by John Ross

Accurately assessing China's present stage of economic development is important. It determines what can realistically be expected from its economy and provides a yardstick for international comparisons.

The aim of this article is to provide this yardstick not in abstract statistics but in comparison to the development of Asia's two large industrialised economies – Japan and South Korea. Such comparison vindicates the Chinese government's realism, provides encouraging indicators of China's company development, and clears away confusions introduced by some commentators.

To assess China's stage of economic development it is important not to confuse the size of its total GDP with the best indicator of an economy's productivity – its GDP per person. The latter, not the former, determines how developed an economy is.

It is officially recognized that China will overtake the US to become the world's largest economy within 10 years. At market exchange rates this will take place around 2019. On the IMF's latest calculations it is likely in 2016, if the comparison is made taking into account different prices in differing countries.

China overtaking the US to become the world's largest economy will certainly be a turning point in world history – ending 140 years of the US holding that position. But China's huge GDP growth has led some non-Chinese commentators to mistakenly claim that China is no longer a developing country. For example Gideon Rachman, the Financial Times chief foreign affairs columnist, claimed earlier this year: "Anybody who talks regularly to Chinese officials will be familiar with the mantra that 'China is a developing country'. But Shanghai, which I visited last week, mocks this modest description."

The claim that China is a developed, and no longer a developing, country is also used to spread a myth that China's economy is not "creative" – allegedly proved because China has not yet created brands as world famous as Apple or Google. According to British economist Will Hutton, for example, not only China but all of Asia outside Japan is unable to achieve this "creativity". He claims: "The reason why so few Britons can name a great Chinese brand or company… is that there aren't any." And: "Asia, except Japan, remains in essence a subcontractor to the West... China's... is an economy that does not innovate – it is the great copier and counterfeiter of Western technology. This may change over the next 200 years, but not during the lifetime of most of the people reading this column.... Not one of this century's general-purpose technologies will be made outside the West and Japan, which have held a monopoly for 300 years. Their lead will widen rather than narrow."

Actually the reality is China's government is entirely accurate in insisting that China is still a developing country. Even when China's GDP is as big as the US, given that China's population is more than four times that of the US, China's GDP per capita will still only be 23 percent of that of the US. China's very large GDP is important, for example in military defence, but even when China's GDP is the same as that of the US it will still be less developed than the US.

To make a real comparison of the present stage of economic development of China it is useful to take its present GDP per capita and see in which year other countries achieved that level. Taking internationally recognised statistics produced by the University of Pennsylvania, China's GDP per capita today has reached the same as Japan's in 1966 or South Korea's in 1986.

These are illuminating comparisons. Japan in 1966 and South Korea in 1986 were no longer primarily agricultural. But the glory days of the international impact of Japanese and South Korean industrialisation still lay ahead. By 1966 Japan's Toyota, protected by tariff barriers and restrictions on inward investment in a way China's car companies are not, was a significant force in the domestic car market but not yet a large scale exporter. South Korea's Samsung in 1986 was entering the high tech market, becoming a leading manufacturer of memory chips, but it was a decade before it became the style leader it is now.

By the mid-1960s and 1980s, the sectors Japan and South Korea had built themselves on were heavy industry, steel and shipbuilding, and domestically competitive motor cars. In short they precisely resembled China's economy today!

A significant difference to 1966 or 1986 is that the world's leading economy, the US, was less developed than today. The gap between the US and China now is bigger than that between the US and Japan and South Korea in 1966 or 1986.

To put numbers on this, in 1966 Japan's GDP per capita was 50 percent that of the US, and in 1986 South Korea's GDP was 30 percent that of the US. China's GDP per capita today is however only 19 percent that of the US. China today faces much more advanced competition from the US than Japan or South Korea did.

What, therefore, would we expect from this comparison? First, in terms of the industries in which China is strong you would expect it to look more or less as it does today – at its present stage of development you would not expect China to have brand names with the global recognition of Apple or Google. At this stage of their development Japan or South Korea didn't have them either. But within two decades Japan and South Korea did achieve them in Toyota, Honda, Sony, and Samsung.

Today, China's Haier is the world's largest domestic appliance manufacturer, Huawei is likely to overtake Ericson as the world's largest telecoms equipment producer in the next two years, and China is already the world's largest manufacturer of high speed trains.

In short, China's development today is entirely equivalent to Japan or South Korea at a similar stage of their economic growth. And in the following two decades of their economic development Japan and South Korea's brands stormed the world.

The author is a columnist with China.org.cn.

John Ross is Visiting Professor at Antai College, Shanghai Jiao Tong University. From 2000 to 2008 he was Director of Economic and Business Policy in the administration of the Mayor of London Ken Livingstone, a post equivalent to the current position of Deputy Mayor. He was previously an adviser to major international mining, finance and equipment manufacturing companies.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn

 Suggestions for a way out of the current economic swamp

After more than three years since the current economic crisis erupted in the late summer of 2007, there has been no lack of analyses as to its causes, origins, and even future direction. Most accounts by economists, media pundits, and policymakers alike grossly miss the mark. Some have been accurate in part. And a very small, select few have gotten most of it right.

But it is no longer sufficient to simply explain the crisis. The pressing need today is to explain what measures are necessary to bring about a sustained economic recovery. For programs and policies of the past three years, from Bush to Obama, and both Republican and Democratic alike, have fundamentally failed to generate recovery—except, of course, for the big banks, large corporations, and wealthy investors. Bank and corporate profits, stock prices, bond yields, and capital incomes in general have all largely recovered to pre-crisis levels and then some. Meanwhile the middle class, 100 million plus hourly wage earners, and the 90 million households earning annual incomes less than $90,000—Main Street USA—still languish in the economic swamp of continuing recession.

