Category Archives: Economic

China, Economic, United States

America’s economic battle with China risks global slump

GLOBAL ECONOMY

PRESIDENT Trump continues to show no mercy in his dealings with China. Emboldened by the robust American economy and the continuing rally on Wall Street, Donald Trump is convinced that tariff barriers will do more damage to Beijing than Washington, and that eventually his approach will force concessions.

The U.S. President’s decision to impose a 10 per cent tariff on £150bn of goods from China means almost half the products shipped from the People’s Republic to America – with the notable exception of some Apple items – are subject to tariffs, raising prices for US businesses and consumers.

These new measures are in addition to the £38bn of tariffs imposed in July and August.

China, led by President Xi Jinping, lost no time in retaliating by finding another £45bn of US goods to penalise. And the country’s best-known entrepreneur, Jack Ma, founder of digital champion Alibaba, said his promise to create up to 1m jobs in the US was no longer viable because of tensions.

 

DESPITE the threat of higher prices for Americans on goods ranging from textiles to electronics, Trump’s tough line will play well in “rust-belt” states as the Republicans seek to seize back the political initiative ahead of November’s mid-term elections.

The White House’s choice of trade as a weapon to curb Chinese influence and expansionism has been met with horror by the International Monetary Fund in Washington and the World Trade Organisation (WTO) in Geneva.

The Organisation for Economic Co-operation and Development (OECD) have also joined the chorus of critics, warning that world economic output was “hitting a plateau” because of US-China trade wars and fragility in emerging markets.

As the apostles of free trade, it argues that much global prosperity, notably in Asia and emerging markets, has been built on an open trading system.

The Great Depression of the 1930s was the result of nations imposing ever-higher barriers on vital trade such as commodities and farm produce. Despite the criticism there is a conviction in the White House that America’s hardline policy will produce dividends.

Larry Kudlow, the White House’s chief economic adviser, declared: “We are open to talks, if there are serious talks.” In May, China agreed to reduce the tariffs on imported American cars from 25 per cent to 15 per cent, to ease strained relations.

Mr Trump has also been encouraged to act tough after his success in bullying Mexico into accepting new rules for trading. Mexico now has to show that products it assembles contain at least 70 per cent of US content before they can move across borders.

The U.S. President has been able to take on China with some impunity because the American economy is going great guns. Growth has exceeded wildest expectations in the second quarter, at an annual rate of 4.1 per cent, creating jobs.

Farming communities have been hardest hit by Chinese retaliation, which has targeted soya bean production, pig products and beef. Trump has bought farmers’ silence with an increase of £9.1bn in subsidies.

So, what does this chest-beating machoism mean for other Western nations?

The big concern is that if the tit-for-tat war carries on for any length of time, Beijing might flood other countries with cheap goods. Complaints of Chinese dumping of cheap steel and aluminum on international markets have led to swingeing penalties being imposed by the countries where the steel is sold – while the cases are examined at the WTO.

The difficulty for Beijing is that it doesn’t import anything like £150bn of goods from the US though it can slow supply chains – such as components for the iPhone and personal computers.

The importance of better trading relations with neighbours has never been more critical. China recently sealed a far-reaching trade deal with India. In Europe, it reinforces the need for Britain to connect to the EU’s market of 500m people and not allow Brexit to damage relationships.

The biggest concern is that the US-China trade war comes at a moment of potential peril for the global economy. Rising US interest rates allied to domestic political upheaval are driving several market economies, including Turkey, Argentina and South Africa, to the brink.

When the financial inducements of Donald Trump’s tax cuts wear off and American retail prices rise – because of the higher costs of Chinese goods – economic conditions could deteriorate rapidly. The trade fracas might just prove to be the start of the next global slump.

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Britain, Business, Economic, Government, Society, Technology

The rise of automated robots is creating fear in the workplace. But why?

ECONOMIC & TECHNOLOGICAL ADVANCES

WE shouldn’t be surprised if trade union’s such as the TUC is waxing lyrical about how robots and new technology will liberate us all to work less for the same money.

After all, no less an authority than Karl Marx claimed automation would help free the miserable proletariat from their mundane drudgery.

John Maynard Keynes predicted in his 1930 Essay, Economic Possibilities For Our Grandchildren, that technology would allow people to work no more than 15 hours a week. “Three days a week is quite enough,” he opined. Keynes didn’t have any grandchildren, but if he had, it’s highly unlikely they would be basking in hours of leisure time.

Employment in the UK is at its highest since 1974, when ABBA won the Eurovision song contest and we actually did have a three-day week (but for all the wrong reasons).

Not everyone sees the advance of robots and technology in the workplace, in warehouses, manufacturing plants or even in new possible areas such as care homes, as a good thing. Fears that machines will make humans redundant or enslave us are as old as technology itself. Crackpot ideas such as Amazon’s robot-driven cage for its employees – now mercifully ditched – is an example that doesn’t exactly help.

