Posts By Michael Burke

1t

Economic Fundamentals and a Unified Irish Economy

, , No Comment

This article is based on a background paper which was delivered to a fringe meeting at the recent Sinn Féin Ard Fheis

In Ireland there are two separate economic entities. Their separation means they run up against the fundamental laws of economics, as first identified by Adam Smith[i]

In the first instance it is the size of the home market which determines the scope of the division of labour. But in Ireland both economies, by their separation, have a truncated home market. This was not always the case. As part of the British Empire the North East portion of the island was highly integrated into what was then the largest ‘home’ market in human history. At the same time most of the rest of the island was primarily a breeding ground for cattle, to help feed the large metropolitan imperial centres.

Post-Partition the situation has dramatically changed.  The Empire is gone while the southern economy has both developed a home market of a certain size while integrating itself to one of the world’s largest markets in the EU. This is the key fundamental fact which explains the dramatic changes in average living standards in the two parts of the Ireland since Partition. 

This is illustrated in Fig.1 below, which shows per capita GDP using common international Dollars (adjusted for Purchasing Power Parities, first Angus Maddison and then OECD). It amounts to a startling transformation of relative prosperity within Ireland.

To specify the data, Maddison shows that per capita GDP in Ireland in 1921 was $2,533 and that in Britain it was $4,439 (and from a variety of sources that average incomes in the north-east counties of Ireland was at least on a par with Britain). From OECD data per capita GDP in RoI was $37,581 in 2013 and in the UK it was 34,755 (and the ONS data shows NI per capita output was 82% of the UK level).

 fig1_mb

Read Post →

greek_neg

The Money Exists for Investment in Greece

, , No Comment

This article originally appeared in Socialist Economic Bulletin on Friday, the 27th of February

The fraught negotiations between the new Greek government and representatives of the EU institutions are likely to be prolonged. They have centred to date on Syriza’s efforts to find room to alleviate some of the worst effects of austerity and address what is called the ‘humanitarian crisis’.

This is entirely justifiable given the depth of the fall in living standards with widespread malnutrition in Greece, a health crisis, hundreds of thousands of homes cut off from electricity supply and other ills.

Policies aimed at income redistribution can help in this key area, so it is entirely correct to attempt to increase tax revenue from the rich in order to ameliorate the effects of poverty on the poor. But any sustainable improvement in living standards must be based on increasing the productive capacity of the economy which requires investment. Any transfer of income will be a one-off effect if income does not grow. Yet the austerity measures imposed by the Troika (EU Commission, European Central Bank and IMF) and the existing burden of debt interest payments prevent the government from investing and provide a further disincentive for the private sector to invest of its own volition.

Domestic sources of investment

There are two key sources of funds that could be tapped for investment; domestic and international.

Domestically the Greek business class claims the highest share of national income in the whole of the OECD. In 2013 (in nominal terms) the Gross Operating Surplus of Greek firms was €102.2bn from a GDP total of €182.4bn. This profit share in GDP of 56% is way in excess of the customary levels in the OECD. By comparison the German profit share in the same year was 39.3%.

A high profit share is not itself directly harmful to growth and prosperity. If firms were investing profits the productive capacity would be rising rapidly and new high-quality and high-paid jobs could easily be created. But the opposite is the case in Greece, which also has the lowest rate of investment as a proportion of GDP in the whole of the OECD. Again in nominal terms investment (Gross Fixed Capital Formation) in Greece in 2013 was just €20.5bn or 11.3% of GDP. By comparison the German proportion of investment was 19.8%.

This is not to hold up the German economic model to be emulated. Like all the Western economies (including Britain) the rate of investment in the German economy has slowed dramatically over several decades, which is the cause of the ‘secular stagnation’ of the Western economies over the same period.

Even so, the disparity in the profit rate and the investment rate is exceptional in Greece. The proportion of uninvested profits in Germany is equivalent to 19.5% of GDP (profits equal to 39.3% of GDP minus an investment level equivalent to 19.8%). This level of uninvested profits is very high by historical standards. But the proportion of uninvested profits in Greece is 44.7% (profits of 56% of GDP minus investment of 11.3%). The nominal level of profits and investment is shown in Fig. 1 below.

