Exactly how severe the crisis in Britain’s economy will be, how long it will take to bite, and the precise political effects of it, are not yet clear.
However, it is certain that it is coming and that it will have important political consequences. This document starts to prepare the party for what will undoubtedly be a new period.
Gordon Brown and Alistair Darling have suggested that Britain will escape the economic storm because it has sound fundamentals.
Presumably unintentionally, their statements have almost exactly mirrored US president Herbert Hoover’s statements in the wake of the 1929 Wall Street crash! While we are not suggesting that Britain is most likely to face a crisis as severe as the Great Depression, there is no possibility that it will escape the economic storm clouds that are looming.
On the contrary, the extreme unsoundness of the ‘fundamentals’ of the British economy means that it is likely to suffer worse than many other countries.
Whether Britain is facing an outright recession or ‘merely’ a slowdown in economic growth is not possible to say.
For the workers’ movement a slowdown is preferable, for the reasons already explained. However, it is far from guaranteed. The British economy has many of the same lopsided and unhealthy features as the US economy. Most of them, however, are more pronounced even than in the US, albeit on a smaller scale.
Manufacturing remains central to the underlying strength of an economy. The economies of all the advanced capitalist countries are being ‘hollowed out’, but Britain and the US are leading the way.
The number of workers employed in manufacturing has fallen by a quarter since New Labour came to power.
Now just over three million workers are employed in manufacturing, the lowest level since 1841. This does not, of course, make up the whole of the industrial working class, which also includes transport workers, energy workers and others.
Moreover, the specific weight of the industrial working class means that, despite relatively small numbers, it potentially has enormous power.
The underlying weakness in the British economy has been disguised by the enormous profits which have been made in the finance and service sector.
Finance alone made up 9.4% of the economy between 2003 and 2006 and yet was responsible for 30% of overall growth of Gross Domestic Product (GDP).
The growth in the service and finance sectors has, to a large degree, been fuelled by the gargantuan bubbles in the world economy which are now deflating, it seems, very rapidly.
Britain may now be a second rate power, but the City of London remains second only to New York. It is not an exaggeration to describe Britain as a vast offshore tax haven for financiers. Regulation is virtually non-existent. If the SocGen crisis is possible in France it is difficult to imagine the level of swindling and fraud that must exist in the City of London.
The idea, therefore, that the turmoil on world stock markets will leave Britain’s ‘real’ economy untouched is false.
In fact the consequences are already beginning to be felt. Commercial property prices fell by 9% in 2007 and have continued to fall since. Some sectors fell more sharply. The value of commercial warehouses, for example, plummeted by 34%. Total returns from the commercial property sector (the combination of rental income and capital growth) fell by more than 7% in the last quarter of 2007, the biggest and fastest fall since records began.
As a result the solvency of a number of banks and investment funds has been brought into question as investors have taken their money and run.
Scottish Equitable was the first to close the doors and refuse to let investors withdraw funds for fear of collapse.
Others have had to follow suit already. The crisis in commercial property is a precursor to what will develop in the housing sector. The housing market is already ‘gumming up’. In December 2007 fewer mortgages were agreed than at any time since the mid-90s. House prices fell marginally in the last quarter of 2007. As we have repeatedly explained, the unprecedented indebtedness of the British population, with personal debt now greater than annual GDP, means that even a relatively small housing crisis will lead to tens of thousands of losing their homes.
The latest report from the Financial Services Authority estimates that over one million families are at risk of losing their homes because their mortgage stretched them to the very limits of their resources.
The nascent housing crisis has already had a significant affect on consumer spending, which is likely to fall further in the coming year.
In the US the government has given the impression of resorting to ‘priming the pump’ in order to try and prevent, or at least minimise, a recession.
It is clear that this will not prevent the crisis that is already unfolding in the US. However, here in Britain the Bank of England is not at this stage prepared to take similar action and has been extremely cautious about lowering interest rates.
This is partly, as Leon Trotsky put it in the 1930s, because Britain’s ruling class is “tobogganing towards disaster with its eyes closed”.
Unlike the US, the economic crisis has not reached the point of impact here in Britain and, despite all evidence to the contrary, the hope that Britain will somehow escape clearly remains.
In addition some of the non-financial sectors of the British ruling class, having been completely dominated by finance over the previous decades, are now blaming it for the ‘fine mess it has got them into’.
