Britain: Gordon's year

As I write, the UK's inflation rate has hit an 11-year high at 3% (excluding the cost of mortgages) or 4.4% overall. At the same time, unemployment is on the rise, if from very low levels. The misery index, a measure that combines the inflation and unemployment rates to provide a gauge on the general health of the economy is still low (above 8 is bad and above 10 would be a crisis), but the direction upward is clear.

Most forecasters are expecting a relatively benign year for the economy, with growth around 2.5%. But even the most optimistic economists reckon there are sizeable risks to their predictions.

The big one is stagflation, where economic growth slows but inflation goes on rising or does not slow. There is certainly a whiff of that in the British air this winter. As we get slowing wage incomes along with higher inflation, the mass of British households can expect no rise in real incomes this year.

A key factor in relatively strong growth last year was the influx of immigrants from the new countries of the EU in Eastern Europe. These hundreds of thousands have worked hard for long hours, usually in relatively low-paid jobs, without taking much in the way of benefits or social services while contributing to tax revenues. It has been a significant boost to the UK economy, but particularly to the profits of big and small businesses desperate for cheap labour.

Despite the help of these new workers, there remains little sign that the underlying productivity of British capitalism is improving enough to boost economic growth much above 2% a year. The reason is clear.

British capitalism has reaped huge profits in recent years (the profit rate for UK non-financial corporations is now over 14%, while the cost of borrowing money to invest is just 6%).

But British capitalists have no intention of investing any of their accumulated capital back into British industries or services, except of course, into the hugely unproductive financial, property and business services sectors that increasingly dominate the UK economy. Investment goes overseas where returns are even higher.

And of course, the economic boom since 2001 has not been a product of investment into manufacturing or the infrastructure of the economy (roads, rail, housing etc). Nothing demonstrates that better than Britain's deficit on trade with the rest of the world. The trucks come across the Channel tunnel laden with imports and go back across to France relatively empty.

Deficit

The deficit on exports and imports of goods has reached a record 6% of GDP. Including services, like insurance, design, professional consultancy etc, where Britain runs a surplus with the rest of the world, it reduces that deficit to 4% of GDP. Then, British capitalism gets profits and dividends from its huge investments abroad. That reduces the overall deficit to 3%.

But that deficit still has to be paid for. It is covered by large inflows of cash from the Middle east, Russia and other oil-producing dictatorships who park their money in London to take advantage of high interest rates (much higher than Switzerland, the alternative port of call). In this way, the British pound has not slid away despite the deficit the economy runs.

As we have argued in this column before, British capitalism is now almost completely parasitic. Long gone are the days when Britain was the manufacturing centre of the world (that was over 150 years ago), or even a major industrial power (finished by the 1930s). Since 1945, there has been a steady erosion of British manufacturing and engineering prowess and its replacement by the City of London, the banks, finance houses and ancillary services as the major earner of profits and provider of employment.

The City of London is now like a large aircraft carrier off the shore of the Thames, completely separated from the rest of the country. Its prosperity now depends on the ebb and flow of international capital and above all on the prosperity of the US economy and its equally overblown financial sector around Wall Street, New York.

Little do the financiers of Goldman Sachs worry about employment and incomes in Newcastle or Liverpool. Their grotesque incomes and bonuses (called rather quaintly 'compensation') are used to inflate luxury house prices in Chelsea, Kensington (up 28% in 2006, the highest rise since 1979!), not to spend on British-made goods. This year, the bonuses for all 170,000 Goldman Sachs employees equalled the annual national product of Vietnam, a country of nearly 80m people.

In the UK, £9bn were paid in bonuses to City of London traders with one GS trader alone getting £50m. No wonder that, under the mantle of New Labour, the inequalities of income and wealth in the UK (just as in the US under Bush) have increased substantially. On the day that Goldman Sachs announced its bumper bonuses for 2006, its cleaners went on strike and demonstrated about the appallingly low rates of pay (£5.35 an hour) their employer (part-owned by GS) gave them.

