Tuesday , November 19 2019
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Masking the collapse

As the spectre of a no-deal Brexit looms larger, picking your way through news about the state of the UK economy is increasingly difficult.  Mainstream media report every item of economic news (depending on their Leave v Remain bias) – as a product of Brexit.  If the economic news is bad, that is because of the growing fear of a no-deal Brexit/another example of project fear.  If the news is good, that is proof that leaving the EU without a deal will not impact the economy/an example of complacency and a failure to plan by businesses and government.

The problem with all of this Brexit-related news is that it drowns out the far bigger threat to the UK; which is that the economy was going sour long before people voted to leave the European Union, and that the trends that have been visible for more than a decade have worsened in recent years.  Nor is Brexit the only thing obscuring the UK’s economic collapse.  Various revisions to definitions in government statistics have served to present a far brighter picture of economic life in the UK than is experienced by millions of ordinary people.  The term “employment,” for example, refers not to somebody who has a traditional 35-40-hour a week job.  Rather:

“The Labour Force Survey (LFS) defines an employed person as anyone aged 16, or over, who has completed at least one hour of work in the period being measured, or are temporarily away from his or her job, such as being on holiday. The number of people in employment is not the same as the number of jobs given that some people have more than one job.”

The definition of unemployment has also changed considerably over the last 30 years to exclude large numbers of people who – because of the way employment is defined – are underemployed, working in the gig economy or not working but holding a zero-hours contract.  These groups are considered not to be immediately available for work, and are thus not unemployed.

The result is that employment statistics are artificially inflated, and unemployment artificially deflated beyond the point that they are useful measures of what is happening in the economy.  For example, economic theory – and as a result, government and central bank policy – has an in-built link between employment and inflation.  If employment is high, wages will increase and these will be passed on to consumers in the form of higher prices.  As a result, the rate of inflation across the economy will rise.

The two traditional means of curbing inflation are for governments and central banks to create unemployment by raising interest rates and cutting public spending.  The drop in the amount and velocity of money in circulation lowers consumer demand for goods and services.  Businesses are obliged to cut prices to maintain sales; and these cuts are passed onto the workforce in the shape of real-terms pay cuts, longer hours and job losses.

The problem today, however, is that we “enjoy” employment levels comparable to those in the early 1970s; but inflation is nowhere to be seen.  Indeed, businesses and governments can only dream of the 3-5 percent rates of growth and inflation that were considered normal in the years prior to the 2008 crash.  Today, a growth rate of 0.3 percent is reported almost as an economic miracle rather than being within the margin of error for a technical recession.

One reason why the economic data is so confusing is that statisticians continue to apply averages in an economy that is now grossly unequal.  For example, a recent statistical release by Her Majesty’s Revenue and Customs (HMRC) notes that:

“Mean [i.e. average] pay is calculated by adding up the total pay for a country or region and then dividing this by the number of individuals receiving pay in this country or region.

“Median pay [on the other hand] is the pay of the individual in the middle of the pay distribution, that is to say where income is ordered from lowest to highest, the median income is the income at which half the number of individuals have both higher and lower pay than this individual.

“It is worth noting that the pay distribution, like other income distributions, is highly skewed because there is a large number of individuals at the lower end of the distribution and a small number at the higher end, therefore mean pay is higher than median pay…

“The mean pay from PAYE employment for the 2014-15 tax year across the UK was £22,520, rising to £22,890 in 2015-16, £23,510 in 2016-17 and £24,260 in 2017-18… Median pay from PAYE employment for the UK in the tax year 2014-15 was £16,060, rising to £16,360 in 2015-16, £16,840 in 2016-17 and £17,440 in 2017-18.”

Because of this, while average pay has continued to rise in recent years (although it is still lower in real terms than it was a decade ago) this has failed to produce the inflation that so many economists and politicians anticipated. Instead, consumer spending in the UK continues to collapse, causing an ever worsening “retail apocalypse.”  As the BBC reports:

“About 16 shops are closing every day as retailers restructure their businesses and more shopping moves online.

“A net 1,234 stores shut on Britain’s top 500 high streets in the first half of the year, according to research by PwC and the Local Data Company.  That is up from 1,123 in the same period last year and the highest since the survey began in 2010.

“Fashion retailers saw the biggest declines in the period, followed by restaurants, estate agents and pubs.”

