Forever blowing bubbles
George Osborne has declared that the UK economy is back on the road to sustainable recovery. Closer analysis shows that the recovery so far is based on rising household debt with policy seemingly geared toward inflating house prices, two of the factors that led to the economic crash in the first place. It is not that the powers-that-be are stupid: capitalism has been experiencing a long-term crisis of profitability for decades, and debt-fuelled growth and asset price bubbles have become essential methods of maintaining any kind of economic vitality. All capitalism can offer at its present stage is stagnation punctuated by the inflating and bursting of bubbles. Predictably, the far-right is thriving in this climate, and will continue to make possibly fateful gains as long as our side refuses to challenge them on what historically was always our ground.
‘Out of intensive care’
In July it was announced that the UK economy had posted positive growth for the second successive quarter (link), leading George Osborne to say that the economy is “out of intensive care… Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend… Unlike the unbalanced economy before the crisis, we are going to make sure that everyone benefits from this recovery”.
The ‘recovery’ needs to be placed into perspective: the UK economy remains 3.2% smaller than its pre-recession peak in the first quarter of 2008 (link) and industrial output fell 1.1% in the year to September 2013 (link). Perhaps more remarkably, a couple of weeks after the most recent GDP figures were released it also emerged that real wages in the UK have fallen by 5.5% since mid-2010 (link).
These pieces of information are not unrelated. What is fuelling economic growth if real wages are falling? In its response to the growth figures, the National Institute for Economic and Social Research stated that “[c]onsumer spending growth has underpinned the recent gains in economic momentum, in spite of the continued decline of real consumer wages… This increased contribution from consumer spending is at the expense of household saving, rather than a consequence of rising real disposable incomes” before warning that “[a]n unbalanced recovery driven primarily by consumer spending (especially if accompanied by rising house prices) is worrying from a long-term perspective” (link).
This would be the very opposite of Osborne’s ‘balanced recovery’, but the October 2013 economic review from the Office of National Statistics clearly shows that the ‘recovery’ is being fuelled by household debt, rather than any improvement in economic fundamentals (link). The survey reports that over the past two years growth in household spending has outstripped growth in household disposable income (by 3% to 1.8%) with the result that “households maintained their spending, despite only modest growth in disposable incomes, by running down their savings”. This is a reversal of what happened between 2008 and 2011 when households were paying down debt.
The review also finds that “recent growth has been concentrated in household expenditure rather than in investment”, and that the proportion of investment in final expenditure in the UK economy has fallen to “the lowest level recorded since the 1950s”.
Recovery ‘linked to two factors that helped cause the last global financial crisis’
So Osborne’s ‘recovery’ is being driven not by investment, industrial output or real wages but by consumer spending, which in turn is being funded by increased household debt and unsecured borrowing. One analyst has remarked: ‘the most recent gains in British economic activity appear to be linked to two factors that helped cause the last global financial crisis – debt-fuelled consumer spending and higher house prices’ (link).
While real wages and GDP remain below pre-crisis levels, house prices in the UK are now just 0.3% below their pre-crisis peak, with London prices 17.3% above their pre-crisis peak having risen 9.7% in the year to July (link and link).
Are we in the midst of another housing bubble? It is too soon to claim that – yet. The revival in house prices is, for now, very much confined to London and the South-East (prices in the North-East, North-West, Scotland and Wales prices remain below their pre-crisis peaks) and so is probably a function at least partly of London’s unique position in the UK economy as a global city, acting as a national and international centre for business and financial services. In this fashion, the current property revival has so far been driven largely by cash purchases, particularly in London ‘where £9bn of cash has been spent on property in the past three months alone, much of it by foreign buyers from Singapore, China and Hong Kong’, rather than the type of frantic mortgage lending that was seen prior to the crisis (link).
However, there are indications that this is beginning to change. The Council of Mortgage Lenders has reported a 33% increase in the year to August of mortgages loaned to first-time buyers (link), while in the same month the Bank of England reported the highest level of mortgage approvals since the collapse of Lehman Brothers (link). This should not come as a surprise, because government policy has been directed towards this end.