Read Post →

1

How the Austerity Con Works

, , Comment Closed

This article originally appeared on Socialist Economic Bulletin on Monday the 23rd of February. 

‘The Austerity Con’ is the title of a recent article in the London Review of Books. It is written by a leading Keynesian economist Professor Simon-Wren Lewis, who is also a fellow of Merton College, Oxford. The article is available to non-subscribers here. It deserves to be widely read because it contains two important arguments against austerity.

The first argument nails the lie that austerity was necessary because of an immediate crisis of government funding. The second argument exposes the myth that austerity has been responsible for an improvement in government finances. Both of these arguments will be familiar to regular readers of SEB and Prof. Wren-Lewis will give them a far wider airing. Given that averting the crisis in government finances is offered by the supporters of austerity as its main justification, the title of his piece is fully justified.

However there is a difference of view among opponents of austerity about the nature of the current crisis. It is important because it underpins both the overall analytical framework and the suggested policy prescriptions. Prof. Wren-Lewis says, “The place to begin is 2009. By then the full extent of the financial crisis had become apparent.” He goes on, “The financial crisis was leading consumers and firms to spend less and save more. That made sense for individuals, but the problem was that because everyone was doing it, the total amount of demand in the economy was falling. As demand fell, firms produced less, so they reduced their workforce.”

This is not entirely accurate. Demand is comprised of two components, consumption and investment. By taking a step back to 2007 it possible to see more clearly how the crisis arose. Regarding the industrialised countries as whole grouped in the OECD it is possible to see that only one of these experienced a sharp fall. This was investment not consumption.

Fig.1 below shows the level of real GDP and its key components, consumption, investment and net exports. The data is presented in both in constant prices in constant Purchasing Power Parity exchange rates and is itemised in the box below.

Read Post →

1

Tsipras versus Cameron: people versus bankers

, , Comment Closed

This article originally appeared on Socialist Economic Bulletin on the 1st of Feb 2015. 

David Cameron became the first elected politician in Europe to criticise the election of the Syriza government in Greece and was quickly followed by George Osborne. This might seem odd as Britain is outside the Eurozone and has limited direct influence over its policies. But the urgent and unrestrained nature of the criticism is very revealing about what is at stake in the anti-austerity struggle and specifically the very different roles being played by the British and Greek governments.

The Syriza government represents the popular will to end austerity. Only the parties of the left increased their vote in the recent election, and that was overwhelmingly to Syriza’s benefit with a rise of 9.4%. But entirely new parties and even parties of the traditional right adopted similar anti-austerity rhetoric in an effort to shore up their vote. The election showed the Greek popular majority wants to end austerity.

In Britain the banks have an extraordinarily large weight in the economy. Consequently, this dominance is felt through all areas of political and social life. A recent Global Financial Stability Reportfrom the IMF (pdf) demonstrated the dangerously lop-sided nature of the British economy by focusing on ‘shadow banking’, the artificially created networks of companies and vehicles to disguise the real liabilities of the banks. In Britain shadow banking accounts for over 350% of GDP. The next highest exposure of all the industrialised areas or economies is the Eurozone at less than 200% of GDP. The phrase ‘too big to fail’ is insufficiently grave to convey the threat posed by the outsized level of British bank liabilities.

This explains the sudden and intemperate Tory interventions against the newly-elected Greek government. The British government represents the interests of British big businesses and the most important of these is the banks. The banks have sharply reduced their loans outstanding to Greek borrowers. As Martin Wolf the Financial Times’ chief economics commentator explained recently, the banks in general were the key beneficiaries of the bailout, not the Greek economy or its population. Since the €254bn bailout organised by the Troika just €27bn was to support the Greek economy. The rest went to creditors with British, German and Dutch banks at the head of the queue for the taxpayer-funded bailout. But the huge debt is incurred by Greek taxpayers, and so the debt burden is unbearable.

Read Post →

Photo credit: Euronews

Syriza’s Victory: Turning Hope into Reality

, , Comment Closed

This article by Michael Burke and John Ross was originally posted on Socialist Economic Bulletin on Monday the 26th of January

The Greek people have inspired every progressive force in Europe, and beyond, by electing the first anti-austerity government in Europe. Syriza has similarly inspired every progressive person with the great political skill with which it outmanoeuvred the forces in Greece and Europe who attempted to scare the Greek people into not voting for it. As Alexis Tsipras said immediately after its victory Syriza has opened up hope for the Greek people – and many others as well.