In a fascinating speech on the future of work, Bank of England governor Mark Carney said that, in the past, machines substituted for “hands” or manual labour. Now artificial intelligence means they might replace “heads” or brain work, leaving “hearts” to people – or, in other words, work that involves emotion, imagination, innovation, caring and creativity, which could translate into more fulfilling work that adds value to the economy.

 

HISTORY tells us automation does not take away human work, but simply shifts people from one type of work to another.

One of the biggest technological revolutions receives virtually no attention from economists because it has mainly affected women. But, by making housework so much easier, the spread of domestic appliances such as vacuum cleaners and washing machines has arguably changed the workplace and society as much as the smartphone.

The idea that robots will take employment away from humans rests on the “lump of labour” fallacy that there are a fixed number of jobs in an economy, so if a robot takes one, a human being will be consigned to the dole queue. In reality, however, it is not like that. Economies are dynamic, so if robots add to productivity and growth then more, not fewer, jobs will be created for humans.

This doesn’t mean the introduction of technology will be seamless. Overall, technology may be beneficial, but individuals can and do lose out if their jobs are taken over by machines and they are not able to find alternative employment quickly.

What Keynes ignored in his analysis is that many of us, probably including himself, have workaholic tendencies and absolutely don’t want to be idle.

For anyone who wonders why multimillionaire chief executives don’t just put their feet up and enjoy their loot, think of it this way: the higher paid someone is, and the more status and admiration they glean from their work, the less incentive they have in taking more leisure time.

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Britain, Economic, Financial Markets, Government, Politics, Society

The real crisis of capitalism

ECONOMIC

THE past week has been a time for recalling the events of September 2008, their long shadow over the economics and politics of the past ten years and for drawing the right lessons for the future.

In particular, did the financial crisis prove that capitalism is fundamentally unstable and that a new model involving greater control and a much bigger role for the state, as favoured by Jeremy Corbyn’s Labour Party, is a better one? Or, the fact that the guilty men and women mainly got away with it, meant that public anger over the crisis was never assuaged?

We should understand that the financial crisis did not begin on the weekend of September 13-14, 2008, which saw frantic but unsuccessful efforts to save Lehman Brothers, the Wall Street investment bank. The crisis had been simmering for well over a year, a period that saw the run on Northern Rock and the start of Britain’s deepest recession in the post-war period.

The bankruptcy of Lehman, announced on September 15, turned a smouldering crisis into a ravaging forest fire that spread rapidly around the world. Banks were bailed-out by free-market governments using public funds. Alongside near-zero interest rates, central banks including the Bank of England did things they never would have contemplated in normal circumstances, most notably quantitative easing (or the printing of free money). Governments spent vast sums of money that ran into the billions boosting their economies to ease the impact of the crisis, but on the basis that they would cut back later. Austerity, on a scale and duration not seen in this country since the Geddes axe of the 1920s, was the course chosen by the coalition government in 2010.

 

MOST of what people think they know about the past decade is wrong. The danger in 2008 was of a prolonged period of deflation – falling prices and economic depression, a modern version of the 1930s. The reality is that both were avoided. After the shock of the crisis the economy grew more slowly than had been the norm, but it grew. All advanced economies were afflicted by weaker growth.

Income inequality in Britain has fallen since the crisis, not least because the burden of tax faced by the highest earners has increased. This financial year, 2018-19, the top 1% will pay almost 28% of all income tax, compared with just over 24% in 2007-08, paying £12bn a year more in tax than before the near meltdown. The top 10% accounts for 59.7% of all income tax revenues, up from 54.3%.

Austerity, as practised by the coalition led by David Cameron and now by a Tory minority government under Theresa May, was never about shrinking the size of the state for ideological reasons. The coalition’s mantra before the crisis was that after the spending splurge under Gordon Brown, the “proceeds of growth” would in future be shared between tax cuts and increased public spending.

Even faced with the task of reducing an out-of-control budget deficit, Mr Cameron ring-fenced NHS spending and imposed a target of spending 0.7% of gross national income on foreign aid. A better criticism of Tory austerity is that too much of it involved cuts to government investment and that the process has dragged on for too long, partly because it was leavened with tax cuts, mostly for working people.

 

THE financial crisis and its aftermath were painful but too many Tories seem to have been cowed by it from making a robust case for capitalism. This leaves the way open for Jeremy Corbyn and John McDonnell, Labour’s anti-capitalist chancellor. When a privatised rail company messes up, or a housebuilding boss is awarded a bonus running into tens of millions of pounds, there is rightly an outcry. The crisis itself was the product, yes, of many greedy bankers and a few in handcuffs might have satisfied public opinion, but it was also the consequence of regulators whose job it was to stop them failing. In many cases, including the recent collapse of Carillion, many of these problems arise at the interface between the public and private sector.

Of course, we all want to return to a time when living standards are rising at a decent pace. That will be achieved only when productivity growth also returns to something approaching past norms. Capitalism in Britain has, since the crisis, delivered something like seven times the number of new jobs as those cut by the public sector. Unemployment is at its lowest since the mid-1970s. It is the private sector, not failed prescriptions of anti-capitalism, that will deliver prosperity in the future.

 

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