The case for privatization

The FT says the government’s decision to sell off some student loans “makes no sense.” From one perspective, this is true: it’s daft to sell an asset that probably has a positive return in order to pay off debt that carries a negative real interest rate. From another perspective, however, there is a kind of logic to it.

One key function of the state is to help maintain capitalist profitability. This isn’t simply because the state is the executive committee of the bourgeoisie. It’s because decent public services require a healthy economy, which in a capitalist economy requires profits to be high enough to finance and encourage investment.

But here’s the problem. In our era of stagnation, profitable opportunities are lacking. This is why business investment has been weak since the late 90s; why banks invested in mortgage derivatives rather than proper assets; and why we are bombarded with calls from people claiming to sell us compensation for PPI mis-selling or accidents we’ve not had. When real investment opportunities are lacking, we get stagnation and malinvestments.

Quite why this should be is a big question: some say it’s because profits have fallen (pdf); others because risk (pdf) has increased.

Whatever the reason, there’s a need for state action to support profits.

One way it can do this is to sell off profitable assets it owns such as council buildings or student loan books. It’s probably better for macroeconomic stability that banks make money by ripping off students than that they chase risk like they did in the mid-00s.

Another trick is to outsource – giving private firms cash to collude with criminals, miscalculate tax credits, build schools that fall down and, I suppose, occasionally do something useful. Although outsourcing companies’ share prices have fallen recently, most of them have generated lots of cash.

I say this because I suspect that what we have here is another example of something I mentioned recently – a tendency for our economic views to be shaped by our formative years as well as by present reality. Because capitalism was dynamic back in the 80s and 90s, we tend to over-rate its dynamism now. As a result, we under-rate the extent to which it needs state aid to generate profits. Privatization and outsourcing are means of doing this.

You might object here that there are more intelligent ways for the state to expand profit opportunities – for example by expansionary fiscal policy, stopping Brexit or state support for innovation.

Such options are  ruled out for political reasons: what we have here is an example of the relative autonomy of the state. Even if they weren't, however, they would have limits from a capitalist point of view. Fiscal expansion might eventually generate wage militancy; stopping Brexit might create a populist backlash and hence instability; and innovation would increase creative destruction and hence threats to incumbent firms. This creates a space for cronyism such as outsourcing and privatization.

Such policies might not always make sense from a conventional point of view. But then, the logic of capitalism isn’t necessarily rational from other perspectives.  

Comments

[Dave Timoney]

The problem is that the low-hanging fruit of privatisation and outsourcing have long since been plucked. The student loan book is trivial at a macroeconomic level.

A privatisation capable of stimulating the economy today would mean encroaching on the NHS or state pensions, neither of which would garner electoral support and either of which could prove counter-productive by depressing demand through precautionary saving.

[gastro george]

Are you trolling here? A better solution for stagnation is surely to increase aggregate demand and company investment through public expenditure and raising income levels, particularly at the lower end.

[Ralph Musgrave]

I agree with Gastro George. I can't see what Chris on about. Plus GG is right to say the solution is to increase aggregate demand.

My only quibble with GG is where he says the solution is to raise "public expenditure and raise income levels". Increased public spending (funded either by borrowing or by freshly printed money) will do the trick (as pointed out by Keynes in the 1930s) and will appeal to the political left.

The alternative (favored by the political right) is tax cuts, which will increase household spending. "Raised income levels" will certainly RESULT from the latter two options. And that raised income can be distributed any way we choose by juggling with the tax and social security system. But I wouldn't describe "raised income levels" as a basic cure for inadequate demand.

[Blissex]

«Because capitalism was dynamic back in the 80s and 90s»

In China and India yes.
In the UK in the 80s and 90s what was dynamic was the zooming up of debt to fund endless "Barber" import consumption booms and "Lawson" property prices booms, backed by vast extraction and net exports of oil from scottish oilfields, and secondarily by a massive influx of low-pay, "anti-inflationary" immigrant workers.

[e]

When you say “such options are ruled out for political reasons” whose politics? Leave aside Brexit/Article 50, not the politics of Corbyn's Labour party.

[gastro george]

@Ralph

To clarify, by "raising income levels" I meant both restoring the wage component of GDP to former levels and rebalancing income from the rich to the poor - because they spend money rather than save it (esp offshore). Either would boost aggregate demand.

[Keith]

The autonomy of the state is not obviously less now than in the past. There is no real reason why a Parliamentary majority could not boost demand and growth by increasing the standard of living of the majority. The political ruling class just seem unwilling to do so.

It would be perfectly possible for the state to spend on investment financed by QE plus borrowing, and boost disposable income by restoring the welfare state increasing benefits and restoring an effective right to strike. Rent control, council house building and higher wages would provide plenty of opportunity for returns on capital. Higher wages mean more tax revenue to repay the debts used for expansion. Instead the political parties have a distant indifferent attitude to the UK economy as if it existed on mars.

[George Carty]

Keith,

The problem is that we live in a gerontocracy where the pensioner vote typically decides elections (note how they have been protected by the "triple lock" while working-age benefit claimants have been hammered). And pensioners want to protect their streams of rentier income at the expense of the real economy.

[Bob]

"why banks invested in mortgage derivatives rather than proper assets"

You ban banks from "creating money" from lending except for "capital development." Anything else becomes a gift.