The key question now is how to turn hope into reality.

Syriza has outlined clearly its orientation – which should be supported by every progressive force. Syriza has said it is not seeking to exit from the Euro. It wants Greece’s unpayable and unjust debt renegotiated. The immediate priority of the left throughout Europe must be to organise support for this demand of Syriza during the coming negotiations. It is to be welcomed that not only the political left but also far wider groups arguing for a rational economic policy support this course – including eminent figures in their profession such as Nobel Prize winners in economics Joseph Stiglitz and Chris Pissarides. All efforts must be redoubled across Europe to gain support for the renegotiation of Greece’s debt – a course which corresponds not only to the interests of the Greek people but to the interests of rational economic policy across Europe, and therefore to the interests of the people of Europe.

Whether or not these negotiations succeed, however, the new Greek government is faced with key choices in economic policy. This is even more the case as, if the economic policies of the new government do not succeed, sinister forces that failed to win this election will seek to turn Greece backwards.

The first and immediate priority, of course, is to reduce and eliminate the appalling humanitarian suffering imposed on the Greek people by the austerity policies. Creating jobs, raising wages, restoring pensions, recreating the best possible social security are the top priorities. As always politics must take precedence over economics.

But to sustain the improvement in the living standards of the Greek people it is necessary to relaunch economic growth. And the key to economic growth is necessarily investment. Without rising investment an economy cannot grow.

Under the conditions of Greece it is even more unrealistic than normal to rely on the private sector for investment. It is the collapse in private investment which has driven economic collapse in Greece and economic recession across Europe. Since 2007 Greece’s GDP has fallen by €57bn of which the bulk is the fall in investment at €36bn. The only way to secure economic growth is therefore to embark on a programme of state investment. Those countries which have used state investment as their key instrument to promote growth have enjoyed outstanding success – for example Ecuador, Bolivia and China.

In a country such as Ecuador, which has enjoyed 5% GDP annual average growth over 10 years, real incomes per capita have risen by over 2% a year, and 10% of the population has been lifted out of poverty. This has been driven by state investment which has now reached 15% of GDP.
Economic growth, led by state investment, will in turn create the conditions under which the private sector will begin to invest again.

Read Post →

mbT

If this is a recovery why are people getting poorer?

, , Comment Closed

On the same day that the CSO reported that the economy grow by 3.5% from a year ago, the Irish Times reported deepening gloom among households with survey respondents reporting decreasing disposable incomes. 45% of people said they were spending more on utility bills, and many others reporting increased costs of transport, healthcare and housing.

How is it both possible for the economy to be expanding at a decent clip yet the population is becoming poorer? Leaving aside the possibility that the population is expanding at a faster pace than the economy (which is not the case here), then either the data is false or all of the benefits of recovery and more are going to a minority of society. Or both.

The reality is that the CSO vastly overstate the improvement in the economy, which in reality is doing little more than bumping along the bottom. At the same time, the austerity policy works to redistribute incomes from poor to rich, from labour to capital, especially unproductive capital such as banks and landlords. If energy bills are rising in real terms incomes are being transferred to them from households. If rents are rising, real incomes are being transferred from tenants to landlords, and so on.

Fake exports, real stagnation

The export-led recovery that is so widely touted by supporters of this government and of austerity generally is a statistical fiction. Over time a number of commentators have pointed to the tax regime as a source of huge distortions to the external accounts. This facilitates the booking of costs, output and profits in this jurisdiction in order to avail of extremely low effective tax rates, way below even the headline rate of 12.5%. Constantin Gurdgiev at True Economics has also shown that this is a key factor in the current inflated level of GDP.

One marker of this distortion to the trade data is that the monthly CSO accounts show total goods exports of €23.2bn in the 3 months of Q3.  Yet the data included in the Quarterly National Accounts show exports at €27.3bn. There is a different methodology for the two pieces of data. But there is a truth gap between the real level of goods exports and reality, which has widened over time. In 2008 the export totals were almost aligned, with the GDP data showing exports just €1.8bn higher for the whole year. Now that annualised discrepancy amounts to €16.4bn. This is greater than the entire recorded improvement in real GDP since the trough of the recession at the end of 2009, which is €15.7bn. Without the fakery of an ‘export-led recovery’, statistically there is no recovery at all.

