Corporate Socialism and the Capitalist Underclass

 

Politics now – witness Keir Starmer’s neo-Blairite recapturing of the UK Labour party – seems to inhabit a mental universe of its own creation rather than trying to deal with the inconvenience of reality. And occasionally the dissonance reaches comical heights of absurdity.

Boris Johnson, for example, when asked recently to justify the ending of the £20 uplift for Universal Credit recipients in October – which the government’s own internal modelling concedes will have a “catastrophic” effect – replied that it was his “strong preference” that people saw their wages rise “though their efforts” rather than through the taxation of other people.

Effort you say. Leaving aside that most people on Universal Credit are actually in work – and thus already are making an effort – the preferences of conservatives don’t seem to stretch to the most glaring welfare dependence affecting society today – the mammoth no strings giveaways to corporations and the immensely wealthy. Which curiously aren’t ending next month and necessitate about as much effort as turning a computer on.

Austerity in reverse

In the aftermath of the Great Financial Crisis of 2008, the world’s central banks (state banks like the Bank of England or the US Federal Reserve) literally created $10 trillion. In response to the Covid-19 pandemic, they created a further $9 trillion. For the past 18 months, central banks have generated $834 million an hour. This goes by the innocent sounding name of Quantitative Easing (QE for short).

QE is initiated by the central bank bringing into being a batch of new money (often called ‘fiat money’ i.e. money without the backing of gold – from the Latin meaning ‘let there be money’. Don’t picture a Fiat 500, that doesn’t capture its size). This is used to buy assets, usually government but also occasionally corporate bonds (debt), from banks, insurance companies or pension funds.

This has two main effects. One is to force interest rates down to very low levels, thus enabling heavily indebted institutions to survive. And the second is to create – by the buying of the assets – a huge mass of money ($13.9 million each minute) seeking investment opportunities and which is incentivised by the low interest on government bonds to go into other assets such as shares, property or commodities. As a result of this influx, their price increases.

QE is invariably presented as “pumping” money into the economy. In reality it involves pumping huge amounts of money into the financial system. Banks are not inclined to lend to the ‘real’ economy, which is the official story behind QE, if returns from buying and selling other assets (such as company shares) are higher. Corporations are not motivated to invest in plant or equipment if they can make more money from buying back their own shares, whose value is guaranteed by QE. Mergers and acquisitions – buying a company, asset-stripping it and selling it on – are also fuelled by the vast funds created by QE.

In theory, QE can be an emergency measure, helping the economy through a rough patch, and then being reversed so that ultimately no new money is created. But this is not how it turns out in practice. The Bank of Japan is still engaging in QE 20 years after it pioneered the policy. In 2018, the Federal Reserve started ‘quantitative tightening’ – the selling or retiring of assets on its balance sheet – but had to call a halt to the process less than a year later because of a negative reaction from markets. This was, it should be stressed, before the pandemic.

Rich bono

Unsurprisingly given how it works, QE has a hugely regressive effect on inequality. It’s not rocket science to understand that if the value of shares goes up, the prime beneficiaries are rich people because they are most likely to own shares. Additionally, banks and corporations benefit because they own shares in each other. “Owners of property have made out like bandits,” said hedge fund owner Paul Marshall in 2015. “In fact, anyone with assets has grown much richer. All of us who work in financial markets owe a huge debt to QE”.

The latest, Covid-inspired, rush to QE has massively exacerbated this inequality. Five million more millionaires were created during the pandemic, while the number of people worth more than $50 million increased by a quarter. Stock markets have hit record highs despite precipitous drops in GDP. In Britain, contrary to all previous recessions, property prices have continued their upwards trajectory. “The world is awash with central bank money,” says economist Grace Blakeley, “and it’s all flowing up rather than trickling down”.

Take from the poor and give to the rich

The QE reflex exposes just how right-wing – across the political ‘divide’ – our politics is, notwithstanding ephemeral lapses like Jeremy Corbyn’s Labour party. In 2019 the China-based economist Michael Pettis mused over two different ways to stimulate an economy – “giving to the rich” and “giving to the poor”. Giving to the rich involves tax cuts for business and the wealthy and policies such as QE “which tend to cause a rise in the prices of assets, most of which are owned by the rich.” Giving to the poor, in Pettis’s description, entails cutting taxes on the not wealthy, funding social safety nets, creating jobs or “setting minimum basic income policies”.

