Steel, & austerity denial

A few days ago, I accused Tories of being "oblivious to problems of weak demand". Not just Tories, it seems, but the media too.

I say this because its coverage of the closure of steel works is blaming these upon, variously, Chinese dumping, high energy costs and the global slowdown.

But there's something missing from this list: fiscal austerity.

Simon has estimated that this has cost the UK economy 5% of GDP, and the euro zone a similar amount. It's reasonable to suppose that if European GDP were 5% higher then there'd be more demand for steel and so the industry would be in better shape. I'm not saying all would be well, but the odds would at least be more favourable to it and, at worst, laid-off workers would have more chance of finding new jobs.

This point, however, is being missed. Instead, we get this from business minister Anna Soubry:

The steel industry across the UK is facing very challenging economic conditions...government cannot alter these conditions."

As if government cannot influence aggregate demand! Instead, in blaming high energy costs for steel's woes, the press give the impression that greens are responsible whist the government is a powerless onlooker.

What's going on here is deeply ideological. Weak demand is being presented as something natural and immutable, rather than what it is - a policy choice. The costs of that choice, however, are not mere statistics - a few per cent of GDP - but people's livelihoods and communities.

You might think I'm making a leftist point here. Not entirely. There is in fact a free market case for high aggregate demand policies.

Such policies would fend off calls for government action to save the steel industry. This isn't because high demand would have stopped the industry slumping. Maybe it wouldn't. But if the industry were collapsing at a time of high demand it would be clearer that the industry needed to shrink in response to changing markets, and it would be easier for sacked workers to find new jobs. By contrast, state aid for specific industries is more market-unfriendly, as it risks preserving the economy in aspic and gives special favours to those who have lobbying power.

Insofar as the alternative to fiscal activism is ad hoc state intervention in particular industries, one would expect free marketeers to be most vociferous in their hostility to austerity. As I've said, the demise of small government Keynesianism is one of the oddities of our era - and, I think, a regrettable one.

Comments

[pablopatito]

I thought the problem was one of low prices, not lack of demand. Increasing UK demand for steel wouldn't effect prices would it, it was just increase demand for cheap Chinese steel?

[gastro george]

But, IIUC, the argument would be that it would increase demand for other Chinese goods that would lead to an internal demand for Chinese steel, and stop them dumping it in our markets.

[Anon]

Agree with pablo, UK demand probably doesn't drive steel prices much at all. Steel is demanded mostly from rapidly industrializing countries, China is no longer rapidly industrializing - hence less demand, lower prices.

[e]

Or in other words not a failure but a feature?

[Andy]

I visited Scunthorpe about 10 years ago, at the time they were doing pretty well because the Chinese were using vast amounts of steel and hadn't yet built enough steel plants of their own. The people at Scunny openly admitted that the UK industry was only viable because of this temporary situation boosting their prices, once the Chinese increased their own steel making capacity they were screwed. As it turns out the Chinese market has seen both a drop in demand and a rise in supply, making the situation twice as bad. The news reports this like it's an issue that's appeared out of nowhere, but it's been foreseeable for a decade or more.

[aragon]

@gastro george

That seems very tenuous, and would make the balance of payments worse if we consumed the steel in finished products.

Steel Industry.
We should retain a core steel making ability to meet minimal UK demand. This is regardless of other factors.

It also make sense from a regional perspective, as the regions affected are: Scotland, North-East, Yorkshire-Lincolnshire, and Wales.

The government's energy policies are a factor (high energy prices to meet green commitments, apparently made in error), but dumping is not fair trade (predatory or not), if China has overcapacity China should adjust, and China has many times the capacity of the UK (loss of the UK industry would not solve oversupply). China engages in state aid, as the economy is the state.

The USA has imposed a dumping tariff, the EU has not.

As @pablopatito has pointed out increased domestic demand would lead to increased imports under the Governments Lassie-Fare policies.

Thatcher sacrificed Coal Mining to imports
and Steel was decimated, now the much reduced industry is to be sacrificed by Thatchers heirs?

What industry is next to go, bulk chemicals to the middle east? Aluminum smelting has already gone dues to high energy prices.

