts can be stubborn things, and it seems that despite the assurances of the Tory Chancellor, Britain’s economy is much the same as it was before the crisis – that is, dominated by the financial sector and by consumption based on rising house prices and credit.
“So what kind of recovery has this been?” asks Robert Peston. “Well it has been completely dominated by our service industries.”
“Without a resurgence in services, there would be no prospect at all of the UK regaining the income lost in the great crash of 2007-8...many will be slightly depressed that although the service economy is now just under 3% bigger than it was at the peak, manufacturing is still more than 7% smaller, and the production industries as a whole have been diminished by 11%...although it is heart-warming to see UK manufacturing growing right now, there has been no rebalancing of the economy back towards the makers.
“Also, within services, the contribution of shoppers to the recovery remains immense - and the retail trade made the biggest contribution to the latest quarter's services surge. That suggests we may be at a premature end to households' attempts to strengthen their finances and pay down debts - and shows that growth in the economy remains perilously sensitive to the cost of money.”
In other words, the UK economy remains precariously balanced on a knife’s edge, reliant on households consuming by eating into their savings, with investment (as a percentage of GDP) – the real engine to economic growth – still far below pre-crisis levels. Household debt, meanwhile, remains at eye-watering levels, acting as a drag on demand.
Nothing, in short, has changed much from before the crisis: the economy is still based on unsustainable levels of household consumption, with enormous excess capacity – i.e. overproduction – preventing any significant investment by big business in new productive capacity and jobs. As Martin Wolf of the Financial Times explains:
“This has been an extremely weak recovery...the economy is still over-levered...All this highlights big challenges...
“...An obvious concern is that house prices have been soaring once again, while households are still burdened with debts that on average amount to 140 per cent of disposable income...
“...It is also possible there is significant excess capacity, possibly more than recent rises in employment suggest. With investment recovering, capacity should rise faster. Moreover, when rates rise they are likely to hit the economy harder than before, given the mountain of household debt...
“...Yes, business fixed investment has improved. But in the first quarter of 2014 it was a mere 8.2 per cent of GDP. This cannot be enough to generate the growth in productivity the economy will need to manage ageing and the overhang of debt...
“...The auspices are not good. How are politicians responding? They seem to be struck quite dumb.”
Where’s our recovery?
Thirdly, and most importantly, this has only been a recovery for the rich. For the vast majority, all talk of recovery remains just that – talk. Even with the most superficial of analyses, one can clearly see that the economy remains below its pre-crisis level GDP in terms of a per person measure, as Larry Elliott, The Guardian’s economics editor, points out:
“...in terms of output per head of population, the downturn is still not over. The population has risen since the economy went into recession in early 2008, and at the current rate it will be 2017 or 2018 before the losses in per capita GDP are made up.”
The Tory-led Coalition have also been fond of boasting about the reduction in unemployment under their reign, with the latest figures from the ONS (Office for National Statistics) indicating that the unemployment rate is now at nearly a six-year low of 6.4%. However, the reality of the jobs market under the Tories and their programme of austerity is well known to anyone who has looked for a job in recent times.
The official figures are virtually plucked from the air, massaged to be far lower than the actual unemployment in society would suggest: thousands have sought refuge in further or higher education, racking up a mountain of student debt in order to avoid the intense competition of the jobs market; thousands more have taken on part-time or temporary work in order to make ends meet. Whilst the latter may not count towards the unemployment figures, they most certainly are underemployed.
Significantly has been the vast increase in the numbers of those registered as self-employed. One-in-seven workers in Britain – some 4.5 million people – are now classes as self-employed, an increase of around 8% over the past year. Desperate for work, thousands have taken to finding piecemeal scraps where they can. Such people, in reality, are another example of underemployment – of those who would like to have a full-time job, but who cannot find one due to the seemingly permanent state of weakness in the economy.
Thousands of others have been forced to reclassify as self-employed in order to gain work through agencies and big businesses that want to cut their labour costs, as is the case with the “bogus self-employment” revealed within the construction industry. Meanwhile, according to the Resolution Foundation, average weekly earnings for the self-employed have fallen by 20% since 2007, compared with a decrease of 6% for those in employment for the same period.