It’s revealing that the response of the British government – and other western governments – to the financial crisis and the Covid pandemic has almost exclusively centred on the first option. In addition to endless QE, corporation tax has fallen from 28% to 19% (it is slated to rise to 25% in 2023 but whether that will happen is a moot point). The top rate of income tax was also cut by George Osborne in 2012 and, if that wasn’t enough, capital gains tax (the tax you pay when you sell shares) was slashed by the soon-to-be newspaper editor in 2016.

As for the second option, it is not a question of giving to the poor but rather of taking from them. Taxes which affect poor people the most, such as VAT and now National Insurance, have been hiked. Social safety nets, by contrast, have been cut – witness the benefit freeze, sanctions, and the £30 cut in weekly payments to disabled people. Creating jobs has been left to the tender mercies of the private sector, and as for basic income policies, I think there’s been a pilot project in Finland. In Britain, destitution and food banks are the preferred course of action.

Boris Johnson’s “strong preference” for people to see their incomes rise “through their efforts” strangely only applies to folk without share portfolios. “The imbalance is unbelievable,” says Robert Reich, former labour secretary under Bill Clinton in the US, “Socialism for the rich, corporate socialism, but the harshest form of capitalism for most working people and the poor.”

The whimper of capitalism

 Of course, the notable feature of “corporate socialism” – apart from its colossal unfairness – is that it’s not capitalism anymore. QE is a massive distortion of the fêted free market. The theory of capitalism is that asset values are based on economic fundamentals – if stock prices rise that is because people believe, maybe mistakenly but genuinely, that the companies in question will generate profits in the future. Under the QE regime, they are rising because the state, in the guise of ‘independent’ central banks, is injecting huge amounts of money into markets.

Former Greek finance minister Yanis Varoufakis sees this as a momentous change. Pre-financial crisis capitalism (before 2008) may have been based on “daylight robbery” – the extraction of rent from a market controlled by Coca-Cola or General Electric – but it was still rooted in some kind of market and driven by private profits. That is no longer the case:

Then, after 2008, everything changed. Ever since the G7’s central banks coalesced in April 2009 to use their money printing capacity to re-float global finance, a deep discontinuity emerged. Today, the global economy is powered by the constant generation of central bank money, not by private profit.

To be more precise, the pursuit of private profit is still at the heart of the system – we haven’t socialised hedge funds – but the profit urge does not ‘make the world go round’. Central banks do.

 Market society, not economy

The supreme irony is that while the economic summit of society is changing into something that is not capitalist, capitalist values are penetrating ever more deeply into the texture of life. Economic and monetary values dominate politics and morality and we seem unable to value non-economic realms without assigning them a financial status, such as “natural capital”.  Individual endeavours, such as learning, physical fitness, volunteering, or nurturing ‘mindfulness’ are frequently seen in terms of their effect on our employability and careers, and undertaken for that reason.

In the 1980s, the social ecologist Murray Bookchin pioneered the idea that we don’t just live in a market economy, but also a market society. By the middle of the 20^th century, he said, “large-scale market operations had colonised every aspect of social and personal life.” The prognosis in the second decade of the 21^st century is that we seem to live in a market society without the concomitant market economy. Or possibly an irredeemably rigged market economy.

How long will it last?

The ultimate question is whether this regime of corporate socialism is sustainable. Japan, “the petri-dish” of Quantitative Easing, been following the policy since 2001 – several years before the rest of the advanced capitalist world followed in its wake. Indeed, it has deepened the practice considerably, coming to own around half the company shares quoted on the Tokyo stock exchange. “If this trend continues it is evident that the Japanese state will become the de facto owner of the bulk of what has been the hitherto privately owned enterprise sector,” wrote economist Harry Shutt in 2019.

However, from the point of view of the powerful and wealthy in Japan, the discernible effects don’t appear catastrophic. Profit has continued to be extracted, well-known corporate forms have endured and, if there has been a quiet revolution in ownership under the surface, it hasn’t resulted in a shift in power. In fact, inequality, low growth, ferocious competition for jobs and little prospect of pay rises, have, far from inculcating a spirit of rebellion, fuelled a culture of conservatism among Japanese youth.