Because the export data is so distorted, it is important to consider the trends in aggregate domestic demand, which is the sum of household consumption, government consumption and investment (Gross Fixed Capital Formation).

Fig.1 Real Final Domestic Demand, €bn

MB1

Read Post →

angloshell_thumb

Low Corporation Tax Rates Do Not Boost Growth

, , Comment Closed

This article by Michael Burke originally appeared as a guest post on Notes on the Front. Michael blogs regularly on Socialist Economic Bulletin and tweets @menburke.

There are a number of reports that Ministers have travelled to the US in order to reassure investors following the closure of the ‘Double Irish’ tax loophole. It is not just highly-paid US executives who are concerned about the possible impact of changes to the corporate tax regime.

There is a widespread belief that low taxes for companies are the key to prosperity, in Ireland and in the Western economies generally. Taxes on companies have been falling in the OECD economies over a prolonged period. The corporate tax regime in Ireland is just one of the most extreme examples of this trend.

The off-setting factor has been a sharp increase in the proportion of taxes by ordinary citizens, either through income tax and social charges, or by indirect taxes on consumption (VAT, alcohol, fuel, tobacco duties and so on).

The argument is that lower corporate taxes increase the incentive and capacity of business to invest. Since investment increases productivity this would mean that lower taxes boost economic growth, create jobs and increase the quality of those jobs, including pay. The only trouble with this is that there is no evidence to support it. The evidence paints a very different picture.

According to the OECD, a weighted average of the main corporation taxes applied in its member states has fallen progressively over the last 32 years. In 1981 the average rate was 49.1%. In 2012 it was 32.4%. This was a period of the most severe economic crisis since the OECD was formed. Clearly low taxes were not proof against economic crisis. Even if we disregard the crisis itself, it is clear that GDP growth has been declining over a prolonged, which has coincided with cuts to corporation tax.

MB - Corporate Tax 1

The same is true in Ireland. The corporation tax rate was cut drastically and a 12.5% rate was phased in up to 2003. The 10-year period of GDP growth since has been the worst in the history of the state. Yet it is still widely claimed that a low rate of corporation tax determines Irish prosperity. This claim is evidently false.

The strongest ever year of Irish growth was in 1997.  This was not a part of what has become known as the ‘Celtic Tiger’ period and was six years before the 12.5% tax rate was fully phased in.

MB - Corporate Tax 2

Even when this evidence is presented, the persistence of the myth on taxation is formidable. It is argued somehow that the inclusion of the crisis years distorts the comparisons, as if the purported reason for cutting taxes was not to increase growth and prosperity. But it is also the case that average GDP growth was 4.9% in the 5 years between the cut to 12.5% rates and the crisis (2003 to 2007). This is less than half the growth rate in the in the 5 years before the rate was cut, which averaged 10.3%.

The mechanism through which lower corporate taxes is supposed to lead to increased prosperity is higher corporate investment. The argument that lower tax rates leads to higher investment has been disproved throughout the entire OECD area, which has a experienced a secular decline in both the rate of GDP growth and the rate of investment for the last 30 years.

The same is true in Ireland. Lower taxes did not lead to higher investment. The chart below shows the level of corporate taxes versus the annual growth in the rate of investment (GFCF, Gross Fixed Capital Formation). The peak period for the growth rate of investment was in the mid-to-late 1990s. This coincides with the period of strongest GDP growth, which is not coincidental as investment plays a decisive role in growth. Both of these were before the corporate tax rate was cut drastically.

MB - Corporate Tax 3

Not only did the rate of investment growth slow when corporate taxes were cut, but the composition of that investment was changed in a negative way. The chart below shows the rate of Irish corporation tax and the proportion of total investment devoted to housing. The increasing proportion of investment directed towards housing led fairly quickly to the unsustainable housing boom. The evidence is that as the tax rate fell the proportion of housing investment increased until the bubble burst. In 2004 to 2006 more than half of all investment was in housing, which was immediately after the tax rate fell to 12.5%.