Alongside the rise of those in self-employment, it is now also officially estimated that 1.4 million are in precarious employment on zero-hour contrasts, with no guarantees or rights. Are these the jobs that the Tories wish to boast about having “created”?
The real situation for ordinary workers and youth is shown by the massive fall in real wages – a process which began before the crisis. After years of price increases alongside stagnant or slowly increasing wages, real earnings are now at the same level as in 2004. According to data from the Institute for Fiscal Studies, real median (middle) incomes are 5.4% below their peak, whilst the average (mean) income is 8.5% lower.
Figures for the latest quarter (from April to June 2014), meanwhile, indicate that wages (including bonuses) have actually fallen by 0.2% compared to a year earlier – the first time since the beginning of the crisis that nominal wage growth (i.e. not even counting for inflation) has been negative. With inflation at between 1.5-2.0%, the real wage decrease is even more acute. In addition, the official inflation figures hide the real increase in the costs of living for many ordinary families, with rent, food, and energy prices all increasing substantially over the past year.
This is the other side of the coin of falling unemployment figures: jobs may have been created, but these are simply low-paid, part-time, or precarious jobs, which offer nothing in terms of a decent standard of living; which offer no hope or future to the youth of today.
Osborne and co., therefore, can talk all they like about economic recovery and low unemployment; but the life for the vast majority in the past six years has been one of falling real wages and declining living standards; of cuts to welfare, pensions, and public services; of zero-hour contracts and precious, low-paid work. The temporary and unsustainable “recovery” that has been seen has only been a recovery for the rich, who continue to make handsome profits, whilst at the same time refusing to invest and sitting on piles of cash. Where’s our recovery George?
The global crisis of capitalism
The situation in Britain cannot be viewed in isolation, however, but can only been seen and understood in the context of the general world crisis of capitalism. Whilst the British economy may have temporarily emerged from the doldrums, across the Channel things are looking a little less rosy. Not long ago, European leaders were breathing a collective sigh of relief at having averted a breakup of the eurozone. But the latest GDP figures show that the threat of imminent breakup has only been replaced by a potential return of recession across the continent. As Paul Krugman comments in the New York Times:
“Just a few months ago Europe’s austerians were busy congratulating themselves, declaring that a modest upturn in southern Europe vindicated all their actions. But now the news is looking grim, with industrial production stalling out and good reason to fear yet another slide into recession.”
Immediate crisis, then, has merely given way to the greater worry of a permanent state of stagnation and decline. Most notable in the figures for the second quarter of 2014 was the data for the eurozone’s three biggest economies: Germany, France, and Italy. The French economy registered its second consecutive quarter of zero growth, whilst figures for Italy show a 0.2% decline in GDP.
Most surprising for the bourgeois analysts was the 0.2% fall in GDP seen for the German economy, normally considered the strong and stable powerhouse of Europe. The drop in German GDP should come as no surprise, however, for it merely demonstrates the extreme interconnectivity that exists worldwide – not only the interconnectivity between the economies of different nations, but also the interconnectivity between the global economy and the global political situation.
Since the onset of the crisis, Merkel – as the holder of the purse strings – has been dictating policy to the rest of Europe, and in particular to the peripheral countries of the eurozone; the so-called “PIIGS” of Portugal, Italy, Ireland, Greece, and Spain. Workers and youth in these countries have had to endure – and continue to face – years of austerity, with cuts to pay, pensions, and public services. The result has been an “internal devaluation” – i.e. a massive reduction in the cost of labour – to increase the “competitiveness” of capitalism within these weaker economies. Needless to say, all of this has come at the expense of enormous attacks on the living standards of ordinary people.
Greece, Spain, and Portugal have seen positive growth in recent months due to this new found competitiveness, allowing exports to pick up. But in an interconnected world economy, for every winner, there will be a loser also. Not everyone can be a net-exporter. Cutting wages to increase competiveness also means cutting away at the very market for the exports of others. And so it is with Germany, where exports – the motor force of their economy – have collapsed as a result of austerity, which has decimated the market for German goods in the peripheral countries of Europe.
