Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 21 September 2021

Neoliberalism, Corporations and Wealth Inequality


These thoughts have been inspired by reading James Meadway’s fascinating essay on the future of neoliberalism, and Terry Hathaway’s article entitled “Neoliberalism as Corporate Power”, both of which I strongly recommend. Needless to say both authors may strongly disagree with what I say here, which as ever is ‘untutored’.

Neoliberalism and Corporations

If I had to offer one piece of evidence to those who are sceptical about the concept of neoliberalism, I would look at Investor State Dispute Settlement (ISDS). These entities are set up as part of trade or investment deals, and essentially allow a corporation to sue governments if governments do something to disadvantage the corporation. For some examples of cases brought by companies against governments see here. These actions are often used against smaller states, but companies have also sued Germany (for ending nuclear power) and Canada (for banning a dangerous chemical).

The motives for corporations for having such agreements are straightforward, and amount to de-risking investment. The motives of governments in signing them is presumably to facilitate investment or trade. But the idea that a government can be sued by a corporation because the government has banned a dangerous substance that this corporation is using seems very odd. If nothing else, it sets up completely the wrong incentives for that government and corporation.

I chose the example of ISDS because it illustrates a case where corporations have legal powers over governments. I think enhancing the power of corporations is at the heart of how to understand neoliberalism in practice. That may involve using the law to sue governments, as here, or it may involve using governments to enhance corporate power.

This description and my choice of example may surprise many, because it is often said that neoliberalism is all about the primacy of markets. This is certainly how many of what Mirowski calls the Neoliberal Thought Collective, and many commentators on neoliberalism, see it. I would argue the distinction is between neoliberalism as a theory or ideology, and neoliberalism in practice. Of course each influences the other, but they are distinct. In many if not all cases of neoliberalism in practice, neoliberalism has strengthened the power of corporations and large companies.

The clearest example of that for me is unionism. Everyone would agree that what was central in the arrival of neoliberalism in the US and UK was an attack on the union movement. What has this got to do with markets? The standard response is that unions interfere with the operation of a free market. But for an economist, so does monopoly, or any form of imperfect competition among firms. On this, neoliberalism in practice seems silent.

Colin Crouch talks about market-neoliberals and corporate-neoliberals to deal with this problem, but it hardly resolves it. You can see the contradiction being resolved in favour of corporations in Will Davies’ fascinating paper on how ideas about the virtues of competition, and the need to break up monopolies, changed within the University of Chicago from the 1930s until the 1980s. (I talked about this and other aspects of the problem here.) You could describe this period as a good example of where interests influenced ideas. As I noted here, I don’t think this is the only case where neoliberal governments are prepared to ignore the market in the interest of large companies.

This apart, it is fairly clear why corporations should like the idea of the primacy of markets, as long as its position in markets is unchallenged. Markets, after all, are how a corporation makes money. It is natural that it should want to avoid anything that interferes with this, like market regulations of any kind. Equally some corporations would want to extend the scope of markets into areas that might previously have been undertaken by governments.

On page 22 of this paper, Mirowski lists eleven ideas associated with neoliberal thought. I don’t think any of them go against the interests of corporations. Indeed number 9 is “Corporations can do no wrong—by definition”! This is at least compatible with viewing neoliberalism as an ideology that protects and enhances corporate interests and power. Of course this doesn’t mean that neoliberalism is only about enhancing corporate interests, or that neoliberalism as ideology is not capable of unwittingly acting against corporate interests (see below).

Of course the advent of neoliberalism was not the first time corporations had been politically powerful. The Polanyi-like tussle between corporate power and labour or democratic power began in the 19th century with the advent of corporations. The ‘Gilded Age’ in the US or the military industrial complex may be examples of strong corporate power before the ‘neoliberal era’. Corporations in the post-war period, in contrast, were relatively weak, which no doubt helped inspire neoliberal ideology.

Neoliberalism, Wealth Inequality and Crisis

One of the important acts of the neoliberal pioneer governments of Thatcher and Reagan was to reduce the tax on high incomes. I have talked about elsewhere how that may have encouraged CEOs to bargain harder, leading to ever growing CEO pay. But lower tax rates on high incomes would also have another effect, which is to incentivize corporations to divert money to dividends, which of course go to the shareholders who are the owners of corporations. Here is the share of dividend income in GDP for the US.

Towards the end of the 1980s, after the 1985 cut in the top rate of income tax from 90% to 50%, the share of US dividends in national income began increasing. (The share in GDP is low, but the share of corporate profits is of course greater.) This increasing share has continued through to today. Of course shareholders as a collective do not choose dividend levels, but the tendency that began at the same time to reward CEOs partly through stock options gave those who did choose dividend levels an interest in raising them.

A higher permanent share of dividends will mean the return from stocks will increase, and that in turn will raise stock prices. A recent study by Daniel L. Greenwald, Martin Lettau and Sydney C. Ludvigson is particularly interesting in this respect. They showed that over the period 1952 to 1988 the growth in the stock market could all be explained by the growth in output. In contrast from 1989 to 2017 a massive $34 trillion of real equity wealth (2017:Q4 dollars) was created by the U.S. corporate sector, and 44% of this increase was attributable to a reallocation of rewards to shareholders. In turn, a higher stock market price increases the wealth share of the 1%.