Also See:
http://www.theguardian.com/commentisfree/2015/oct/20/george-osborne-renationalisation-britain-nuclear-power-china-france-privatisation

"Yes, you read that last sentence right: the UK stands accused of dispensing state aid – to another state." (Also applies to China)..."Civil servants let Redcar and thousands of steel jobs go down the drain, as they lend millions to Roman Abramovich to keep his foreign steel plant going."

[gastro george]

@aragon - I agree, I was just trying to clarify what the argument would be, not supporting it.

I'm surprised that the opposition aren't making greater hay about the government's schizophrenic nature. It's extraordinarily ideologically laissez-faire, especially when it comes to industry - they just come to the news conference and say "what can we do".

And yet the amount of government subsidy given to some sectors - financial, nuclear, next fracking? - is staggering.

The same dissonance can be seen in education and health. Where are journalists when you need them?

[Atypical_Scot]

I'm not an economist and I am very much to the left. That aside, the economists arguments against the fiscal charter appear to my untrained eye as valid only on the basis that our, and indeed the global economy is having a normal dip and as such, demand will rise again soon enough to apply their arguments as reasonable.

I need help understanding the situation from someone(s). I've got a few questions that I would like to ask that could put my mind at rest;

Is the UK debt burden still on an upwards trajectory?

Moody's downgraded the UK in 2013 stating they will reassess the UK 2016 and will not downgrade the UK further if the debt burden is stabilised. If the debt burden is not deemed stabilised, will the cost of borrowing increase?

Is the interest on the public debt still on an upwards trajectory?

If the annual interest repayments keep increasing, is it not the case that more of the budget needs to be allocated to it in order to stabilise the debt burden?

If more is borrowed to pay the debt interest, does that increase the debt burden?

If that does increase the debt burden, is it more likely that the UK will be downgraded again, and the cost of borrowing shall therefore increase?

I'm probably not asking pertinent questions, but from where I'm sitting, the debt problem looks pretty much a persisting global issue. The failed QE program has increased the debt burden and in turn increased the interest repayments to the degree that further borrowing will achieve little more than a GBP spiral to junk status.

I despise the concept of austerity, but as it not just the UK adopting it, my suspicion is no-one anticipated QE would fail, and in turn drastic, ruinous policy has ensued. I doubt even the Tories themselves like their policy, but as ever, in the hands of the city and the central bank, they choose policy that protects it rather than the UK.

[Dave Timoney]

It's worth remembering the geography and production process of steel. The disposition of steelworks reflects the fragmented coalfields of the UK. Smelting was traditionally done near the energy source because the transport cost of coal was much higher than ore (due to the relative volume needed to produce coke).

When the industry was rationalised from the 70s onwards, it was the inland plants that initially lost out (Corby, Consett, Ravenscraig), while the coastal plants, which generally had greater efficiencies due to size and transport, hung on (Redcar, Scunthorpe, Port Talbot).

However, it has been obvious since 1984 that steel-making in the UK was doomed. Without cheap domestic coal, which could only be provided through a large coal industry centred on modern pits, the industry was always going to be on borrowed time. China may be (pace Andy) the final straw, but the roots of this lie in the policy decisions of the first Thatcher administration. In other words, government did once "alter these conditions".

[Bob]

"If the annual interest repayments keep increasing, is it not the case that more of the budget needs to be allocated to it in order to stabilise the debt burden?"
Interest is spend and generates tax and an amount of saving just like any other spending.
I see no reason for the UK to pay interest at all. It is corporate welfare.

[Bob]

"But if the industry were collapsing at a time of high demand it would be clearer that the industry needed to shrink in response to changing markets, and it would be easier for sacked workers to find new jobs."
Yes Chris but then "corporate confidence" would no longer be of concern.

[An Alien Visitor]

UK steel production has halved since 1970 while Germany's has increased very slightly.

There is more going on here than cheap prices.

The lack of a coherent industrial strategy is a factor.

We do come close to topping the number of Kentucky Fried Chicken establishments though.

[Blissex]

«The lack of a coherent industrial strategy is a factor.»

That's a common illusion: the governments of the past 30-40 years have had a very solid, coherent, long term industrial strategy and that has been to smash all unionized industries, and in particular in the North the teach an important lesson. And too bad if this meant some upper and middle classes whose fortunes were tied to those industries got shafted too. When the "establishment" sees an existential threat it will even cut off part of itself to prevail.

BTW I think that *some* unions had become as much of a threat to the country as currently the City is, yet the "establishment" pushback was pretty extreme even given that.

