The need for supply-side socialism

There's an important fact that's lost in the debate about economic policy. It's that counter-cyclical policy is nothing like sufficient.

The back of a beermat tells us this. Let's say we wanted to get unemployment (on the LFS measure) down from its current 2.5m to one million. How many jobs would we need to create?

The answer is NOT 1.5m. This is because many jobs would be filled by those out of the labour force - the retired, home-makers, students on marginal courses and, OK, immigrants. For example, in the last year employment (pdf) has risen by 584,000 but unemployment has dropped by just 156,000. This tells us that reducing unemployment by 1.5m would require well in excess of 3m new jobs. That's an increase of over 10%.

This requires a massive expansion in GDP. Once we allow for the possibility that productivity will begin to rise again, we probably need a rise in GDP of over 15%. And we'd need a bigger rise in money GDP to achieve this, simply because a large part of any fiscal or monetary expansion would raise prices rather than real GDP: the Bank of England estimates (pdf) that its first £200bn of QE raised real GDP by 1.5-2 per cent and inflation by up to 1.5 per cent.

Getting unemployment down to one million would therefore require a rise in money GDP of perhaps 30 per cent - over £400bn. Nobody is proposing a fiscal or monetary expansion anything like this*.

Instead, the belief seems to be that a small policy stimulus will kick-start the economy, get the normal capitalist engine of growth purring again.

But this is questionable, for at least two reasons.

- There's a dearth of investment opportunities. There are many reasons for this: a (maybe temporary) slowdown (pdf) in technical progress; the migration of low-wage industry to the east; an inability to monetize what new technologies there are; or perhaps a wising up to the fact that innovation never really paid off anyway.

- Inequality has become a barrier to growth. This could be because it reduces the marginal propensity to consume. More likely, I suspect, it's because it has added to debt and because the same institutions that create inequality - managerialism - also give us bad decision-making and rent-seeking.

Policy-making, then, requires more than (very mild) stimulus and the hope of return to business as normal. We must think about ways of increasing trend growth.

It should be obvious to anyone not blinded by ideology that the right's ideas here - of reducing the power of the working class - no longer work. Instead, Duncan Weldon, Stewart Wood and Ha-Joon Chang are right; the left must think about supply-side socialism.

Now, you might object that I've argued that history shows that long-run growth doesn't much change. This fact, though, might not be so hostile to supply-side socialism. For one thing, it shows that "moderate" policies don't work, so perhaps we need something radical. And for another thing, it shows not just that few policies raise growth, but also that few depress them. And this suggests that perhaps radical leftist policies are a "free hit": they might not be disastrous for the economy. As for what such policies might be, I'll suggest some later.

* Because most of the money printed by QE just stays in the financial system, we'd need far more than £400bn of QE to raise money GDP by £400bn - around £1.5 trillion if we (heroically!) scale up the Bank's estimates.

Comments

[Anonymous]

The fact that the definition of "economically inactive" does not capture the significant numbers of people who re-enter the labour market when opportunities arise indicates, to me at least, that the definitions are inaccurate.

Supply side reform is often cited as a panacea to cure our economic ills. I wonder how that most fundamental supply reform of them all, namely taking public ownership of the means of production, distribution and exchange, would go down with supply side reformers?

Hmmm.

[Anonymous]

Yes, supply side reform is an agenda on which left-progressives need to fight. And win.

[Ralph Musgrave]

As Bill Mitchell (Australian economics Prof.) has pointed out ad nausiam, the political left worldwide is incapable of doing anything more than aping the neo-liberal economic illiteracy of the political right.

That being the case (which it is), I’m 100% certain that if there are solutions, they won’t come from bog standard lefties or bog standard “righties”. They’ll come from people with a genuine interest in economics. That’s 0.0001% of the population.

Moreover, with the Labour Party now being a thoroughly conservative (with a small “C”) party, the Labour Party will reject out of hand anything genuinely radical or socialist or progressive.