Those suffering the worst are the 25 million unemployed, the 10 million homeowners who have experienced foreclosures and bank seizures of their homes, the tens of millions of workers confronted today with declining real wages, with rising double-digit health-care premiums, millions of students' overwhelmed with accelerating education costs, and shrinking pension balances for tens of millions. About to join their ranks are millions of public employees who will find themselves hammered on all fronts in 2011. And all 115 million households in 2011 will face accelerating costs for food, gasoline, and local government taxes and fees.

Raising Revenue

There is now more clearly than ever a two-tiered America—and it's growing and spreading rapidly. From 1980 to 2007 the wealthiest 1 percent households (about 741,000 out of 115 million total households) witnessed their share of total income grow from only 8 percent to 24 percent by 2007, according to Internal Revenue data on income reported for tax purposes. What's fundamentally changed after 2007 is that, in order to continue to ensure that the wealthiest 1 percent retain their 24 percent share of income, it is no longer sufficient merely to freeze income gains for the bottom 90 percent. Income is now being directly shifted from the bottom 90 percent to the top 10 percent.

Also, it should be pointed out that the widening income gap is a highly conservative estimate. The IRS data on which it is based does not account, for example, for income by the wealthiest households and corporations that is not reported to the IRS—i.e., income diverted offshore in order to avoid having it taxed.

Multinational corporations admit to nearly a trillion dollars that has been shifted to offshore subsidiaries by corporate accounting tricks in order to avoid paying U.S. corporate taxes. Were that trillion effectively taxed at the 35 percent corporate tax rate, it would produce a tax revenue windfall of about $350 billion. The remaining $650 billion, repatriated back to the U.S., would be reinvested in the U.S. instead of offshore creating additional profits of $100 billion a year. That could raise an additional government annual tax revenue of about $35 billion ever year from that $100 billion in each of the next four years.

Even greater in number terms is the amount that wealthy households, investors, and companies have diverted to offshore tax havens. In 1985, it was estimated by the investment bank Morgan Stanley that $250 billion was stashed away in offshore tax havens. In recent years the estimates range from $6 to $11 trillion. The share of that global total held by U.S. based investors, wealthy households, and corporations is at least 40 percent of that, or about $2.4 to $4.4 trillion. Much of that is held offshore by institutional investors, like hedge funds and other private banks, on behalf of wealthy individuals and the other institutional investors they represent. So the wealthiest U.S. households probably have diverted $1-$2 trillion to these offshore havens as a means to avoid U.S. taxes. Assuming $1.5 trillion, and a 35 percent top marginal tax rate, that's about $500 billion in new tax revenue immediately. Assuming annual profits from the remaining trillion dollars results in an additional $150 billion a year, tax revenue is about $50 billion a year annually after that.

Based on these two preceding tax changes alone, the total new tax revenue raised comes to around $850 billion in the first year and $85 billion a year thereafter for each of the next four years, or another $340 billion.

A third tax could be levied on excess corporate cash. From his first stimulus program introduced in early 2009, it has been clear there never was any intent by the Obama administration for the government to directly create jobs. The strategy from the outset has been to bail out the banks and big non-bank corporations facing bankruptcy. It was argued at the time that if the banks were bailed out, they would then lend to businesses, which in turn would invest, hire, and create jobs. But the banks have insisted—for nearly two years now—on hoarding their $1 trillion in cash.

Meanwhile, non-bank big corporations are hoarding another $2 trillion. Private sector business in 2010 hired only about 1 million of the 25 million effectively unemployed, and about two-thirds of that 1 million have been part-time and temporary workers.

Remarkably, despite the severity of the current recession, government at all levels has reduced jobs instead of hiring to offset job loss in the private sector. Going into 2011, the increasingly united political elite of both parties are in agreement that no more will be spent on jobs. The budget deficit comes first.

A third measure—a one-time, one-year, 10 percent surtax on the $3 trillion hoarded corporate cash—would produce an additional $300 billion in government tax revenue. A total of $1.150 trillion could be raised by these three measures in the first year alone.

A fourth tax measure could require the wealthiest households to pay the equivalent of the 12.4 percent payroll tax that the bottom 80 percent, or 92 million-plus middle and working class households, pay on their annual income. If the wealthiest 1 percent households were required to pay the 12.4 percent on their total income (dividends, capital gains, interest, rent, etc.), just as the bottom 80 percent/92 million do, the payroll tax would produce tax revenues of an additional $85 billion in the first and every subsequent year. This 12.4 percent could be levied as a line item adjustment after taxes paid on their annual 1040 tax returns.

The next wealthiest 19 percent households, about 22 million, earn both capital incomes, like the wealthiest 1 percent, and wages, like the bottom 80 percent. But they pay the 12.4 percent payroll tax only up to $106,800 a year and pay nothing at all on their capital incomes. If they, too, were to pay the 12.4 percent payroll tax equivalent on all their salary in excess of the $106,800 ceiling for the payroll tax, as well as on all their non-salary capital incomes, it would raise roughly an additional $85 billion a year. The total is now roughly $1.320 trillion in the first year, and $255 billion each year thereafter.

That $1.320 trillion, by the way, could just about cover the U.S. federal government's currently projected budget deficit of $1.3 trillion. If the entire amount were dedicated to reducing the deficit, it would, in turn, eliminate any need to reduce social security benefits, cut Medicare and Medicaid, reduce student loans, and other social program cuts forthcoming in the next U.S. budget.

