Monday, 25 May 2015

We are not the 99%

‘We are the 99%”, the Occupy movement famously proclaimed. Society is now run for the benefit of the top 1%, Occupy said. The rest of us, the 99%, are frozen out, paying for the mistakes of a small elite, in whose clutches wealth was obscenely concentrated.

I’ve written before about how, paradoxically, this depiction of society is both an underestimate (the ones really making out like bandits are the 0.1%), but also brushes over fundamentally conservative impulses among a large segment of the 99%.

But in light of the Conservative party’s victory in the UK general election, I think the second part of that argument needs firming up. We are witnessing, it seems, not just a coincidence of interest between the 1% and, roughly, the top half of society. But an active alliance to the exclusion and detriment of the rest of society. “We” are definitely not the 99%. Some animals are more equal than others.

This is not just based on a common or garden assumption that the fortunes of the rest of us depend on the 1% or 0.1% prospering. That argument is always there.  Just last week, we learnt that in 2011 nearly a fifth of UK pension fund money was “intricately linked” to the profits of BP and Shell.

No, what I’m talking about is a division between asset rich and asset poor. And a de facto alliance between the finance industry and around half of society in the UK. One based around near zero interest rates.

Despite the assumption that this is the new normal, interest rates, the level of interest charged by government central banks to commercial banks, are astoundingly low. They have been stuck at 0.5% in the UK since 2009. By way of comparison, the Bank of England base rate (interest rate) was 5.75% in July 2007, 6% in January 1999, 7% in August 1997, nearly 14% at the end of 1990, 12% in 1986 and 11.25% at the start of 1975.

And the official interest rate has profound impact on the wider economy, since the interest charged by commercial banks will reflect the so-called ‘base rate’. Back in 2007, the now deceased former Bank of England governor, Eddie George confessed to a Parliamentary committee that he had paved the way for the financial crisis, by slashing interest rates from 6% in 2001 to 3.5% two years later. This had the effect, he said, of pushing house price inflation above 25% and stimulating consumer spending in a way not seen since the late ‘80s boom. Note, that when the late ‘80s boom turned into recession, the response was to raise interest rates mercilessly. Now, post-crash, they been cut even further. Is that not a prima facie example of a reckless economic strategy?

What are the effects of ultra-low interest rates? One is to make is much easier for banks and the government to handle their huge debts. With the base rate so low, bank debts, 210% of UK GDP in 2011, are much lower than they otherwise would be. So, taken together with Quantitative Easing, government intervention which reduces the effective interest rate, insolvent financial institutions are made solvent. So the banks, especially overleveraged ones, love low interest rates.

The other main effect is to make it much cheaper to hold or take out a mortgage. Mortgages either track the base rate or follow it closely. The number of people with a mortgage, compared to renting, has certainly dropped, to around 65% of the adult population in the UK, but it is still a clear majority. Government subsidies in the ‘market’ through the £80bn Funding for Lending scheme and Help to Buy, has also had the effect of reducing the cost of mortgages.  The result for many people has been a massive compensation for the fact that wages have endured their greatest contraction since the 19th century. “Many landlords who bought property before the financial crisis are on interest rates tracking the Bank of England base rate and have seen their costs plummet since it dropped to 0.5%,” observed an article on how Buy to Let landlords have earned 1,400% returns since the mid-90s. “They are coining it in – they’ve benefited from unprecedented property price rises and their rates are rock bottom,” said one mortgage broker. So mortgage-holders love low interest rates, too.

But others, those without assets, are definitely not coining it in. Private renters have endured rent rises of, on average, 15% since 2010, and they are accelerating. Evictions stand at a six year high. Benefit claimants, invariably without assets, have endured a torrent of hostility ranging from sanctions, the denial of help to sick and disabled people, the Bedroom Tax, and the benefit cap. There are roughly 1,000 food banks in Britain now, and just one provider, the Trussell Trust, distributed enough food last year to feed 1.1 million people. These people are paying for the sins of others.

Ultra-low interest rates, together with the deliberate restriction of the supply of newly built houses, also work to bolster perpetually rising house prices. This is clearly an advantage if you already have a mortgage or own a house outright. But not if you don’t. It’s no accident that support for the Conservatives in the recent election increased with age. In the way the British economy has been skewed in the last few decades, older and middle aged people, by and large, have housing assets. Younger people don’t.