It gets worse. They also estimate that most of this reallocation was at the expense of labour compensation. Not only was the stock market booming because dividends were rising, but workers wages were lower as a result. In contrast to the 1952-88 period, output growth accounted for just 25% of the stock market rise. (Playing a more minor role in stock market growth were a lower risk price (18% contribution), and lower interest rates (14%) due to secular stagnation.

It is perhaps not surprising that an ideology that enhanced the power of corporations would lead to an increase in the income and wealth for the owners of corporations. However I have also argued that it led to a crisis for neoliberalism in at least the two countries where the influence of neoliberalism was strongest.

In the UK, the biggest blow to corporate power came not from unions or left wing governments, but from forces created by neoliberalism itself. High incomes and wealth generate a demand for innovative forms of financial investment, which because of financial deregulation were allowed to multiply. If you look at who helped Brexit by providing finance or, in one case, directly helping to win votes, we know of two very wealthy hedge fund managers (Robert Mercer and Paul Marshall). Critical to persuading people to vote for Brexit were very wealthy newspaper owners. More than 40 per cent of the Leader’s Group of top Conservative donors (who meet the PM and ministers regularly) owe their wealth to investment firms – a combination of finance, hedge funds, private banking and private equity.

In this sense Brexit was where one form of capital, the personal financial wealth of a few, helped set back the interest of another form of capital, a large number of corporations in the UK. The Conservative party that had previously always supported business interests in general became a populist plutocracy. Donald Trump in the US departed from the neoliberalism playbook by messing with free trade and by restricting immigration, neither of which were in the interests of corporations as a whole. [1] Whether this is a hiccup in the forward march of neoliberalism, or is a more fundamental challenge, we will see.

[1] From the early days of the Labour government the Conservative party has talked the talk on reducing immigration. However once in power, the pre-Brexit Conservative coalition and then government was very reluctant to take effective measures to reduce it. That changed with Brexit and the ending of EU free movement.

Monday, 13 September 2021

Three myths about Johnson’s Social Care package

Most of the controversy around the extra spending for the NHS and social care announced last week focused on the higher rates for national insurance. As Rachel Cunliffe explained here, national insurance contributions are a tax just like income tax or VAT. The misconception that they are payments into some pot of money that you get back later helps explain why this was the tax of choice for Johnson, although the fact that it is not as progressive as income tax (excluding, in particular, rent or interest income) probably helped too.

I'm not going to talk about why national insurance is a very bad way to fund this additional spending because that has been covered elsewhere. However my first myth is that this unfairness has something about ‘generation wars’. When the post war Labour government introduced the state pension in 1946 I don’t know whether anyone said that because money was being taken from the young to give to the old (true) it was unfair on the younger generation, but if they had it would have been nonsense. It is difficult to get your head around, but with that kind of scheme, the old at the time it starts gain a huge amount, but there is no corresponding loser if the scheme continues forever. Some things are about generational transfer (like higher house prices), but schemes where the young will benefit when they are old are not. [1] The reason to oppose the use of national insurance is on normal equity grounds considering who benefits, rather than anything intergenerational.

The second myth I want to talk about is that this package shows that this government is not Thatcherite, or Osbornite, but instead favours a bigger state (and therefore it is more left wing). This myth is believed by a number of Tory MPs, some journalists (the Telegraph’s editor even called it the triumph of socialism) and some on the left. The reality is that it shows no such thing. Instead it is just bowing to the inevitable consequence of having a state funded health service.

The fact of life that few journalists are prepared to admit, and many Tory MPs pretend not to understand, is that in economies such as ours the share of health spending in GDP rises over time. This is something I have talked about for some time, ever since Osborne pretended that he was ‘protecting the NHS’ which journalists parroted. Here, for example, is a post from 2015 that shows a graph of the share of NHS spending in GDP rising from 3% of GDP in the 1950s to over 7% in the 2010s.

There are a number of reasons for this. As our incomes rise our wish to spend money on our health rises faster than our income, while our spending on food (for example) rises less. Doctors are finding better ways (or sometimes ways that didn’t exist previously) of treating us, which often seems to involve expensive drugs or capital equipment. But perhaps most important of all, we are on average living longer but the age our bodies start needing attention has not been rising so rapidly. This point applies to social care as well as the NHS. 

The inevitable consequence is that taxes need to rise to match this rising spending. [2] This was masked for a long time by an opposing trend: falling defence spending as a share of GDP. That however came to an end certainly by the turn of the century, which is why the Blair/Brown government increased national insurance to get the NHS to a reasonable level of operation. In contrast Cameron/Osborne were able to run the NHS into the ground again not just because they ran a right wing, small state government, but because they used the false excuse of a runaway government deficit which most of the media and the public believed and because their squeeze began from a fairly good position.

This chart, of how many cancer cases were treated within the target number of days, shows what happened clearly.

This chart is one of many that show a gradually deteriorating health service since 2010: see here for more information.