A fifth and final tax proposal is to impose a permanent transactions tax on all financial trades—stocks, bonds (per $100 value), and the trillions of derivatives trades over the counter (interest rate swaps, currency swaps, etc.). A simple $1 fee for every stock trade would have virtually no negative effect on stock trading. Similarly a 10 cents for $100 value bond trade would amount to a mere $10 tax on the purchase of a $10,000 U.S. Treasury bond, for example; an amount that would hardly deter the bond sale. Additionally, with the passage of the Dodd-Frank financial regulation bill in June 2010, for the first time some derivatives trades will have to occur in clearing house transactions, which means they will now be recorded. A financial transactions tax on derivatives trading of similar dollar proportions as for stocks and bonds would raise further significant amounts of tax revenue, an additional $150 billion a year in tax revenue would be raised from a financial transactions tax.

Government Job Creation

The overwhelming fact today is that business won't create jobs; therefore government must. That means a direct shift in government policy from relying on markets to create jobs by flooding corporations with cash via bailouts, zero interest rate loans to banks, and multiple business tax cuts, to a government policy of direct job creation itself.

An effective program would target immediate, intermediate, and long-term job creation. For example, service sector jobs can be created more quickly, whereas jobs on large infrastructure projects take much longer to ramp up. The same applies to alternative energy projects.

A third of the available first year funding, about $500 billion, should go toward establishing a Government Alternative Energy Public Investment Corporation (AEPIC) to produce solar, wind, and other infrastructure to jump start this new industry. The current approach of the Obama administration is to provide government loans to private sector company start ups. However, it is clear these companies are increasingly unable to compete with Chinese and other European companies and are in decline financially. Only a large-scale U.S. government project can compete with other heavily government-dependent, subsidized, and virtually government-run companies in this sector in Asia and Europe.

Another $250 billion would fund traditional infrastructure jobs, emphasizing infrastructure repair projects in the U.S. Labor intensive projects should also be given strong preference, as opposed to big ticket cost projects that hire few initially and where most of funding is spent on expensive equipment and materials. In the 1930s, the Civilian Conservation Corps was created immediately and 500,000 workers (equal to 2 million in today's larger labor force) were hired in a matter of months to clean up forests and build rural structures. Today a similar organization—a Civilian Reconstruction Corp (CRC)—could focus on repair of roads, public lands, and inner city structures owned by the government, community facilities, local health clinics, and the like. Job creation need not be exclusively by government, but shared with private sector employers and even totally contracted out if immediate hiring were the rule.

For quick job creation some of the funding might be dedicated to the establishment of local health clinics, as part of a third program, a Community Health Services Corp (CHSC). The CRC could build them or, better yet, convert other buildings and structures in the inner cities and elsewhere. These health clinics would be staffed by doctors, nurses, technicians, and other administrative employees. Their availability would offload the growing burden on hospital emergency rooms and provide immediate healthcare for the current 50 million uninsured and the tens of millions on Medicaid, thereby also offloading some of the costs of Medicaid on States' budgets. Salaries could be paid by a combination of direct payment from the $200 billion allocated for this program and generous tax deductions for pro bono work by professionals. Part of the funding would also go towards a mass training program to bring 100,000 new health-care professionals and related staff into this sector. Government-subsidized training costs would be worked off by guaranteed years of service in the facilities: $50 billion annually would fund employee hiring and equipment for the community clinics.

Complimenting the above three targeted job creation programs is a new equivalent to the WPA jobs program of the 1930s, a 21st century Works Project Administration. Initially funded by $250 billion, it would create jobs in sectors and industries other than those created by the preceding Public Investment Corp, CRC, and CHSC. This program would function along lines similar to its 1930s counterpart, which created more than 8 million jobs during its 6-year tenure—which in today's workforce would be the equivalent of 30 million jobs. Not as initially ambitious as its 1930s counterpart, the New WPA would not at first function on a nationwide scale, but target employment creation in states and areas within states with chronically high joblessness. Like the WPA it would create decent paying jobs, not minimum wage jobs, but no jobs paying more on average than $50,000 a year. Employment terms would not exceed more than two consecutive years for anyone hired.

There are more than nine million involuntary part-time employees. Their underemployment status is the equivalent of 4.5 million unemployed of the total 25 million effective unemployed today in the U.S. Part of the jobs creation strategy should be to move these workers to full-time employment status, by a series of measures that would temporarily subsidize their benefits in exchange for employers agreeing to convert them to full-time status and pay. To strengthen these measures, wage legislation should be amended to require companies to provide full benefits to part-time and temporary employees, to index their wages to levels of wages in the full-time workforce in the company employed, and for employees to provide all other benefits provided to full-time employees. These provisions would apply to public employment, including schools, as well as private sector employment. Another $50 billion would fund this program in its first year, enabling the conversion of two million current involuntary part-time jobs to full time.

All of the $170 billion a year raised by the 12.4 percent payroll tax now levied on all incomes would be earmarked for encouraging workers having to work past retirement to leave the workforce, thereby making more jobs available to younger workers. Workers in the 60-69 age bracket are the fastest growing segment of the labor force today. This is largely due to inadequate retirement benefits, forcing the working elderly to continue past normal retirement age in the labor force. Social security benefits should be further subsidized by the payroll tax measures noted above ($170 billion a year), to allow earlier retirement at two-thirds equivalent pay for those in this age group, instead of the current less than half benefits rate. Retirement should be mandatory at the current eligibility age 66 if they receive subsidized payments at the two-thirds level; and voluntary at age 66 if they choose not to receive the two-thirds.

The remaining $50 billion of the total $1.470 trillion funding would be deployed to provide direct incentives to corporations to repatriate jobs offshore back to the U.S., particularly in the manufacturing sector of the economy. The incentives should be accompanied by strict disincentives for continued offshoring of jobs. The disincentives would include the loss of current tax credits that encourage offshoring, as well as the imposition of 25 percent tariffs on U.S. corporations that have offshored jobs and then re-import the products once made in the U.S., now produced offshore, back to the U.S.

An immediate, positive spillover effect from these measures and taxation would no doubt include an incentive to private employers to quickly start hiring themselves. They would know that hiring resistance in their companies and industries might well make them a future target for a government direct hiring project.

