No shit. posted by Richard Seymour

After seeing the latest batch of dismal economic statistics and hearing ominous noises about new cut-backs and another round of lay-offs, I was going to write one of those posts pointing out that "It's worse than you think". I don't need to now, since the Chancellor has just come out and said we are in for the worst economic downturn in sixty years. The reason why it could get particularly bad in Britain was spelled out by Larry Elliott a while ago. To wit, the government's babbling insistence that Britain is particularly well-placed to withstand a credit crunch is absolute drivel, because the government's growth strategy has depended to a large extent on the City, even as they have allowed over 1.5 million manufacturing jobs to be lost. Having allowed the fundamentals of the economy to be eroded, there is little to help us weather the financial storm. Further, the government has relied on a personal debt surge to sustain consumption, with the total amount of debt more than doubling since 1997. The ratio of debt to disposable income in the UK was 162.9 percent [pdf] as of late 2006, which was even higher than the figure in the US. Real household incomes in the UK have risen by only 0.35% a year since 2001-2. Now that the debts are being called in and credit is increasingly difficult to get, we are arguably more exposed to a terrifying slump than America, which has a far more activist state, much more investment in manufacturing and is very quick to slash interest rates should the going get tough.

Officialdom is torn between the need to alleviate the problems faced by industry and the desire to avoid strengthening labour's hand. Take a look at the battle going on over interest rates in the UK. Practically everyone outside the Bank of England appears to be pleading for a cut, including the most powerful sectors of capital. The only person on the Monetary Policy Committee who has been calling for a cut, however, is the labour economist David Blanchflower. His colleagues argue that rates have to be kept high to counteract potential wage rises. In fact, far from the likelihood of real-terms wage rises being unleashed by a rate cut, real wages have fallen. In the last quarter, median wage rises were 3.5%, but the inflation rate (CPI) rose to 5% in the same period. At the same time, however, outside the UK Continental Shelf (oil and gas), profits have been falling - from 6.6% to 4.9% in manufacturing, and with a slight dip of 0.1% in the services sector. An overriding priority of capital, therefore, is to curb its costs. If they can't transfer the costs to workers as producers, in terms of real wage cuts, they will try to transfer them to workers as consumers, in terms of price increases. The government has taken the lead on this with its incomes policy in the public sector, cutting real wages for millions of workers. This is why wages rose by only 2.7% in the public sector, compared to 3.8% in the private sector, last quarter.

The political class is hardly divided on this question: the argument is only over the rate at which the burdens of the recession should be transferred to workers. The Tories are taking the opportunity to demand a tax cut for businesses. Cut taxes for capital, and you're going to have to cut public spending on services depended on by the poor. Either that or, as the Tories have a propensity for doing, tax consumption more. The trouble they will almost certainly face in a year's time, barring a Lazarus-like revival for the government, is that pay cuts have stimulated successive waves of labour struggle, which are likely to intensify as the crisis worsens. It will be a raucous period, whoever governs, simply because we can't afford to let them pass the costs of their crisis onto us. And I'm not talking about 'we might have a one day strike and hope the government makes a small concession'. It has gone way beyond that: with ongoing real-terms wage cuts, and an anticipated 2 million officially unemployed by Christmas (meaning the real unemployment rate will be over 3 million), government efforts to discipline trade union members through their leadership are apt to flounder. If the present course continues, it will probably lead to acts of violence in Grosvenor Square.

Given that Alistair Darling can see the shit hitting the fan in slow motion, does he have any solutions? Well, no. The government is still pursuing its blessed "knowledge economy" [pdf], as evidenced by the continued encroachment of private capital into academic institutions and the recent announcement that City Academies might run failing primary schools, even as the academies are themselves failing. It is devoted to neoliberal policy solutions, which is why it is set to plough a billion pounds into the nationalised Northern Rock even as they slash jobs, just to keep it running as a possible private sector entity. Brown remains intransigently opposed to any windfall tax on energy companies who are reaping obscene profits while we... well, you know what we reap. Even the moderate lefties at Compass are starting to sound like class warriors in contrast to this spent administration (not that the Compass group of MPs have a spine between them). There is going to be no relief for manufacturing: the government isn't about to abandon a strong pound when London is the financial centre of the world and try to build an export-driven manufacturing economy. I need hardly say that all of this punishes Labour's core voters for the benefit of the wealthy, just when the collapse of the core vote is looking deadly to the government. This is why it could be heading toward another 'heartland' wipe-out, this time in Glenrothes (where, lord save us all, Gordon Brown is 'masterminding' Labour strategy). And to think - the only likely alternatives to Brown that the big battalions of the labour movement can produce are Alan Johnson and David Miliband.

Labels: economy, interest rates, new labour, prices, recession, strikes, wages

The double squeeze posted by Richard Seymour

When the economy tanks, prices are supposed to go down as demand slumps. The trouble is that prices are soaring, particularly in the commodities that people most need. I expect many people will, like me, have noticed the weekly food bill going up. Food prices have apparently risen 20%. Alongside food prices, the latest news is that energy prices are set to go up by 40% this winter. This compounds already existing rises in fuel prices, and it also comes at a time when New Labour has scrapped the winter fuel allowances for pensioners. At the same time, the Bank of England is determined the keep interest rates high and even considered raising them this month. The tight credit market drives up the real cost of borrowing as it is. One effect is to drive would-be home buyers off the market and force them to seek rented accomodation. That's driving up rent already, with an overall rise of 6% (a figure that conceals even sharper rises in particular locations). The Bank of England raises interest rates to curb inflation, but the theory is that such inflation results in normal circumstances from an overheating economy or 'excessive' wage demands. This inflation, however, is the result of speculators moving from riskier margins to blue chip stocks, as the subprime collapse undermines the allure of high-risk, high-profit investments. So, what the Bank is actually doing is knowingly restricting consumption when times are already tough. The signs are that they will drive interest rates up further. So, we're being hammered from every direction.

The only hope is the kind of collective resistance that will be displayed in the public sector pay strikes this summer. Note that the Shell fuel tanker workers won a 14% pay increase as a result of their strike, causing the CBI to worry that there will be a summer of discontent. In the last year alone, strikes in the public sector have risen by 25%. That's a trend that is likely to continue, although those calling for tougher militancy will face the argument from New Labour supporting union leaders that they have to scale back the action in order to do least harm to the government given the prospects of a Tory victory in 2010. The unions have got precious little from the government for previous acquiescence, and the Brown administration has moved far enough to the right to given an opening to its Left for David Davis of all people - he, who would restore the death penalty and isn't too hot on gay rights. What is more, when people feel helpless and desperate they can very easily swing further to the right - inaction on the part of organised labour may actually help hand the Tories a victory. Nonetheless, the argument will be made and heard, and the contest will then be between loyalty to Labour - eroding rapidly, but still quite strong among some - and the desperate need to pay the bills.

Labels: economy, energy, interest rates, prices, profits, strikes

Up in Flames posted by Richard Seymour

Labels: federal reserve, interest rates, recession, unemployment, us economy