Meanwhile, whilst the PIIGS economies have seen large internal devaluations, wages in Germany have not been attacked to the same degree over the past period, meaning a relative decline in the competiveness of German capitalism, further affecting German exports.
Added to this has been the increased political instability in the Ukraine, which has spilt over and created tensions between Germany and Russia, who have strong mutual economic interests. The overall result has been a fall in investment into Germany, which, combined with the decline in exports, has meant a fall in the overall GDP for Germany. Once known for its exporting strength, the German economy is now surviving on the basis of internal consumption.
With Germany, France, and Italy – which account for two-thirds of GDP in the eurozone – all seeing stagnation and decline, the overall result is that the eurozone registered zero growth for the second quarter of 2014, with the EU economies only seeing positive growth due to the figures for Britain. In addition is the slide towards deflation in Europe, which poses a serious danger by making debts (both public and private) harder to repay. The fears now are of a triple-dip recession in the eurozone, which, combined with the threat of deflation, has fuelled calls for the European Central Bank (ECB) to intervene more vigorously by conducting its own programme of quantitative easing (QE) – something that Germany, with its paranoia of inflation, has strongly resisted up until now.
As the experiences of QE in the USA and UK demonstrate, however, there is no such thing as a free lunch. Far from stabilising the economy, the enormous amounts of cheap money being thrown into the system by QE has the effect of creating even greater instability on a world scale, fuelling speculative bubbles in China and other emerging economies. Any QE programme by the ECB will only add to this general instability in the global economy.
Worldwide, the economy is still facing turbulent times. In China, Brazil, Indonesia, and elsewhere – once thought to be possible saviours for the global economy – growth is slowing down. Added to this is the extreme instability and turbulence in the geo-political situation, which feeds back and creates further instability in the economy. In Ukraine, Iraq, Syria, etc.: all of these are powder kegs that could explode at any time, driving up the price of energy or leading to heightened protectionism – either of which would push the world economy over the edge.
The productivity puzzle
One of the main causes for relief for those concerned with the fate of the global economy has been the performance of the US economy, which registered strong growth in the second quarter of 2014. However, this followed a contraction in the first quarter of the year and the “recovery” as a whole remains the weakest since the Second World War, meaning that the patient will not be given a certificate of full health just yet.
Behind the short-term fluctuations, however, there are long-term concerns regarding the health of the economies in the US, Europe, and Britain. Most notably has been the fall in productivity growth – that is, in the economic output per hour – in these countries, indicating that capitalism has run out of steam and can no longer develop the productive forces.
In the America, productivity growth has been around 1% since the beginning of the recent “recovery”, compared to an average of 2.3% between 1947 and 2007. In Britain, the productivity of labour has actually fallen since the crisis, with a decrease of at least 4% in the output per hour from the pre-crisis peak. If one compares productivity in the UK now to where it should be on the basis of the pre-crisis trend, the figure is an even more dramatic 16% drop in output per hour.
The so-called “productivity puzzle” has left economists scratching their head. On the one hand, the fall in productivity is clearly the mirror image of the fall in unemployment, with companies taking advantage of relatively low wages to keep people in work rather than invest in machinery and technology. Added to this is the large numbers of those in self-employment or part-time work, as mentioned earlier.
On the other hand, however, in a recent report on the question of the productivity puzzle the Bank of England (BoE) concludes that the fall is productivity is likely to be less of a temporary effect, and may in fact signal a more persistent problem, stating that:
“The protracted weakness in productivity and the strength in employment growth over the past two years suggest that other factors are likely to be having a more persistent impact on the level of productivity.”
In other words, this drop in the productivity of labour is not something temporary due to the crisis, but reflects a long term structural problem in the economy – a “hysteresis” in which conditions do not return to their pre-crisis levels, but remain permanent altered. The Economist points out that the American economy faces similar structural problems, explaining that:
“Economic growth over the business cycle is driven mostly by swings in demand, and in recent years demand [in America] has been held back: households have been repaying their debts; the government has restrained its spending and raised taxes; and interest rates, having reached zero, are unable to fall further. Over the long run, however, a country’s potential growth depends on supply: how many workers it has and how productive they are. The recent divergence between America’s employment and output suggests the country faces not just deficient demand but also enfeebled supply, as more people working without more output means lower productivity.”