The direct job creation program would launch a very large, front loaded, job creation effort on multiple fronts, given the initial major tax revenue windfalls from repatriation and other measures. It would thereafter be funded from the ongoing roughly $400 billion a year revenue sources, as well as direct sales revenues generated from public investment projects.

The adjacent table summarizes the five elements of tax restructuring that would raise $1.470 trillion in new tax revenues in the first year and another $1.620 trillion over the next four years. The above seven jobs creation programs funded by these new revenues would create 14.7 million jobs in the first year to jump start today's stagnating economy, and fund a continuing 4-6 million jobs in each of the next four years as well.

America: from progressive to rentier

February 15, 2011 by michael roberts

http://thenextrecession.wordpress.com

Is America recovering?

The January employment figures in the US were totally confusing.  The increase in jobs in January was announced as just 36,000, way below most economists’ forecasts.  That suggested the US economy is stuttering and would not sustain an economic recovery.  On the other hand, the January unemployment rate fell from 9.4% to 9.0%, a huge monthly fall and followed a similar drop in December.  That suggests a fast-gathering economic recovery is under way as corporations and small businesses start to hire new staff.

Since the figures were announced, economists have written reams about what is the truth behind these conflicting data.  The conflict is caused by the employment figures being generated from a different survey than the unemployment figures – the two series are not compatible and only begin to coincide after a long period (of even longer than a year sometimes).  So one or two month’s data tell you little.

So is American capitalism recovering from the Great Recession?  The best way to answer that question is to look at three economic series.  The first is the state of corporate profits and profitability.  This is the best measure of the health of capitalism and the best indicator of which way a capitalist economy is likely to go.

The second measure is to look at investment. Capitalists use most of their profits to invest and without capitalist investment in new structures and new equipments, economic growth will be weak at best and fall back at most.  And with investment in new technology and buildings, increased hiring and a rise in employment should follow.

With a  rise in employment would come better incomes for the majority of working people and thus more spending on consumer goods and services.  So the third and lagging measure is the state of employment.

Let’s consider these series, starting with profits and profitability.  We don’t yet have the figures for US corporate profits for the last quarter of 2010.  The data stop in Q3’2010 at the moment.  But they show two things in the graph below.

First, total corporate profits in $bn are now virtually back to the level they peaked at in Q3’2006.  They fell a staggering 40% from that peak to a low at the end of 2008.  Now they have jumped back by 65% in the last two years, as corporations drastically reduced costs by sacking over 9m workers and stopping investment programmes or closing down plant.   So profits have risen $645bn from the low point.  At the same time, corporate revenues have risen just $$540bn, or 7%.  So the huge recovery in profits has mostly been achieved by cost-cutting not by an increase in sales.

This cost-cutting has also restored corporate profitability.  We can’t measure properly the rate of profit in the US economy right up to the end of 2010 from a Marxist point of view because the data are not available yet.  But we can get a good proxy for profitability by measuring corporate profits against gross domestic product.  If we do that, we see that the rate of profit (more strictly, the profit margin) has climbed back to over 11% of GDP from a low of 7% at the end of 2008.

Profitability is still not back at the peak of 12.3% in Q3’2006, which was artificially bloated by the great credit and financial sector boom that went bust in 2007-8.   But it’s now well above the average rate of the last ten years.

So the profitability figures suggest that the US economy is recovering.  But for the recovery to be sustainable, investment and employment growth must follow.   If we look at the state of private investment in the US, the picture is not so positive.

As the graph shows, private non-residential investment (so this excludes households buying houses and government investment) fell 18% from a peak in mid-2008 to a low at the end of 2009.   Since then, it made a 9% recovery in 2010.  But corporate investment levels are still $240bn lower than they were in 2008, some three years later.   And the ratio of corporate investment as a share of GDP is still 2% points below its peak three years ago.    The recovery in US corporate profitability would suggest that investment will also pick up, but so far it has been painfully slow.

That brings us to employment, where we started in this post.  Recovering profitability and profits have engendered a weak revival in corporate investment.  And because investment is rising only slowly, companies are not rehiring , even if they have stopped sacking workers.  The best measure of that, which cuts through the confusions of the January data, is the employment to population ratio.

When we look at the US data, we find that the employment to population ratio took a huge fall during the Great Recession.  The ratio has more or less stabilised since the end of 2009, but shows little sign of recovering.  The ratio is still higher than in the 1970s, but that’s simply because many women have taken up jobs in the last 40 years ( the male participation rate has systematically fallen over the last 50 years and is now at its lowest level ever).   The overall participation rate (ie the number of those employed compared to those of working age) fell 8% from the end of 2006 and has not recovered.  That means many Americans cannot get a job, have given up and stayed at home or gone into education.

As the US Center for Budget and Policy Priorities puts it, although job losses have bottomed out, 7.7m less Americans are at work than in December 2007.  It’s particularly worse for those long-term unemployed .  Over two-fifths of the 14m Americans who are unemployed have been out of work for over half a year – that’s 6.2m peple and over 4% of the labour force.  That’s more than 70% worse than in the last big recession of 1980-2.

New jobs are being created at about 100k a month right now.  That’s not enough to keep up with population growth and nowhere near enough to get the unemployment rate down.  There needs to be an increase in jobs of 320k a month for two years to get employment back to December 2007 levels and even more to restore full employment.  Indeed, the US Congressional Budget Office reckons even if the US grows at its historic trend real growth rate of 3.4% a year from now on, it will take until 2016 for the unemployment rate to halve!