This deterioration has stepped up substantially in 2020 because of the COVID pandemic. No government, whether left or right, could have failed to react to this, if it wants to survive in office. So Johnson had to put additional resources into the NHS to clear the backlog created by COVID, and that is what the higher national insurance increase is initially about. It does not make him left wing, it does not raise the scope of the state (which is what really matters politically), and it certainly doesn’t herald a victory for socialism.

At this point we do need to ask whether permanently higher taxes make sense for what is a temporary problem - clearing the COVID backlog of cases. Just as most of the costs of COVID have been paid for with borrowing, why not this? It makes no macroeconomic sense to raise taxes now to cover transitional spending. The obvious answer to this puzzle is that nothing has changed since Osborne, in that we still have a Chancellor who is distorting economic policy just so he will meet some arbitrary deficit targets. This, in turn, is why it is so inaccurate to describe this as a left wing, big state government. Talk to those in local authorities, or in criminal justice, to see that Sunak (whatever Johnson’s wishes) continues to be a small state Chancellor.

But there might be another reason why the government chose to permanently raise taxes? This brings us to myth number three, which is that this package is about improving the quality of social care, even in the longer run. In the short term most of the money raised by the new tax will go to the NHS. What is left for social care will have to cover the cost of reducing the amount the elderly need to pay for their care (but not their living costs). As the IFS says, this aspect has not been costed by the government, but “can be expected to be several billion pounds a year.” Not much if any will be left over to improve the quality of care for the next three years.

Thus the IFS writes

“While the precise path for spending – and hence for the availability and quality of care – is unclear, it is clear that the extra funding will not be sufficient to reverse the cuts in the numbers receiving care seen during the 2010s. Thus, while more people will become entitled to financial support as a result of the reforms planned, many people with care needs not considered severe enough will continue to miss out.”

Even the cap on personal social care costs will not necessarily prevent some people having to sell their homes. If your only asset is a £200,000 flat or house you still have to find the 86,000 that is the cap on payments. The government responds by talking about a growing insurance market, but that market is small at present for obvious reasons (adverse selection) and that will not change much with these plans.

What will happen in the longer term, once the pandemic backlog has been dealt with? Here we have to come back to the state of waiting lists before COVID. The NHS does not just need money to catch up with the backlog caused by COVID, it needs money to stop (and even reverse) the deterioration in waiting times that began under austerity.

There are other pressures on NHS budgets too. One is pay. It is not sustainable to keep funding the NHS by decreasing the real value of nurses’ pay. Another is privatisation. The bill currently going through parliament gives ministers the power to circumvent normal procurement rules (competitive tendering), and their past actions suggest they favour giving contracts to private sector friends rather than allowing the NHS to do work in-house. Whatever these private sector companies may claim, that means higher cost to the public sector to fund the profits these companies need to make. [3]

The risk therefore is that after three years not much, if any, of the money created by the national insurance tax increase will end up in social care. As Graham Atkins of the Institute for Government says, “There is a risk that the funding for the NHS to tackle backlogs goes into the baseline NHS budget and the funding never ends up going to local authorities to reform social care.” This risk will be intensified if the government continues to squeeze local authority budgets, which in the short term at least seems likely to happen as Sunak tries to meet his deficit targets.

If higher taxes were really for social care, then it would have made sense to give the NHS temporary money to cover costs arising from the pandemic by borrowing, and direct the funds from higher taxes to social care immediately. Better still delay the tax rise but increase funding straight away to give the economy the boost it clearly needs. One of the reasons this didn't happen is that the NHS needs more money on a permanent basis, and Johnson is a Prime Minister who knows further deterioration in NHS waiting times beyond 2019 levels will risk losing power. Thus the tax increase says very little about the ideology of this government, and instead reflects the continuing desire of Conservative Prime Ministers to retain power. .

[1] The young could lose a bit if they could do better saving themselves and then investing in social care insurance, but when that insurance is scarce and expensive because of adverse selection it seems unlikely.

[2] This is a red flag to twitter MMT, who will say you could borrow or create money instead. But doing so year after year will overheat the economy, so if we are talking about several decades it’s not a very helpful remark. I talk about the immediate short run below.

[3] The usual counterpoint to this is that the private sector have more of an interest in improving efficiency. While that may be true in some areas, it seems highly unlikely for the NHS. The inefficiencies in the current NHS largely stem from a lack of public sector investment.

Tuesday, 7 September 2021

Is creating worker shortages by restricting low paid immigration a good idea?


The combination of Brexit, Covid, and an immigration policy that favours skilled (in practice higher paid) workers has created severe shortages of some lower paid workers. We are seeing that today among lorry drivers, crop pickers, food processors, butchers and other occupations. There are two, seemingly compelling, arguments for why this might be a good thing.

The first is straight supply and demand: a worker shortage means employers raise wages to attract workers. The second is that shortages increase productivity, as firms seek labour saving machines that will reduce their demand for labour. If, like me, you think reducing low pay and increasing low productivity are good things, what is there not to like? Few should begrudge the wages in some of the industries discussed by John Harris or Sarah O’Connor rising.