Most of the London-based media coverage of the unfolding collapse is oblivious to the main cause of the collapse of retail, and looks instead to (inevitably) Brexit, changes in shopping preferences, the UK’s antiquated tax arrangements and the growth of online retail.  For example, Sarah Butler at the Guardian informs us that:

“Retail chains have been hit by a mix of low consumer confidence, which has cut spending, and rising costs from business rates, an increase in the legal minimum wage, and higher cost prices as a result of the decline in the value of the pound since the EU referendum.

“The rise of online shopping and a shift in how consumers spend their leisure time – towards spending more of their spare cash on holidays and dining and drinking at home – have also hit high streets and shopping malls.”

London, though, has largely been spared the ravages of four decades of neoliberalism.  As a recent Eurostat infographic shows, while the London region is the richest in Northwest Europe, nine of the ten poorest regions are in the wider UK:

EU rich v poor

Recent Office for National Statistics data shows a similar disparity, with London, the Southeast of England and Scotland enjoying more high-paid and less low-paid jobs than the UK average; while the remaining UK regions have less high-paid and more low-paid employment:

Nevertheless, the London-based media continue to sell the collapse of consumption in the UK in terms of “lifestyle choice” rather than the increasingly desperate shifts in spending by millions of households struggling to make ends meet.  As I pointed out in July:

“Bizarrely, Andy Bruce and Jonathan Cable at Reuters attempt to put a positive spin on evidence that we have stopped buying new stuff altogether:

’British retail sales rebounded unexpectedly in June, driven by sales of antiques and second-hand clothes, raising hopes that a downturn in the second quarter could be softer than previously expected.’

“There are several reasons for welcoming the unexpected boom in the sale of second hand clothes; not least the benefit to the environment.  But attempting to portray a switch to shopping at charity shops as a sign that the economy is doing better than expected is stretching things.”

Out here on the Celtic Fringe, journalists are beginning to realise that the London narrative simply doesn’t reflect the real world.  BBC Wales economics correspondent, Sarah Dickins, for example, concedes:

“People not having much money to spend is the main reason high streets struggle, according to researchers.

“Tactics such as lowering business rates or taxing online sales were unlikely to help because they ignore the problem of a weak local economy, the think-tank Centre for Cities said.

“It described Swansea and Newport as weak cities and Cardiff as strong.”

This is in line with the point I have made repeatedly about the UK witnessing a gradual retreat of prosperity into the London region and the archipelago of top-tier university campuses that can still provide various forms of high-skilled/high-tech/high-paid employment.  The University of Wales in Cardiff has been included in the top tier for decades – and while low-pay is rife beyond the city centre, the pockets of high pay serve to drive the average wage upward.

Unfortunately, the prescriptions offered by the Centre for Cities mentioned by Dickens amount to little more than a cargo cult – Newport, Swansea and – presumably – several hundred other UK towns and cities should seek to copy Cardiff.  This would require, however, that the wider economy – UK and international – has massive unmet demand for the various specialist high-tech goods and services that currently maintain a dwindling pool of high-paid employment.  The global economy, however, is currently experiencing a major reversal as the Asian economies that economists had hoped would pull the world out of recession are no longer able to provide cheap enough goods to maintain demand; as rising energy and infrastructure costs outweigh the benefits of cheap labour and loose environmental protections.

In a UK economy that has been kept afloat on a mountain of debt underwritten by the once-and-done gift and curse of North Sea oil which peaked in 1999, there is only one direction of travel and it is not the one where our towns and cities follow the example of London and somehow become prosperous again.  As a recent United Nations report (of a kind which only used to be written in relation to the developing world) pointed out:

“This is obvious to anyone who opens their eyes to see the immense growth in foodbanks and the queues waiting outside them, the people sleeping rough in the streets, the growth of homelessness, the sense of deep despair that leads even the Government to appoint a Minister for suicide prevention and civil society to report in depth on unheard of levels of loneliness and isolation.  And local authorities, especially in England, which perform vital roles in providing a real social safety net have been gutted by a series of government policies.  Libraries have closed in record numbers, community and youth centers have been shrunk and underfunded, public spaces and buildings including parks and recreation centers have been sold off…

“The results? 14 million people, a fifth of the population, live in poverty. Four million of these are more than 50% below the poverty line, and 1.5 million are destitute, unable to afford basic essentials. The widely respected Institute for Fiscal Studies predicts a 7% rise in child poverty between 2015 and 2022, and various sources predict child poverty rates of as high as 40%.  For almost one in every two children to be poor in twenty-first century Britain is not just a disgrace, but a social calamity and an economic disaster, all rolled into one.”

