The Horror, the Horror .... the Silence. Conservatives and unconditional income

 

The 20^th century Polish economist Michał Kalecki noted an apparently perplexing trait of business leaders and their bought “experts”. One would expect such people to oppose public investment much more vehemently than subsidizing mass consumption because the former contains the possibility of competition from state enterprises. But such expectations are misplaced. “Indeed”, said Kalecki “subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ – unless you happen to have private means”.

Kalecki was writing in the 1940s with an eye on the previous decade. But his observations are particularly apposite to our own era.

Boris Johnson revealed the lingering mind-set of conservatism when he justified ending the £20 uplift to Universal Credit by citing his “strong preference” that people see their wages rise “though their efforts” rather than by welfare.

The same mentality was at work in the pervasive uneasiness around the now defunct furlough scheme which was only introduced under pressure from lame duck Labour leader Jeremy Corbyn and the unions. It can still be seen in the ‘get back to the office’ propaganda that conservatives and business executives – supported by the media – routinely dish out.

The anxiety – verging on horror – that these schemes provoke in conservatives stems from the fact that, in Kalecki’s words, “a moral principle of the highest importance is at stake”. That principle is the maintenance of work discipline. The sanctions regime at the heart of Universal Credit exemplifies the edict of conservatives – big C conservatives and those who go by other nomenclature – that no money be given to ordinary people without stringent conditions.  “Please keep on cracking the whip,” exhorted Good Morning Britain host Richard Madeley earlier this week in true conservative style.

But note Kalecki’s caveat – “unless you happen to have private means”. In which case, all qualms instantly vanish. In fact, regarding the lack of actual work undertaken by the ultra-rich, a veil of silence reigns.

So what do you do?

The existence of huge swathes of people who receive large amounts of money without doing anything to earn it is capitalism’s dirty little secret. “What do capitalists actually do?” asks mathematician David Schweickart in his 2002 book After Capitalism. The answer is very little. They have an entirely passive role. “The capitalist” he says “engages in nothing that can be reasonably regarded as ‘productive activity’. Workers produce and distribute goods and services. Salaried managers coordinate production. Entrepreneurs and other creative personnel develop new products and techniques of production. The capitalist qua capitalist does none of these things.” In sum:

In a capitalist society, enormous sums are paid to people who do not engage in any entrepreneurial activity or take on any significant risk with their capital. Trillions flows to shareholders who make an entirely passive contribution to production.

Some have tried to quantify the enormity of these “enormous sums”. According to economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman, around 30% of all income produced in the United States is paid out as “capital income”. These payments, in the form of interest, rents and share dividends, are “entirely passive”. They comprise “income divorced from work”.

But conservatives are, to borrow a phrase from Peter Mandelson, “intensely relaxed” about this form of unconditional basic income. In fact, they’d rather not talk about it if you don’t mind.

Capitalism, but not as we know it

However, this was the income distribution under capitalism. The past tense is not a typo. Because under the state capitalist system we’ve inhabited since the financial crisis – one vastly ramped up by the Covid pandemic – the passive income of the ultra-rich has been multiplied many times over by the actions of the state.

This process goes by the name of Quantitative Easing (QE) – so-called because it increases the quantity of money in, putatively the economy, but in reality swishing around the financial system.

QE is an extension of practices undertaken by central banks before the financial crisis over a decade ago – known as Open Market Operations – but one that vastly changes their nature. Central banks used to buy assets from commercial banks in order to ensure they had cash in order to settle their day to day transactions with each other, but these purchases were only very short-term. The assets would usually be sold back after a week.

However, under QE the central banks uses the money only it can create to buy assets – government bonds, corporate bonds or mortgage-backed securities usually – outright. Not temporarily. That why, under QE, the balance sheets of central banks have grown exponentially.

As a result of QE the bank or corporation that sells the assets suddenly has an enormous amount of cash to spend. The volume of financing under QE is astronomical, amounting to $834 million an hour by central banks worldwide. By buying the assets, the central bank causes their prices to rise and their yield to fall. The sellers – the banks and corporations – are therefore ‘incentivised’ to put their new money elsewhere, for example into shares or property or acquisitions. Thus, synthetic ‘asset booms’ are generated and the prices of assets rise. In theory, QE is meant to generate a ‘wealth effect’ in the ‘real economy’ by stimulating investment and lowering the borrowing costs for corporations. But there is no evidence this actually happens.

