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Economists for Rational Economic Policies contributors John Weeks, Ozlem Onaran, and Jeremy Smith say nominal gains in economic performance are based on household debt. (The report can be read here:The Cracks Begin to Show: A Review of the UK Economy in 2015)

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SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network, and happy new year to all of our great viewers. Thanks for joining us. Economists for Rational Economic Policies in the UK has just released a report titled The Cracks Begin To Show: A Review of the UK Economy in 2015. The report argues that the high expectations that were predicted for the UK economy, essentially that it is getting back to normal times and destined to continue economic growth, has not quite transpired. In reality, and despite some positive results, the number of those in some form of employment, for example, has gently deflated as 2015 progressed. Well, three of the contributors to the report are now joining us from London, and first we have John Weeks. John is a regular contributor to the Real News Network, so you’ve seen him before. John Weeks is a Professor Emeritus at SOAS, University of London, and his most recent book is Economics of the 1%: How Mainstream Economics Serves the Rich, Obscures Reality, and Distorts Policy. Then we have Ozlem Onaran. She is a professor of economics at the University of Greenwich, and director of Greenwich Political Economy Research Center. And finally, we have Jeremy Smith. He is currently co-director of Prime Economics, a policy research house in macroeconomics, and formerly he served as the secretary general for the Council of European Municipalities and Regions. Thank you all for joining us today. OZLEM ONARAN: Thanks for having us. PERIES: So Jeremy, let me begin with you. Give us a synopsis of the findings of the report to begin with. JEREMY SMITH: Yes. Well, it’s written by different authors, so there’s no one absolute overarching story. But generally we share a perspective that the government in Britain has adopted relative austerity policies which have been, we would argue, unsuccessful in their own terms in reducing deficits and debt anything like the pace the government originally planned. But at the same time, leading to major reductions in public services and to services for the poorest in our community. Yet at the same time, the government seems to have got away very much with a sort of discourse that everything’s going splendidly. And looked at from one or two points of view there seemed at one point to be something behind their story. Namely that actually, the unemployment–the employment figures were improving considerably, and unemployment in numerical terms was coming down. And for a couple of years GDP started, after the slowest recovery ever from a recession, to go at a reasonable nick, although that was largely, we would say, on the back of sort of promoting asset bubbles in property, et cetera, in housing and other bubbles. But during the course of this year we’ve seen that, as you said in the opening, the sort of steady, disappointing decline, a step down, so that in each quarter the rate of annual increase of economic activity has declined. At one time it looked as though pay, for the first time–real pay, that is after you allow for inflation–has been falling for six full years. But in the last year or 18 months it’s been starting to do a bit better, but even that has declined again. At the same time, monetary policy has been as easy as it’s almost possible to be. There are no signs at the moment that the Bank of England, unlike the Fed in the states, will risk increasing interest rates, because the economy is still too frail. And therefore I think overall we’ve argued that economy insofar as it’s recovered has been back on the old model of laying debt on households again, starting to get that [crosstalk]. PERIES: Yeah, let’s dig into that with Ozlem. Ozlem, in this report you argued what Jeremy just said, that growth in Britain is still based on shaky grounds, as it is driven by a major increase in private household debt, and will remain fragile, you say, in any–if for example, an increase in interest rates were to occur, essentially that working people are [obliged] to rely on debt to maintain their living standards in this so-called slow growth period that we are going through. So why, why is that happening? ONARAN: Well, the rise in inequality and stagnation of wages have been one of the fundamental flaws of our economic model. This was one of the root causes of the Great Recession, and sadly we are far from correcting this imbalance. And this is primarily due to a massive loss of bargaining power of working people, for three decades by now in Britain. If you look at real pay, it is still 9 percent lower compared to its peak in 2008. And of course, just as Jeremy have said, we have had the longest fall in wages since the Victorian times, and wage and [inaud.] still are looking to a recovery in their incomes not too much before 2017 or even 2018. So we have had a lost decade in terms of incomes of working people. The share of wage income and national income has decreased since the Great Recession. It’s very unusual for recessions, for the wage share to decrease when there is a fundamental fall in productivity. This time around, both in Britain and the U.S., share of labor income and national income has been falling in the down cycle. And this is coming on top of three decades of falling labor income. What our recent research at the Greenwich Political Economy Research Center, together with [inaud.], in Britain as well as in the U.S. and many in the major developed countries, if the share of labor income and national income falls and its growth rates decline, they become more unstable, more fragile, more based on [inaud.] by the [inaud.]