Economy: “arguably the worst in 60 years”

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 A truth that's told with bad intent

Beats all the lies you can invent[1]

Economic conditions today are "arguably the worst they've been in 60 years" according to Chancellor Alistair Darling (Guardian 30/8/8). No, that's not just for Britain, but for the whole world economy

For the Sunday Times the next day this was a "gaffe", contradicting both his deputy's memo to spin doctors and Brown's ‘relaunch'; for the Times his job is at risk. Before we jump to any conclusions about what Darling was doing we should first of all examine the real state of the economy.

The Chancellor of the Exchequer's remarks have given government and media the chance to rubbish Darling's idea: we don't have rationing as we did 60 years ago, we don't have double figure inflation as in the 1970s, we don't have unemployment of 3 million as in the 80s (officially we don't), and the crisis won't be as deep as in the 1990s (oh really?). This sort of argument asks us to look at each new crisis as if it had nothing to do with the previous one. It would be a bit like arguing against global warming because Gustav was less powerful than Katrina or because we had a cool wet August in Britain. We have to look at the long term trends, at the state the economy was in when the credit crunch hit, at the margin of manoeuvre for governments to respond, and not explain everything away by comparing facts or statistics without any context. Even the Economist (6-12 September) had to concede "Mr Darling had a point... It is rare to be hit by so many problems in such a short space of time", going on to list rises in oil and food prices, reduced consumer spending, the banking crisis and the collapse in the housing market.

40 years of crisis

Sixty years ago the world had just been through the most disastrous half century: the Great War 1914-18, flu pandemic, crash of 1929, followed by the great depression and then World War II. For revolutionaries this was clear evidence that capitalism is decadent, that it has no perspective for humanity but more and more disasters, that it needs to be overthrown. But in 1948 things seemed to be improving, at least for developed countries in the west and others benefiting from loans from the USA (particularly the Marshall Plan) and from massive state intervention. In Britain nationalisation of coal, steel, railways and health provided important support for economic development. Whatever the hardships, the economy was apparently recovering. 20 years later Sterling had been devalued, announcing the start of the crisis we are still living through today.

Unemployment: In Britain a generation that had grown up after the 2nd World War was shocked by the threat of the 1960s Labour government that we had to accept unemployment of 1-2%,. But in fact it is low unemployment that was the aberration in the 20th Century. Even before the crash of 1929 or the hunger marches in the 30s, Britain had endemic unemployment of a million men throughout the 20s (see ‘Evolution of British imperialism' in WR 312 and 313). Unemployment grew during the 70s and then exploded to more than 3 million in the 80s, when government policy reduced the numbers by forcing millions to claim incapacity benefit instead.

Much has been made of falling unemployment over recent years, but what is the reality? The credit crunch has not hit an economy with full employment, as the 1960s crisis did, but one with over a million unemployed. Officially unemployment is now 5.4% or 1.67 million, up 60,000 over the last 3 months, but the Labour Force Survey noted that in the 3 months to June there were 3.06 million households where no-one works, including 4.29 million working age people and 1.8 million children.

Remember this when you read about how the credit crunch is not as bad as the 70s or 80s. Remember that unemployment is one of the main ways the working class suffers in a crisis. And remember that the recovery in the 1990s was so ‘successful' that in the US it was dubbed the ‘jobless recovery'. It is not a question of whether the credit crunch is going to create more or less job losses than previous crises in the last 60 years, but how many more unemployed it will add to the millions already out of work.

Growth has clearly been hit by the credit crunch. Negative growth in the euro zone in the last 3 months, the OECD forecasting a ‘technical recession' for Britain at the end of the year. But the American economy is growing again - thanks to a $180 billion fiscal handout - so perhaps we should look forward to the light at the end of the tunnel? After all, have we not seen stupendous growth during the years the ICC has been claiming that we are living through an economic crisis? The reality of growth is often revealed in the crash that follows. The Asian ‘tigers' helped stimulate growth in the 1990s, but the role of debt in sustaining this was revealed in the crash of 97/98. The reality of the ‘recovery' was revealed in the crash that followed - when much of the ‘growth' was in fact the growth of companies valued at far more than either the capital invested or the profits they had made. It was nothing more than a bubble. And the ‘growth' that resulted in the credit crunch was based on the growth in the price of houses and a stupendous increase in personal debt so that by summer 07 personal debt in Britain exceeded GDP.

Stagflation is a term from the 1970s that has reared its head again since the credit crunch. With inflation well over the 2% target the Bank of England is charged with maintaining, the government has much less margin for manoeuvre for injecting more money to kickstart the economy. Interest rates are no longer being cut, as they were in 1998 or 2001. Clearly they have learned the lessons of the 1970s when money pumped into the economy fuelled damaging levels of inflation. Some money is being pumped in of necessity: the budget deficit has widened to £35 billion, and may double. Money will be pumped in as loans to potential homebuyers, and when councils and housing associations buy out those liable to lose their homes, but the £1.6 billion this will cost won't restart the economy.

What has Darling achieved?

Media attention on Alistair Darling's remarks has often focused on whether they were a gaffe or part of a power struggle within the cabinet. Nevertheless, we can see that Darling has achieved three important results for British capitalism. In the first place he has given the media plenty of opportunity to tell us that things are not nearly as bad and that they will get better if we put up with a year or so of austerity. If they were not rubbishing the chancellor's ‘gaffe' would anyone have believed a word of this? Secondly, he has fuelled the media smokescreen about divisions and power struggles within the cabinet that diverts attention from the real economic problems and the attacks being made on the working class.

Thirdly, the pound fell to a record low shortly after he made his remarks. Overall it has lost 15% of its trade weighted index in the last year and 5% in the last week. "Still there are signs that sterling's slump is lifting the domestic economy" (The Economist 6.9.08). This devaluation may temporarily improve Britain's competitiveness, but we should have no illusions as its economy is particularly vulnerable due to the high household debt to income ratio (the basis of the last 10 years' growth) and the weight of the finance sector in the economy, as well as the stagnation of the euro area which takes more than half of its exports.

The perspective for the working class

Politicians of left and right, media, business, all are agreed that wage claims must remain below inflation. Workers are already paying for the credit crunch through higher food and fuel prices, job losses and the fear of job losses; and this comes on top of 40 years of attacks. The economic crisis shows what capitalism has to offer: declining pay, more unemployment, lost pensions at home while the state engages in continued military adventures overseas. This crisis has put down a challenge to the working class every bit as serious and every bit as dangerous as that of 1914, for we face the same historic choice: socialism or barbarism.

Alex 06/09/08


[1] ‘Auguries of innocence' William Blake.