Fifteen years on from the Great Financial Crisis, the world economy remains fragile. Jonathon Shafi spoke to economist George Kerevan about the forces shaping global capitalism, and how they impact Scotland.
This is an abridged version of an article first posted at Independence Captured.
Jonathon Shafi (JS): George, it’s great to speak to you. I want to start by asking if you can sketch out some of the broad tendencies in the UK economy and where you think things are headed in the post-Covid era.
George Kerevan (GK): The UK economy is an outsider compared to the other big industrial economies since the economic banking crisis of 2008. The UK has really lagged. Productivity has flatlined. We’ve got incomes flatlining. Investment is flatlining. It’s ground zero. I think there are two reasons for that. One is a general crisis in the nature of British society. Another is that the fiscal structure just funnels money away from productive investment into hare-brained financial schemes and particularly to property.
With government policy geared almost entirely towards channelling money into property, there’s this great squeeze on industrial investment. There’s always talk about the tax regime being geared towards encouraging investment. But in practice, if you look at the actual tax structure of the UK, you are better off putting your money in property. So that is the backdrop to events unfolding today.
Now, in the immediate short term, what’s been happening is that as we came out of Covid huge numbers of people in the UK economy decided not to go back to work. And why should they be motivated to in this relatively low-wage and highly exploitative economy? In a sense, there wasn’t much incentive to return to work, so we’ve lost about half a million workers.
This shortage of labour has really caused the economy to slow down. The bottom line is that at the moment every other major industrial economy has caught up and surpassed pre-Covid output. Britain is still trailing behind. It is a limping economy.
JS: Let’s zoom out from Britain to get a big-picture view of how international capitalism has recovered, or otherwise, from the pandemic. How do you assess the trajectory of the global economy and in particular in Europe and the United States?
GK: The last 18 months have been quite interesting as far as the development of the global economy. We suddenly got into a kind of “mini-boom,” partly because we’d lost a lot of productive capacity during the lockdown. At the same time, a lot of demand has been built up throughout the pandemic, and cash dispensers have been quite buoyant as society reopened. On top of that, big capitalist companies have rediscovered inflation. A good way of repairing your balance sheet and boosting your profits is to jack up prices. For a long time that was very difficult, particularly in the face of massive competition from China, which would force prices down again.
But China was in lockdown until quite recently. And so that disrupted competition, and gave firms a chance to bang up their prices. So a combination of pent-up demand and the ability to raise prices has meant there’s been a “boom” going on right across the western world. Britain is the last economy to crawl onto the bandwagon. That’s created labour shortages, which in turn has resulted in workers across the western world having a bit more economic muscle because they’re in short supply. This has led to big wage demands and a strengthening of class struggle, which we’ve seen right across America and in Europe.
How long can this boomlet last? That’s the big question. There was a lot of feeling that it would peter out quite quickly because central banks were raising interest rates on the back of inflation concerns. Central banks work on behalf of the big lenders, not on behalf of you and me, and the lenders are worried they won’t get their money back. And so they have decided to raise interest rates to try and block off the boom. Of course, that’s contradictory, because it would mean a lot of companies don’t get to sell things to make a profit. So there’s a lot of tension in the system.
The boom has exposed a lot of weaknesses in the banking sector. Go back to 2008, when of course we had the last banking meltdown and they were bailed out by central bankers and taxpayers, and the banks were regulated heavily to stop them from making silly loans and so on. But, of course when you regulate the banks, all that happens is that the financial system creates another set of institutions, which are outside the regulatory zone.
That’s what is happening at the moment with, for instance, the collapse of Silicon Valley Bank. It was part of a kind of shadow banking system, outside the old big, regulated, banks that were sucking in money from the wealthy, and channelling it back out through reckless loans, to whoever needed it to fuel this mini-boom. So boom leads to bust and a banking crisis because when it starts to abate and profit starts to decline, the banks who have made all the loans end up in trouble.
My guess is that the collapse of Silicon Valley Bank, and the shock that is going through the financial system, will mean that central banks delay raising interest rates, and that will prolong the boom. So instead of the boom ending this year, as initially predicted, I think it will probably go on into next year. Indeed, the Chancellor of the Exchequer announced that Britain wasn’t going to go into recession this year. It’s going to kind of limp along through the next 12 months or so. As a result, I think we’ll see another wage round into the autumn and spring of next year, with the unions having to fight to maintain living standards against rising prices.
JS: You touched on the question of labour shortages. This is something I wrote about in the middle of 2021 when it was becoming clear that the pandemic, rather than creating a big reserve of labour desperately seeking jobs, resulted in the opposite. What is your analysis of post-Covid industrial relations?
GK: In the Western world, but also in Southeast Asia where the bulk of capitalist production takes place, we have seen a rise in labour militancy. And it’s partly because workers are in a stronger position as a result of big labour shortages and firms desperately needing workers post-Covid. In addition, with inflation going into double digits, living standards are being eroded very rapidly. So workers are obviously going to respond. What we’ve seen broadly in the private sector, where firms are able to put their prices up quite significantly, is that they’ve made concessions to the workers. There have been some significant wage rises in the private sector across most of the world.
That has left the government with the task of trying to hold the line in the public sector where attempts have been made to squeeze public sector wages, again precipitating a new round of trade union activism. Then there’s an odd line which does rounds where both the government and the central bank say we have to stop “contagion” and prevent increases in wages so as to protect against a price spiral. That is not true for the public sector. Indeed if you understand the lies wrapped up in this formulation, it’s almost a religious belief.