There are many caveats to these arguments. The most obvious caveat is that it would be far better to have much more modest shortages, which would have the same effect on productivity and wages but which wouldn’t disrupt the wider economy. It should be possible to allow some immigration on a short term basis, without diminishing employers’ knowledge that wages will have to be higher. So far the government has refused to do this. The result is significant damage to the economy as a whole. The rest of this post is about those more modest shortages.

Another caveat is that some of these workers, like those working for the NHS or in social care, are paid for by the state, and it is highly unlikely that their pay will be allowed to rise under this government. A consequence will be permanent shortages unless the government adjusts its immigration rules to allow these workers in.

A third caveat is if workers are working in industries that produce products that can be easily produced abroad, another response to worker shortages is to take production overseas. Production may no longer be able to compete with overseas production if domestic wages rise. But this caveat obviously does not apply to goods that cannot be traded, like social care or, after Brexit, lorry drivers.

A fourth point to never forget is that there are clear losers from ending immigration - immigrants themselves. They are prepared to undertake the considerable costs of working in a foreign country because they are much better off financially from doing so. If you think in global terms rather than from the point of view of natives alone, there are large global benefits to be gained from immigration. One economist argued that barriers to immigration were Trillion Dollar bills on the sidewalk. 

The fifth caveat, which is often ignored when talking about immigration, is that we are ignoring one side of what has happened. Immigrants leaving has created labour shortages in many industries, but it has also reduced the overall level of aggregate demand. [1] We cannot have one without the other. As a result, there is going to be less employment in all the industries unskilled immigrants didn’t work in. Not enough unemployment to fill all the jobs immigrants used to do, but enough to question what the macroeconomic impact of reduced unskilled immigration will be.

This is a crucial question we need to answer before we can accept Larry Elliot’s claim that Brexit has solved a problem (low wages in some industries) created by free movement. We need to look at the economy as a whole, not just workers in a particular industry.

To do this I want to suggest a thought experiment. Imagine a country where (for simplicity) there is no foreign trade. Jobs are either ‘good’ (high wage because they are relatively productive) or bad (low wage that are relatively unproductive). All the good jobs are taken by native workers, while all the low paid jobs are filled by immigrant labour. Although the jobs done by immigrants were badly paid, they still want to do them because they are much better than wages in the countries immigrants came from. Goods produced in the country are consumed by both native and immigrant workers, and both groups have similar preferences.

Now suppose this country sent all the immigrants home. Suddenly the demand for good jobs would fall (because immigrants were not buying them), and there would be many vacancies for bad jobs. Filling the vacancies comes partly from the unemployment caused by high wage workers losing their jobs, but also an increase in the wage of low skilled workers relative to high skilled workers.

Now consider who is better off. Former immigrants are worse off because they have been thrown out of jobs they wanted to do. How about native workers? Whereas before all had been working in high wage jobs, now some of the native workers are working in low paid jobs (although not as low as they once were). As you would expect high paid jobs to be better than low paid jobs, it would seem that no one in the economy is actually better off.

How is that possible? The economy has shrunk because immigrants have left, but the mix of goods produced is unchanged. Without immigrants, some native workers have to be low paid. From native workers’ point of view, some have lost good jobs and are doing worse jobs. Average income per head is unchanged, but whereas before native workers were in the better part because immigrants were in the lower part, now some native workers are in the lower part. 

This was the point of an earlier post, which argued that restricting ‘low skilled’ (aka low paid) immigration would mean more native born workers doing lower paid jobs. True, they might not be as low paid as they were when immigrants did them, but I doubt if anyone would call them ‘good jobs’. [2]

What about low paid jobs getting higher pay stimulating productivity? Again from a macro perspective we need to look at the higher paid jobs, where wages have fallen, reducing the incentive to innovate. I have for some time argued that the best way of increasing productivity is to run the economy hot. Giles Wilkes argues the same in the context of an interesting discussion of worker shortages. In general creating shortages is definitely an inferior way of inspiring productivity growth, because excess demand is a stronger motivator of new investment than higher costs. One of the problems of worker shortages is that it may lead to inflation, which encourages fiscal or monetary policy makers to deflate the economy.

Of course the UK is not like my thought experiment in many ways. In particular, native born workers work alongside many immigrants in low paid jobs. They clearly gain from restricting immigration. But this doesn’t change the result from the thought experiment that on average the position of native workers will get worse. This is a very similar situation to free trade agreements, which often increase overall welfare but where some workers lose out. [3]

Considerations like this mean that economists tend to think low skilled immigration is a good thing from a purely economic point of view. Focusing on those who gain from reduced immigration is misleading, because it ignores those who lose out. Now there may be good social or political reasons to limit immigration as a whole, but if you want to improve the position of low paid workers a better policy is to increase the minimum wage, or in some industries enforce restrictions in hours worked and ensure better pay for working unsocial hours (bring back and extend the agricultural wages board).

Labour shortages among workers deemed to be unskilled by this government are damaging to the majority of workers in the UK and damaging to those overseas who are prevented from filling the shortages by immigration rules. It will improve the relative position in the income distribution of those working in the industries immigrants have left, but there seem to be better ways of achieving redistribution that do not reduce average incomes at the same time. If you still think the redistribution is worth it, remember you have also made the global distribution of income more unequal.