. And of course it doesn’t help private investment either. So we are saying another very peculiar development, which rising profitability, falling wages or stagnant wages, private sector isn’t [missing]. And this is why growth is based on shaky grounds. Why should investors invest when they see household consumption being based on very fragile, shaky, debt-driven grounds? There is not sufficient demand. The prospects for markets, the prospects for sales in the future is still uncertain and unreliable. And of course this wage [strain] is coming on top of another major development in our economies. This is the financialization of the economy. Firms are seeing their profitability increasing, but they’re using their profits to speculate. They’re buying their shares of other companies, or they’re buying their own shares back instead of investing in physical machinery and equipment. So obviously you’re talking about another puzzle in Britain, the productivity puzzle. But indeed there is no puzzle. If there is not enough demand and there is ample room for speculation and financial activities, firms will not invest. Their financial income is also not helping them to invest, so overall productivity obviously doesn’t increase in this environment. This feeds back to another fragility of the UK economy, the balance of payments deficit. Exports, particularly export of manufacturing is going very poor. And again, this is no surprise. If firms do not invest, if they don’t increase their productivity, they will not be able to increase their exports just based on wage moderation because everyone else in the global economy is also doing the same. In particular, this [constant] race to the bottom in labor income is removing any competitive advantage UK firms can get from wage moderation. Their [inaud.] low investment, low productivity, low exports, and all the fragilities are building on top of each other just in the same way as it was before the crisis. PERIES: John, let me get you in on this. Now, you in the report argues that the UK economy remains demand constrained, and that government fiscal policy had made that straitjacket even tighter. What do you mean by that, and how does it transpire in the economy? JOHN WEEKS: Well, thank you. First I should say that many of the things that Jeremy and Ozlem have said, particularly Ozlem’s discussion of wages, also would apply to the United States. I say that because what I’m going to say now also applies to the United States. The question you asked shows what the one big lesson to come out of this year’s fiscal policy [inaud.] the Tory government. And that is a government cannot eliminate a fiscal deficit by cutting expenditure. And Americans, those of you don’t realize it by now should realize it. You cannot–if you want to get rid of a deficit you cannot do it by raising taxes and cutting. You cannot do it that way. Because what happens is that reduces the aggregate demand in the economy. The economy goes slower because people can’t sell, businesses can’t sell as many things, as Ozlem said. And as a result of incomes growing slower, taxes grow slower. And unemployment continues to be a problem, and you have to pay unemployment compensation, so you have to continue to pay the level of benefits associated with the recession without getting donation of tax revenue. And I think that also has been what has happened in the United States over the last seven or eight years. So that is the message why it is happening. But if we can go into that more later, but I would say partly it is a failure of the Chancellor, of George Osborne, to understand economics. But it is more the fact that he understands politics very well. He has a political agenda. His political agenda is to destroy the welfare state. And as you’ve seen in the United States, particularly with the loony Republicans in the House of Representatives, you use a deficit as your excuse for destroying the welfare state. And the great thing about using the deficit as an excuse to destroy the welfare state is that as you cut expenditure the deficit doesn’t go away. So you can keep saying, well, we have to cut even more, even more and even more. And that is exactly what George Osborne has been doing. It’s a very clear message: we want to destroy the welfare state. PERIES: All right. John, I’m going to end this segment now and then we’re going to pick it up in terms of the political implications of the findings from your report and how that will transpire in the political arena in the UK coming up.


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John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.

Ozlem Onaran is Professor of Economics at the University of Greenwich in the U.K. She regularly publishes research studies on globalization, income distribution, and business investment in publications such as the Cambridge Journal of Economics and Labour. She recently co-authored a major study for the International Labour Organization on the relative importance of decent wages versus high profits as an engine of economic growth in several countries throughout the world.

Jeremy Smith is Co-Director of PRIME Economics.