Read Post →

ft_larget

Investment Remains the Key to a Real Recovery

, , Comment Closed

The Irish recession which began in the final quarter of 2007 is the most severe in the history of the state. GDP contracted by 12.1% in a little over two years ending in the 4th quarter of 2009. That slump is not over. The latest data shows that the economy still remains 3.4% below its pre-recession peak. In effect it is likely to take 5 years or more simply to recover the output that was lost in the slump.

Even then, the economy will remain way below its previous trend rate of growth. This is illustrated in Fig 1 below, which shows real GDP and real GNP from 1997 to the present. The average annual growth rate of the Irish economy from 1997 to 2007 was approximately 6%. Maintaining the trend rate of growth would have led the economy to be approximately 50% larger than it is currently, and there is a danger that this potential is lost permanently.

Fig.1 Medium-Term GDP & GNP

Fig.1 Medium-Term GDP & GNP

The causes of the slump are very clear. Over the entire period of the crisis the fall in investment more than accounts for the entirety of the decline in aggregate measures of output, either GDP or GNP. GDP in the 2nd quarter of 2014 is still €6.6bn below its late 2007 peak. Investment (Gross Fixed Capital Formation, GFCF) is €14.4bn below its peak. There are other compoents of GDP which have also failed to recover, notably personal consumption and government expenditure. But even taken together, their combined fall of €10.1bn is less than the fall in investment. The only component of GDP which has risen is net exports. The change in components of GDP is shown in Fig.2 below.

Fig.2 GDP & Components In the Slump. Source: CSO

Fig.2 GDP & Components In the Slump. Source: CSO

This data belies the notion that there is an ‘export-led recovery’ under way. Recorded net exports have grown very strongly, up €30.5bn over the period. But only one quarter of this or €7.4bn is a rise in the export of goods. A much larger statistical contribution has arisen from the decline in the imports of goods, down €14.6bn. As both investment and consumption have fallen, this simply suggests that both firms and households have been priced out of world markets by reduced purchasing power. The remainder of the rise in net exports is derived from international trade in services. These are particularly prone to the tax-induced flow of funds that plague the Irish economy and completely distort the economic data. There is little benefit from attempting to unravel them.

More importantly, it is clear that exports have not led a broad-based recovery at all. All the main domestic indicators of activity, consumption, government spending and investment are still far below their pre-recession peaks.

Read Post →

4t

Hoarding Cash While Refusing to Invest

, , Comment Closed

This article originally appeared on Socialist Economic Bulletin on the 8th of July.

The world’s largest companies are hoarding cash and cutting productive investment at the same time. The Financial Times reportsa survey from one leading ratings’ agency, Standard & Poor’s, which shows that the 2,000 largest private firms globally are sitting on a cash mountain of $4.5 trillion, which is approximately double the size of Britain’s annual GDP.

Yet capital expenditure, or ‘capex’ by those firms fell by 1% in 2013 and is projected to fall by 0.5% this year. But this does not presage an upturn. Steeper declines in productive investment are projected by those firms in both 2015 and 2016. Taken together, if these projections materialise the actual and projected falls in capex over the 4 years from 2013 to 2016 will approach the calamitous fall in productive investment seen at the depth of the recession in 2009. This is shown in the FT’s chart below.

Chart 1. Real Capital Expenditure by 2000 leading firms

1

SEB has previously argued that companies are not prevented from investing by lack of access to capital or similar factors. They are sitting on a cash mountain. The same is true of British firms. There is plenty of money left, but firms refuse to invest it.

This is because private firms are not concerned with growth, either GDP growth or the growth of their own productive capacity. They are primarily driven by the growth of their own profits, or preserving them. Where that is not possible, where new capex will not meet an expected level of return, no new investments will be made.

Read Post →

DIA2

Economics and the Debate on Immigration II

, , Comment Closed

This article was originally posted on Socialist Economic Bulletin on the 6th of June.

The now notorious UKIP poster which suggested the entire population of the EU might come to Britain for work is designed to whip up racism. But it contains two fallacies that are unfortunately shared by many people who are not racists, and are therefore worth rebutting.

Myth 1
The first myth is that Britain is a uniquely attractive place within Europe in terms of pay or workers’ rights, or social security entitlements. The graphic below was produced by the UNITE union in Ireland in their argument for higher pay. But it is such a good graphic it is worth reproducing as it stands.