[1] Expansionary fiscal or monetary policy are good at dealing with temporary demand shocks, but not permanent ones.

[2] A simple numerical example may help. Suppose the economy is initially made up of 10 million immigrant workers, and 90 million native workers. Native workers are on average paid 10 units a week, although that is a distribution where some will be getting much less. The immigrants get paid on average 5 units a week (also a distribution). Total national income is equal to 10*5 + 90*10 = 950 units, where 10 is the average income for native workers.

The 10 million immigrants now leave. Immediately aggregate demand falls by 50 units. The demand for native jobs is now 900/950th of its previous level, which makes just over 5% of native workers redundant (just over 5 million). But because preferences are the same and assuming no economies of scale, our new economy must have just under 9 million native workers moving over into the jobs immigrants used to do. So relative wages have to move until we attract just under 4 million native worker to do the work immigrants used to do. These assumptions imply that, once relative prices have adjusted, the new economy is just a scaled down version of the old one, where total income is 950*9/10=855 and average native income has fallen from 10 to 9.5.

[3] Another thought experiment can illustrate this. Suppose wages are low in a particular industry not because of immigration, but because of foreign competition from low wage economies. Let’s say the industry was textile production. Would we think it was a good idea to create shortages of textiles domestically by restricting imports of textiles? That would lead to more domestic production and therefore almost certainly higher wages and prices in the domestic textile industry. But equally, more people would work in the textile industry, and less in other industries which were more competitive internationally. Productivity in the textile industry might improve, but in the economy as a whole it might fall because workers had been diverted to a relatively low productivity industry.

Economic policy in most countries for decades has been to do the opposite of this thought experiment, by reducing barriers on trade. By specialising in producing the goods we are relatively good at producing, we increase productivity in those industries. Not everyone in the economy gains from this (e.g. domestic textile workers), but average incomes rise.

Tuesday, 31 August 2021

Is it true that “anything we can actually do we can afford”?


This was something Keynes said in a 1942 BBC address. By 'we' he meant the government, and by 'actually do' he meant the physical resources (e.g. labour) were available. He was talking about what he hoped would happen after the war, and against the austerity policies that had seen mass unemployment in the late 1920s and 1930s. He says in the same address:

With a big programme carried out at a regulated pace we can hope to keep employment good for many years to come. We shall, in fact, have built our New Jerusalem out of the labour which in our former vain folly we were keeping unused and unhappy in enforced idleness.”

It was a policy the UK pursued in the next few decades, after a few years producing full employment on average along with rapid growth and, initially at least, with little or no inflation. Keynes was proved correct. However in the 1960s and 1970s that was no longer the case, and we learnt through double digit inflation, and in the UK widespread disruption, that the real constraint on what you can do is inflation rather than full employment. It was always clear, however, at least to UK and other European economists, that how close you could get to full employment before inflation set in was governed by a complex and variable set of institutional factors. So Keynes’ statement became ‘governments can do anything as long as inflation remains stable’.

If inflation is the ultimate constraint on what we can actually do, why did governments start to worry about their own finances? Why did bodies like the IMF start advocating fiscal rules to limit government borrowing and later independent fiscal institutions to monitor government deficits? Some may have wanted to reduce the growth of government spending, but the official reason was real enough: deficit bias.

Deficit bias has been long forgotten as a result of the macroeconomic disaster that began in 2010, but it is crucial to understanding the origin of financial considerations influencing what we can actually do. To understand deficit bias you also need to understand another change that began in the 1970s and has now become dominant, which is how demand management is done.

In the UK in the decades after WWII, fiscal policy was used to stabilise the economy at full employment. Interest rates played a minor role, and arbitrary limits on personal borrowing were common. (This is similar to the policy proposal associated with MMT.) This made sense under the system of fixed exchange rates created by Bretton Woods. When that came to an end in the early 1970s, interest rate changes became more powerful because of their impact on exchange rates, and that was enhanced as credit controls were gradually abolished.

The world moved, often erratically, towards a system we have today: macroeconomic stabilisation using interest rates set by central banks trying to hit inflation targets. This in turn created the problem of deficit bias. In a world where fiscal policy stabilises the economy, deficit bias isn’t an issue because deficits increase in recessions but fall in booms. The economic cycle and the need for fiscal policy stabilisation means that government debt broadly looks after itself. To put it another way, labour shortages and high inflation are the cost an irresponsible government pays for spending to much or taxing too little.

In contrast, in a world where interest rates are varied to stabilise the economy, inflation is no longer a constraint on fiscal policy. In this world, Keynes’ statement of the title again becomes true, because central banks will look after inflation. The only cost of spending a lot or taxing too little would be high interest rates, but as these rates were set by someone else, the political cost to governments of running large deficits is more opaque as long as the increase in rates wasn’t too rapid. 

