Class interests

This is a small contribution to answering Paul Krugman’s question about why the wealthy want to raise interest rates, even when the economy remains depressed. (See also Steve Randy Waldman, Peter Dorman and Brad DeLong.) The preliminary point to make is that this is not just a US phenomenon. In the UK the right wing Institute for Economic Affairs set up what they call the ‘shadow MPC’, and they were voting for higher interest rates before the recovery began! The highly influential FT journalist Chris Giles, who has become a bellwether for right wing interests, has been championing the cause of an early rise in rates for many months.

I want to start with inequality, and the rising share of the 1% in the US and UK. This began in the 1980s, and is associated with deregulation of the financial sector and large cuts in top tax rates. The dominance of a neoliberal ideology, associated with Reagan and Thatcher, occurred at the same time, and there is no doubt that those who started becoming much wealthier at that time understand the connection.

Both politicians began their administrations during periods of high unemployment - higher than anything seen since the war. Both were the result of tight money: in Thatcher’s case this was a clear political choice, whereas in the US it was the result of the Volcker Fed. Whether intentional or not, this high level of unemployment greatly helped both administrations achieve their neoliberal goals, in part because it fatally weakened the power of organised labour. The period also helped the neoliberal cause because it appeared to discredit the idea that governments could intervene in the economy to achieve full employment.

Is it any wonder, therefore, that the ‘1%’ who started to become much richer in the 1980s should see tight money as an essential condition of their new found wealth? But what about the ‘interests of capital’: surely the owners of business should see that firms will be less prosperous if demand is kept too low through tight money? Here I can only quote Michal Kalecki:

“But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders.  Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.”

This was written in 1943, and the post war consensus appeared to suggest Kalecki was being too pessimistic. But that was before neoliberalism and the rise of the 1%.

Nowadays we see achieving the ‘natural unemployment rate’ as predominantly the task of monetary policy. Most economists see independent central banks as a better means of achieving this than direct political control for familiar reasons. However if you think that lasting full employment can be unsound for your class interests, then giving monetary control to conservative central bankers would also seem like a good idea.

This sets up two areas of political tension between the interests of the wealthy and, of all people, academic macroeconomists. First academic macroeconomists, and their occasional number who become central bank governors, see monetary policy as a means of achieving the natural unemployment rate and steady inflation. The wealthy see monetary policy as a means of maintaining a degree of unemployment that reduces the political threat to their wealth. Second, when monetary policy stops working in a liquidity trap, most academic macroeconomists want to use fiscal policy to take its place. To the wealthy this not only seems unnecessary, but it also calls into question their ideology about the failure of pre-neoliberal times.

As macroeconomists we know (or think we know) that it is impossible to keep unemployment above the natural rate forever, because inflation will continue to decrease, although there is now a lot of evidence which suggests it may not decrease by much. So if you wanted to critique my (and Kalecki’s) characterisation of the views of the wealthy, you might say that keeping unemployment above its natural rate is not a sustainable strategy (and therefore not rational). To which I would respond maybe, but there could be a reason why now, like the 1980s, is a particularly important time to keep unemployment high for a while.

The reason for this is that the aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%. I remember saying shortly after the crisis that the neoliberal position that government regulation was always bad and unregulated markets always good had been blown out of the water by the crisis. This was politically naive, in part because a crisis caused by unregulated markets was morphed by the right into a crisis caused by too much government debt, or too many immigrants. But that fiction will not be sustainable once a strong recovery has reduced both government debt and unemployment. For the 1%, these are very dangerous times, and they want to be on favourable territory for the battles ahead.  

On Hidden Motives

                Chris Dillow has a nice follow-up to my earlier blog on balanced budget fiscal expansion. I first read the Kalecki paper when I was at Cambridge, but for better or worse this is not part of the macro lectures I give at Oxford. We all miss Andrew Glyn a lot.

                Is this what I had in mind when I said that if the government argued against all the possible balanced budget spending and tax measures that might stimulate the economy, we might suspect other motives? Before trying to answer that, I should say that part of my complaint was that such policy ideas are not part of the public debate, so we do not know what the government’s response would be. (We could infer, from the fact that none of these policies are being pursued, that they would be against them). I should also note that the FT suggests that the Liberal Democrats are thinking about tax switches, although I have my doubts about whether raising the £10K tax threshold would be particularly effective at stimulating demand.

                When I drew parallels in an earlier post between the current UK situation and 1981, I mentioned by way of anecdote a little speech I made at the internal meeting of Treasury economists at the time. What I did not report was that at that meeting I made exactly the argument Kalecki puts forward. (Needless to say Kalecki was not normally quoted in discussions about budgets in the Treasury! - I was young, and probably knew I was going to leave fairly soon.) I think what Kalecki says made a good deal of sense in that particular context: as we were to find out, part of the Thatcher agenda was to take on the power of organised labour.

                Whether it makes sense in the current context I’m less sure. Some of the factors identified by Chris in a later post could simply be attempts to deflect sympathy for the unemployed (which in turn would translate into criticism of the government) rather than the more strategic design he suggests. What I probably had more in mind on this occasion were two things.

                The first involves the point about ideology which I have mentioned several times. If your ideological perspective is that ‘government is always the problem’ and that the private sector is best left alone, then blaming all our ills on the excesses of the previous government (rather than the financial system), and pursuing austerity by government as the means of correcting those ills fits well with that perspective. To use government intervention as a way of correcting a problem with the private sector (insufficient demand) does not.

The second is that nearly all the fiscal proposals I suggest involve redistributing money from the rich to the poor. This makes macroeconomic sense, because the poor are more likely to be credit constrained than the rich. It would also make sense from an equity point of view: the poor are suffering most as the result of austerity, as the chart below from the IFS illustrates. Unfortunately it does not make political sense for the current government.

                  There is also a familiar but important point here about political influence and recognition. Issues to do with debt and financial markets are reported daily and major players in this area have almost guaranteed access to politicians – from whatever party. They tend to be rich, and will complain about being taxed at 50%. The young unemployed, who now make up nearly a quarter of the 16-24 age group, have by comparison very little political voice. Even when they are talked about when monthly figures are released, we are likely to get stories about motivation and how to brush up your CV, rather than recognition that with many times more people looking for a job than there are vacancies no amount of self help will make the problem go away. (See this by Zoe Williams.) These are the political reasons why the ‘counsels of despair’ that Jonathan Portes rightly complained about are able to endure.