Saturday, 7 April 2012

You supply the "reforms", we'll demand the revolution

There is a word that has been clasped with ideological zeal in the response to the current economic impasse, yet one with a decidedly retro feel: supply.

“It has now been more than thirty years since the supply-side revolution conquered Washington,” writes Thomas Frank in Pity the Billionaire, a book about the resurgent Right in the US. “And yet, as I write this, the most effective political response to these events is a campaign to roll back regulation, to strip government employees of the right to collectively bargain and to clamp down on federal spending.”

In Britain, there are the same rejuvenated supply-side obsessions: make millionaires and corporations richer and make it easier for employers to fire workers. All that is missing is a Spandau Ballet revival.

Supply has its familiar counterpart, demand. In simple terms, supply means the regulations and taxation affecting employers. Demand is the ability of people, mainly employees, to spend and consume.

But like a neglected sibling, demand is left to make its own way. While supply is lauded with gifts, demand is confronted with insurmountable obstacles. In the UK, real wages are dropping, benefits and tax credits are being cut and public spending is being slashed. The cost of gas and electricity has more than doubled in the past five years.

Only four years ago, demand, which had developed a chronic borrowing habit to keep pace with supply, faltered, plunging the Western world into economic crisis. But after a bracing cold shower, it obviously won’t make the same mistake again.

In economics, the conviction that if you nurture supply, demand will obediently follow, has a very long history. Back in the 1820s, it was known as Say’s Law – “supply creates its own demand”. But repetition doesn’t make it true. “All the supply-side solutions in the world will do little to aid recovery in the absence of growing demand for goods and services,” said the economist Ann Pettifor of George Osborne’s budget. “Nothing will happen if customers (of banks, firms, shops) simply cannot or will not walk through the door.”

The supply reflex is unfortunately not an Anglo-American delusion. Both Spain and Italy, aside from demand-choking austerity, are changing their labour laws to bring about more “flexibility”, a classic supply-side measure.

In Spain, labour market “reform” is taking place amidst some of the lowest wages in Europe and a 23 per cent unemployment rate (almost the same as the US during the Great Depression). “There's little doubt that in the context of a downturn, more flexibility means more lay-offs, more short-term contracts and lower wages,” writes one Spanish commentator, Miguel-Anxo Murado. “This will have the immediate effect of increasing earnings for employers, but this will come back to haunt them as households will have less disposable income. The employer's "wish-list" may turn into an employer's last wish.” A perfect example of supply-side reforms strangling demand - in economic terms, eating your own tail.

If a historical case-study was required, the same newspaper, The Guardian, provided one. The economist Ha-Joon Chang wrote of what happened in his home country, South Korea, in the aftermath of the Asian financial crisis of the late ‘90s. Economic deregulation was combined with a relaxation of labour laws. Employers, writes Chang, gained “a decisive upper hand over their workers. Many employees were sacked and re-hired as "agency" workers, doing the same jobs at lower wages.” Economic growth slowed from 6-7 per cent a year to under 4 per cent.

If another supply-side revolution makes no economic sense, then why do it? Murado believes that Spain’s newly elected right-wing government has to be seen to be doing something, even if that something is completely counter-productive. The familiar is a refuge from the unknown. The UK Conservative government has embraced again the prized policy of the 1980s, the “Right to Buy” council houses. The fact that now only 20 per cent of council house tenants are in full-time employment and it has been only five years since the sub-prime mortgage disaster hasn’t acted as a deterrent. It speaks, to put it politely, of an unwillingness to get to grips with reality.

But from the point of view of the controllers of this society, the senseless is also dangerous. If capitalism ceases to deliver rising living standards, its intrinsic features – a slave-like work discipline and exploitation (you work, they get) – will appear less and less tolerable. The management consultant Peter Drucker said in 1939 that “depression shows man as a senseless cog in a senselessly whirling machine which is beyond human understanding and has ceased to serve any purpose but its own”.

A system that has ceased to serve any purpose but its own, is an apt description of contemporary capitalism.

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