Key Trends in Globalisation

Trends in the British general election are no 'surprise' - Part 2

The outcome of the vote in the British general election corresponds to the trends analysed on this blog before it - as the figures below confirm.

That it was possible to foresee these trends beforehand demonstrates that the results of the election appear 'surprising' or 'confused' only if a wrong analysis of the situation had been made - although such mistakes were made by many commentators, which led them to take it for granted for two years that the Tories would stroll to victory.

The real trends of the 2010 vote also have important features, in particular regarding the Tories and the Liberal Democrats, differing from the analysis still being presented after the election in sections of the media - these commentators are repeating the mistakes in analysis they made before the election. This article therefore looks at the real trends in the voting, why it was possible to foresee them, and what is their dynamic.

The election was the expression of long term trends

This blog noted before the election that the reason many commentators expressed 'surprise' about the trends during the British general election campaign was that these were often presented as though they were a consequence of unanticipated short term events in the election such as the introduction of TV debates between the party leaders. Such a view was wrong. The only serious uncertainty at the election was the rather lottery like way in which the undemocratic features of the British voting system would allocate seats in parliament. The trends of support for the parties in the election were the logical continuation of long term social electoral trends. 

The Tories

The way in which the trends in the results of the 2010 general election continue long term processes may be seen first in Figure 1 which shows the analysis of the Tory vote first presented by the present author in the book Thatcher and Friends and updated to include the result of the 2010 election as indicated by the BBC this morning - the final few results to declare will not shift the figures significantly.

It shows that while naturally there have been short term oscillations from election to election, which help produce individual Tory victories or defeats, the steady downward trend of support for the Conservative Party is entirely clear.

Tory support in the 2010 election was simply the latest oscillation within this declining fundamental trend and reveals that the decline in Tory social support has now reached the point where they are unable to form a majority government.

Figure 1

 

The Conservative vote has fallen progressively from its highest ever level, of 60.7% in 1931, to its post-World War II peak of 49.6% in 1955, to 41.9% the last time it won a majority of seats in an election in 1992, to 32.3% at the general election 2005.

Typically the Conservative vote, each time the party won a general election, was lower than at the one it won previously, and each time it lost an election its vote fell to a lower level than the previous defeat.

The result of the Tories at the 2010 election, at 37% of the vote, is 4.9% below the level they received the last time they were the largest party and therefore is clearly an oscillation within this fundamental declining trend.

Liberal Democrats

Turning to the Liberal Democrats a number of commentators have been misled by the Liberal Democrats poor showing in terms of seats at this election into believing that Liberal Democrat support had somehow declined. This is false - as may be seen from Figure 2.

In reality the 23% of the vote secured by the Liberal Democrats at this election is the highest achieved by the Liberals alone since World War II and is only a small margin behind the 25.4% achieved in alliance with the SDP in 1983. The fundamental trend of rising Liberal support for the last fifty years is clear from Figure 2. The Liberal Democrats were robbed by the electoral system. Their actual vote rose compared to the last election and its upward underlying trend was clear.

Figure 2

Labour 

The Labour vote, at 29% at this election on current projections, was also a logical continuation of its previous long term trend - as may be seen in Figure 3.

Labour's long term electoral support rose to a peak of slightly less than 50% in 1945-66 and then, with a temporary sharp depression in the 1970s and early 1980s, it has declined. Even in the 1997 landslide Labour only received 43.2%.

Conservative unpopularity, not high support for New Labour is why the Labour party was in office from 1997 onwards.The present decline continues that underlying trend. 

Figure 3

Conclusion

The outcome of the 2010 general election was therefore the expression of profound and long term social processes - the long term decline of the social base of Tory support, the fact that Liberal Democrat support has been on a rising trend, the inability of Labour to raise its vote. These processes will therefore not be halted by whatever are the immediate steps after the election and whoever immediately forms the government.

If, as appears most likely immediately after the election, the Tories are able to temporarily form a minority government due to 'tolerance' by the Liberal Democrats, this will not stop the trend of Tory decline. As the Liberal Democrats would be tying themselves to a 'sinking ship', and in the middle of an economic crisis, it is likely this would lead to a downward oscillation of the Liberal Democrats and a revival of Labour.