Having looked at these three series, we can reach a conclusion.  The capitalist economy is recovering from the Great Recession: profits and profitability have nearly recovered to previous peaks.  But American corporations are still reluctant or cautious about raising investment and starting to expand again after huge cutbacks in costs and ‘downsizing’ their workforces.  As a result, employment is not yet picking up much and so American households will not see any improvement from the cuts in real incomes that they have suffered over the last two years.

Of course, that loss in the real incomes of average Americans has not happened to the rich.  The richest 1% own more than half of all the shares of stock traded on Wall Street and the top 10% own the next 40%.  And the US stock market has nearly doubled since its low in March 2009.  Most Americans have hardly any assets and what they do have is just a portion of equity in their homes.  The collapse in home prices (30% plus since the peak) has not been restored at all.  So for the average household, wealth is still hugely down.

In the latest quarterly survey of housing-market conditions, home prices continue to drop. They’ve dropped in all of the 28 major metropolitan areas compared to a year earlier.  The size of the year-to-year price declines is larger than the previous quarters in all but three of the markets surveyed.

And as we have commented on before, Thomas Piketty and Emmanuel Saez have published data recently that show, while the top 1% of American households by income saw a 20% fall in real income during the Great Recession (see my post, No remorse, 13 January 2011).  This wiped out half the gains they had made between 2002 and 2007.  But the bottom 90% of American households also saw incomes fall by 7%, the largest one-year drop since 1938!  And that more than wiped out any increase from 2002 to 2007, leaving real incomes for 90% of American households no higher than they were 15 years ago!

For most Americans, there is no recovery at all.

 http://www.redpepper.org.uk

 The government and the press say we are in the grip of a debt crisis caused by the 'bloated' public sector. Here, Red Pepper debunks the myths used to push cuts to jobs and public services

MYTH: Government debt is the highest it's ever been

The UK's government debt is at around 70 per cent of GDP (the total amount of goods and services produced in one year). That is certainly high, but it is far from unprecedented.

Government debt never fell below 100 per cent of GDP between 1920 and 1960. It is only in the past decade or so that it has become normal to think of government debt being stable at around 40 per cent of GDP.

It is worth noting that government debt reached 250 per cent of GDP around the end of the second world war, as the result of a 'once in a generation' economic and political crisis. It is certainly arguable that we are now living through a similarly momentous crisis.

MYTH: The UK's debt crisis is one of the worst in the world

Just as the current level of government debt is not unprecedented historically, neither is it substantially higher than that of other countries.

IMF data (IMF World Economic Outlook Database, April 2010) shows the UK has the lowest government debt as a proportion of GDP among the G7 countries (the US, Canada, Germany, Britain, Japan, Italy and France).

Much has been made by Cameron and Osborne of Gordon Brown's 'imprudent borrowing record'. They say that before the spending to stabilise the financial system, public debt was high.

But again, IMF comparisons of the level of public debt prior to 2007 showed the UK in a much better position than many comparable countries, such as France, Canada, the US and even Germany, the home of fiscal rectitude.

MYTH: Government debt is 'unsustainable'

The sustainability of government debt is not just dictated by its size, but by its make up. We have already seen that government debt is at a comparable level to other similarly sized economies. Where the UK is in a much stronger position, however, is in the nature of its debt.

While countries such as Greece tend to owe money to external financiers, the vast majority of UK debt - about 70 to 80 per cent - is held within the country.

And the UK's debt is not so short term. Countries such as Greece, Ireland and Portugal have average debt maturity rates of between six to eight years, but UK government debt stands out among international comparisons as being much longer term at well over 12 years on average.

This means that the UK has to ask the financial markets to refinance its debts much less frequently, making it less vulnerable to short-term speculative pressures and much more able to continue to finance its debts on a sustainable basis.

MYTH: The government shouldn't get into debt, just as your own household shouldn't

This overlooks the fact that, for the past 30 years, governments have positively encouraged households to get into debt.

In fact, it can be prudent for households to take on debt - particularly if they are borrowing to pay for something (a house or educational qualification) that might reasonably be expected to improve the household's income and well being in the long run.

In just the same way it is often sensible for governments to take on debt to pay for investments (such as housing or transport infrastructure) that will make the economy work better and so pay for themselves over the longer term.

But the public economy is also different from the household economy. What might make sense for a household could, for the government, deepen a recession. When times are hard households tend to tighten their belts - reducing their spending and borrowing. But if everyone does this at the same time, the effect is counterproductive: total demand for goods and services falls, which makes it harder for businesses and individuals to generate an income, and everyone ends up worse off.

This is exactly what is happening now, which is why it is essential for the government to compensate for households' reluctance to spend and invest.

MYTH: Public spending got 'out of control' under Labour

It is true that the Labour government gradually raised public spending in the early part of the decade, but it was from what were historically very low levels.

Levels of public spending are now about the same as they were in the early 1990s, at the time of the last economic crisis. This is because spending always rises during a recession as a result of welfare spending on unemployment.

In fact, levels of public spending as a proportion of GDP were much lower for most of the 2000s than they were than at any point since the 1960s.

Where Labour did spend more in the years after 2000, it was necessary to repair the visible effects of long-term under-investment. Who can forget schools and hospitals with buckets in the corner to catch the leaks, or grim city centre landscapes with crowds of homeless people sleeping rough?

Labour's increased spending also addressed workforce shortages in schools and the NHS, where more staff were needed to raise educational standards and care for an ageing population.

Rather than cutting such spending, the crisis could be an opportunity to build the infrastructure of a more energy-efficient, green economy. That would prepare us for the longer-term structural barriers to growth presented by climate change and the depletion of natural resources.

MYTH: The UK has a big public sector compared to other countries

Public spending in the UK is lower as a proportion of the economy than in the likes of France, Italy, Austria and Belgium, as well as the Scandinavian countries (OECD World Factbook 2010).

And spending on core areas such as health and education remains comparable or low in relation to other OECD (broadly speaking, 'rich') countries.