This is perhaps the most important point of this post. Deficit targets or more sophisticated fiscal rules only make sense in a world where interest rates are able to be used to target inflation. It follows automatically that fiscal rules make no sense when rates are stuck at their lower bound. These two sentences are sufficient to show that 2010 austerity makes no sense. The reason MMTers don’t like fiscal rules follows automatically from their wish that fiscal policy rather than interest rates target inflation.

In the three decades after the fall in Bretton Woods, governments in the US and Europe (not the UK) took advantage of this new freedom monetary policy stabilisation had given them. Global debt to GDP ratios almost doubled. This is deficit bias. [1]

To what extent was this deficit bias a problem? In the short and medium term for the major economies (treating the Eurozone as a country) not much, but in the longer term (by which I mean centuries rather than decades) there is bound to be a limit on how large government debt could be in relation to GDP. [2] So for that reason alone it makes sense to try and make it hard, through rules and institutions, for governments to increase debt at that rate. It should also increase welfare if governments are discouraged from increasing debt for no good reason beyond buying elections.

I think the evidence that inflation stabilisation by independent central banks was highly successful compared to all the other stabilisation regimes that preceded it is overwhelming. So having good fiscal rules that make it difficult for governments to try and win elections by increasing debt is also worth having. This is why I support good fiscal rules.

However, I also think bad fiscal rules are far worse than no fiscal rules at all. It is vitally important that government debt should be allowed to rise in a number of situations. Fiscal rules that prevent that do far more harm than good. There are two clear situations today where debt needs to rise. The first is in severe recessions, where interest rates get stuck at their lower bound [3]. The second is where large investments are required to produce a large future benefit. The most obvious example of the latter is climate change.

Why are there so many bad fiscal rules around today? I think one important reason is that the political right has seen them as a way of reducing the size of the state. The media have not helped, by grossly exaggerating the cost of higher debt and using any departure from a (bad) fiscal rule as a sign of government irresponsibility.

Which brings me to what inspired this post, Adam Tooze’s Chartbook No.34. This takes an MMT perspective, and ignores all the points I make about interest rate stabilisation and inflation. Which is understandable, when interest rates have been at or close to their lower bound for over a decade and inflation has not been an issue. The puzzle he addresses is how can we describe a government project (project X) as crowding out something else, when the amount the government could borrow before hitting an inflation constraint far exceeds what it actually borrows. You cannot say doing X stopped you doing Y and Z, because you could have done X, Y and Z.

I suspect this is usually an artificial question, because for me at least doing X, Y and Z would bring the economy to the point where it either hits the inflation constraint (in an MMT world) or where interest rates start rising (in today’s world). This would be a certainty if Y was greening the economy and Z were the fiscal transfers to make a carbon tax (or equivalent) politically acceptable. In both cases there is a clear opportunity cost of doing X.

An example of X where this arose recently was Trump’s tax cuts for the rich. I am happy to say the main problem with this is it was a transfer of income from the many to the few. The rich were better off, and that money either comes from the rest of the population now or in the future. Most people don’t see that because Trump paid for it by borrowing. For me [4], that means it’s also an example of deficit bias: raising the deficit just to pay off those who gave you money to win the election. [5]

I agree with Adam Tooze when he says there is no fixed pot of money. The government is the owner of the magic money tree, and in the US, UK and collective Eurozone today can borrow freely. I disagree on three points. First, I think the constraint in MMT type economies (where only fiscal policy does macro stabilisation) is normally inflation and not available resources, and second I think we can talk about the opportunity cost of bad policies even when the inflation constraint does not bite for the reason I gave above. Third, in today’s economies, it does make sense to ask whether deficits are justified or not, just as it did over the period of deficit bias and subsequently.

[1] The term deficit bias is bound to involve value judgments. No one should describe the rise in government debt after the GFC and the pandemic as deficit bias, because debt rose for very good reasons. Deficit bias is a rising government debt to GDP ratio over decades for no obviously good reason, and what a good reason is has to be a value judgement.

[2] Debt around 100% of GDP is fine. But if it doubles every 30 years for no good reason, you are over 1000% a century later and over 10,000% after that.

[3] This is why the fiscal rule that Jonathan Portes and I proposed here contained a knock-out where the rule no longer applies when interest rates hit the lower bound. Any fiscal rule today that fails to have something similar is a bad fiscal rule. It also focused on the current balance, putting no constraint on investment to green the economy, for example.

[4] I admit that a Republican who thought the economy was better off if taxes on the rich were reduced would not call this deficit bias. In that case all you can do is point out that there is little sign his belief is correct (e.g.)

[5] Does the relationship between r (the interest rate) and g (the nominal growth rate) matter here? I don’t think so, because we are talking about a permanent flow (tax cuts) rather than a one-off project.

Tuesday, 24 August 2021

Like so much of what this government does, tackling climate change is just for show

If there was ever one picture that tells you all you needed to know about why this government is almost unique in the world in abandoning almost all measures to tackle the pandemic, it is the Tory benches during the Afghanistan debate. Hardly a mask to be seen among them, despite the government’s own advice to wear masks in crowded indoor places. Do they care that their lack of masks could potentially give other MPs and parliamentary staff COVID? They care not at all. This is the true ‘I’m alright, Jack’ generation of Tory MPs.

