preferenda

Blaming the victims for causing the recession

Michael Roberts explains why the editor of City AM, Allistair Heath, is wrong to claim workers’wages and banking regulations are to blame for the UK’s weak recovery…

“On official figures, labour’s share of UK GDP has been falling since 2009 and yet UK corporate profitability is still weakening.  So it cannot be labour’s fault.  Indeed, household real disposable income per capita has been falling for seven consecutive quarters.

“What is the reason for falling profitability if it is not a rise in labour’s share of GDP?  The problem is ‘dead capital’, or excess capacity in the UK capitalist sector. This must be cleared before profitability will rise sufficiently for investment to resume. Since 1997, when the overall rate of profit peaked in the UK (see graphic above), the mass of profits has risen 38%, but capital stock has jumped 65%. So it’s the falling productivity of capital that is the problem, not a rising share of new value going to labour. And until profitability rises, as Heath says, UK capitalists are on an investment strike. UK businesses are still investing 15% less than they did before the crisis at end 2007.

“Heath says the other reason the UK economy is not recovering is that banks cannot lend to businesses because they are hamstrung by too much regulation.  Bank lending to businesses is down 3% over the latest 12 months, continuing a fall that began in the early part of 2009.  Lending to small businesses is down roughly 10%. As Heath says: “It is not unusual for lending to firms to be weak in the aftermath of a recession. Banks become risk-averse. After the recession of the early 1990s, when they suffered large losses on their small firm loan books, business lending was also negative.  We have, however, now gone beyond the point at which business lending should be turning positive. In the 1990s it was two and a half years into the recovery. This recovery is now near its third anniversary and business lending continues to fall inexorably.”

“The answer for Heath is to end the ‘over-regulation’ of the banks: “Unless somebody in authority gets to grips with the conflicts between regulation and growth and realises a credit-starved economy will always struggle, we can only expect more disappointing GDP figures.”  But this is codswallop.  The fall in lending is not because of too much regulation.  It is demand-driven. The evidence is clear from the Bank of England’s’ own survey.  Nobody wants to borrow money.

“Demand for loans by small businesses collapsed back in mid 2010.   They had too much debt and did not want to borrow more when revenues plummeted.  Large companies don’t want to borrow either and need to less because they have built up stockpiles of cash (see my post, Why is the US recovery so weak? – look at profitability, 3 April 2012).  Why borrow more when profits are down and prospects are poor?”