«And yet the amount of government subsidy given to some sectors - financial, nuclear, next fracking? - is staggering.»

Part of the same industrial strategy has been to subsidize with fantastic sums finance and other non-union industries and in particular services related to housing, private transport and share investments, as those generate tory voters, and in any case are concentrated in the South where most working-class/median voters are already tories.

Current governments thus fund with enormous sums a new class of "national champions".

[Metatone]

Chris, I think you underestimate the degree to which the government and indeed all right-of-centre types and far too many "mainstream" economists have bought the idea that "demand" is "natural and immutable."

I've been thinking about my "political compass" recently and it's clear to me that I end up supporting people who are quite to the left not because I agree with all that they do, but they are some of the few in Britain not believing that demand and other features of the economy are "natural and immutable."

[Blissex]

«all right-of-centre types and far too many "mainstream" economists have bought the idea that "demand" is "natural and immutable."»

When there is insufficient demand for real estate and financial assets, «right-of-centre types» and «far too many "mainstream" economists» become very worried and governments spend whatever it takes to boost demand and prices for real estate and financial assets, with "Right-To-Buy" and whatever are schemes can be found, and central banks push forward ever bigger credit booms to finance even higher levels of leveraged speculation on real estate and financial assets.

Because markets! :-)
Because wealth effect! (just a new fancy name for "trickle down" used by central bankers).

While instead there is always insufficient supply of labour, and then governments try hard all the time to expand the supply of labour via immigration, higher retirement ages, lower welfare, etc.

[Metatone]

Fair point Blissex, they don't practice what they preach.

But that's in part at least a problem with all parties in the British political system because "1 election every 5 years" is not a particularly fine grained method of accountability.

They are still winning arguments and elections on the back of what they preach. And that bothers me more - because I think it closes off options which we are in need of.

[Blissex]

«laid-off workers would have more chance of finding new jobs»

But right-wing people and politicians constantly complain that there is insufficient supply of workers and cheaper hired help is always hard to find.

In particular they point out that it is always easy for workers to find new jobs: those steel workers just have to move to the South to work for much lower wages and be happy to live 4 to 8 per room while paying high rents.

Just like immigrants from much poorer countries have been very eager (huge queues in Calais!) to do.

Right-wing people and politicians point out some hard evidence: there are now 2-3 million new jobs that immigrants have created for themselves by winning the race to the bottom, where ex-steel workers in the North could have well won that race instead if only they had been willing to work for lower wages and pay higher rents than the immigrants to the benefit of businessmen and property owners in the South: a win-win situation :-).

For right-wing people therefore those steel workers from "up North" will have no difficulty to find new jobs, rather than being snotty and demanding and hoping to spend their life on welfare in mansions with many spare bedrooms and with benefits well above median wages.

Central banks very much agree of course: lower wage jobs are less "inflationary" than higher wage jobs, and still count as "employment", and rents and profits and capital gains are never "inflationary", so higher incomes for businessmen and property owners are not more inflationary than lower ones, and actually create a "wealth effect" (trickle down).

«What's going on here is deeply ideological.»

Just the cover for a distributional conflict...

[Nanikore]

Your argument is very convincing. But don't underplay the influence of Chinese industrial policy and dumping. There are strong linkages between this and its monetary policy (which works through loans to regional banks which are connected to major regional semi state corporations of which the steel industry is one of the most important). The steel industry is an important foundation industry with a large support network -anywhere. We lose this, and the possibilities of 'rebalancing' the economy are made more difficult. This is understood in many countries, which is one reason, besides admittedly and obviously political ones, unprofitable steel industry is preserved. The steel industry must be propped up until obvious recovery is seen.

[Boffy]

The talk about lack of demand reminds me of the claims of Ricardo and others that there was no problem of overproduction, only underconsumption. At that time it was China that was supposedly not producing enough to be able to consume all of the commodities that Britain had over produced and could not sell to them.

In fact, a look at global steel consumption shows that demand for steel has continued to rise. The problem is not a reduction in demand, but that production has expanded faster than the market, driven on by high profits, i.e. the condition of overproduction described by Marx. The same can be seen in other commodities, whether it is oil, copper, milk and so on. It is not that demand for these things has fallen, but that production of them has been ramped up beyond what the market can consume at current prices of production.

