The 1st May local election results were a very bad setback for the Labour government, with only 24% of the vote, the lowest share since 1968, the loss of a number of councils in their core areas of support, and most spectacularly Boris Johnson's victory over Ken Livingstone in the London Mayoral election.
This fiasco is widely, and correctly, put down to the feel-bad effect of the economy since the credit crunch. Gordon Brown has tried to insist that the economy is basically sound and Mervyn King, governor of the Bank of England, has argued that investors overdo the "doom and gloom" of the markets. But there has been a whole media campaign blaming the economic problems on Gordon Brown's incompetence, while various Labour MPs have, rather belatedly, discovered that the loss of the 10p tax band announced a year ago when he was still chancellor will hurt many Labour voters on low incomes.
Fears about the effects of the credit crunch on the economy, and particularly jobs and living standards, are entirely justified. The housing bubble, an integral part of Britain's ‘growth' during Brown's chancellorship, burst loudly with the dramatic run on Northern Rock, the first on a British bank for well over a century. House prices have been estimated as 25-30% overpriced, or to put it another way, the price of a home for a first time buyer is now well over 5 times annual income whereas it was just under 4 times income at the end of the 1980s, immediately before the last fall in the housing market. Naturally house prices are now falling, down 0.6% in March, 1.8% in April, and 4% down from peak levels last summer according to building societies; but not all buyers have a mortgage and estate agents have noticed that overall sales are about 10% down on the peak of last summer (The Economist 12.4.08). The IMF has estimated that the credit crunch will cost nearly $1 trillion in write-downs and credit losses for financial institutions internationally.
The long and the short of it is that while more and more money is being made available to the banks - such as the £50 billion the Bank of England announced it will make available in bonds in exchange for mortgage security at the end of last month, and the bank base rate is falling - mortgages are rising on top of already unprecedented repayments: "Mortgage payments are making ever-larger dents in household income, rising from 12.5 per cent in 1997 to 17.6 per cent in May this year" (Independent 24.8.07). Of course, the actual payments for any household with a mortgage is much higher. And that is for those who can afford a mortgage. It is estimated that the effect of the crunch will be the loss of 40,000 city jobs; a third of estate agents may close, and a further 100,000 retail jobs may go.
Is it all down to poor government, or is there a more serious underlying problem in the economy?
But what about the soundness of the British economy?
Britain was not just the workshop of the world and imperialist top dog in the 19th Century, with a third of the land mass coloured pink (for the empire) on maps, it was also the world's banker. Financial services played an increasingly important part in Britain's economy, and their relative importance increased from the late 1800s as her competitors, especially USA and Germany, caught up and overtook her industrial production. Much of the world had conducted its trade in £s, the ‘Sterling area' including Portugal, Argentina and Scandinavia. Britain's huge financial sector was analysed by revolutionaries in the Italian communist left in the 1930s: "It is a fact that British finance has for a long time ceased to be interested in the industrial and agricultural sphere in the Metropolis, contenting itself with gleaning profits from merchants and colonies and from the capital exports derived from accumulation in industry. ... The structural particularities of finance capital constitute both a weakness and a strength: a weakness, because, due to its intimate links with the mechanisms of world trade, it suffered from their perturbations; a strength because, cut off from production, it retains a greater elasticity of action in periods of crisis" (‘The evolution of British imperialism', WR 312). The depth of Britain's continued decline was shown up very clearly with the sterling devaluation forced on the Labour government in 1967 by a run on the pound, which marked the final end of the last remnants of the Sterling area. The devaluation was also an important marker of the onset of the economic crisis internationally.
With British industry in even further decline since then, the underlying weakness of the economy is more pronounced and the strength and elasticity less effective, particularly in a crisis which is centred on banks and financial services. "Jim O'Neill, chief economist at Goldman Sachs, who correctly forecast the collapse of the US property market, said that Britain was likely to be the worst hit of the world's economies in the fallout of the global credit crisis. Mr O'Neill said that Britain, with its heavy reliance on financial services, was ‘in the eye of the storm of a de-leveraging world economy' and that British homeowners would bear the brunt of the City's ensuing slowdown" (The Times 1.5.08). He also predicted that Britain's service sector would lose ground to the rest of Europe.