The BoE report provides a number of possible factors that may have led to this hysteresis, including: a reduction of investment in new machinery and technology; a lack of investment in innovation – i.e. in research and development; “impaired resource allocation” – that is, a failure of market forces to allocate capital and labour effectively and efficiently; and a high survival rate of firms, which have been propped up by historically low interest rates.
Here we have it in black-and-white from the Bank of England themselves, the guardians of British capitalism: the “invisible hand” of the market has failed; businesses, left to their own devices in the pursuit for profit, have refused to invest and develop the productive forces; so-called “creative destruction” has not worked, and instead we are left with “zombie capitalism” – an army of the unliving, of firms that should be dead, but that are instead being kept alive artificially by an abundance of cheap credit.
All of these factors are a reflection of the huge levels of excess capacity on a world scale – that is, of the enormous contradiction of overproduction, which built up in the decades preceding the onset of the crisis, and which continues to exist today. Despite six years of recession and stagnation, the tremendous excess capacity in the system has not been destroyed, placing a barrier in the way of new investment in the productive forces. Indeed, figures indicate that capacity utilisation in Britain has been below 50% for the past year, meaning that British capitalism is only using half of the potential productive forces at its disposal. What more of a damning indictment of the capitalist system could one ask for?
This is the reason for the historically low investment in the USA and UK, which fell dramatically following the crisis, and which remains below pre-crisis levels today. Why invest in new capacity – in new factories, new machinery, and new technology – when there is already a general glut of commodities on the market? But without investment, how can there be any sustained recovery?
As long as this enormous excess capacity in the system – this gigantic contradiction of overproduction on a world scale – exists, there can be no talk of any genuine recovery. For as long as this excess capacity exists there can be no significant new investment, without simply creating even bigger contradictions, for example through the use of Keynesian measures or the expansion of credit, as has been seen in China. And without sustained investment, what recovery we see will be fragile and anaemic.
Furthermore, in cutting education budgets and the money available for research, capitalism has cut away at the very source of its own growth. Investment in education and training is vital in developing the skills of workers and thus increasing their productivity; meanwhile, research and development is essential for innovation and technological progress, and thus a key factor for productivity growth also. With education and innovation facing a crisis, and with a fall in investment in new machinery, where are increases in productivity expected to come from?
The “productivity puzzle” aptly demonstrates the obstacle to development that capitalism has become. The forces of competition and the free market have become an enormous barrier to innovation and growth. Private ownership and production for profit are strangling society, holding humankind back in every field, from science and technology to art and culture.
The new normality
The UK and US economies may be growing for now, gaining the praise from a number of bourgeois plaudits around the world, but one should not get sucked in by the hype. The reality is that these short-term spurts are nothing but blips on a graph that has a distinctly downwards trajectory; spasms of life in an otherwise terminally-ill patient.
As Marxists, we must avoid the shallow empiricism of the bourgeois commentators. Marxists look beyond the immediate facts and figures, peering beneath the surface in order to attempt to understand the underlying processes and the contradictions that govern the dynamics of this motion. Rather than reacting with surprise to every change in the situation, Marxists must be able to step back and analyse the long term changes and developments within society.
Beyond the month-to-month or year-to-year changes, the more serious bourgeois commentators are warning of fundamental changes that are taking place within the capitalist system: former US Treasurer Larry Summers and Nobel Prize winning economist Paul Krugman are saying that capitalism is in a state of “permanent slump” – of permanently lower growth and of “secular stagnation”; academic economists are talking about “technological unemployment”, in which automation leads to a “race against the machine” and mass unemployment; meanwhile, Thomas Piketty has risen to fame for his writings about the tendency under capitalism towards rising inequality, which he predicts will only widen further in the future.