For example, the UK spent just 8.4 per cent of its GDP on health in 2007, roughly half that spent in the United States (once the large private sector is taken into account) and well behind Germany, France and most other west European nations.

On education, the UK again spends less per pupil than most comparable OECD countries.

The UK is not profligate in public spending and does not have an oversized public sector compared to similar countries.

MYTH: Spending on the public sector is 'crowding out' private sector growth

It is argued that public spending comes at the expense of overall growth, because potential investment is being re-directed into taxation to fund an 'unproductive' public sector. But in fact investment in public infrastructure and services is essential to private sector productivity, and so is no less critical to future growth than private sector investment.

Furthermore, the UK is not a highly taxed economy. The OECD's comparative figures on taxation as a proportion of overall economic output show the UK way down the list, only just above the average.

It is sometimes suggested that taxes hit the private sector in such a way as to discourage job growth. Again, though, the data shows the UK to have very low levels of taxation per job: far lower than the OECD average.

The second way in which the public sector might be said to be crowding out private sector growth is by taking workers it needs, but this would only really be the case where the labour market was operating close to full employment.

With the unemployment rate at about 8 per cent, this is clearly not the case. and in many areas of public provision - from child protection, to education and training, to care for the elderly - there is a pressing need for more, not fewer, public service workers.

Finally, some argue that public investment 'crowds out' private investment, because government borrowing pushes up interest rates and inflation. But there is no evidence that this is currently a problem - real interest rates are low, and the economy is still operating well below its potential output, which means there is lots of room for non-inflationary public sector expansion.

In fact, in current circumstances, public spending is more likely to stimulate private sector investment by maintaining levels of demand and preventing a deeper collapse of economic activity.

MYTH: Public sector workers are overpaid

It is true that very recently average wages in the public sector have moved marginally above those in the private sector. This is mainly because privatisation has pushed many low-paid jobs out to the private sector.

The trend is not that public sector wages have risen sharply, but that private sector wages have fallen - a characteristic of the economic crisis. If we take a longer view, since the 1990s average public sector pay has not seen significantly more growth than the public sector.

And when private sector wages are split up to consider different sector and occupational patterns, a rather different picture emerges. Wage rates differ widely, with the average pulled down by very low wage sectors such as distribution, retail and hospitality.

What the data shows, therefore, is not that public sector workers are overpaid, but that some private sector workers are severely underpaid.

MYTH: The financial crisis was caused by a lack of money in circulation

This one is true to some extent, but it requires careful explanation. The system of finance capitalism pursued in the UK and US since the 1970s has continuously recycled economic surpluses away from the poor toward the rich. In both countries, the share of economic output taken up by wages (as opposed to profit) has fallen, and inequality has risen. The very affluent have got wealthier, at the expense of the rest of the population. In 2007/08 the richest tenth of the population had more than 30 per cent of total income ('Income Inequalities', poverty.org.uk).

In the post-war period, part of the role of the state was to redistribute economic surpluses to the wider population so that they could keep spending on goods and services. This was seen as so important precisely because large inequalities had been identified as one cause of the 1929 stock market crash and the subsequent depression.

For a while, the problem that rising inequality presented for growth was overcome by the use of credit and the super-exploitation of workers in the developing world, which allowed consumers to keep buying cheap products. This is one of the factors that fed the debt crisis.

So, yes, there is not enough money in circulation - but this is precisely because it has been captured by the super-rich.

MYTH: Cutting public spending will help us avoid economic disaster

A range of economists, from Larry Elliott of the Guardian to Nobel prize winning professors like Paul Krugman and Joseph Stiglitz, are warning that making cuts now raises the very real possibility of undermining the fragile economic recovery.

As every first year economics student knows, there are four main components of economic growth: (1) exports; (2) investment; (3) household spending; and (4) government spending.

Over the past two years, governments around the world have stepped in to bridge the gap in the first three by providing debt-financed public sector stimulus packages. There is precious little evidence that the private sector or households are ready or able to step up their activity to fill the gap, or that exports will increase in a world where our major trading partners are also reining in spending.

As such, any austerity programme may prematurely remove the foundations of the recovery and lead to a return to recession - a 'double dip'. This would be disastrous, not just for growth, but in turn for tax receipts and the capacity of the state to reduce the deficit and government debt.

How will that help to stabilise the world economy? How will it deal with the frequent, persistent and cumulative financial crises that are endemic to it, or overcome the pressing resource and environmental constraints that are so clear for all to see?

The economic crisis was a golden opportunity to move toward a more economically, socially and environmentally sustainable national and international economic system. For a while all countries were so concerned about the whole system that there was at least a chance to overcome narrow self-interest and look toward a more co-operative and sustainable future.

We are about to squander a once-in-a-generation opportunity for progressive change - unless, that is, we organise and campaign for an alternative.

MYTH: There is no alternative to cuts

The beginnings of an alternative have already been discussed. For example, Unison's alternative budget ('We can afford a fairer society', Unison Alternative Budget 2010) suggests that almost £4.7 billion could be raised each year from introducing a 50 per cent tax rate on incomes over £100,000.

About £5 billion could be raised every year from a tax on vacant housing; £25 billion a year could be raised by closing tax loopholes; and the IPPR think-tank has estimated that a 'Robin Hood tax' on financial transactions could raise another £20 billion a year (T Dolphin, Financial Sector Taxes, IPPR 2010).

All these taxation measures would be 'progressive' in the sense that they would divert wealth from the rich to the poor, in contrast to measures such as the government's VAT increase, which hits the poor hardest.

In addition, some of these ideas might have behavioural advantages: they could work against destabilising speculative financial flows, or lead to fewer empty houses.

