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.

'To every one who has, more will be given'. Can Quantitative Easing last?

Austerity and Quantitative Easing, the two signature economic policies of the second decade of the 21^st century, possess an uncanny symmetry. The former was a brutal snatching away of funding from the poorest in society such that life expectancy was diminished, while the latter, despite the free market rhetoric, was – and is – a massive unconditional subsidy to the richest.

Both are profoundly ideological. Austerity was presented as a penance for the sin of previous overspending, a rooting out of waste and inefficiency and a long overdue imposition of “tough love” on the unemployed and disabled. Quantitative Easing (QE) was framed as a vital injection of liquidity into a flagging economy, technocratic medicine that, according to the BBC, encourages “people to save less and spend a bit more”.

Both conceptions are utterly misleading. The UK was never on the verge of becoming financially like Greece after the Eurozone debt crisis, and years of austerity failed to even make a dent on government debt. The huge rise in government borrowing precipitated by the Covid pandemic – more than £300 billion – and last year’s £16 billion hike in defence spending have both materialised without the gods of the market punishing us with financial ruin.

QE, meanwhile, was never about encouraging banks to make loans, companies to invest or consumers to spend money. Interest rates – the cost of borrowing money – are already so low as to provide adequate incentive for the taking out of loans or consumer spending in preference to saving. If people aren’t doing so, there must be other reasons for their reticence. “Think about it:” write the authors of Do Central Banks Serve the People? “if investors are reluctant to invest in the real economy with interest rates already at the zero lower bound, under what circumstances, if any, would extra liquidity be sufficient to change their mind?”

Thus the “extra liquidity” of QE, one must conclude, has remained within the financial system. The creation of $834 million dollars an hour by the world’s central banks has fuelled asset bubbles – in company shares, property and, after at first freezing in the wake of the pandemic, in corporate mergers and acquisitions. “Dealmakers”, it is comforting to know, “are having a record year”.

The classic explanation for inflation is too much money chasing too few goods. If the staggering amount of money created by central banks had really been “pumped into” the economy, as the bedtime story tells us, it would show up as inflation. Undeniably inflation is rising but not by anything like the level implied in the standard narrative of QE.

This indicates a crucial difference between austerity and QE. Both are ideological constructs but austerity has a placebo quality – its purpose lay entirely in the perception that it was necessary. QE – actual, real-world QE – by contrast really was, and is, necessary.

The Long 2010s

Government cannot go bankrupt, the gurus of modern monetary theory assure us. But the private sector definitely can and ever since the demise of Lehman Brothers in 2008, governments around the world have strained every sinew to ensure the contagion of insolvency doesn’t spread. The initial bank bail-out was followed by successive batches of QE around the world. The US Federal Reserve increased its balance sheet in the first tranche of QE by $4.5 trillion. The Bank of England has resorted to QE every time the economy has hit turbulence – after the credit crunch, after the Brexit vote and now during the pandemic.

It is commonly accepted that QE works to ensure, artificially, a low effective interest rate (whilst increasing the price and reducing the yield on government bonds, incentivising investors to shift into other assets). So-called zombie companies – firms that do nothing more than survive by meeting the interest payments on their debt and paying wages – are permitted to live on thanks to rock bottom interest rates. It is estimated that a fifth of US and European companies are zombies.

The silent assassin

Interest rates are a potentially devastating tool of government policy. When she first gained office in Britain, Margaret Thatcher hiked interest rates. They peaked at 17% in late 1979 and didn’t drop below 10% until 1983. The ostensible aim was to bring down inflation but the side effect, many think consciously pursued side effect, was to send countless companies to the wall – the UK’s manufacturing sector, which contained many unionised firms, shrunk by a quarter in the first wave of Thatcherism and unemployment rose to more than four million.

This mirrored what was happening in the US where a doubling of the interest rate – dubbed the “Volker shock” after the head of the Federal Reserve, Paul Volker – also precipitated a wave of bankruptcies and send unemployment soaring. The Volker shock also caused international interest rates to spike, triggering many developing countries to default on their loans and sparking the so-called Third World Debt Crisis. Mexico was the first to default in 1982 and others followed. Countries were forced to go cap in hand to the IMF which imposed free market structural adjustment programmes as a condition of support. Thus the worldwide market fundamentalism of today can plausibly be traced back to a massive rise in interest rates four decades ago.

So, for a seemingly arcane financial instrument, interest rates can have shattering consequences. And as a general rule, high interest rates cause bankruptcies while low interest rates preserve companies that would, under free market conditions, go under.

The Janus Face of Interest Rates

It might seem therefore that today’s ultra-low interest rates are a good thing – the government’s bank rate is currently 0.1%, the lowest for hundreds of years – because they stave off suffering both personally and for the economy as a whole. But it’s not that simple. Low interest rates, because they make the cost of borrowing so low, encourage speculation which is exactly the flaw in the economy exposed by the financial crisis and which has only got worse since. They also make it easier to be indebted.  In late 2020 non-financial corporate debt hit $11 trillion and for the first time exceeded global GDP.

Near zero interest rates thus have to remain incredibly low in order to make the debt they encourage manageable. But if, for example, inflation takes hold, higher interest rates may become necessary to combat it by damping down demand the economy. And inflation, it should be stressed, doesn’t just affect creditors and the wealthy. By making basic goods and outlays like rent more expensive, inflation makes life harder for most people.  Thus policymakers are in a quandary.

Low interest rates also seem to require endless QE, a perpetual subsidy to the wealthiest, to remain low. Obviously there is more than one kind of interest rate. The official bank rate, set by the Bank of England, is augmented by countless other interest rates –for example, the rates given or charged by commercial banks or mortgage interest rates. They will usually roughly follow the bank rate.

According to economist Harry Shutt, if markets were “undistorted” (i.e. didn’t have QE), banks and others would refuse to hold the huge debt of corporations without demanding a much higher interest rate. “Rates would have rapidly risen to unaffordable levels, probably 10 per cent or more,” he writes, “thus precipitating mass bankruptcy in both public and private sectors.”

Destined to Repeat it?

Clearly markets, notwithstanding the propaganda, aren’t suddenly going to become undistorted.  Authorities will use every weapon in the arsenal – no matter how much they contradict free market doctrine – to ward off systemic market collapse. They have also, one would assume, learned the lessons of the recent past. The 2008 Financial Crisis had its proximate cause in the steady raising of interest rates by the Federal Reserve (mirrored by other central banks). They rose from 1 per cent in 2003 to 5.25% in 2007. As a result US mortgage interest rates increased and holders of sub-prime mortgages began to default, leading to a nationwide collapse of the housing market.

So central banks will not willingly hike interest rates or end QE unless compelled to do so. They can, it might be assumed, continue to follow the example of Japan, which pioneered QE and has taken it further than anyone else. This is a world of low growth, low interests rates and low inflation – unequal, rigged and immensely unfair – which nonetheless persists for fear of the alternative. Or the pain of the real economy, probably exacerbated by inflation, could compel the authorities to change tack.

At present, the financial system and the economy most people actually inhabit seem to exist in near total isolation from each other. The former prospers while the latter suffers. If their fates realign, things could get very interesting.

You can read part one of this article here