The rulers of our society don’t have, despite the propaganda, a fervent ideological commitment to the free market, but merely a belief in private property. If that endures, they are satisfied.

The lingering question is, if Japan has indulged the QE fixation for two decades without presaging economic Armageddon, are western economies free to follow its example and practice QE for years, decades even, and emerge basically unscathed? Or are we preparing the ground for a financial collapse of mammoth proportions?

I want to address this question in the second part.

 

 

 

 

 

 

 

 

 

 

Neoliberalism is broken but no-one, not even leftists, want to pull the plug

One should always be suspicious of unanimity. While debate rages about the right fiscal policy (tax and spending) governments should adopt in the post-crisis world (the austerians versus the Keynesians, George Osborne versus Jeremy Corbyn and most economists), when it comes to monetary policy (interest rates, the price of borrowing money, whether the money supply should be increased through quantitative easing), eerie silence reigns. No-one, the odd Conservative ex-Prime Minister aside, is calling for interest rates to be raised significantly. The US Federal Reserve, which recently pondered raising interest rates ever so slightly, couldn’t bring itself to actually do it.

The trouble is ‘markets’, those capricious, unelected arbiters of our future who cling to ultra-low interest rates for dear life, have finally determined that they don’t actually work. Investors have decided that the “world’s problems can’t be solved by low interest rates alone” said an article in the New Statesman after August’s Chinese stock market turmoil. The Bank of International Settlements, which is owned by the world’s central banks, warned earlier this month that it was dangerous to expect that monetary policy could cure all the global economy’s ills.

Broken beyond repair

There is a growing realisation that neoliberalism is fatally wounded. After the flashing warning lights of the 2008 crisis, the heart attack victim has gone back to smoking 40 a day and consuming fry-ups. Global debt has risen by 40% since the crisis to $199 trillion (three times what it was in 1990) and privatisation, trade liberalisation (see TTIP) and wage repression have intensified, buoyed by $12 trillion worldwide in invented money (quantitative easing). All hail free markets.

“At some point you have to take your bitter medicine”, says the Bank of International Settlements, a recognition that markets are overdue a “correction”, or in layman’s terms, another financial crisis. The problem is that no-one, leftists included, want to administer the dose.

The official reluctance is in plain sight. See the Federal Reserve’s prevarication over interest rates. In the UK, Bank of England monetary policy committee member, Andy Haldane, claims that, far from rising, interest rates may have to fall further and may, following the example of Japan in the 1990s, turn negative.

But this instinct to preserve, even if what you are preserving is broken and hurts millions of people, is not limited to official policymakers. Earlier this year, the leftist Keynesians of Syriza in Greece, faced with the chance of rejecting austerity and exiting the Eurozone, caved in and opted for heightened austerity and a massive programme of privatisation carried out by a foreign country. They looked down the barrel of precipitating another financial crisis in Europe and bringing down the wrath of the world’s entire financial establishment on their own country, and capitulated.

A Titanic minus the lifeboats

Even if you don’t agree with them, you can understand the reluctance. Another financial crisis would very likely be devastating. The chief economist of HSBC warned in May that world economy was like an ocean liner without lifeboats. If another recession hits, it could be a “truly titanic struggle for policymakers”, he wrote in a note to clients. This is because, in response to all downturns since the 1970s, governments and central banks, have cut interest rates. Their capacity to do that again is extremely limited because they are so low already. More bailouts would doubtless be attempted, and austerity can be understood as creating a ‘fiscal space’ to enable this, but the ability of states to save insolvent institutions is likely to be dwarfed by the size of the task.

Stephen King, the HSBC economist, apparently didn’t speculate what a renewed financial crisis would look like “in the absence of adequate policy tools”. But let’s speculate (every else is). Pension funds are identified by King as “high risk”. There are $50 trillion in pension and insurance funds invested in stock markets in OECD countries, much more than their combined GDP. Then there are mortgages, a debt owned primarily by banks, but as 2008 showed, by many other investors as well. Mortgage payments in the UK, says the Economist magazine, are the lowest they have ever been in peacetime. But were ultra- low rates to rise quickly, as they would in a financial crisis, “things could start looking very troubling”, says the magazine.