Similarly, we could look at spending that really should be cut. For example, while estimates of the true costs of replacing the Trident nuclear weapon system vary widely, they tend always to come in above £80 billion over 25 years.

Getting rid of the cost of the war in Afghanistan, massive consultancy fees on private finance deals and contractors' profits in privatised public services would also make a difference.

We could also decide to manage the deficit and public spending in a long-term manner, targeting social issues such as inequality, under-investment in education and child poverty, and strongly regulating international financiers, banks, hedge funds and the like.

All of these are political choices.

We don't have to live in a world where unemployment co-exists with a long-hours culture in which workers are so stressed that mental health problems are on the rise.

We don't have to live in a world where bankers gamble millions across the world in elaborate financial casinos at the same time as 1.4 billion people live on less than $1.25 a day.

We don't have to live in a world where there is no limit to how much of our collective economic output goes to the rich, yet others do not have enough to eat.

It is worth remembering that after the last crisis of this scale and significance, and with public debt something like three and a half times the size it is today, we established the NHS, created the welfare state, put in place comprehensive education and built a vast number of public housing estates.

History tells us that there is more than one way out of an economic crisis.

Download our pdf version of this article to distribute far and wide...

Thanks to Dr Alex Nunn of Leeds Metropolitan University and the Transpennine Working Group of the Conference of Socialist Economists. www.alexnunn.net csetranspennine.wordpress.com

Making working class students pay

 December 8, 2010 by Michael Roberts

 This week, leading right-wing economists in the US launched a campaign in the Wall Street Journal attacking the plan of the US Federal Reserve Bank under Chairman Ben Bernanke to buy $600bn in US government bonds.

This plan is the next chapter in so-called ‘quantitative easing’ (QE) by the Fed.  QE is a weapon in monetary policy.  Central banks like the Fed can lower interest rates in an economy by lowering the rate of interest that banks can borrow cash from it.  Reducing the price of borrowing should help an economy to grow faster.

But when the interest rate reaches zero, as it has done in the US, a central bank must resort to pumping more cash into the economy, so it is the quantity, not the price, of money or liquidity that is increased.  The Fed buys bonds or other assets from the banks and pays for it with cash.  The cash is found by simply printing it (or to be more exact, increasing the amount of the reserves that the commercial banks hold with the Fed).  It’s just done by fiat.  Thus we have ‘quantitative easing’.

The Fed’s plan is to get the value of government bonds up and thus interest rates paid on holding those bonds down.  Government bond interest rates usually set the floor for all interest rates in an economy.  That’s because mortgage lenders and banks borrow their funds at rates set by government bonds (the safest form of loan). So if interest rates on government bonds fall, then so will mortgage rates, the interest rates on corporate loans and on corporate debt.  If those rates fall, then households will be more willing to take out loans to buy homes or consumer goods.  And corporations will be more willing to invest in plant, offices, machinery and jobs.  Or at least that’s the theory of QE.

Bernanke also hopes that rising bond prices will feed through to rising share prices, inspiring increased ‘confidence’ that will feed through to more investment and consumer purchases and so get the economy going.   As a leading student of the Great Depression of the 1930s, Bernanke has been really worried that the US capitalism could slip back into a ‘double-dip’ recession with deflating prices, as happened in 1937-38.  Quantitative easing is his plan to avoid that.

The Austerians are those economists who reckon that the printing of money is wrong in theory and won’t work in practice (see my earlier post, Keynesians versus Austerians, 22 June 2010).  They believe that reducing debt, not increasing it, is what is necessary to get capitalism on its feet again.   So they are strongly opposed to the Fed’s move.  As they say in their open letter to Ben Bernanke in the Wall Street Journal: “ the planned asset purchases risk currency debasement and inflation and we do not think they will achieve the Fed’s objective of promoting employment.”

And if the result of the previous bout of QE by the Fed back in 2008-9 is anything to go by, the Austerians are right.  Then the Fed launched a huge programme of purchasing the mortgage loans and bonds of the banks and financial institutions, along with some government bonds, to provide the likes of Goldman Sachs, Morgan Stanley and all the other banks with more cash.    As a result, the Fed increased its balance sheet from about $800bn to $2.3trn, or a tripling.

But the economy failed to make much of a recovery, and with unemployment not a dent was made.  And it is clear why.  Just look at this graphic.  It shows the rise in Fed purchases against the change in lending by the banks to companies and households.  Bank lending fell.

It shows the classic Keynesian concept of the ‘liquidity trap’.  Back in the 1930s, JM Keynes argued that, by keeping interest rates too high, people were encouraged to ‘hoard’ their cash rather than spend it or lend it on.  As long as that lasted, more money would not lead to more economic growth – the monetary authorities would be pushing on a string.

That’s why the Keynesians are also less than enthusiastic about Bernanke’s QE2 measures.  However, this time it is not high interest rates that are the problem – the Fed has its base rate down to virtually zero.   And with inflation around 2%, real interest rates are negative.  Nor is it the lack of supply of money that is the problem – the Fed has already pumped in trillions and plans even more.  There is just a lack of demand for cash to invest or spend.  People don’t want to borrow more money when they still have big mortgage debts, lower home prices, no increases in wages and the possible loss of their jobs.  And banks don’t want to lend money to risky companies and indebted householders, when they can take advantage of rising government bond prices supported by the Fed to get an easy profit.

So the Austerians and the Keynesians are right.  The Fed’s QE2 plan won’t work.  But what is their alternative?  The Austerian position is that there is nothing you can do to revive the economy ‘artificially’.  We must just wait for markets to cleanse the bad debts by ‘deleveraging’ .  At  some point when unemployment is high enough and bad debts have been written off enough, profitability for new investment will be high enough to kick it off.  Any attempt to interfere with this process will only prolong the agony.