With COVID this government no longer feels it needs to even give the pretence of trying to reduce deaths from COVID or cases of long covid. It seems to have convinced enough of the electorate that it has led the world in vaccinating its adult population, and anything else is just detail. For these MPs, and those who lead them, living with COVID has become synonymous with doing almost nothing about it beyond the vaccination of adults. As a result, cases and hospitalisations are now rising again even before schools return, and deaths are now averaging around 100 a day.

This callous disregard for the people it is governing, just so long as they get enough votes, is not confined to COVID. Of course all political parties favour some groups over others, but this is the first administration in the UK that cares about themselves, friends and financial backers alone, as long as their survival in power is assured. It is why I call this government a populist plutocracy.

All this is crucial when thinking about the greatest crisis facing humanity over the next few decades, climate change. While we can try for 1.5 or 2 degrees higher temperatures, if we do little or nothing things will become far far worse causing mass movements of population around the globe. In addition there is a concern that we may be close to setting off natural processes which could raise temperatures well beyond what is tolerable for large parts of the world, leading to global chaos and massive human depopulation. It’s perhaps not yet the most likely outcome, but it is not an insignificant possibility either. It may have happened, for different reasons, on the Earth hundreds of million years ago.

Given these possibilities, if civilisation as we know it is to survive, the world has no choice but to work together to all but eliminate carbon emissions within a few decades. But this is not how many MPs in our current government see it. The choice our government sees is whether to pay lip service to tough climate change change targets while not doing nearly enough to meet those targets, or to do almost nothing at all.

The Committee on Climate Change is an independent body set up by an act of parliament to advise on all matters to do with climate change, and in particular it monitors the UK’s progress in meeting its climate change targets. In June this year it issued two reports which found that the government had failed to enact sufficient measures to meet its own targets by a huge margin.

This is hardly surprising. It is easy for this government to avoid spending money or taking difficult decisions, because it knows the Prime Minister setting targets gets much more publicity than reports explaining how they will be missed by a mile. An additional reason for taking the ‘promise a lot, do almost nothing’ approach is that there is serious disquiet among some Tory MPs about doing anything.

Opposition to action on climate change is beginning to organise among Tory backbenchers. Ian Dunt suggests a new group may soon form, perhaps called the Environmental Research Group following in the Orwellian tradition of similar groups for Brexit and COVID, to campaign against any further measures to meet climate change targets. Just as worrying, sections of the UK press, including Murdoch, have long questioned the scientific consensus.

They will have no impact before the COP26 summit hosted by the UK later this year. This summit is a gift for Johnson, as it allows him to present himself as a global leader and crusader on global warming simultaneously. The UK’s own record on implementation is not conducive to a successful conference, but Johnson knows his press and the BBC will follow his line that the meeting was a personal triumph whatever the outcome really is.

He needs this success because polls suggest voters are overwhelmingly frightened about climate change, and this concern goes across all age groups. He hopes that a self-styled Johnson success in the autumn at COP26 will be his equivalent of the UK vaccination programme - the success that allows his voters to excuse all other failures. Once that is achieved, the climate change deniers in his party can hold sway, much as a similar group of MPs eventually had their day on COVID.

They, rather than expert opinion (aka metropolitan elite) and moral imperatives (aka WOKE), will get their way because the Conservatives of the last decade have boxed themselves into failing to act on climate change in two ways. The first is most obvious: deficit targets. One way measures to tackle climate change (much cheaper than dealing with the effects of the higher temperatures they will avoid) can happen is through deficit finance. But as long as the Tories follow the macropolicy of the Swabian housewife this will not happen.

The second involves the private sector costs of dealing with climate change. Things like carbon taxes or the equivalent. What proponents of the Green New Deal have always understood is that many individuals who have to pay higher prices for the carbon they are indirectly creating need some compensation for the impact of those higher prices on their budgets. You can do this in two ways. One is through deficit finance, and the other is through redistribution. Both go against Tory policy. A failure to compensate leads to political unpopularity, or worse (the gilet jaunes of France, for example).

This is why it is almost impossible for the current Conservative party to tackle climate change. It is why Cameron ended up wanting to ‘get rid of the green crap’. If we and others keep electing similar governments the world’s progress in fighting climate change will be too slow, with catastrophic consequences. The UK plays a role beyond its carbon footprint as a result of hosting COP26 this autumn, and it is a tragedy that the UK’s leader at this time is an irresponsible showman with little respect outside our shores.

Monday, 16 August 2021



Sado-populism is a term used by Timothy Snyder, a Professor of history at Yale University, in the fourth of a series of short lectures he published in 2017. The lecture was perhaps inspired by the election of Trump. It was publicised in the UK recently by Alastair Campbell in The New European, who applied it to Brexit and Johnson. In this post I want to relate this idea to my own discussion (e.g here) of plutocratic populism.

The most trivial difference is terminology. Snyder talks about oligarchy, and how the US under Trump was an oligarchy. However in his third lecture in the same series Snyder is clear that you can use the terms oligarchy, populism or kleptocracy to describe what he is talking about, so there is no difference here.