The Lib-Con coalition has created schemes such as Funding for Lending and Help to Buy in order to increase the supply of cheap funding in the housing market, and now the coalition has unveiled the second part of Help To Buy three months ahead of its original schedule. Help to Buy 2 is explicitly aimed at making it easier for financial institutions to issue mortgages by guaranteeing 15% of the value of the loan to the lender, thus subsidising their risk at taxpayers’ expense at a time of supposed ‘austerity’.
Help to Buy is billed as an initiative ‘to help working people buy a home in England’, but one thing the coalition is not doing is increasing the supply of housing stock: the number of new homes built in the first quarter of 2013 was the lowest since 1990 (link), this at a time when the UK is experiencing the highest population growth in the EU (link); while more generally, house-building has been on the decline for forty years with only 146,000 dwellings built in 2011-12 compared to 378,000 in 1969-70 (link). On Help To Buy, the Financial Times editorial has commented ‘a healthy property market can quickly turn into a bubble. Without an overhaul of planning laws, Help to Buy is a financial ticking bomb. Mr Cameron should have reconsidered the scheme rather than bringing it forward’ (link) while their chief economic commentator Martin Wolf stated ‘[t]he government has increased its commitment to frighteningly expensive housing. It is a trap from which the UK may not now escape’ (link).
This all seems to run counter to Osborne’s claims that the economic recovery will be different to the “unbalanced” model that prevailed before the onset of the economic crisis: instead, it appears very much that the ‘recovery’ is simply the old bubbles being re-inflated.
Why are these mistakes being repeated? After all, if the government funding that is being earmarked for Help To Buy was instead put toward a large-scale house-building programme (or if the coalition were prepared to take advantage of historically low borrowing costs), this would act as a major stimulus to the economy, boosting employment as well as heading off the risk of a housing bubble. So why isn’t it happening?
It’s not because the policymakers are stupid, it’s because there are few other options available. There are solid economic reasons (aside from political ones) why, among other things, current housing policy has the aim of inflating the level of property prices instead of providing plentiful levels of affordable housing for the general population, both public and private.
Long-term crisis of profitability
A number of economists have found that, when looking over post-war (and pre-war) economic history, the booms and busts of the global capitalist economy can be correlated to movements in the rate of profit (the average rate of return on a given amount of capital invested). The ‘Golden Age of Capitalism’ that spanned the late 1940s up until the mid 1970s was underpinned by high rates of return on capital, and it was when these rates began to persistently fall away that the ‘Golden Age’ came to an end. In the words of the American economist Robert Brenner:
“[t]he rate of profit is the fundamental determinant of the rate at which the economy’s constituent firms will accumulate capital and expand employment, therefore of its output, productivity and wage growth, and, in turn, of the increase of its aggregate demand, both investment and consumer… What made possible the inauguration and long perpetuation of the post-war boom in the US, Europe, and Japan was the achievement, over the period between the late 1930s and late 1940s, of elevated rates of profit and their maintenance during the following two decades. What brought the post-war boom to an end was the sharp fall in profitability for the advanced capitalist economies taken individually and together between 1965 and 1973, focused on the manufacturing sector but extending to the private economy as a whole, beginning in the US but soon encompassing Western Europe and Japan. The reason that, as of 2000, there had been no clear revival of the global economy is that there had been no decisive recovery of the profit rate system-wide, or in the US, Western Europe, or Japan considered separately”.
It was this falling rate of profit that prompted the economic crises of the 1970s, ended the Keynesian era and ultimately drove neo-liberalism, which was at bottom an attempt to reverse the downward trend in capitalist profitability. This was what drove, among other things, the liberalisation of capital and financial markets, debt-fuelled economic growth, the destruction of the labour movement, the off-shoring of industrial production and the pumping up of stock and asset-price bubbles, including housing.
In the Reagan era, record US federal government deficits (largely driven by military spending) acted to pump demand in the sluggish global economy. But such measures, usually the preserve of governments, eventually had to be extended to private individuals and enterprises as ever-larger state deficits proved increasingly less effective as a means of generating growth. To again quote Brenner:
“To get the economy expanding again, US authorities ended up adopting an approach that had been pioneered by Japan during the later 1980s. By keeping interest rates low, the Federal Reserve made it easy to borrow so as to encourage investment in financial assets. As asset prices soared, corporations and households experienced huge increases in their wealth, at least on paper. They were therefore able to borrow on a titanic scale, vastly increase their investment and consumption, and in that way, drive the economy.