The idea of "dumping" is equally nonsense, because capitalist firms selling the overproduced commodities below the price of production, and even below the cost of production, is the natural response to such overproduction, as Marx describes. In such conditions, its just as likely that a Tata steel plant in Scunthorpe might sell its steel at lower prices than another steel producer in Rotherham, Redcar and so on, in order to dispose of its output, at their expense, as it is that Chinese producers will sell their output at lower prices than UK producers.

The term dumping simply disguises that reality and adds a nationalistic, xenophobic twist to it.

[Boffy]

@David,

"However, it has been obvious since 1984 that steel-making in the UK was doomed. Without cheap domestic coal, which could only be provided through a large coal industry centred on modern pits, the industry was always going to be on borrowed time."

Not necessarily. The Shelton steelworks in Stoke, for example, moved to the use of an electric arc furnace, so the issue of coal became irrelevant. However, the use of such furnaces highlights the question of scale, and quality.

If you are producing bulk steel then all of the laws of economy of scale apply, but as with most other things, where a country like Britain is concerned the way to be competitive is to move increasingly away from such large scale production of low value products, to the production of higher value, production, which is often produced in lower volumes.

So, the production of high quality specialist steels and so on, rely on skills etc. rather than large amounts of cheap labour, and cheap materials.

But, it also demonstrates a further consequence of the dominance of conservative ideology, and the power of the owners of fictitious capital over the last thirty years. The creation of British Steel, reflected the rationality of socialised capital. It was also to be witnessed in the creation of the European Coal and Steel Community (and in other areas things like the Milk Marketing Board) that were able to plan production more rationally though still within the context of a capitalist economy.

But over the last thirty years, the owners of fictitious capital - shares, bonds - have been dominant and only interested in screwing as much in interest payments out of productive-capital, and capital gains as possible.

As part of that process, state assets were sold off, and large scale asset stripping was undertaken. Part of the problem of the UK steel industry is down to the fact that it is smaller separately owned units competing against each other, whereas a rational development would instead have been the establishment of an EU wide single steel producer.

In fact, events show why instead of talking about drawing away from the EU, the UK needs to be part of a federal United States of Europe, whereby such production decisions can be undertaken more rationally, and why that includes the UK being part of the Eurozone, so that UK producers are not undermined by additional currency conversion costs, and uncertainty, as well as by a high value of the pound.

[An Alien Visitor]

"where ex-steel workers in the North could have well won that race instead if only they had been willing to work for lower wages"

Very much like the workhouses that are Sports Direct warehouses!

This is the true meaning of Osbourne's Northern powerhouse.

In Germany they subsidised their steel industry when energy prices soared, for example.

They have an overall government led industrial strategy, what Blissex describes in relation to the UK is more like industrial sabotage.

[Blissex]

«They are still winning arguments and elections on the back of what they preach.»

You may missed some of my previous posts, where I point out that many voters are not that gullible, and often vote their narrow, mean, immediate interests.

A considerable number of voters are very satisfied with "austerity for thee but not for me and my mates", with governments that preach and achieve some austerity for workers, and don't preach but very much subsidise more demand and bigger prices for financial assets and real estate.

Because those voters see the effects in their pockets. People like SimonWL and ChrisD may mostly participate in the "mediamacro" framing they criticize, and thus argue the fine points of QE or fiscal austerity or the multipliers, but what many voters care about are interest rate and asset price policy being driven by the goal of making rentiers like themselves better off.

Their vote for a party is not drive by «what they preach».

Southern votes are for sale, and they are not for sale to mere preachings.

I am as always stunned by the apparent disconnect of so many from the most obvious and tangible aspects of the modern (and lasting for decades now) UK economy, as celebrated in very loud terms on popular media like the Daily Mail and the Telegraph and ITV shows.

[Blissex]

«in relation to the UK is more like industrial sabotage»

Perhaps the concept of "reducing an enemy" as practised by the British Empire (and others before and after) should be more familiar.

Governments for the past several decades seem to have had a policy of smashing the industries that employ their enemies and of giving huge handouts to the industries that employ their friends and family: just ordinary class war and redistribution.

One of the most remarkable quotes I often produce from "The Economist" magazine on the long terms prospects of employment in the UK is:

www.economist.com/node/21542417
«Save the City» «one of the world's most successful business clusters, and the best hope the next generation has of earning a decent living.»