It’s been the argument of this blog that eventually capitalism will recover once profitability is restored sufficiently.  In that sense, I agree with the Austerians.  But, given the very high levels of debt (or what Marx called fictitious capital) built up during the great credit bubble and the subsequent Great Recession, it is going to take a very long time to get the costs of capital down to levels that will revive profitability (see my post, The overhang of debt, 3 March 2010).  In the meantime, the ‘collateral damage’ to people’s  livelihoods, jobs and incomes will be huge.

For the Austerians that is the price you have to pay for capitalism’s past ‘excesses’.  The Keynesian solution is different.  Their argument is that, given the liquidity trap, the Bernanke plan won’t work.  So what is needed is massive government spending even if it runs up huge deficits and debt.  They don’t matter.  Government spending will boost ‘effective demand’ , replacing private sector weakness and thus generate new economic growth.

The problem with this approach is that if it was imposed effectively, it would seriously impinge on private sector profitability and ‘free markets’.  When Keynes first proposed government spending as a solution to the Great Depression, he too recognised that it would encroach on the ‘rights’ of the private sector to make a profit.  As a result, he thought it should be done gradually so as not to frighten the horses.  Modern Keynesians do not even consider this conflict – it is assumed that the private sector will remain intact and increased government spending will not be a problem for profits.  But is it that easy?

If governments increase spending and don’t raise taxes, they will increase the budget deficit and the government debt.  The Keynesians say this does not matter.  Indeed, cutting government spending to reduce a budget deficit would also reduce economic growth.   Paul Krugman, the doyen of the Keynesians, for example, has stated that the plans of the UK government to cut its budget deficit over the next four years will ensure that Britain slips into another Great Depression.

However, a recent study by the IMF has shown that different sorts of spending have different results (see the IMF’s World Economic Outlook, October 2010, chapter 3, http://www.imf.org/external/pubs/ft/weo/2010/02/index.htm).   And so which sort of spending you cut will produce different outcomes for the capitalist economy.   The IMF looked at 15 developed capitalist economies from 1980 that carried out reductions in government spending to see what the impact was on economic growth over the following years.  I’m afraid that the results must be taken with some pinches of salt given all the assumptions that the IMF makes.  Indeed, the results are now subject to criticism from other researchers and a debate is under way.  But I think there are some reasonably firm conclusions to draw from the IMF study and the others.

look at the graph in the IMF report.  First, it seems that a cut in welfare benefits would raise growth.   It does not do so by much – just one-quarter of 1% on the growth rate.  And it’s not so surprising under capitalism.  Increased welfare benefits to the unemployed, disabled and poor is a cost to capitalist profits and is not compensated by a sufficient rise in effective demand.  The poorest and weakest in our society just spend too little.  A cut in welfare costs provides a breather to private sector profits

However, cutting government consumption does damage economic growth by up to 0.3% pts off the growth rate.  That’s because spending on government services like schools, universities, medical services, transport and housing creates jobs and boosts incomes for millions of households.  Cutting the spending on these services will do the opposite.

But economic growth gets the biggest impetus from government investment, according to the IMF.  Cutting government investment by 1% of GDP takes up to three-quarters of 1% off the growth rate of an economy.   That’s because government investment into infrastructure projects to build bridges, roads, schools, hospitals or railways help industry and commerce, while providing millions of jobs that can make a significant contribution to economic growth.

There is a glaring example in Britain, where the private sector cannot manage to build more than 150,000 new homes a year.  That’s way below what is required just to replace 250,000 a year that become uninhabitable.  So there is a chronic housing shortage in the UK that has driven up home prices and rents to the highest levels in Europe.   As a result, housing benefits to subsidise rent payments for the poorest in society have rocketed.  Now the coalition government plans to slash benefits, making it impossible for hundreds of thousands of families to pay their rent and forcing them to move to cheaper areas, lose their jobs, take their kids out of schools etc.  Government investment in homes construction over the last decade could have avoided this misery and boosted employment and growth at the same time’.

Its the same argument for government investment in environmental projects that improve the quality of life , raise efficiency and help deal with climate change, while providing jobs to replace those lost in the private sector during the Great Recession.

In the second world war, both the US and British governments took over the planning of industrial investment and employment for the ‘war effort’.   It could not be left to the private sector and production for profit to do the right thing.  But, of course, that was an emergency not to be repeated in peace time, such are the assumptions of both the Keynesians and Austerians.  Instead, we shall going on pushing on a string.

 By Michael Roberts www.thenextrecesson.wordpress.com

 In article in the UK’s Guardian newspaper, Thursday 14 October, John Ross makes the telling point that the reason for the snail’s pace in economic recovery since the Great Recession finished in mid-2009 is one of under-investment not under-consumption (http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/14/currency-wars-dollar-renminbi-exchange-tarrifs).

As he says about the US economy; “At the recession’s core is a US investment collapse.  Since it began, household and government consumption has risen by $504bn, while private fixed investment has fallen by $483bn: the US economy remains in recession solely due to this investment decline.”

Indeed, I estimate that US private investment as a share of GDP is at a post-war low of under 12%, or 20% below its historic average.

It’s the same story with the UK. I checked the data and since end-2007, household and government consumption is up £21bn ,or 7%, while fixed investment is down £12bn , or 19%.

It is not as if US and UK corporations are not making profits.  In 2009, US domestic profits rose $420bn, while incomes for everybody else fell $377bn.  But they are not investing – at least not in real assets (instead there’s even more speculation in stocks, bonds and commodities).

That’s because although profits are up, profitability on existing capital is still too low (there was so much dead capital and debt built up before).  This is a point I made in a recent post (Greenspan gets it, 8 October 2010).

Capitalism still cannot get off its knees. It’s time for state investment to get recovery under way.  That requires bringing the banks and major industrial companies under state ownership and control to plan productive investment.