“So, private deficits replaced public ones. What might be called “asset price Keynesianism” replaced traditional Keynesianism. We have therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalised by state policy makers and regulators – first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s…
“In the US, during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the post-war epoch. There was no increase in private sector employment. The increase in plant and equipment was about a third off the previous the post-war low. Real wages were basically flat. There was no increase in median family income for the first time since WWII. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices.”
And these trends were largely replicated in the UK, and are seemingly being replicated still even after the crash. As Peter Wilby wrote in 2009: “Housing thus allowed neoliberalism to deliver what, up to the 1970s, Keynesianism had delivered through high wages, secure employment and guaranteed pensions: buoyant, confident consumer markets and a population that had an interest in preserving the existing political and economic order. The new economic order could not otherwise bring to the masses the stable and rising living standards that it promised… Credit, normally secured on rising house values but increasingly unsecured, was the rabbit in the neoliberals’ hat… Keynes argued that, when economies needed stimulating, governments should take on debt. Under the privatised version of his doctrine, individuals do the borrowing.”
Forever blowing bubbles
And it is for these reasons that all the Treasury can do is re-stoke the bubbles that caused the crash. Even if a government were elected that was inclined to replenish the nation’s housing stock, the economy is to a large extent dependent on the spending that private debt (often backed by rising property prices) enables, the very same factors that prompted the current capitalist crisis. In his analysis of Help to Buy, the FT’s Martin Wolf has noted that the loan books of the UK banking sector are so dependent on high property prices maintained via a restricted supply that ‘[a] deregulated and dynamic housing supply could spell financial and political Armageddon’ (link).
The Nobel-winning American economist Paul Krugman recently wrote: “the whole era since around 1985 has been one of successive bubbles. There was a huge commercial real estate bubble in the 80s, closely tied up with the S&L crisis; a bubble in capital flows to Asia in the mid 90s; the dotcom bubble; the housing bubble; and now, it seems, the BRIC bubble. There was nothing comparable in the 50s and 60s”. Krugman’s explanation for this is “financial deregulation, including capital account liberalization. Banks were set free — and went wild, again and again” (link). This is not incorrect, but Krugman doesn’t ask what necessitated ‘financial deregulation, including capital account liberalization’: the need to find new avenues of profit due to falling rates of profit in the real economy.
None of these bubbles have helped restore growth or profitability to the levels seen during the ‘Golden Age’ in any sustainable manner. The economic historian Angus Maddison noted “Within the capitalist epoch, one can distinguish five distinct phases of development. The ‘golden age’, 1950-73, was by far the best in terms of growth performance. Our age, from 1973 onwards (henceforth characterised as the ‘neoliberal order’) has been second best”. Why has profitability not recovered? What would it take to restore the economic vitality seen in the Golden Age?
Where it ends
When the economic crises of the 1970s and the 2000s erupted, governments stepped in to prevent a repeat of the large scale collapse of economic institutions seen in the Great Depression of the 1930s. The Great Depression radicalised the working class internationally, enabled the rise of fascism as a mass movement and paved the way to world war, and the capitalist body politic barely survived. Ever since, whenever the spectre of economic crisis has appeared, the political representatives of capital have acted to avoid a repeat of the 1930s, but it was this very process of destruction which ultimately set the stage for the ‘Golden Age’ which followed. To again quote Brenner:
“[T]o actually resolve the problem of profitability that has so long plagued the system – slowing capital accumulation and calling forth ever greater levels of borrowing to sustain stability – the system requires the crisis that has so long been postponed… It’s by way of crisis that, historically, capitalism has restored the rate of profit and established the necessary conditions for more dynamic capital accumulation. During the post-war period, crisis has been warded off, but the cost has been a failure to revive profitability leading to worsening stagnation. The current crisis is about that shakeout that never happened.”