It is increasingly clear today that the long term perspective for capitalism is not one of growth and rising living standards, but one of crisis, stagnation and decline; of a system that is no longer able to develop the productive forces to any significant degree and take society forwards. Six years after the crisis began, the economy has yet to return to normal. Indeed, there will be no return to the normality of old. Instead, we now find ourselves in a “new normality” – one of low growth, austerity, and mass unemployment.
Official estimates in Britain indicate that the levels of growth seen in the past will never be regained. Along with the crisis, the result is a permanent loss of output, which will scar society for decades to come. As Martin Wolf of the Financial Times notes:
“Whatever the causes of the crisis, it has bequeathed huge headaches. But the biggest, by far, is how to reduce the permanent losses of output. Even if the economy grew at a sustained rate of close to 3 per cent a year, the present value of lost output would be close to five times annual GDP. This is why a delayed recovery is not much of a triumph.”
This is the effect of the crisis of capitalism: we have permanently lost the equivalent of five years of economic output. It is as though all the work and labour for half-a-decade was for nothing – just destroyed in an instant or flushed down the drain. Yet again we see the absolute waste of resources – the complete squandering of wealth – that capitalism, supposedly the most “efficient” of economic systems, causes.
Such long term decline is by no means restricted to Britain, but is predicted to take place worldwide even by the more serious bourgeois analysts. In a recent document entitled “Shifting Gear”, the OECD (an international organisation for the advanced capitalist countries) outlines the challenges facing the capitalists over the next 50 years. The OECD predicts that global economic growth will slow from an annual average rate of 3.6% in 2010-2020 to 2.4% in 2050-2060, accompanied by an increase in wage inequality of 30% in the advanced capitalist countries.
To boost long-term growth, the OECD suggests that, “Further reforms to inject dynamism in labour and product markets [read: attack labour laws and workers’ rights], combined with re-designed intellectual property right policies, will be needed to sustain innovation, productivity and employment.” The OECD report quickly adds, however, that, “Such policies could put further pressure on earnings inequality however.”
Meanwhile, other long term projections only reinforce the message that inequality – already growing over the past few decades – is set to rise further in the years ahead. What productivity gains there may be from new innovation and technology will, under capitalism, accrue far more quickly to the owners of capital than to workers. Growing profits at one pole will be accompanied by growing unemployment at the other, as machines displace labour and even middle-class jobs come under threat from automation. As The Economist reports:
“In the early part of the Industrial Revolution the rewards of increasing productivity went disproportionately to capital; later on, labour reaped most of the benefits. The pattern today is similar. The prosperity unleashed by the digital revolution has gone overwhelmingly to the owners of capital and the highest-skilled workers. Over the past three decades, labour’s share of output has shrunk globally from 64% to 59%. Meanwhile, the share of income going to the top 1% in America has risen from around 9% in the 1970s to 22% today.”
“...some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently. They start from the observation that, across the rich world, all is far from well in the world of work. The essence of what they see as a work crisis is that in rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade. Recent research suggests that this is because substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share going to labour has fallen...
“...technical change is increasingly taking the form of ‘capital that effectively substitutes for labour’. There may be a lot more for such capital to do in the near future. A 2013 paper by Carl Benedikt Frey and Michael Osborne, of the University of Oxford, argued that jobs are at high risk of being automated in 47% of the occupational categories into which work is customarily sorted. That includes accountancy, legal work, technical writing and a lot of other white-collar occupations.”
All of this is a recipe for an intensification of the class struggle, as the needs of capital come into conflict with the needs of workers and youth to maintain their living standards. The future will be one not only of crisis, stagnation, and decline on the economic place, but of mass movements, struggles, and revolutions also. Everything that the ruling class does to restore economic stability will only further destabilise the social and political order, and vice-versa.
This is the new normality facing society: a future of instability at all levels – economically, socially, and politically. The relative stability in the economy at the present time will only be a prelude to another – higher – phase of the crisis of capitalism; a calm before the tumultuous storms that lie ahead.
We are living in turbulent times – times, when, in the absence of a clear understanding, it is easy to be blow hither and thither by events. But with the compass of Marxism to guide us, we will not be taken by surprise, but will steer a steady course as we fight for the socialist transformation of society. We invite our readers to join us in this fight.