What there is evidence of is an immense, artificially induced, increase in the wealth of the ultra-rich. The combined wealth of US billionaires, for example, has risen by 70 per cent (!!)* since the beginning of the pandemic, a stretch of a little more than 18 months. That is, during a period of severe economic contraction – not to mention prolonged suffering endured by many people – billionaire wealth has leapt from just under $3 trillion to over $5 trillion. In addition, the number of billionaires in the US has risen from 614 in March 2020 to 745. According to Ruchir Sharma of Morgan Stanley Investment Management (and he should know) “the fundamental driver … of the billionaire boom” is “easy money [QE and ultra-low interest rates] pouring out of central banks.” For a sense of perspective here, a billion is a thousand million.

That’s capitalism folks. Except of course it isn’t just capitalism. Pure capitalism, inequality generating machine though it undoubtedly is, does not increase billionaire wealth by 70% in a year and a half all by itself. In essence, the passive wealth accruing nature of capitalism – the ‘normal’ workings of the market – has melded with the passive wealth accruing intervention of central banks – the abnormal workings of the state capitalist regime. But about both unconditional fountains of income for the rich conservatives are, almost universally, mute.

Drop the Pilot

However, the deafness is not limited to conservatives. Leftists also seem unable to grasp the nature of QE. Often the only problem they have with the “easy money” regime is that they think it should be redirected. The authorities, it is said, seem peculiarly oblivious to the unsuccessful nature of QE: that – despite the vast sums involved – it doesn’t actually seem to stimulate the economy.

As an alternative, many advocate cutting out the middleman and instituting so-called “helicopter money”. This involves the metaphorical ‘dropping’ (the term was coined by right-wing economist Milton Friedman in 1969) of large amounts of free money into ordinary citizens’ bank accounts. The theory is that this will actually stimulate the economy as poor (or not rich) people, unlike “high net worth” individuals, are liable to spend the money rather than save it. And it can achieve this at a fraction of the cost of QE.

The problem is that helicopter money flagrantly transgresses Kalecki’s “moral principle of the highest importance”. It doles out unconditional income to the multitude. Therefore, whatever its economic rationality, it won’t be allowed to happen. QE only appears unsuccessful. It wasn’t ever seriously intended to stimulate the economy. QE has served – and continues to serve – its real purpose. It preserves the existence of large corporations and banks and bolsters the wealth of the mega-wealthy.

For conservatives, that is justification enough. As for the rest of us the whip needs to keep being cracked, as it has been for centuries past.

*Elon Musk, CEO of electric vehicle manufacturer Tesla and potential coloniser of Mars, tops the list. He has seen his wealth grow from a mere $24.6 billion in March 2020 to $209.3 billion in October 2021, a rise of 750%. Indeed, he subsequently saw his fortune increase by another $36.2 billion in one day in October. You could argue that this latest alignment of cherries has something to do with the ‘natural workings’ of capitalism. Rental car firm Hertz placed an order for 100,000 Teslas. But even here the fingerprints of the QE regime are all over the deal. Last year Hertz declared bankruptcy but under the strange conditions of QE infinity its share price surged and it issued $1 billion worth of new shares. If the ‘laws’ of capitalism existed anymore, Hertz wouldn’t be around to wave a magic wand over Elon Musk’s wealth.

Cui bono? State capitalism comes to town

According to the investment bankers Macquarie, the “beating heart of Australian capitalism”, the reactions of world governments to coronavirus are a sure sign that “conventional capitalism” is being discarded in favour of a “version of communism”.

The view of the bank, which is famous for leaving Thames Water £2 billion in debt, seems to chime with the idea that the British government, following its promises to pay ‘furloughed’ workers 80% of their wages and support the incomes of the self-employed (in about 3 months), has undergone an overnight conversion to ‘socialism’.

In fact, if any conversion has taken place it is to state capitalism, not socialism, and it represents an intensification of previous trends, rather than their negation.

State capitalism, as a theory, is associated with Trotskyism and some anarchists and the idea that the Soviet Union, far from being socialist in any way, was actually a continuation of capitalism in which the nomenklatura extracted the wealth made by the rest of the population. Early on Trotsky predicted that, in a wave of privatisation, state capitalism would become conventional capitalism again. This is indeed what happened, though many decades later.

But I propose a simpler definition: State capitalism is using the power of the state to control, sustain, and, in some cases, own, private resources whilst leaving power and wealth in the hands of private corporations and high net worth individuals.

This can be seen in the ‘effective nationalisation’ that has occurred in the British railway system. 

While rail franchising has been ended, private train operators are being paid a management fee to continue to run services. The government is guaranteeing their income as long as the coronavirus crisis lasts.

The same is true of the unconditional bail out for bus companies.

In the health service, NHS England has temporarily assumed powers from the clinical commissioning groups set up by the 2012 Health and Social Care Act to buy services from the private sector but there is no indication that the government has changed its mind on outsourcing to the private sector or competition in the internal market. Trade negotiations with the US, in which medicine prices and the NHS are thought to be up for grabs, will still commence as soon as possible.