To understand the extent of the effect that this will have we need to see that the housing bubble was one of the main factors behind a huge increase in personal debt, rising to £1.35 trillion up from 1.25 in 2006, ie more than the GDP of 1.33 trillion (Grant Thornton predictions quoted in The Independent, 24 August last year). We need to add to this mountain of personal debt a public debt of 43.3% GDP (CIA World Factbook). Back in August the Bank of England was saying that this debt was a ‘social' rather than an ‘economic' problem - by which they meant it was a problem for the individuals who got into debt. But in fact it is a social problem for the ruling class as well because of the effect the bursting of the housing bubble will have on the working class as it is faced with rising mortgages, along with rising food and fuel prices, at a time of relative pay cuts and job losses. The working class will be forced to defend its living conditions.
Britain is due to break the Maastricht rules over its public debt, with new borrowing rising to more than 3% of GDP as the Treasury loses £16 billion in revenue over the next 2 years. Brussels estimates UK growth will be down to 1.7% this financial year and 1.6% next (far less than the Treasury forecast given for public consumption at the time of the budget).
Leaner and meaner
The ruling class has not remained inactive in the face of the decline in British industry, attempting to make production leaner and fitter, more competitive, particularly in the 1980s, the Reagan and Thatcher years. This was accompanied by the ideology of neo-liberalism, but we should not let that label fool us into thinking that it was just about ‘Tory policies' nor that it was about less state intervention. The rundown of the steel industry in 1979-80 was the result of the economic crisis of the time, in particular the overproduction of steel relative to the market and the fact that British Steel could not compete. Jim Callaghan's outgoing Labour government was just as aware of the need to cut steel jobs as Thatcher. And the rundown of the steel industry was not the result of privatisation. Privatisation was simply the best way for the state to run down the industry as it gave a false target for workers' anger - not the crisis of capitalism and the state, but a particular government and the new private boss. Such diversion tactics were particularly important given the militancy of the struggles in the 70s and 80s, which included the 1980 steel strike.
The next industry to fall was coal mining, which also had to be run down in the face of the militant struggle of workers in 1984. And this time there was a clearer feeling of solidarity from the rest of the working class, although it was usually channelled into set piece battles with the police. The final nail in the coffin of the coal industry came in 1992.
Of Britain's great industrial prowess in the 19th Century - coal, iron and steel, shipbuilding, textiles - almost nothing is left. The remnants of the steel industry, Corus, was sold off to an Indian capitalist. This part of the economy is not leaner and fitter, but emaciated and moribund.
But we are talking about a crisis-ridden capitalist system, not a complete collapse. There have been new industries in the 20th Century: cars, computers, services. The massive loss of jobs in the docks was due to containerisation, which gave a boost to global trade by cutting costs, allowing some production to be transferred to areas of the world where labour is significantly cheaper, such as China and India. But none of this has re-launched the economy since the 1980s. There have been waves of redundancies in the car industry and there will be more to come as it is acknowledged that it is about 20% overcapacity world wide. Each new hope for the economy has proved to be largely speculative and given rise to its own crash - the Asian tigers in 1997, then the internet bubble, and now the housing bubble. Each new industry only participates in a crisis-wracked world capitalist system and cannot escape the limits of its solvent market, based on who can pay for things and not what is needed by human beings.
This is confirmed by the levels of unemployment. Although unemployment of 1 million became normal in Britain in the 1920s, reflecting the decline in the economy and the weakness of the recovery after the First World War, even before the depression of the 1930s, the post war boom in the 1950s and 1960s created a great need for labour and the ideology that capitalism could create full employment. But unemployment gradually rose in the late 1960s and 1970s (before the massive redundancies in steel and coal), so that the length of the dole queues was a major plank of Tory electioneering in 1979. Thatcher was duly elected and continued to lengthen the dole queues to around 3 million, only getting the unemployment figures down by statistical manipulation and forcing many unemployed to claim incapacity benefit instead of unemployment for the most minor health problems - which allows them to be portrayed as malingerers today.
No government competent to run the economy
The latest outbreak of the economic crisis is exposing the shallowness of both the Thatcherite fix of the 80s and the Brownian ‘boom' of the last ten years. Gordon Brown has lost his shining image as the prudent chancellor who presided over a healthy economy. He is now being widely portrayed as the profligate who failed to save in the good years, and an incompetent not fit to be prime minister. Taking this flack is an essential part of his job - far better for the ruling class and their state that we blame Gordon Brown or Alistair Darling, and wonder whether Cameron and Osborne could do better, than that we start to question the future capitalism has to offer us. Alex 3.5.08