Sunday, 23 September 2012

Just what kind of fix are we in? Two English economists on our economic paralysis

“The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.” The words of the Italian Marxist Antonio Gramsci, written in the late 1920s, seem acutely relevant to our own time.

You would have to be basically insentient not to appreciate that there is something deeply awry with our economy. The description “financial crisis” is patently inadequate. We are in an economic crisis, whose roots stretch back decades.

But there is something immobile about our economic situation. Economic growth has flatlined and, in response, politics becomes incrementally nastier and more desperate. Change threatens - Syriza almost gets elected in Greece and the Socialist party in Holland - but it ultimately doesn’t break through the prevailing stasis.

Two English economists, Stewart Lansley and Harry Shutt, have characterised our situation as “economic paralysis”. Capitalism refuses to be restored to health, but there is not an alternative economic model that commands widespread allegiance or even understanding. The old is dying but the new cannot be born.

Both Lansley and Shutt say blaming reckless banks is inadequate. They may have provided the final spark, says Lansley, but the slow-burning fuse had been laid years earlier. Shutt says discussion of the crisis has been uniformly superficial and evades questioning how the economy became so dysfunctional.

Both claim that without sweeping transformation, we are doomed to repeat the past. Lansley says the economy is being steered towards another wave of destructive speculation. Shutt predicts an inevitable fresh financial crisis.

But, crucially, and despite definite similarities, Lansley and Shutt are advocating very different things. Lansley, who is closely associated with the Trades Union Congress in Britain, wants a new model of capitalism. Shutt, far more of a radical, believes capitalism itself is outmoded and to attempt to prolong its existence will irreparably damage society.

Stewart Lansley and the Cost of Inequality

Lansley’s fundamental idea is that the huge economic inequalities that have built up over the last 30 years - in FTSE 100 companies, the pay of the lowest earners is now one-third of one percent that of the highestare lethal to capitalist economic health.

As with Richard Wolff in the US, Lansley describes this as a dual process. There is too much money at the top of society as well too little in society at large. The share of GDP going to wages in Britain has fallen just as the share going to profits has risen. Demand – essential for a healthy capitalist economy – would have collapsed long ago were it not for an exponential increase in consumer debt. This has been dubbed “privatised Keynesianism”.

Consumer debt is a relatively new phenomenon. Before the 1980s, when wages kept up with productivity, widespread consumer debt was not needed.

But while demand has stalled, this process of inequality has the opposite effect at the top of society. There incomes have risen spectacularly. The number of millionaires in Britain increased eight times in the decade to 2006.

The interest from consumer debt adds to the glut of money. “The squeeze on wages, rising profitability, and soaring personal fortunes all meant the accumulation of big corporate and private cash reserves across the globe,” says Lansley. This money is employed to transfer existing wealth rather than create new wealth. Companies merge or are taken over, firms are bought out by private equity groups and loaded with debt, often destroying them at the same time as makng more money for their buyers. This is exactly how Mitt Romney made his fortune.

This “money economy” says Lansley is dominant, while the productive economy is starved of investment, partly because there is not enough demand to make high returns from “organic growth”.

“The result of this imbalance is economic paralysis,” says Lansley “While the workforce is denied spending power, the leaders of corporate Britain are allowing near record surpluses to stand mostly idle.” We wait for a probable new financial crisis, while the economy cannot throw off recession.

Harry Shutt and the growth delusion

Shutt too, has described our predicament as “economic paralysis”. Like Lansley, he says there is a “wall of money” at the top of society perpetually seeking new ways to make more money. This is manifested in the growth of private equity, mergers and acquisitions of companies, and speculation in property or “commodities” like food (speculation means buying assets in the hope their market value goes up and they can be sold for a profit).

This is what the author John Lancaster has dubbed “fake growth”. It is not investment in new products or innovations (organic growth) but the buying of assets in the expectation that their value will rise. Or what Lansley calls the transfer of existing wealth, not the creation of new wealth.