Britain is therefore still heading to a new political era of proportional representation and coalition government. The apparent 'confusion' coming from the 2010 general election were due to it being part of the break up of the old system. Because these processes are so deep and so powerful a minority Tory government will be incapable of halting them.

Britain is heading to a new political system.

1st Quarter US GDP data shows continued deterioration of underlying economic structure

Media reportage of the 1st quarter US GDP figures has concentrated on the 3.2% annualised economic growth - a slowdown from an annualised 5.6% in the 4th quarter of 2009. This 'disappointed' markets because, as was correctly pointed out by the Wall Street Journal, not only was it below most analysts predictions but it was only about half the rate of growth of the US economy when recovering from previous deep economic recessions.

However, more fundamental than the headline GDP growth figures, and explaining them, was the clear continuation of the deteriorating structure of US GDP. As is widely known the US economy is characterised by its extraordinarily high percentage of consumption in GDP, its lack of saving, and its low level of investment. This led to the theory that as part of the 'rebalancing' of the world economy consumption would fall as a percentage of the US economy and investment and saving would rise.

As this blog has pointed out in analysing previous US GDP results in fact the exact opposite is taking place. Consumption is actually rising as a percentage of the US economy and investment is falling - the overall US savings rate will only be released later although the latest figures show US household savings falling as a percentage of GDP.

Taking first consumption, the percentage of total consumption, private and government, in US GDP is shown in Figure 1. As may be seen the proportion of consumption in US GDP has risen from 85.8% prior to the financial crisis, in the last quarter of 2007, to 88.0% in the first quarter of 2010.

Figure 1

This 2.2% increase in the share of consumption in US GDP is equally accounted for by government consumption and personal consumption - both have risen by 1.1% of GDP. The trend of personal consumption is shown in Figure 2 - US personal consumption rose from 69.9% of GDP to 71.0% of GDP between the last quarter of 2007 and the first quarter of 2010.

Figure 2

 

The converse of the rising percentage of consumption in US GDP is, of course, a decline in US investment - shown in Figure 3. Total US fixed investment has fallen from 19.1% of GDP in the last quarter of 2007 to 15.3% in the 1st quarter of 2010 - the latter figure is the lowest since the aftermath of World War II.

Figure 3

While the decline in US investment is, as would be expected given the housing crisis, particularly severe in residential construction a fall has occurred across all categories - as shown in Figure 4.

Taking the comparison between the last quarter of 2007 and the 1st quarter of 2010, private non-residential fixed investment has fallen from 11.8% of US GDP to 9.4%, private residential investment has fallen from an already depressed 3.9% of GDP to 2.4% of GDP and government investment has declined marginally from 2.4% of GDP to 2.3% of GDP.

Figure 4

 

The pattern of development of US GDP is clear. Far from consumption falling as a proportion of the US economy and investment increasing the opposite is occurring - consumption as a proportion of US GDP is rising further and investment is falling. As investment is the main medium and long term driver of economic growth the decline in investment limits the growth potential of the US economy as well as being largely responsible for the slow recovery from the recession.

The 'slower than previously' recovery of the US from severe downturn is likely to continue.

Key determinants of the different GDP growth rates in India and China

An earlier entry on this blog considered India and China’s efficiency of investment in terms of GDP growth. This analysis was carried out in terms of their relative Incremental Capital Output Ratios (ICOR) – the percentage of GDP which is invested to generate a unit increase in GDP. An advantage of using this measure is that many countries, including India, produce quarterly GDP figures which allow up to date calculation of results – valuable for practical current policy making. China does not issue quarterly data on the composition of GDP, which would allow up to date precise ICORs to be calculated, but it does issue figures for the shares of investment and consumption in quarterly GDP growth - which allows qualitative estimates to be made which can also be used as practical policy guides.