The left-leaning capitalist economist, Kenneth Galbraith, coined a phrase to describe capitalism when it was doing well: it delivered "private affluence, but public squalor". The incomes and wealth of the rich clearly demonstrate the first half of that equation. The second half is revealed in all the things that would matter for the majority of Britons. Despite more government spending, our public services remain either in dire straits or are ripped off for private profit.

Take housing. In the 1950s and 1960s, under Labour and Conservative governments, public housing programmes were expanded so that at one point over one million homes were built in a year. But now, 50 years later, the government cannot even guarantee that private sector builders can manage more than 50,000 homes - and most of these will be priced out of the range of those that badly need them. Of course, none of this affects the rich in their mansions in London, second homes in Cornwall, and their buy-to-let investments.

Take transport. The national rail service was raped and butchered by the Conservative government of the 1990s to impose a ludicrous 'franchise' system that means capitalist companies can get taxpayers' subsidies, hike fares to Europe-high levels, and still fail to provide a safe and punctual service to commuters and travellers. That forces more people into cars to clog up the roads and put their lives and limbs in danger. Of course, the rich in their gas-guzzling Chelsea tractors and first-class air travel don't care.

Take health. Despite more spending, the government continues to destroy this major achievement of the post-war Labour government - a universal health service free at the point of use - by making every unit operate on a so-called market basis, charging internally for services and hiving off sections to private health cowboys and gradually privatising through health foundation hospitals and private GPs and dentist services.

No wonder MRSA and other diseases spread through the hospitals, inadequately cleaned as they are by understaffed, poorly paid contracted employees. This does not worry the rich. They have private insurance and private hospitals, staffed by doctors, consultants and nurses trained by the NHS and often moonlighting from NHS hospitals.

Take education. Sure, new schools are being built, usually by handing over ownership to private builders, or handing over complete schools to individual capitalists. But teachers struggle to earn a living, classrooms remain crowded, college students have to pay big tuition fees and take out loans and standards slip further behind those abroad.

"Special schools"

The middle-income families of Britain fear the worst and are desperate to send their kids to posh schools to give them a chance to get up the social ladder. What could be more damning than a leading Labour cabinet minister, who used to be education secretary presiding over the closure of 'special schools' for those with learning difficulties, should decide to send her child to a private school despite several available state schools. Labour leaders have no belief or commitment to publicly-financed free education. Again, none of this worries the rich. They have their expensive private schools and universities.

The vast majority of Britons do not get huge bonuses, but work the longest hours in Europe with the shortest holidays to just about make ends meet. Massive borrowing at low interest rates has fuelled spending power. That sparked a housing boom of monstrous proportions, which eventually collapsed in 2004.

Now, continued low interest rates and banks flush with cash ready to lend, have revived the property market a little since. But the property and credit boom has left most British households with huge debt. Sure, these are mainly mortgages backed by inflated house prices, but debts they still are, now standing at 159% of average household disposable income - way higher than anywhere else in Europe or the US.

And during 2006, the Bank of England steadily hiked interest rates. As a result, the debt burden (what households have to pay on their debt in repayments and interest) has reached over 12% of disposable income, or back to the levels of the early 1900s and not far behind the level reached before the last economic recession in 1990.

Most significant, given the sharp increases in electricity and gas prices and taxes, British households now spend more of their income on non-discretionary spending (necessaries like the mortgage, etc) than since records began in 1988!

And it is a big assumption that house prices will continue with their recent recovery when mortgage rates are heading upwards through 2007. Higher borrowing costs will curb the ability of the average working family to spend more. As a result, economic growth is going to slow.

This is the environment that Gordon Brown will succeed to the leadership of the Labour party and as prime minister. He will be the first Scottish prime minister since Ramsay MacDonald in 1929. MacDonald was the Labour leader who betrayed the labour movement in 1931 by breaking away and forming a national coalition with the Tories and the Liberals designed to impose severe cuts in social benefits and jobs on the working-class at the height of Great Depression.

This is not a comforting analogy for Gordon Brown. Will economic slowdown mean that he too will begin to make the working class pay to make capitalism work?

January 2007