But at this point Shutt and Lansley diverge. Shutt does not locate this paralysis in the growth of inequality but in a long-term decline (since the 1980s) in the demand for capital investment. This sounds a forbidding and technical term so what does it mean?

Services are replacing manufacturing and they require less capital investment than the machines of the traditional factory. In areas like online newspapers, recorded music, telecommunications, and movies, traditional corporations are finding it harder and harder to stay in business, especially as the rate of return demanded by investors has been pushed higher.

Rapid technical advance means that it is increasingly seen as too risky to invest a lot of money in new technologies, which can quickly become outdated, while new start-up companies can be created with little capital investment, using the internet for example.

The result of these processes is to drive investment into financial speculation rather than “organic growth”. Property (sub-prime mortgages and asset-backed securities), mergers and acquisitions and public services (in the latter case high returns are guaranteed by the state), are all destinations for this investment.

Lansley blames the dominance of the money economy, its “supranormal” profits, on the “perverse incentives” of personal enrichment, which neglect the needs of the wider economy. Shutt, by contrast, believes the triumph of finance is simply a result of a rational calculation of where the highest financial returns can be made. If that is true, investment cannot be diverted to more beneficial and less lucrative opportunities, merely by exhortation. But speculation also does not lead, Shutt believes, to enduring and sustainable rates of economic growth.

Future upswings in the economy will, of necessity, be brief and will primarily be based on speculation. “There is not only no chance of reviving growth for the immediate future but very little prospect of ever returning to the relatively high growth rates of the past on a sustained basis,” he says.

Lansley, by contrast, is convinced growth can be revived if the imbalance between profit and wages is redressed, and workers receive a fairer share of soaring profit in wages.

Economic growth and its evasiveness continue to dominate political debate. Jobs and growth are at forefront of the American Presidential election campaign. The right-wing, in a kind of hair of the dog that bit you approach, claims growth can be achieved through tax cuts, deregulation and people working harder. A morbid symptom if ever there was one. Back on Planet Earth, the left of centre, wants to reign in finance, restore the bargaining power of labour and encourage manufacturing.

But what if neither approach will work? What happens if growth refuses to return to the black? What are the political consequences of an entire political culture failing to achieve its objective but refusing to see that the objective may be impossible?

The old may be dying but the new is barely visible on the horizon.

Saturday, 8 September 2012

Storming the last citadel of socialism: the pay entitlement delusion

 The following was secretly recorded at a closed session of the Centre for Neoliberalism Studies in London on 5 September.

“Ladies and Gentlemen, five years on from the start of the ‘Great Recession’, or as I prefer to call it, the ‘Great Enlightenment,’ it’s appropriate to take stock of just how far we’ve come.

Across Europe democratically elected governments that have displeased the markets have been summarily deposed. Portugal, Spain and Italy have begun to dismantle those impediments to freedom known euphemistically as “workers’ rights”. And in Greece, in a move that almost brings tears to the eyes, a six day week is about to return, a wistful throwback to the halcyon days of the nineteenth century when liberty meant something and was not suffocated by government red tape.

Here in Britain the progress has been palpable too. The Stalinist tyranny that was the National Health Service is being liberated from state control: the culmination, as my friend Eamonn Butler of the Adam Smith Institute has noted, of 20 years’ unrecognised labour. Those shirkers, the disabled, who claim that not being able to see or walk somehow exempts them from the obligation to look for work, are being systematically rooted out. Planning regulations have been ripped up so the countryside can finally be seen as the resource it so obviously is.

But there is hunger for more, I know.

Young and brave Conservative MPs such as Dominic Raab have had the guts to tell the truth. That the British people, pampered by a century of socialism, are a nation of idlers who would rather spend half the day in bed than do a decent day’s work. Statistics that show a quarter of Britons work more than 48 hours a week just demonstrate the indolence of the remaining three quarters who fail to reach even this minimal standard.

Older heads, like David Davis, have recognised that we must cull the slew of regulation holding back business. The fact that, in 2007, the OECD declared Britain one of the most unregulated of all developed economics only shows how much more work in that area needs to be done.