But what is most interesting is that, to many economists, ultra-low interest rates, or to give its technical name, financial repression, means economic stagnation. This is because it discourages new investment. Investment largely takes place through borrowing and investors know, in the context of near zero interest rates, they won’t get much of a return (if interest rates are below inflation, a negative return), so they don’t bother. The game isn’t worth the candle. The dominant, supply-side philosophy, which says that if you reduce taxes on business, investment will increase simply doesn’t work. Still, a rise in government interest rates, though perennially predicted as being just around the corner, never actually happens.

All this chimes remarkably with Thomas Piketty’s assertion that, in an era of low growth, returns from capital (income from the ownership of assets, such as houses) will outpace returns from labour (income from work). It’s also why, I would suggest, society is so culturally conservative in comparison to the 1960s or ‘70s, but that’s a matter for another article.

The question is, can this alliance around low interest rates, last? Japan, the country of two ‘lost decades’, has kept interest rates below 1% since the mid-nineties (sometimes they have even been negative) and resorted to recurrent bouts of quantitative easing. The wealth and home owners have benefitted, savers and wage earners haven’t. But Japanese politics has remained staunchly conservative, with the only departure being that so-called ‘Abenomics’ isn’t implementing austerity.  
What would explode this compact between finance and a significant segment of the UK population? Undoubtedly, a large and unintended rise in interest rates. Default or write down of debt in the Eurozone may provide the spark, with debt being sold, the value going down and interest rates rises the inevitable result. The financial crisis, part two, in other words. But in its absence, the mantra, ‘we are the 99%’ simply doesn’t get to the heart of the matter.

Thursday, 14 May 2015

Re-post: What is wealth creation?

The idea of celebrating ‘wealth creators’ is a constant background hum in our culture. But the noise has been turned up a notch with the UK Labour party’s election defeat and the consequent explanation that the party was too hostile to creators of wealth and entrepreneurs and didn’t understand their motivations (the condensed version is make Richard Branson feel loved)

So I thought it would be a good time to re-post an article about wealth creation from 2012, which was, specifically, a review of David Schweickart’s book, After Capitalism.

In a nutshell, our societies are intent on confusing those who create wealth with those who merely receive it. The point about capitalists, as opposed to entrepreneurs, is that they have an entirely passive role. However, if you make the leap that wealth is created by a combination of labour, ideas (entrepreneurs if you like, another form of labour), backed by investment, private or public, that doesn’t exhaust the problem. Because some economists feel that demand for private capital investment is in terminal decline; that big, capital-intense, labour employing projects don’t generate sufficient returns anymore, so capital is now funnelled in making money from rent (the ownership of assets) or finance. Nothing is created and there is immense potential, as 2008 showed, to destroy wealth in other parts of the economy …

What exactly is capitalism? That might appear a strange question to ask, fifty-plus posts into a blog about, erm, capitalism. But if you’ll forgive the tardiness, this is an inquiry that needs to be pressed.

While capitalism is a noun that attracts adjectives in abundance (crony capitalism, free-market capitalism, and now the oxymoronic humane capitalism), the noun itself remains largely uninterrogated, an unexamined presence. Everyone is supposed to understand what capitalism is – it’s all around them after all – but it’s remarkable that something so taken for granted is seldom defined. I’m convinced that many people who define themselves as anti-capitalist have only an intuitive sense of what they are against.

Perhaps you can be too close up to something to fully grasp it. Maybe you don’t really know the people you’re closest to.

David Schweickart is an American mathematician and philosopher who published a book in 2002 called After Capitalism. Aside from elucidating an alternative to capitalism, he attempted to define it and describe its consequences. After Capitalism isn’t a howl of outrage against “the system” but a rational effort to go beyond TINA (‘there is no alternative’)

Reviewing Schweickart’s book is therefore a good way to look at capitalism in the cold light of day: To examine what it is (which may be very different from how it is commonly perceived) to look at its faults, to say what’s good about it and what the alternatives to it are. There is, I believe, an unconscious and very prevalent fear, that interfering too deeply in the workings of the mysterious capitalist machine will lead either to the government controlling everything, with lethal consequences for freedom, or, alternatively, plunge us into a technological dark age and anarchistic chaos. Refusing to be awed or intimidated by what is, after all, an economic system that humanity has rejected for the vast majority of its history is a path to confronting those fears. The review will be in three parts.