And similarly, Andrew Kliman states:
“The rate of profit – that is, profit as a percentage of the amount of money invested – has a persistent tendency to fall. However, this tendency is reversed by what John Fullarton, Karl Marx, and others have called the ‘destruction of capital’ – losses caused by declining values of financial and physical capital assets or the destruction of the physical assets themselves. Paradoxically, these processes also restore profitability and thereby set the stage for a new boom, such as the boom that followed the Great Depression and World War II.
“During the global economic slumps of the mid-1970s and early 1980s, however, much less capital value was destroyed than had been destroyed during the Depression and following World War. The difference is largely a consequence of economic policy. The amount of capital value that was destroyed during the Depression was far greater than advocates of laissez-faire policies had expected, and the persistence of severely depressed conditions led to significant radicalization of working people. Policymakers have not wanted this to happen again, so now they intervene with monetary and fiscal policies in order to prevent the full-scale destruction of capital value. This explains why subsequent downturns in the economy have not been nearly as severe as the Depression. But since so much less capital value was destroyed during the 1970s and early 1980s than was destroyed in the 1930s and early 1940s, the decline in the rate of profit was not reversed. And because it was not reversed, profitability remained at too low a level to sustain a new boom”.
When Lehman Brothers went down five years ago, a ‘full-scale destruction of capital value’ was threatened; at times during the Euro crisis such a thing has been close at hand, and may still be in the future. The powers that be stepped in to prevent such destruction occurring, and will likely continue to do so until a problem emerges that is too big to be contained. The political consequences of such destruction are likely to be severe, but until then all capitalism can offer is stagnation punctuated by bubbles and their bursting.
For our side, the lesson to draw is that the political methods which the working class movement used during the Keynesian era (centred predominantly on large-scale, workplace-based organising) are no longer appropriate to current conditions, and furthermore are not likely to be appropriate in the forseeable future. Just as there will be no going back to Keynesian economic conditions of full employment, domestic industrial production and restrictions on the cross-border movements of capital prior to an enormous economic implosion, so it is reactionary and unrealistic to continue to offer the old political solutions and hope for them to prevail under current conditions. Indeed the NHS, the Post Office, legal aid, the welfare state and public education are being dismantled piece by piece without any meaningful opposition. Meanwhile, the IWCA experience has been that working class support can be mobilised by orientating toward the working class where it is, as it is and by fighting for day-to-day goals, while still being tied to (and in fact underpinned by) a wider, holistic political analysis.
The far-right have shown a willingness to adapt to changed conditions, and are climbing all over the furniture in Europe (the FN in France recently topped a nationwide opinion poll for the first time ahead of local and European elections next year, and the Freedom party are also heading opinion polls in the Netherlands). Domestically, UKIP are aping this example as the BNP did before them. With the conditions that are giving rise to support for the far-right likely to continue for the forseeable future, at some point our side will have to begin engaging with the enemy under extant conditions, if the field is not to be left wide open for the far-right to clean up.
 Among others: Philip Armstrong, Andrew Glyn, John Harrison (1991), Capitalism Since 1945 (Oxford: Basil Blackwell); Robert Brenner (2002), The Boom and The Bubble: the US in the World Economy (London; Verso); Robert Brenner (2006), The Economics of Global Turbulence (London: Verso); Gérard Duménil and Dominique Lévy (2011), The Crisis of Neoliberalism (Cambridge, MA: Harvard University Press); Andrew Glyn (2006), Capitalism Unleashed: Finance, Globalization and Welfare (Oxford: Oxford University Press); Andrew Kliman (2012), The Failure of Capitalist Production: Underlying Causes of the Great Recession (London: Pluto Books).
 Brenner (2006), xx
 Peter Wilby, ‘All of us live by the logic of finance’, New Statesman, 5th February 2009, http://www.newstatesman.com/economy/2009/02/housing-societies-essay.
 Angus Maddison (2001), The World Economy: a millennial perspective (Paris: OECD), p125. For trends in the US rate of profit since 1929, see http://mpra.ub.uni-muenchen.de/14147/1/MPRA_paper_14147.pdf, Chart 1 and http://thenextrecession.wordpress.com/2012/07/26/the-rate-of-profit-is-key/
 Kliman (2012), p3.