For example, the Labour Party won’t have anything to do with the essentially socialist idea, promoted by Positive Money, namely that only the state should create money. You’d think the latter idea was a no-brainer for socialists. But as I pointed out, socialists no longer have brains, and the Labour Party is not socialist.

Bill’s blog is here: http://bilbo.economicoutlook.net/blog/

[Keith]

I do not see the problem here really. Or rather the problem we have in the UK, and USA, and Euroland is political not economic. Ralph Musgrave is correct. In the 1980s the left would have had no problem with a five year plan to boost GDP by 30 per cent. Or 40. Build council houses, hospitals, schools, roads; invest in rail, electricity, gas and water supply; raise wages increase welfare benefits. create a few million Jobs and redistribute National wealth to the many not the few.

The Political problem is that the main political parties do not want to increase the Labour share of National Income and base production on need rather than profit. The desirability of MMT or positive money etc is a technical issue. Where Ralph is wrong is to blame mere stupidity. It is the political implications of changing the Financial system that blocks any reform plan and the Tory party is bought and paid for by Banks. I doubt it is really necessary to radically alter the Banking system as such to boost growth and employment and change wealth distribution. You could argue that a properly regulated Financial system and large growth push would increase Banking profits and returns and more National Debt would aid the Banking and financial system by providing liqidity. The public and private sectors are complimentary and this kind of policy is not incompatible with a privately owned Banking system or Capital Market. But it would require a willingness to accept that revision of National wealth and controls that Thatcherism dismantled in the UK and Ragan dismantled in the US. Who gets the gains from growth is the underlying issue.

[Anton]

Watch Italy where the internet experiment is entering politics for the first time in a serious way. Grillo's movement may be a turning point in progressive politics. All of a sudden supply side socialism may become possible.

[Broilster]

Grillo is as close to fascist as makes no difference. Don't look to him for solutions of any kind. Berlusconism without Berlusconi about sums him up.

[Broilster]

'Labour Party is not socialist.' Agreed, but then it never was.

[Greg vP]

Two points.

The dearth of investment opportunities is due to managerialism.

Very roughly, investments can be placed along a continuum from "completely new product or service" to "production efficiency improvement".

Capitalism is agnostic about this continuum. An investment is an investment to a capitalist.

Managers, by contrast, are focused on increasing control and reducing risk. A managerialist economy is biased hard over to the "efficiency improvement" end of the spectrum.

Managerialism is why we can have technologically-induced unemployment at the same time as a stagnation in innovation. Few new products are being created because investment is going into making the production of existing products require less labour.

Second: increasing investment and technology growth rates is unnecessary. As Keith says, at bottom this is an issue of distribution. But the "inequality" lens makes the view of the subject hazier than need be.

GDP is a flow. All that is required is to take money from groups that aren't spending it, and give it to people who would spend it if they had it: flow increased.

(Yes, imports, but all interventions have costs. Policy is about trading costs.)

[Johnnydub]

In your analysis you seem to completely ignore the elephant in the room - the government is spending too much money... and the only two choices the governemnt has for dealing with this is either excessive taxes or currency debasement. In that environment why risk your capital? Especially now, when QE is causing such a bull run in stocks and bonds...

All you pfaffing on about supply side socialism etc.. is meaningless rubbish. The government being 49% of the economy is ridiculously unsustainable.

[AndyfromTucson]

To me the obvious solution is to adopt an MMT (See the Prof. Bill Mitchell blog mentioned in an earlier comment) inspired approach to managing the economy where government prints and spends money on infrastructure like a maniac whenever the economy is below full potential (measured by unemployment rate) and interest rates are at the lower bound and cuts back on printing and spending money whenever the economy shows signs of overheating (inflation, unemployment below 5%, etc). As Keynes observed a very long time ago in his General Theory of Employment, Interest and Money, when a large part of the workforce sits idle during a recession that is a irreplaceable loss of economic output.

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