In reality, public sector wages going up doesn’t affect prices. If teachers’ wages go up, it doesn’t put prices up in the supermarket. What governments are doing is trying to hold their wages in the public sector down in order to afford tax cuts for businesses. But fortunately, workers in the public sector across Europe in particular, are still quite strong and are able to resist that.
We are seeing signs that workers are extending disputes beyond wages too. In France, there are major strikes in the public sector to oppose the rise in the retirement age. Have these strikes been successful? I think what we’ve broadly seen is that governments have made concessions. Rather than see the strikes out, they’ve tried to delay or split workers taking action. In some cases, they have offered concessions, and we’ve seen that in Scotland. I doubt whether governments could do that for a second wage round if it comes to it next autumn or spring.
So the strikes are not over, and the contest between capital and labour is not over. I think what we’ve seen in the private sector just recently is that there’s been a slowdown in the rate of wage rises. So what we might be beginning to see in the private sector, particularly in Britain and the US, is that capital is going to tough out with labour in the next wage round. I think we are in for another 12-18 months of wage struggle.
JS: It is interesting to consider where Scotland fits against this backdrop. It seems to me that the Scottish Government has prioritised the needs of foreign investors to the extent that it represents something of an economic organising principle. How do you think this impacts the Scottish economy as a whole and the prospects for independence?
GK: If there’s one thing that characterises the economic policy of the SNP administration since 2007 when they first formed the government, it is promoting and supporting inward investment. Now, at first, that sounds quite benign. Okay, we’ll get foreign companies to invest money in Scotland, that creates jobs and it’s all great. But actually what it means is you’re selling off the Scottish economy to foreign investors. And what SNP governments have done under Salmond and Sturgeon is to make it as easy as possible for foreign companies to come in and buy up Scottish assets.
Now, does that create jobs? Not very many. But what it does mean is that the profits made by those companies then leave Scotland. So when you add up Scotland’s national income, it sounds like it’s quite good compared with other small industrial nations. But actually a lot of profits being made here – quite a significant amount – are repatriated abroad to the headquarters of those foreign companies in America and in Europe. So Scotland is actually been drained of income.
Under the SNP the sectors which have gone over to foreign ownership have extended. If you look at agriculture, for instance, agribusiness is now largely foreign-owned. If you look at the financial sector, where 20 years ago the big banks were Scottish-owned, they are now foreign-owned. A huge influx of foreign financial companies, insurance companies, and investment trusts have moved into Scotland because they have been given a red carpet by the Scottish Government. They’re making a fortune here, and that money is going abroad.
So in practice, none of the major sectors of the Scottish economy are domestically owned, even in the likes of building construction, which is a huge, huge chunk of the economy. So compared with, say, a Scandinavian country, where significant parts of engineering, agriculture, and domestic manufacturing are still locally owned, very little in Scotland is domestically owned. Therefore, if you get independence, it means you simply don’t have the political levers of power, or the economic autonomy, that you would hope to have. Because the decisions are being made in boardrooms overseas. This also means you don’t have a tax base because a lot of the money goes abroad.
I don’t think most people have caught up with that. I’ve noticed in the big SNP leadership debates that everyone’s talking about the green economy and Net Zero and building this great future based on renewables. But the renewables are all out in the North Sea, and they’re all foreign-owned, and the wealth is again being extracted from Scotland. And what was one of the last things the Sturgeon administration did just before Christmas? It sold off, for pennies, the next wave of licences to harness wind power in the North Sea, and it was sold off to foreign companies. So Scotland might one day get its independence, but its economic independence has been sold off by the SNP.
JS: Independence Captured is striving to make a contribution around these important issues. Have such matters, and the Scottish economy generally, featured in the SNP leadership debates in a way that has impressed you?
GK: I have been intrigued by the absence of genuine economic debate around the leadership discussions and in the SNP leadership contest. A lot of the debate has been very superficial. So all the candidates have said: “oh, we want to want a green economy.” Well, what is the track record of the SNP? In 2010 John Swinney, then the finance and economics spokesperson said there would be 100,000 jobs created in the North Sea through the investment in renewables. So we move on a decade, with massive investment in renewables in the North Sea, and did we get 100,000 jobs? No, we didn’t. We got a few hundred because the infrastructure was manufactured in China and the Middle East.
We have lost control over the green agenda. There is a lot of talk, but not a lot happening. You might think that anybody serious about leadership in Scotland, and building the Scottish economy, would at least address the mistakes of the past. But no, they were talking in platitudes. I mean, to give Ash Regan her due, she’s talked about North Sea oil, and whether or not gas there should be exploited in the medium term. Or do we just close it down? That would be an immediate question for an independent Scottish Government. But these kinds of issues are completely missing from the leadership debate.
There’s been a lot said about small business, and that it’s at the “heart of the economy.” Well, to some degree it is, in the sense that small businesses provide the bulk of employment outside the public sector. All three candidates are positioning themselves as friends of small business. But if you wanted to be friendly to small businesses, you’d need to make significant tax changes. And you’d need to make significant changes in the planning regime. But actually, we don’t see much of the way of concrete proposals being put forward by any of the candidates. So I’m sceptical that there’s going to be much difference no matter who is elected.
An independent Scotland would not be an instant economic Garden of Eden. We would take with us from the UK a series of problems, low productivity probably being the most extreme. Our export track record may be better than the UK given our energy, whisky and food sectors, but our export levels as a proportion of national income are not as big as other comparable European economies. There are serious structural problems in the Scottish economy that have to be addressed. That would be a priority for any government post-independence. And if it failed to deliver, then there’s no one else to blame. I think that would then lead from an economic to a political crisis.
That is why a serious debate about economic and industrial strategy, ownership and monetary sovereignty is required in the here and now. And on these issues, we need a far higher level than is currently on offer.