Here is Schweickart speaking (with others):

Say cheese! The C-word in focus

Schweickart gives a three part definition of capitalism. Firstly, he says, the bulk of the means of production (offices, factories that produce goods and services) must be privately owned, either by corporations or individuals. This was traditionally called by the Left ‘private property’ which is unfortunate, Schweickart says, because it implies that homes, cars and toothbrushes will all be confiscated and “communalised” in any revolutionary change (think of John Lennon’s Imagine). These things were, to someone like Karl Marx, not ‘private property’ but ‘personal property’ and would not be seized by anyone.

Secondly, products are exchanged in a market. “Individual enterprises compete with one another in providing goods and services to consumers, each enterprise trying to make a profit,” says Schweickart. “This competition is the primary determinant of prices.” The state owning all enterprises and deciding that to produce by means of a plan, as in the old Soviet Union, is not capitalism. Neither is it capitalism when the local community owns most of the economy, as with social ecology.

But, says Schweickart, it is an “ideological distortion” to use “market economy” as a synonym for capitalism. They are not the same thing. Enterprises within a market economy can be organised differently. They can be controlled by their workforce. This is significant because, when it comes to imagining a “post-capitalist economy”, Schweickart says it will be populated by worker-controlled firms operating in a “decentralized market economy,” a system he calls “economic democracy”. This is contentious on several levels and I will critically examine Schweickart’s proposals in Part Three.

Lastly, he says, capitalism, to be capitalism, has to be based on wage labour. This means that most people, of working age, have to rent themselves out to others, who own the “means of production”, in order to gain the resources to survive and consume. “It is a crucial characteristic of the institution of wage labour that the goods or services produced do not belong to the workers who produce them,” says Schweickart, “but to those who supply the workers with the means of production.”

It is this reliance on wage labour, says Schweickart, that gives capitalism its susceptibility to crisis, its downturns and booms. Economic health, under capitalism, is based on what Keynes called “effective demand”: the purchasing power of the millions of wage labourers. But this demand is formed from wages or salaries, the consequence of what is negotiated from employers for whom wages are just another cost. If that happens, private investors can lose confidence and companies do not spend the profits they have amassed.

This, says Schweikart, is one of the “central contradictions” of capitalism. An in-built conflict, you might say. “Wages are both a cost of production and an essential source of effective demand,” says. “Capitalist firms are always interested in cutting costs, expanding markets and developing new products. But to the extent that the first of these goals, namely cost cutting, grows in importance relative to the other two, effective consumer demand will tend to be depressed – and hence also those “animal spirits” of investors. This can mean a stagnating economy and rising unemployment, perhaps on a global scale.”

So, if most assets are privately owned, economic exchange takes place in a market, and most people are wage labourers, a society is capitalist.

But, within these parameters there are different kinds of capitalism. The twentieth century had quite a varied palette of capitalisms. Post-war Japan and later, South Korea, were examples of one version where the state directed investment to certain favoured parts of the economy and had a bias towards exports (a type of capitalism the economist Ha-Joon Chang is enamoured by). After the Second World War, Western Europe and the US had for many years a form of managed capitalism, based on collective bargaining and the state ownership of some parts of the economy. West Germany went in less for state ownership and instead practiced ‘co-determination’ – workers were elected to company boards. After 1980, this changed, especially in the US and Britain, in that trade unions were “zapped” and much of what the state did was privatised.

This has morphed into a strange economic constellation where the rich and corporations are subsidised by the taxpayer while the rest of the population is subject to the discipline of free enterprise.

Perhaps this is just an extreme manifestation of a state of affairs that was there all along. “I watched with incredulity as businessmen ran to the government in every crisis, whining for handouts or protection from the very competition that has made this system productive,” wrote one William Sutton, Treasury secretary under US President Richard Nixon in the 1970s.

The point is that real-world capitalism can, and invariably does, radically depart from the textbook “free market” model, but it’s still capitalism.

Love me, I’m a wealth creator

We can see from this definition there is one conspicuous absentee – the “entrepreneur”. In conventional justifications of capitalism, the entrepreneur looms very large indeed, especially during economically tough times. In fact, in conventional explanations, the entrepreneur is capitalism. In the UK, Conservative business minister, Michael Fallon, says we should salute entrepreneurs as “Olympic Champions” who deserve adulation for creating wealth and jobs.