They think there should be no attempt to keep the bubbles in the economy inflated but, rather, to allow them to deflate and ‘start again on a healthier basis’.
However, it will be absolutely impossible for the capitalist class to stand back from the crisis once it unfolds further.
The finance sector not only dominates, it is also completely intertwined with every sector of British capitalism.
However, the ruling class also has a genuine fear that ‘priming the pump’ would increase inflationary pressures in the economy.
They are trapped between a rock and a hard place. There is no capitalist policy which can solve the problems of British capitalism, which are intrinsic to the system itself.
Cutting interest rates dramatically would undoubtedly increase inflationary pressures. While official inflation remains relatively low – the Consumer Price Index (CPI) put it at 2.1% in December 2007, the more realistic Retail Price Index (RPI) at 4% – the real rate of inflation is undoubtedly higher.
In particular the sharp increase in the prices of basic necessities – food, petrol, utilities and, for many, mortgage payments – is hitting workers’ pockets hard and creating inflationary pressures in the economy.
Factory gate inflation is also on the increase – it is now at a 16-year high of 5%. Brown has tried to claim that it is workers’ wage increases that are responsible for inflation. Marx answered this argument 150 years ago. A redivision of the spoils between the working and capitalist classes, what Marx described as a change in the division of surplus value, is not in any sense inflationary.
It is true that the capitalists sometimes try to pass on increased wages by increasing prices. But, in addition to the fact that the workers are not responsible for this, the capitalists are only able to do it within the limits of what the market will accept.
Moreover, in the 150 years since Marx dealt with this issue, there has probably never been a time when blaming workers for inflation was more ludicrous than it is now.
After an epoch in which the capitalists have made vast profits by increasing their share of the surplus, where the norm has been unimaginable increases in the wealth of the elite and wage stagnation for the majority, the idea that workers are responsible for the inflationary pressures in the economy is particularly absurd.
A similar argument applies to the public sector. It is possible for governments to respond to demands to increase public spending by resorting to ‘the printing press’, although this would not be the responsibility of public sector workers.
This is particularly clear at the moment. When for 30 years we have had never-ending cuts in taxation on big business it is laughable to say that it is the fault of public sector workers greed that the government claims not to be able to find the money for a pay increase to keep wages level with inflation.
Even the Financial Times had an editorial explaining it was the government’s ‘lack of cash’ rather than inflationary pressures which was the cause of its wage restraint policy.
It is absolutely clear that workers’ struggle for pay increases are not causing inflation, but chasing it.
Average median weekly pay in Britain grew by 2.9% in 2007, considerably below the real rate of inflation.
It is common in the end phase of a boom that there is an increase in the number of struggles for improvements in pay as workers fight to get a greater share of economic growth.
However, in Britain currently the lack of confidence of the working class, combined with the pitiful role of the majority of the national trade union leaders, has prevented this happening to any significant extent.
It is true that there have been some private-sector pay increases above the rate of inflation, but the majority have not been.
Overall wage inflation was 3.5% last year, well below the real level of inflation. Normally, economic slowdown would tend to squeeze inflation out of the economy as commodity prices drop.
However, while this is most likely, it is far from certain that a slowdown or recession will completely remove the inflationary pressures from the British economy.
In particular the slide in the value of the pound, which seems likely to continue, could add to the tendency towards inflation.
Some economic commentators have argued that a weaker pound will benefit the British economy because it will make exports cheaper.
There is obviously some truth in this, although manufacturing is such a small part of the British economy now, even if a weak pound leads to an increase in manufacturing profits, it is very unlikely to be sufficient to counter the crisis in the finance and service sectors.
What is more British manufacturing exports are unlikely to be victorious in the brutal battleground of a shrinking global market with increased competition and protectionist measures.
In addition a further slide in the pound will also increase the price of imported raw materials, therefore increasing the tendency to inflation.
An element of stagflation (recession or economic stagnation combined with runaway inflation) is possible in the coming year, albeit with a different root cause and not on the scale of the 1970s, when inflation reached 25%.
It is likely, however, that British capitalism will have to put its concern about inflation aside once economic crisis actually hits.
The government and the Bank of England are likely to find themselves in a similar situation to the US Federal Reserve.
Ben Bernanke, head of the Fed, was initially very cautious about intervening to try and stimulate the US economy, but was then forced to take panic measures, far too late, when the real scale of the crisis became clear to them.