The default belief system among those who still reside within the prosperity bubble is that there is some yet-to-be-discovered economic policy (perhaps a basic income or a green new deal) that will allow the growing list of impoverished regions to return to the glory days of the post-war boom when workers’ wages were growing even as national economies boomed.  That we still regard the oil-fueled magical two decades 1953 to 1973 as the “normal” to which we are supposed to be returning is a measure of the massive denial that the elites and the affluent liberal class continue to suffer.

As with global collapse more generally, it is not the poor who stand to suffer the biggest shock (people who already live subsistence lifestyles are far better prepared than those who still enjoy affluence on tap).  Rather, it is those whose largely illusory prosperity depends upon the maintenance of a neoliberal system that is already long past its sell-by date who stand to suffer the most.  Consider, for example, ordinary pensions and savings.  At present, these will likely be regarded as a nest egg that can be drawn on as and when needed, and to provide a cushion in old age.  But what are they really?  In the end, they are merely bits on a computer server in a bank datacentre.  If the bank collapses or the internet goes down, they are gone.  Government guarantees might save some of the investment – but the inflation that results from a crisis and from government money printing will undermine the value of the amount that is protected. 

For those with greater pools of electronic wealth, there is no safe space.  Although many of those who continue to enjoy the fruits of prosperity fail to realise it, much of their lifestyle is underpinned by nothing more than the temporary fixes put in place by the central banks.  As Frank Shostak from the Mises Institute explains:

 “The expansion in activities that emerge from the loose monetary policy is what an economic ‘boom’ (or false economic prosperity) is all about. Note that an increase in the monetary pumping due to loose monetary policy of the central bank lifts the monetary turnover and hence GDP

“Once however, the central bank tightens its monetary stance, this slows down the diversion of real wealth from wealth producers to non-wealth producers… Activities that emerged on the back of previous loose monetary policy cannot now divert real wealth to support themselves. This is because these activities were never economically viable – they could not support themselves without the diversion of real wealth to them by means of an expansion in money supply.

“Now, even if these activities are well managed, and maintain very efficient inventory control, this fact cannot be of much help once the central bank reverses its loose monetary stance. These activities are the product of the loose monetary stance of the central bank and they were never approved by the market as such.”

The over-paid tech and financial sector employment that has maintained the islands of prosperity within an otherwise declining economy are not propped up by demand in a properly functioning market economy.  As we have seen, in an economy where the majority have seen their prosperity collapse, the result has been a retreat from consumer spending; with the cheapest alternative (take-away meals, second-had clothes, online shopping) substituting for previously “normal” consumption (restaurant meals, throwaway fashion, department stores).  Rather, the remaining pockets of prosperity are the beneficiaries of the billions of dollars, pounds, euros and yen that have been pumped into the banking and financial sector as a supposedly stop-gap measure to dig the western economies out of the mess that burst over us in 2008.

Both quantitative easing and the proposed alternative of a Green New Deal are based upon the belief that more currency printing can result in greater prosperity spread more evenly throughout the economy.  Where quantitative easing is concerned, however, this is unlikely to work since each round of QE has resulted in less economic growth; as its recipients seek to park their wealth in non-productive “assets” (most of which are also mere bits on a computer).  The Green New Deal, in contrast, is likely to fail simply because there are not enough accessible raw materials on our depleted planet to prevent extreme shortages.  Whereas QE has resulted in “asset inflation” and small pockets of ersatz prosperity; the Green New Deal would produce stagflation as the price of a plethora of raw materials and components rose beyond the capacity of the economies seeking to deploy them.  The end result being closures and lay-offs as businesses could no longer operate profitably; and the collapse of extractive industries (leading to even worse shortage) that cannot operate on the prices the economy is able to pay.

Not, of course, that economists and governments will not employ these approaches in the face of the next economic crisis; since the alternative would be to acknowledge that there is no prosperous “normal” to go back to; and that decline is the only option on the table.  Rather than accept de-growth, those who still enjoy political power will deploy green new deals here, helicopter money there, along with anything else that promises to keep the party going for a few more years.  In the end, however, it is the impoverished fringes of the UK economy that are marking out the path that every one of us will soon have to follow.  De-growth is built in; the only question now is whether it is to be managed or chaotic.

As you made it to the end…

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