The results of such ICOR calculations for India and China are illustrated in Figure 1. As may be seen, if a five year moving average is taken to smooth out purely short term fluctuations, both India and China invest essentially the same percentage of GDP to generate a unit GDP growth – 3.7% of GDP invested to achieve 1% GDP growth. This efficiency of investment, from the point of view of GDP growth, is almost twice that of the US - for which a comparison is also shown in Figure 1. Both India and China's figure is highly efficient considered from the point of view of international historical comparisons of sustained periods of growth.

Among the conclusions which followed from this ICOR data, other things being equal, were that:

1. On the basis of India's previously achieved domestic savings rate, and a moderate balance of payments deficit of up to three percent of GDP, the data supports the view that India should over the medium term be able to achieve its goal of 10% annual GDP growth without unsustainable inflation or other uncontrollable  macro-economic imbalances. Therefore the inflationary pressures experienced by India at the beginning of 2010, while significant, should be containable except in the case of serious adverse international economic trends.

2. China's higher level of investment allows it to achieve 12% annual GDP growth without the development of unsustainable macro-economic imbalances. Therefore China's 11.9% year on year GDP growth achieved in the first quarter of 2010 was not surprising nor should it lead to unsustainable inflation or other uncontrollable imbalances - although significant further acceleration would be unsustainable. As with India such a conclusions applies in the absence of serious adverse international movements.

3. There is no evidence from such ICOR data that investment is used more efficiently in India than China. The efficiency of investment, from the point of view of GDP growth, is almost exactly the same in India and China and therefore, other things being equal, the relative rates of GDP growth in the two countries depends on their relative rates of investment.

Figure 1

ICOR and TFP studies

If an advantage of ICOR as a measure is that it is up to date, a disadvantage is that it does not capture the detailed data on investment and other sources of GDP growth that full Total Factor Productivity (TFP) studies do through use of growth accounting methods – ICOR is a less statistically precise measure of relevant trends. The problem of TFP studies, in contrast, is that they require far more detailed statistical information and are therefore typically not as up to date as ICOR comparisons.

Trends in the British general election are no ‘surprise’

Normally this blog deals with economics, and the implications of economics, rather than immediately  political trends. Readers with no interest in British politics can therefore skip this post and the discussion of voting patterns below.

But many commentators, not just in the UK, have expressed ‘surprise’ or 'uncertainty' about the present trends in the British general election with its outcome later this week .The trends in electoral support the campaign has revealed are often presented as though they were a consequence of unanticipated short term events in the election campaign such as the introduction of TV debates between the party leaders.This view is  wrong – as the figures below will demonstrate.

The only serious uncertainty in this election is actually the rather lottery like way in which the undemocratic features of the British voting system will allocate seats in parliament. Unlike most European countries the British electoral system has no element of proportionality in it. It allows governments to be formed on relatively extremely small proportions of the vote - indeed it is theoretically, and practically, possible in Britain that a party with only a little over one third of the vote may have a majority over parties which between them have received the vote of almost two thirds of the electorate. . 

In reality the trends of support in the present British general election are the logical expression of long term social trends and they actually are related to economics. Twenty seven years ago the author of this blog wrote a book, Thatcher and Friends: the Anatomy of the Tory Party, demonstrating that the traditional governing party in Britain, the Conservatives, were a party suffering a long term decline in support and analysing the economic and social reasons for this and the consequences for other parties. The intervening period has confirmed these trends. So it is worth outlining, for those watching the election, the way in which the trends revealed in the British general election campaign are a result of long term processes.

The Conservative Party

Taking first the long term trend of the vote for the British Conservative party this is shown in Figure 1. This  shows that while naturally there have been short term oscillations from election to election, which help produce individual Tory victories or defeats, the steady downward trend of support for the Conservative Party is entirely clear.

Figure 1

The Conservative vote has fallen progressively from its highest ever level, of 60.7% in 1931, to its post-World War II peak of 49.6% in 1955, to 41.9% the last time it won an election in 1992, to 32.3% at the last general election 2005. Typically the Conservative vote, each time the party won a general election, was lower than at the one it won previously, and each time it lost an election its vote fell to a lower level than the previous defeat. Tory support has therefore oscillated within a clear downward trend.