QUICK GUIDE TO THE RECESSION

James Meadwaynew economics foundation

CURRENT HEADLINES• “Double-dip” recession over the year– Expectation for the year is no growth overall

• Most recent GDP figures show 1% growth over last three months

• Cameron claims “good news will continue”, but…– 1% growth driven by Olympics and Jubilee: +0.5%– 1.7% drop in industrial output over September– Productivity continues to falter

• Likely return to recession in January

THE GOVERNMENT STORY

• “The credit card is maxed out”• We spent too much on public services…– … so the deficit widened…– …and the national debt increased…

• …and now we must cut back, just like a household

• Some of this is true…– National debt and the deficit have grown

YOU ARE HERE

COALITION MYTHMAKING

• The official story is, fundamentally, a lie• The national debt is not exceptionally high– Either historically, or internationally• US: 81% GDP, Germany 83%, Japan 200%

• The deficit did not increase because of excessive public spending

• Both the debt and the deficit rose because of the financial crash

“Deficit” is the gap between what a government takes in taxes, and what it spends.

It was, on average, higher under the Conservatives than under Labour.

But it has exploded since the crash of 2008.

THE FINANCIAL CRISIS• September 15, 2008: Lehman Bros files for

bankruptcy• Lehman is US’ 3rd largest investment bank• Panic spreads throughout market• World financial system on brink of collapse• Governments bail out the banks– Stabilises system…– …but at huge cost: $11tr worldwide

• …worst global recession since 1930s erupts

WHAT IS A RECESSION?

• Why should an economy shrink?• In the first instance, this is about demand– It’s about spending

• What I spend is what you earn…– …so if I spend less, you earn less– …and if everyone spends less, everyone earns less

• Result of falling spending: recession– Story known since 1930s: John Maynard Keynes– Any economics textbook will tell you this

EFFECTS ON GOVERNMENT• In a recession, tax receipts for government fall• At the same time, unemployment rises• They receive less, but must spend more• The deficit is the gap between tax receipts and

spending…• …and so the deficit automatically increases• This is exactly what happened in 2008– GDP falls 5% over 2008-9, deficit balloons– Note this helps stabilise economy

RECESSION TODAY• Huge decline in spending by households– Biggest drop in last few years since WW2

• Huge decline in investment spending by businesses– Down c.£40bn since 2008

• Declining spending drives stagnation• But then government also cuts spending• Result: the recession is made worse• …but note the problems are deep-rooted

UK: ELEMENTS OF THE CRISIS

• Exceptionally large financial system– Heavy cost of bailouts

• (Almost) largest total debt burden of any developed country– Total debt – not “national” debt

• Chronic current account deficit• Permanently weak productivity growth• …these elements all tie together

Source: IMF (2010)

GROWTH BEFORE THE CRASH• Overall growth is relatively rapid over 1997-

2008• Consumer spending drives economic growth– 89% of economy by 2008

• “No return to boom and bust” (G.Brown)• “The NICE decade” (M.King)• …but it is a debt bubble

DEBT COMPENSATES FOR UK ECONOMIC FAILURE

• Average household incomes stagnate (or even fall) since 2002

• Household incomes do not keep up with growth

• Debt plugs the gap…– …debt compensates for weak incomes– …and sustains economic growth

• …but labour’s share of the pie shrinks

FAILURE TO CREATE JOBS• 4.3m manufacturing jobs lost since 1980– 3m lost by 1997; 1.3m after 1997

• Financial services create no net new jobs, 1992-2007

• Employment soaked up by public sector– 56% of all jobs created since 1979 funded by public

sector

• “Deindustrialisation” leaves economy in weak position internationally

CHRONIC TRADE IMBALANCE

• UK has run a deficit on its trade in goods every year since 1983– Means always imports more than exports

• Permanent deficit to rest of the world• Services exports have not compensated• Instead, costs of imports have been met by

financial transactions– Rest of the world lends us money

• Permanent dependence on the City

REGIONAL OUTPUT/PERSON

Graph shows spread of output per capita across regions within each country

UK has worst regional inequality of any EU country

For example, Wales earns 43% of what London receives

Source: ONS (2011)

GEORGE OSBORNE:WORST CHANCELLOR EVER?

• Original Office for Budget Responsibility projections, June 2010: export boom– Pound has decline 30% since crash, but trade deficit

now at record levels

• Original predictions: biggest investment boom since WW2– By 2012, investment predicted to be rising at 10% a

year– Reality: 0.8% this year

• Austerity is a total failure

THE FUTURE?

• No realistic prospect of immediate recovery through austerity

• No realistic prospect of sustained recovery without restructuring– Chronic trade imbalance, weak productivity

growth

• Financial system remains unreformed– …and therefore dangerous– IMF Global Financial Stability Report, 2012

ALTERNATIVES #1• End austerity• Restructure economy– Industrial policy, support for green jobs and regions

• South Korea: aiming to create 800,000 green jobs over the decade

• Transform finance– State Investment Bank for major projects

• KfW in Germany

– Break up RBS, more regional banks

ALTERNATIVES #2

• Redistribute wealth and resources– Regional inequalities won’t be ended otherwise

• Strongly oppose “regional” pay in public sector

– Inequality is a barrier to growth• …and potentially a source of financial instability (IMF

2010)

– …so push up labour’s share of national income– Tax wealth, close tax loopholes

• HMRC: £35bn lost through avoidance• TJN: £120bn or more, annually

END