Why sado-populism? Snyder says that normal populists offer policies that will benefit the people they appeal to to get their support, but Trump didn’t do this. Instead he offered policies, like a large tax cut to the rich, that will hurt most those who voted for Trump, because to a first approximation lower taxes for the rich mean higher taxes or less spending on the poor. The idea that tax cuts for the rich create aggregate wealth which trickles down to everyone else is a right wing myth.

So he uses sado-populism to denote a form of populism that in reality does harm to most of those that support it. So how do sado-populists like Trump (and, I would agree with Campbell, Johnson) get elected. To some extent it is by fooling people about who will benefit from their policies (hence trickle-down), but mainly through a culture war. The aspect of the culture war that Snyder talks about for the US of course is race. More generally, the offer made to supporters of a sado-populist is status rather than income.

Typically the way to create status is to hark back to the past when such status was very evident. One of the things that differentiates sado-populism from a more typical democratic platform is that it is more about the past than the future. Here the link to Brexit is very clear. As Campbell notes, in the US it’s “not ‘ Make America Great’ but ‘Make America Great AGAIN.’ Or, bringing it to Britain once more, Take BACK control”. One of the fascinating things about the Ashcroft poll published after the referendum is how Brexit voters thought the past was better than today, while Remain voters did not.

This is why Johnson keeps talking about ‘world-beating’, and right wing ‘journalists’ keep harping back to WWII or even Empire. A sado-populist looks for ‘the other’ who can be demonised and then tormented so that at least their supporters can feel they are better than someone else. So this government is brutal to asylum seekers, and hard on benefit claimants, not because they happen to be mean but because that is how to win votes. The UK government is also is very antagonistic to attempts to reduce racism, for similar reasons.

I think Snyder's analysis is broadly correct, and his discussion complements my own thoughts on populist plutocracy. As I have sometimes said, the focus of my discussion tends to be on the supply rather than the demand side, by which I mean how did part of the rich elite set out to transform democracy into a populist plutocracy rather than just support one of the two dominant political parties. In doing this I focus on two elements that Snyder also mentions as critical to the formation of rule by oligarchy: the media and inequality.

One interesting aspect of Snyder’s discussion of the rise of oligarchy in the US is the emphasis he puts on the decline of local newspapers. He suggests that with local newspapers readers could relate the news to things they knew about and that were therefore clearly true or false. With the decline of local newspapers we now have just ‘media’ which largely talks about facts that are remote from readers/viewers and can therefore be described as fake news.

It’s an interesting idea. It is certainly true that a feature of both Trump and Johnson’s government is that they lie all the time, and that it would be hard to convince others to go with you, internet based cults aside, if the entire media reported reality. This is why Fox News and talk radio in the US, and the right wing press in the UK, are so essential to sado-populist leaders. In the UK having a public broadcaster with a huge audience that is vulnerable to state funding cuts turns out, like so much of the UK’s pluralist democracy, to be highly vulnerable when a lying sado-populist is in charge.

The BBC aside, understanding why parts of the UK press went rogue is hard, because we are talking about the psychology of a few men. My guess is that Brexit was a radicalising moment in this respect. All the right wing press have supported it for some time, but getting it over the line required them to argue against the leader of the party they normally support, and also meant they lied their socks off. (In truth they had had practice from what they had done before.) Later they saw the chance of getting their journalists to lead that party. As Johnson sometimes says, the owner of the Telegraph is his real boss. By forsaking truth they gained influence like never before.

As to those that read these papers, I think we should never underestimate the power of propaganda for the majority that spend so little time thinking about politics.

Should I talk about sado-populism rather than talk about plutocratic populism? As I have always tried to make clear, I use populism in the sense Jan-Werner Müller uses it. A populist in this sense will always talk as if they are representing the views of the people, when in fact they only speak for some of the people. Remember how Brexit was ‘the will of the people’ when around half the people opposed it. Almost by definition this form of populism is divisive, with a clear ‘them’ whose wishes are irrelevant. By ignoring this 'them' and calling them the elite they can give some status to 'the people' who appear to have finally beaten the elite (although in reality the elite has just fragmented).

If you add in plutocracy, then it is clear the true interests of a plutocratic populist will be the interests of those in that plutocracy. Again it almost follows that everyone else, particularly those who are not ‘the people’, will suffer as a result. What I think Snyder’s discussion adds to my own is that what is offered to ‘the people’ by populists is status: an ‘other’ which is clearly beneath ‘the people’. Furthermore that status may have been lost compared to what it was, and the populist plutocrat or sado populist aims to return it to ‘the people’.

Snyder talks about the US as being on a knife edge between plutocratic populism and democracy. At the end of his talk Snyder briefly discusses how the US can end up on the right side of this knife edge, and then get off it. He suggests the opposition to plutocratic populism has to talk about the future, with clear policies about how to make the future better.

I was reminded of this when reading this piece by Alan Finlayson. He argues that Labour spends too much time talking about values and not enough time formulating demands. Values are timeless, and our plutocratic populist leaders are more than happy to talk about values. In contrast the future is about demands: demands for a better future. Get the demands right and detailed enough to move beyond three word slogans, and you also make it clear what your values are.