But conservatives are not alone in celebrating the entrepreneur. The left-wing economist Stewart Lansley, author of The Cost of Inequality, differentiates between the deserving and undeserving rich. One of his favourite examples is the industrial designer, James Dyson, who merits his wealth, says Lansley, in contrast to someone like Philip Green who makes money from taking over existing businesses. Dyson creates wealth, says Lansley, but Green merely transfers it to himself.

But Schweickart says both these understandings are ideological distortions. He does not deny that entrepreneurs exist or they merit a reward for their contribution, although frequently they merely copy what has gone before (new coffee shop anyone?) Any society needs people who invent new products or technologies. But what Schweickart does deny is that entrepreneurs are capitalists.

From Marx, Schweickart gets the insight that all wealth derives from labour. “As any economist will confirm,” he says, “unless labour costs are less than the value added by labour, there will be no profit.” So entrepreneurs create something and ethically are entitled to a reward. Workers literally produce goods and services. Managers supervise production. They all contribute something.

But what do capitalists do? The answer, says Schweickart, is very little. They have an entirely passive role. They watch their wealth compound by virtue of the fact that they have quite a lot in the first place. “In a capitalist society, enormous sums are paid to people who do not engage in any entrepreneurial activity or take any significant risk with their capital,” he writes.

As an example consider the National Express Group, which operates buses and trains in the UK. The major shareholders in, and therefore owners of, National Express are the Cosmen family, a Spanish family who “first entered the transport industry, in a horse-and-carriage operation, in 1728”, a hedge fund called Elliot Partners who very persistently pursue very high returns for the immensely rich people who invest in the hedge fund and an investment company called M&G. None of these investors are entrepreneurs.

We are now in the ideological belly of the beast. An entire economic system is justified by virtue of its vital role in creating wealth when it is primarily about the receiving of wealth by a small minority that other people create.

To be a capitalist, says Schweickart, you must own enough productive assets to be able to live comfortably on the income they generate. In the US, he says, and he wrote this in 2002, this comprises about one per cent of the population. Sound familiar?

The investment game

So why does putting money in the capitalist investment game, in normal times, yield results? Why do stock markets, bond markets, investment banks and currency markets produce positive returns? Most pensions are invested on the stock market and charitable foundations derive their income for grants from endowments in shares. “One gets something for nothing because someone else gets nothing for something,” explains Schweickart. “Investment income, the reward to those who have “risked” their money by channeling into financial institutions … is possible only because those who produce the goods and services of society are paid less than their productive contribution. If capitalist distribution were really in accord with the principle of contribution (as is often claimed), the investor would get nothing.”

Two things follow from this. One is that share dividends are, in Schweickart’s words, “a tax on enterprise” and should be abolished and replaced with a capital assets tax. The second is that the real problem is not the stupendous consumption of the very rich but what they do with the money they don’t consume, the money they invest. Control of investment should pass from the capitalist class to society as a whole. He calls it “social control of investment”. I will look at this in detail in part 3.

In the next part, I will examine Schweickart’s take on how far the problems of society, such as environmental degradation, a hollow democracy and poverty, can be laid at capitalism’s door. But I also want to look at the appeal of capitalism and why people are so scared of moving beyond it.

“Most workers, especially those in rich countries, have far more to lose now than just their chains.”

Monday, 4 May 2015

Labour spending crashed the economy versus Gordon Brown saved the world. Two election myths that won't go away

There is something about a general election campaign that shoehorns reality into fantastical contortions. Actually, scrub that, there is something about a general election campaign that invents reality so that the resultant limpet-like myths bear absolutely no relation to actual events.

So it is with the economic story of the last few years.

As predicted in this blog, the myth of Labour over-spending as a cause of the economic crisis has come to dominate the popular narrative of the crash and its aftermath. Bringing to mind Bertrand Russell’s observation about the stupid being cocksure, while the intelligent remain beset with doubt, its giant wrongness only seems to invigorate the resolution of those clinging to it.

It is probably futile to point out (as the graph below shows) that the last Labour government spent, as a proportion of the GDP, less than Margaret Thatcher did. Labour also taxed the rich and corporations much less than Thatcher as well, although she established the direction of travel. Which goes some way to explaining why government debts and deficits remain so predominant; a situation exacerbated by the current UK government cutting corporate income tax by nearly 30%.