Graphic 1. Private Sector Hourly Compensation in Western Europe, € PPPs

Graphic 1. Private Sector Hourly Compensation in Western Europe, € PPPs

Compensation includes both pay and social wages such as pensions and other benefits. The data is in Purchasing Power Parity terms, so that they account for price differentials between European countries. The data is drawn from Eurostat database here.

The compensation for British workers is among the lowest in Western Europe. Britain is not a uniquely attractive destination for economic migration within the EU. Therefore it should come as no surprise that Britain has one of the lower levels of immigration of the Western European economies.

Read Post →

thumb

What is the Current Phase of Imperialism?

, , Comment Closed

A new situation requires a new analysis, and each new factor in the situation requires a specific and concrete analysis, placing it and its weight correctly in the overall situation.

In world politics, the new situation is that the US was unable to bomb Syria, it finds itself negotiating with, rather than bombing Iran, and its coup in the Ukraine may not be entirely successful in drawing Russia’s neighbour into NATO’s sphere of influence.

This overturns recent history. The overthrow of the Soviet Union in 1991 was accompanied by the US-led Gulf War. Since that time, the US and its various allies have bombed, invaded or intervened in Somalia (twice), Yugoslavia, Haiti, Afghanistan, the Philippines, Liberia, Iraq, the Maghreb, Yemen, Libya, Pakistan, Libya and South Sudan. The US has also led, organised or outsourced countless other interventions, overthrown governments and destabilised economies in pursuit of its interests. There has also been a series of coups and attempted coups in Latin America with varied success, and the so-called ‘colour revolutions’ in Eastern Europe to install pro-US, pro-NATO governments, as well as the US hijacking of the Arab Spring.

However, the economic rise of China has warranted a strategic ‘pivot’ towards Asia in an attempt to curb the rise of the only economy that could rival US supremacy in the foreseeable future. Given this absolute priority and the reduced circumstances of the US economy, it has been necessary to suspend new large-scale direct military interventions elsewhere.

This curb on US power has had immediate and beneficial consequences for humanity. Syria could not be bombed and neither could Iran. In these, Russian opposition to US plans was a key political obstacle, especially as the US wanted to deploy multilateral and multinational forces to do its bidding and needed the imprimatur of the UN Security Council. The US response to this blockage has been to increase pressure on Russia, most dramatically with its ouster of the elected Ukrainian government in a coup and its attempt to breach the country’s agreed neutrality by bringing it into NATO.

This curb on US power, however limited or temporary, should be welcomed by all socialists, by all democrats and simply by all those who desire peace. Instead, we have the strange spectacle that some on the left have raised the charge that Russia is imperialist, or that China is, or countries such as Brazil, or India or South Africa are ‘sub-imperialist’!

Read Post →

bed

Trying to Learn from What Works

, , Comment Closed

This article was originally posted on Socialist Economic Bulletin on Sunday May the 4th.

Facts can be a very severe judge. Either economic structures, the models used to explain them and economic policies work, or they don’t. The factual verdict alone can determine who was right, what was successful, what economic system works best.

The chart below is reproduced from The Economist. It shows the change in the IMF’s own estimates and forecasts of the level of US and Chinese GDP. Previously the IMF’s projections were that China would surpass the US as the world’s largest economy in 2019. Its revised estimates are that this will now occur at the end of this year. From 2015 onwards, when anyone refers to the world’s largest economy this will be China, not the US.

Chart 1. IMF Estimates & Projections of US & China GDP, PPP $ trillions

Econ_Primacy

By any standards, this is a momentous economic event. The leading position in the world economy does not change with great frequency. The US surpassed China’s GDP at some time around 1890, having already overtaken Britain in in 1872. (The Financial Times is incorrect to place this earlier data as the key turning-point – it seems to have ignored China altogether).

In this sense the current reversal is a return to the norm. China’s economy, with a population of 1.3 billion people should be larger than the US. At the same, this higher population level means that per capita GDP is still much below countries like Britain or the US, although this gap too is narrowing rapidly.

As a result, it would be foolish to argue Britain should ‘copy’ China. Different geographies, different relationships with the world economy, different histories and different levels of current economic development would make that an impossibility.