A "decent living" will be largely the privilege of perhaps a few dozen thousand "professional" jobs in London, mostly reserved to "public schoolboys", Oxbridgians, and perhaps a slice from the Russell Group.

And since the City makes significant to huge losses over the business cycle, those "decent livings" will need to be bailed out periodically with fabulous handouts of public money more or less disguised in various ways.

[Blissex]

«In Germany they subsidised their steel industry when energy prices soared,»

In the UK they subsidised with much, much bigger handouts (hundreds of billions of pounds) their financial industry when capital losses soared.

One of the commenters here once said that if tory MPs had to retire to work down the pits, it would be in coal mining that wages would be huge and working conditions luxurious.

An excellent observation from someone insightful:

«John V. Rainbolt
Chairman, International Issues Subcommittee of the American Bar Association’s Committee on Futures and Derivatives Regulation
[ ... ]
Knowing the relevant history, a U.S. politician worth his or her salt should wonder if the Conservative government’s approach to market oversight has something to do with the number of Tory resumes on the street, and if a vote to duplicate U.K. market regulation communicates this disease, brought on by a rapid succession of Barings, Morgan Grenfell and Sumitomo problems, to name a few.»

[An Alien Visitor]

Blissex,

You have me over a barrel!

"One of the commenters here once said that if tory MPs had to retire to work down the pits, it would be in coal mining that wages would be huge and working conditions luxurious."

I think it would be more true to say that if coal mines had cushy offices, a nice environment and a secretary or three they could shag then Tory Mp's would retire there rather than the city!

[Dave Timoney]

@Boffy,

Steel is made through the combination of iron ore, limestone and coke (which is made from the pyrolysis of coal). This produces pig-iron, the initial "dough" for the smelting of steel and alloyed products. Even if you use an electric arc furnace for smelting and alloying, the first stage of the process still requires coal.

You are right that British steelmaking "moved up the food-chain" after the 70s, relying more on imported pig-iron from which to produce high-quality steels, but this ultimately depended on high global prices to offset the increased cost of production (there's a direct parallel here with North Sea oil over the same period).

Once we got out of the pig-iron business, we were always going to be at the mercy of the global "finishing" market. The real issue with China is not that they are dumping steel but that they have also moved up the food-chain from the production of pig-iron to high-quality steels. If they were only dumping pig-iron, we'd be laughing.

My point is that this trajectory was inevitable after the mid-80s. In contrast, other EU countries made a point of preserving their steel industry as a strategic resource, which mean treating the coal industry likewise. For example, 2/3rds of German steel production comes from integrated facilities - i.e. ones that cover the entire process from coking to rolling.

[Boffy]

@David,

Actually, with electric arc steel making that isn't true, because you can use scrap steel or direct reduced iron. In fact, if you are making specialist steels in relatively smaller quantities, the amount of existing steel and iron in Britain, in scrap form is probably adequate for your needs.

Moreover, even if you needed coal, you can just as easily import it, for that use as for any other, which is one reason most facilities have been located in coastal areas. In fact, as I've set out in discussing it on my blog in the last couple of years, the price of iron ore has fallen, by about 75%, as result of overproduction, which is another cause of lower steel prices (which should in fact, raise the rate of profit in steel production) besides the overproduction of steel itself.

As I said, what it really shows is the need for a single European Iron and Steel industry, operating within the kind of macro-planning context that only a large economic structure such as the EU can provide.

[George Carty]

From Arse to Elbow seems to be blaming the current demise of steelmaking in Britain on Thatcher's war on the coal industry. But could the root cause of British industrial decline go all the way back to Attlee's Town and Country Planning Act (or perhaps more accurately to the amendments to it made by subsequent Tory governments, which allowed landowners to retain the planning gains)?

This has made buildable land very expensive in Britain (hundreds of times more expensive in fact than in unconstrained American cities), favouring finance and bureaucracy (which need very space) at the expense of actual productive industry, and creating the destructive petty-rentier mentality that Blissex describes so well.

The United States is a bigger industrial player because unrestricted fringe construction keeps land rents low, while Germany works by combining rent control, subsidies for new construction, and provision to confiscate land from overly-greedy speculators.

[George Carty]

That should have been "favouring finance and bureaucracy (which need very little space)"