Then, there is the fact that consumers are, as Paul Mason says in his book, Postcapitalism, “direct participants in the financial markets” through credit cards, student loans, car loans, mobile phone contracts, gym memberships and household energy. An unchecked financial crisis could turn all these investments and the services they deliver, into dust. And this is besides the geo-political effects in an already hugely unstable world. The refugee crisis Europe is experiencing now would be merely a foretaste.

It’s my, maybe irrational, hunch that the world’s governments and monetary authorities would somehow find a way to arrest a future financial crisis, through a combination of negative interest rates, nationalisation, bailouts and expanded quantitative easing. But the mere fact that a crisis occurred would lead to the realisation that it will inevitably recur. The process cannot be arrested forever.

It is for these reasons that leftists are as conservative as anyone else when it comes to the financial system. They, understandably, combine an awareness of the system’s vast anti-social consequences with an aversion to systemic meltdown. “Europe’s crisis,” wrote former Syriza finance minister, Yanis Varoufakis, in February, “is far less likely to give birth to a better alternative to capitalism than it is to unleash dangerously regressive forces that have the capacity to cause a humanitarian bloodbath”. The implosion of a “repugnant capitalism”, “despite its many ills”, he said, “should be avoided at all costs.” To repeat, at all costs.

No appetite for destruction

Leftists now have no appetite for destruction. In fact, Mikhail Bakunin notwithstanding, the willingness to destroy was always more of a right-wing characteristic. The desire during the Great Depression “to purge the rottenness out of the system” by liquidating stocks, labour and farmers, emanated from a finance minister in a Republican US administration. Despite American Marxist Andrew Kliman’s assertion that since the Great Depression, policymakers have always responded to downturns with fiscal and monetary measures to avoid mass bankruptcy, conservatives since the 1930s have sometimes been happy to destroy business for political and economic reasons. The huge spikes in interest rates in Britain and America at the beginning of the 1980s, unthinkable now, were instituted by the conservative regimes of Thatcher and Reagan with the aim of humbling organised labour. In Britain, a quarter of manufacturing industry was destroyed as a result.

But if leftist governments now see their overriding aim as saving capitalism from collapse, that vastly limits their room for manoeuvre and puts them in a contradictory situation. Paul Mason in Postcapitalism, argues that neoliberalism is broken but imagines an “escape route” for capitalism. Governments agree to suppress financial mania by raising interest rates in response to all future bubbles (like this one) and removing the guarantee of bank bailouts. The opposite, in other words, to what they are doing now. But, simultaneously, he advocates ‘financial repression’ to pay off huge public and private debts, by holding interest rates below the rate of inflation for 10 to 15 years. I would suggest that doing both is impossible.

Any leftist government will naturally face sabotage from corporations and banks eager to turn it into an economic calamity, as a warning to others if nothing else. But a leftist government in current circumstances is especially constricted because it must always keep one eye on stopping the stock market from imploding. Will a Jeremy Corbyn government be able take rail franchises into public ownership when they expire? Probably. Will it be able to nationalise energy companies without sending the stock market in a tailspin? That’s more debatable. And such a government must play along with the pretence that companies’ share values represent their future profitability. Banning companies from buying back their shares thus inflating their value, as many currently do, will precipitate a mass stock market ‘correction’. So it won’t be done.

A day of reckoning

Of course, the fact that leftists won’t pull the plug on neoliberalism, doesn’t mean that the system won’t pull the plug on itself. Many believe a ‘great reckoning’ is approaching whatever governments and central banks do. In that eventuality, a Corbyn-led Labour party would be much better placed in opposition than in government. If it was elected to power following a huge, impossible to bailout crash, it would have far more freedom. Stock market pension schemes, for instance, would have to be replaced with taxpayer-funded, pay as you go schemes, currently portrayed as unaffordable. The house price bubble would be fatally pricked, and there would be no alternative to huge expansion of public or non-profit housing. Public ownership of natural monopolies would be impossible to resist. A basic income would come to the fore.

But as things currently stand, politics and economics resemble a giant game of Buckaroo in which no-one wants to be responsible for triggering the mayhem. And leftists, however unwillingly, have been drawn into the game.