QE 2

However, the major way in which state capitalism is asserting its dominance in our allegedly ‘free market’ system is through quantitative easing. QE, which works by central banks buying government bonds and other debt from banks, is a form of massive state intervention which nonetheless leaves the most powerful private actors in the economy untouched – in fact it enormously bolsters their position.

Not only does QE hugely increase inequality as a direct result of government action, as economist Grace Blakeley observes, it inverts the way a free market economy is supposed to work. Theoretically a company’s share price should increase only if other people think it is a good bet to make profits in the future. QE, however, by reducing the yield on government bonds, ‘incentivises’ investors to switch their funds into other assets – primarily the stock market – regardless of whether such a switch is justified by underlying economic conditions. In other words, QE creates stock market booms – the appearance of economic health – where none should exist.

The world’s governments resorted to QE in the aftermath of the financial crisis with the desperation of an alcoholic grasping for another drink – the four largest central banks have created around $10 trillion in new money since 2010. This was an era presciently described by geographer David Harvey as defined by the “dictatorship of the world’s central bankers”. This was state control – central banks are an intimate part of national states and pan-national state organisations – but a type of state intervention insulated from democratic interference: since the 1990s central banks have invariably been made ‘independent’ of any meddling by elected governments.

However, the era we are now entering – I think it’s unarguable that March 2020 marks the beginning of new historical era – has and will see levels of quantitative easing that make the previous decade seem like the height of sobriety. And, moreover, QE that will take its inherent logic of expanding state ownership of the corporate economy to new peaks.

In Britain, £200 billion QE has been announced. The European Central Bank, which already was dabbling in QE to the tune of €20 billion a month has expanded the programme so that it will create €750 billion by the end of 2020. And the Federal Reserve in the US has unveiled “QE infinity” – unlimited quantitative easing – in addition to, for the first time, the purchase of corporate, as well as government, bonds.

In the last case, certainly, what this portends is not only the state massively intervening in the economy – in the interests of the rich and powerful – but also taking ownership of its commanding heights.

The new nationalisation

Because this is what has been happening in the birthplace of quantitative easing, Japan. Confronted since the 1990s with a stubbornly stagnant economy, the Bank of Japan has resorted to ever greater doses of QE. In 2013, it inaugurated Quantitative and Qualitative Easing (QQE), buying government bond and “other market assets” worth £1.8 trillion. In an article from last summer, entitled ‘Capitalism’s Silent Surrender”, economist Harry Shutt noted the “creeping nationalisation” occurring all over the world. The Bank of Japan, he wrote “is now estimated to own at least half both of all outstanding government bonds (JGBs) and of equities quoted on the Nikkei 225 Index of the Tokyo stock exchange”.

On the surface, Japan still appears to be a classic capitalist economy. The world-famous names of its economy – Toyota, Hitachi, Sony, Mitsubishi and so on – are all still alive and kicking and internally organised no differently to before. The country is as hierarchical as it ever was, as well as steadily becoming more unequal. But behind the scenes it is transforming, in terms of ownership, into something different. “If this trend continues,” Shutt concludes, “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.”

And, as current events show, this trend is continuing, in fact rapidly accelerating. If lockdown persists for 18 months, albeit with brief relaxations, it seems almost certain that the main capitalist countries of the world will follow Japan and become the effective owners of large swathes of the private sector.

State control is not socialism

But it won’t be anything resembling socialism, unless the suffix “for the rich” is added afterwards. This isn’t merely because, in the UK, Sunak’s massive package to pay 80% of employee wages will go to the companies that employ them not to the workers themselves. Or that support for businesses eclipses that for ordinary people (estimated in the US to be set at 2/3rds for business, in terms of cash and loans and 1/3rd to unemployed workers and the self-employed). Or indeed that the rescue package is conspicuously partial, passing over private renters – who can still be evicted – and benefit claimants for whom existing sanctions have not been rescinded.

It is mainly because the expansion of state control and ownership will be used to reinforce the power and control of the small minority at the top of the corporate economy. While small businesses will suffer, large corporate entities with enormous cash reserves, will survive and likely prosper, aided by state bail-outs and de facto state ownership.

As Blakeley wisely notes, the Left should not react to the massive rises in public spending in evidence across advanced economies as if its programme is being reluctantly enacted by those ideologically opposed to it. “The legacy of this crisis will be the concentration of economic and political power in the hands of a tiny oligarchy, composed of senior politicians, central bankers, financiers and corporate executives,” she says.

The question to ask is cui bono.

What Shutt said last summer in relation to another financial crisis may, in fact, be the end result of the coronavirus crisis: “… it may suddenly dawn on the public that it has already, by default, assumed ownership of most or all of what was once believed to be the private enterprise sector – without ever having taken control of it.”