Apparent stability masks a deeper fragility

Andy Kilmister 

14 May 2007

This article has been reprinted from the socialist resistance site at: http://www.socialistresistance.net/

Any successor to Gordon Brown as Chancellor of the Exchequer is likely to face a much more difficult set of economic problems than those apparent in the last few years. There are recent tell tale signs, such as the rise in the value of the pound above two dollars and the rise in the rate of inflation above three per cent. 

These are sure indicators that the seeming stability of British capitalism under Brown actually masks a deeper fragility.

If inflation is still higher than target levels, even when the pound is strong and import prices are low, any fall in the value of the currency will just make matters worse. But if that then leads to a rise in interest rates this will only push the pound higher, squeezing manufacturing even further and widening the already large trade deficit.

New Labour acolytes have trumpeted the success of Brown in managing the economy on the basis of a decade of relatively low inflation and steady growth. This has been an improvement on the record of Thatcher, Howe and Lawson in the 1980s. But in many ways the progress of the economy under Brown is very similar to that under his Tory predecessor Ken Clarke.
Now serious underlying weaknesses are showing through. Even at the macroeconomic level growth has resulted in a soaring balance of payments deficit. This has been coupled in recent years with increased government borrowing and, for much of the last decade, relatively weak investment growth.

The high value of the pound does not reflect an underlying confidence of international investors in the strength of the British economy. Rather it signals worry about the prospects of the USA and the continuing global availability of large amounts of surplus capital looking for a temporary home.

The growth and price stability that have occurred have largely depended on factors which are inherently temporary in nature and now appear to be coming to an end.

The most important of these, of course, is the long period of fast growth in the US – both in the 1990s as a result of the dot.com boom and since 2001 as the Bush government slashed taxes and boosted spending. Now with interest rates rising in America and serious problems in the housing market, growth there has slowed markedly.

But US growth is not the only temporary development which has allowed for continuing expansion in Britain. The British housing boom and the borrowing encouraged by it is another example.

The trade deficit has been covered partly by an inflow of capital from abroad. It has also been met by exceptionally large profits earned on previous foreign investment by the UK. This trend led Guardian economics correspondent Larry Elliott to describe Britain as “a very successful hedge fund with a smaller economy attached”.

Another factor helping to reduce inflation has been the inflow of migrant labour from the countries that joined the European Union in 2004.

None of these developments can last indefinitely. Even if house prices continue to rise for demographic reasons, there is a limit to the extent to which this can feed into continually increasing debt-fuelled consumption, especially as interest rates rise. The jump in migration from Eastern Europe was a one-off event with future migrants likely to replace those returning home and with those remaining likely to demand higher wages over time. And it continues to be a risky strategy for capital in Britain to depend in the long-term on being able to outguess the rest of the world in seeking out profitable investments abroad.

Most serious for New Labour is the fact that the macroeconomic stability achieved by Brown is matched by, and depends to a large extent on, massive structural imbalances below the surface.
Three of these imbalances are becoming particularly threatening and reinforce each other.
The first is the growth in inequality; initially through income differentials and now, partly because of the housing boom, being translated into massive wealth gaps. This is at the root of the rise in household debt. Consumption increases become more and more narrowly based on a restricted number of very high earners with much of the rest of population facing ever smaller increases in takehome pay.

The second imbalance is between generations. It is most obviously expressed in the pensions’ crisis, which again acts to discourage consumption. The pensions’ crisis has also stoked the housing boom as white collar `professionals’ have started investing in property as a substitute for pension provision.

The third imbalance is the growing regional divide in Britain – both between north and south and between west and east. This again has encouraged the rise in house prices which in turn has boosted inequality. A growing concentration of people in the south and east of the country has also had serious ecological consequences, especially in terms of road use and congestion.
All these factors reflect the continuing inability of New Labour to solve the deeper problems of British capitalism. The growth that has taken place has been deeply uneven in character and has depended on very particular circumstances.

Anyone stepping into Brown’s shoes as Chancellor will have to confront the consequences.
Socialists will then have plenty of opportunities to show that capitalism cannot provide economic security and to argue for fundamental change.