The George Osborne retort that the last Labour government should have mended the roof while the sun shone is strangely never applied to the blessed Margaret. And there is no reason why not. Because things got decidedly overcast when the UK dipped into deep recession in late 1989. I blame debt racked up by Margaret Thatcher’s Conservative government (that way lies insanity. Ed)

The notion that Labour was drunk at the wheel of City regulation, while true, ignores one serious, endemic flaw of regulation in a capitalist economy. It is necessarily ineffective. Truly effective regulation, whether in finance or pharmaceuticals or food production, would suffocate profit and growth and so there is always a modus operandi reached with the industries that are supposed to be regulated. Even halfway decent regulation will produce lower growth and so government revenues will inevitably be smaller.

All this may look suspiciously like making excuses for the last Labour government. But that’s not what I want to do. Because, while the over-spending myth has come to cast a pall of stupidity over the general election campaign, an opposite myth has arisen. Admittedly, one that has far less traction. But it’s no less fictional.

This narrative is best called, the Gordon Brown Saved the World myth. While other world leaders were like rabbits frozen in headlights in 2008, Gordon Brown stepped in and advocated nationalisation of the banks. This together with other interventionist measures, the story goes, ensured that growth returned and economy was ‘on the mend’ before the Conservatives got elected in 2010 and choked off this resurgence with austerity.

There are numerous aspects to this story of events that are seriously wrong. Firstly, the kind of nationalisation employed by Brown, an arms-length, business as usual nationalisation, was entirely the wrong kind of nationalisation. Secondly, this nationalisation effectively transferred massive private sector debt to the public. Thus, if it did save the world from a great depression, it did so at the expense of giving a massive shot in the arm to austerity (which now could be portrayed as necessary to pay off the debts) and, by rescuing insolvent institutions, all but ensuring future economic stagnation.

One writer on the history of austerity, Mark Blyth, has confessed that, while in 2008 he thought there was no alternative to bail out the banks, he is now “no longer sure this was the right thing to do”. “Perhaps we should have let the banks fail,” he writes in his book, Austerity: The History of a Dangerous Idea. “Yes, systemic risk says otherwise. But if the alternative produces nothing but a decade or more of austerity, then we really need to rethink whether the costs of systemic risk going bad are any worse than the austerity we have already, and continue to put ourselves through.”

The notion that real growth had returned to the UK economy at the start of 2010 (in the first two quarters of 2010 the economy expanded by 0.5% and 1%) is risible. Growth was produced by bail outs and quantitative easing (QE), an entirely artificial way of stimulating the economy that works by raising the price of shares and property. Government intervention which, by the way, direct benefits the rich and property owners. And makes borrowing more attractive; which some might say is a strange thing to do in a credit-addicted economy.

And QE always produces a temporary effect, which fades away. The Eurozone economies are expected to grow more quickly that either the UK or US in the first quarter of 2015, following the introduction of QE late last year. The US economy, which ended six years of QE last October, grew by just 0.2% in the first quarter of 2015 and has yet, according to Reuters, “to demonstrate self-sustaining resilience.” In fact, we seem to be at the beginning of a global economic downturn, as the various stimulus measures undertaken in 2008 wear off. We used to have boom-bust, now we’ve got dribble-bust. The world hasn’t been saved, in case you were wondering.

“It is possible that the world economy is so damaged that it needs permanent QE just to keep the show on the road,” said the Daily Telegraph’s independent-minded international business editor last October.

None of this is meant to justify austerity, an entirely self-defeating policy that inflicts huge suffering on the people that didn’t cause the crisis in the first place. But Labour in 2010 was in favour of austerity and has in no way diverged from the QE/ultra-low interest rates/house price bubble route to economic ‘recovery’ undertaken by the Conservatives. Private debt is enormous and getting worse. The fact so many new jobs are self-employed or zero-hours is not just because the balance of power has swung so far in the employers’ favour, but because the economy is fundamentally weak.

It does no-one any good to pretend that what happened in 2008 was a bog-standard recession effectively countered by the nimbleness of politicians in power at the time. That just won’t wash, it was far deeper than that. There are ways in which the kind of government in power after May 7 will change things, from the way disabled people are treated to the circumstances faced by private renter; however marginal that may be. Make your choice with your eyes open. But the UK economy will remain deeply, structurally flawed. That’s a certainty.