But, to be truly consummated, our economic revolution must confront one last giant citadel of socialist thought.  The idea, so beloved of the totalitarian twentieth century, that workers are automatically entitled to be paid for the “work” they do.

We have already made inroads into this culture of entitlement. Unpaid internships in Britain and US can last for years. The government’s Work Programme in Britain, in which employers generously offer the young unemployed the chance to gain invaluable experience, has challenged the Marxist assumption that work somehow needs to be rewarded with money.

But we need to go much further. For inspiration, we should look to the great Russian-American philosopher, Ayn Rand, herself a refugee from Bolshevism. Some have castigated her as a granite-hearted loon, but I say, you just need to look at her acolytes, like Alan Greenspan, to see her greatness. In any case, as the history of our country demonstrates, granite-hearted lunacy and the determination to change the course of history often co-exist within the same person.

Rand’s great insight was this. Contrary to the Marxist inversion, employers don’t exploit workers. Rather, workers exploit employers.

As the visionary free market economist, Ludwig Von Mises wrote to Rand on completion of her magnum opus, Atlas Shrugged. “You have the courage to tell the masses what no politician told them. You are inferior and all the improvements in your conditions which you simply take for granted you owe to the efforts of men who are better than you.”

In the early years of the 21st century, the world is belatedly coming to see the profound truth of Rand’s idea. Without wealth creators, more properly “life creators”, workers would be nothing. They would just lie in bed all day unable to do anything. Actually they wouldn’t have beds, because beds are a creation of wealth creators. They would writhe about uselessly on the ground, eventually indulging in unspeakable acts of Marxist cannibalism.

Without wealth creators, like the unfairly maligned Bob Diamond, this would undoubtedly be the fate of the British people. We should not hold back from telling them this uncomfortable truth.

Inspired by Rand, I propose that we end the automatic link between working and getting paid, a remnant of our delusionary socialist past.

Workers should only be paid money if it can be demonstrated, to the satisfaction of their employer, that they have personally contributed to corporate profits. If that matter is in doubt, they should merely be permitted the privilege of continuing to labour unpaid. If they are clearly an unproductive waste of resources, they should be summarily dismissed. “Under-performing” workers, as Dominic Raab has so bravely highlighted, have no place in the British workforce.

This plan, as critics will undoubtedly point out, might produced a sharp spike in unemployment. This is not something to fear. The present government’s attempts to motivate the unemployed through benefit sanctions, though laudable, have not been sufficient. Here is an opportunity to do much more.

I propose, with a nod to David Davis, a healthy dose of “shock therapy”. But I don’t mean it metaphorically. If an unemployed person fails to meet their target of job applications: if they, say, only apply for 39 jobs in one week when they agreed to apply for 40, they should be given an electric shock. Not so powerful as to maim or kill them. That would just be cruel. But strong enough to motivate them to redouble their job seeking efforts.

As the famous Milgram experiment has shown, the public would undoubtedly be keen to help out with this act of social service. The involvement of thousands of public-spirited volunteers in the scheme could give a new lease of life to the concept of the Big Society, which has sadly been allowed to languish.

One last point. I want to anticipate a criticism that will undoubtedly be made by our Keynesian and socialist opponents. That ending the entitlement of automatically receiving wages, would result in a catastrophic collapse of demand. How would people continue to buy goods and services if they no longer automatically received wages for the “work” they supposedly do?

The answer is simple. Debt. In the UK, we have merely skimmed the surface of debt’s potential. Personal debt stands at a paltry £1.45 trillion in this country. The spurt of debt that this plan would bring about would act as a tremendous fillip to our economy and to the finance sector in particular.

Imagine: these waves of new credit card debt could be packaged together in bundles by banks and then sold to investors. GDP rates would return to health. In the midst of a double dip recession, we all know we can’t be ambivalent about growth.

It was once said, by some wag, that those who don’t learn from history are destined to repeat it. But if you don’t repeat what has gone before, how can you be sure you will achieve the same fantastic results?”