But the Chinese economy has delivered exceptionally strong growth, and grown much more rapidly than the Western economies over a very prolonged period. In 30 years of the process of reform and opening up from 1978 to 2008 it has raised average living standards from the British level of the 15th century to the same as Britain in 1948. No doubt the advance since 2008 has been equally impressive (probably to something like the early 1960s in Britain).

Read Post →

1

Pressing On Both Sides of the See-Saw

, , Comment Closed

The slump in the Irish economy continues to be driven by the collapse in investment. The fall in investment more than accounts for the entire contraction in the economy during the recession.

The chart below shows the annual totals for both GDP and investment (Gross Fixed Capital Formation, GFCF) versus the peak in 2008. The worst GDP outcome was in 2010 when it was €12.7 billion below the 2008 peak. But by 2013 it was still €9.5 billion lower. Not much sign of genuine recovery.

Investment has fared even worse. It carried on falling even after GDP had stabilised. The low-point was in 2012, when investment was €16.6 billion below the previous high-point. But in 2013 it was still €15.9 billion lower.

MB1

Over the 6 years of the slump GDP has fallen by 9.6%. Investment has fallen by 47%. As a result, investment as a proportion of GDP has fallen from 20.8% to 12.1%. Since the level of investment is decisive for the long-term productivity of any economy, a falling rate of investment will hurt growth over a prolonged period.

The relative weakness of investment by firms in Ireland is shown in the OECD chart below. Over a prolonged period leading up to the crisis private firms (Private Non-Financial Corporations, or PNFCs) operating in Ireland invested much less than firms in the other industrialised countries.

This weakness has been further exacerbated by the crisis. Since 2008 firms’ profits have actually risen in cash terms, by €6.7 billion. But on the same basis, investment in transport equipment and other equipment have both fallen by €1 billion, road building and other construction apart from homes have slumped by €5.4 billion.

Private Non-Financial Corporations Investment:  Decade Averages

MB2

One of the key factors which has worsened the crisis is that successive governments have cut the state’s own level of investment. On the same cash basis, government has cut its investment by €7.6 billion. This was not always the case. Previously, when the economy was growing rapidly government had a higher level of investment than in the other industrialised economies, as shown in the chart below.

This is the see-saw of the Irish economy: very low levels of private firms’ investment and relatively high levels of government investment. The policy of austerity is pushing down on both ends of the see-saw at once. As a result the economy is cracking.

Read Post →

LP

That Tory Recovery in Perspective

, , Comment Closed

This post was originally published on Socialist Economic Bulletin on Tuesday the 18th of March.

This week George Osborne will announce his latest Budget. The specific measures in this Budget were not published at the time of writing. But it is a fairly safe assumption that he will boast that the economy is on track, and that there is a recovery. This is simply an exercise in redefinition.

The economy grew by just 1.9% in 2013. This is following a period of historically slow growth, the deepest recession in living memory and the weakest recovery on record. Yet many commentators and not just explicit supporters of austerity seem to believe this means we are automatically on track for a genuine recovery with all that means for growing jobs, rising real pay and improving living standards.

Unfortunately both the celebrations and the optimism are misplaced. Of course this does not mean that the economy will never grow again. It is even possible that growth will be a little better in 2014 than it was in 2013. But after most recessions the economic rebound is usually fairly strong. After a very steep recession the recovery should be very strong. That is not the case currently.

Annual growth in GDP of just 1.9% in 2013 is the best since 2007. But that is really a measure of the crisis of the economy and how badly policy has failed.

Prior to the current crisis, in the 20 years to 2008 the average annual growth rate of GDP was a little under 3%. In the same 20 year period from 1988 to 2008 only 3 years have seen worse growth for the British economy than last year’s 1.9% and all of those were associated with the recession under the Tories in the early 1990s (the ERM crisis).

So, a growth rate associated in the past with crisis is now redefined as recovery and heralded as success. Crisis is redefined as success; stagnation is now growth.

Current growth rates also remain well below the previous trend. That means the gap between where we are and where could or should have been is actually getting wider. It would take many years of sustained growth above that 3% rate in order to close the gap between the actual level of GDP and its previous trend. No major forecasting body suggests anything like that is going to happen over the next few years. The chart below shows the trend growth of Britain’s GDP in from 1988 to 2008.

Read Post →