Avoidable unemployment

We Marxists are often accused of being ideologues. This is silly. Everybody has an ideology, in the sense of a set of preconceptions about how the world works. The difference between we Marxists and others is that we are sufficiently self-aware to know this. By contrast, some of the most dangerous ideologies are those which their believers take for granted despite being wrong. This, I suspect, helps explain what is otherwise a paradox.

The paradox is that most voters approve of the government’s handling of the coronavirus crisis despite the fact that Universal Credit claims show that unemployment is soaring, especially perhaps among freelancers: the ONS expects (pdf) it to rise by two million, to over 10 per cent of the workforce.

This rise, though, is largely preventable. In principle, the government could protect jobs and income via tax rebates or debt interest or rent holidays. Of course, the lockdown means that output and incomes must fall. But in principle, all of this fall could be borne by the public finances, leaving firms and individuals cocooned.

Now, there is a case against doing this, as Giles Wilkes has shown. Protecting firms in this manner would mean bailing out firms that would have gone bust anyway: many retailers and restaurants were failing before Covid-19 struck.

Giles has a point. Economic growth requires creative destruction: one reason (of many) for our stagnant productivity since the financial crisis has been that zombie firms have blocked the growth of more efficient ones, as weeds prevent desirable plants from growing.

What’s true in normal times, however, is not necessarily true in crises. Right now, the best-run restaurants and non-essential retailers are seeing exactly the same collapse in demand as the worst ones.  What determines their survival chances is not so much their efficiency as their balance sheets: cash-rich firms have better survival chances than indebted ones. But the correlation between efficiency and balance sheet strength might not be high: a firm can have high debt because it has been badly managed, but it could also be because it is a well-run outfit that had sensible expansion plans. Letting market forces work now would not, therefore, necessarily see the survival of the fittest.

What’s more, we need creative destruction in normal times so that the resources released by failing firms can go to more efficient ones. But this won’t happen when even efficient firms are locked down. So there’s no economic benefit from letting firms fail now. There is however a massive psychological cost. Even in the best of times, unemployment (pdf) is a huge source of misery. To force people out of work when they have no immediate hope of finding another job would be an act of cruelty.

For these reasons, I think firms should be supported now. The time to let creative destruction rip is when aggregate demand has recovered. Giles is right to say this will require a huge and difficult pivot. But it should be tomorrow’s problem, not today’s.

Whatever its merits, though, Giles’ argument, however, does not explain why the public are so accepting of soaring unemployment: voters don’t really support a free market economy, and certainly not the chill winds of creative destruction.

Instead, I suspect this tolerance reflects an often-implicit ideology, which rests upon two related errors. One, which I’ve described earlier is that people often conflate costs with what are in fact transfers. Journalists speak of the “cost” of the Job Retention Scheme when what they really mean is the size of the transfer. In fact, it is wrong to speak even of this as a “cost” to the Exchequer. It’s plausible that preserving jobs today will permit a stronger expansion in future – for example, by preserving valuable matching capital; maintaining capacity thereby reducing the inflation constraint on growth; or by mitigating scarring effects upon animal spirits. If so, the Exchequer will gain future tax revenue.

This error is especially nasty when combined with another one – the tendency to think of the government finances as being like a household’s. Because we as consumers cannot afford some things, we infer that governments cannot afford them either, and so consider it impossibly expensive for the government to fully cocoon the economy.

Of course, as sensible economists have pointed out for ages, this is plain wrong. We can print money to buy increased government debt. The only constraint on government borrowing is inflation. And you don’t fight inflation tomorrow by destroying economic capacity today.

As I say, the cost error and the government-as-household error are often only implicit in most voters’ minds. But they have been reinforced down the years every time an interviewer asks “where will the money come from?” and confuses costs with transfers.

For many, ideology, like culture, is “everything you don’t notice” – and, therefore, what you don’t question. Every economist knows that the government-as-household metaphor is gibbering imbecility, but it has been implicit and unquestioned in the media and in voters’ minds.

This leads to a version of what Georg Lukacs called reification. Although the economy is a set of relationships between people and therefore something which we should be able to control, people come to see it as an external force which governs us because they under-estimate (often unconsciously) the amount that governments can do. As Lukacs put it:

A relation between people takes on the character of a thing and thus acquires a ‘phantom objectivity’, an autonomy that seems so strictly rational and all-embracing as to conceal every trace of its fundamental nature: the relation between people.

Rising unemployment is thus seen as a natural disaster rather than what it is - a man-made catastrophe. And so the government escapes blame.

Comments

[James Peach]

I have never understood the immense popularity of the liquidationist school (the idea that we need regular recessions to reallocate capital and labour). It has a social darwinist tinge that would cause moral outrage if the debate was about human beings and not the economy (even though they are one and the same). Despite having no empirical backing its intuitive pull makes it popular - the idea that you can 'clear the dead wood'.

Recessions surely put good businesses as well as bad out of business.They destroy human and physical capital which are fundamental to long term growth. And shouldn't the process of reallocation occur during a regular business cycle anyway as weak businesses shut down or downsize relative to more competitive ones?

[e]

See, I'm confused. I've got a lot of uneducated years behind me and not cocooned from the apolitical or 'blockheads' as some will have it. No one I know believes governments can do no more on the bases of that's just how the world works.

For what its worth I'd say you're conflating understandings of how a political economy is working with understandings of how the world works. Right or wrong, of the former a recognition of ideology is integral to the formation of an opinion. For the latter, there's no such requirement.

Unsurprisingly therefore (given the current state of play) being ideological or “politicising” is marked-up and displayed by the dominant crew as anti whatever – most successfully, anti-British.

But I'm beginning to see pretending not to recognise there's always distinction to, but never automatic value for all in an educated opinion is just the mark of the devil – class bigotry. And there's a lot of it about.

[AJ]

I think part of the problem is that, while governments do have a lot of power to change societies etc, a lot of that takes a very long time. The DWP we need right now - high capacity, focused on saving people rather than saving money - is not the one we have. Even if the government went on a hiring spree, institutional change takes time. Even if the political will were there, even if you threw money into the system like it was going out of fashion, you'd still have a DWP workforce trained to assume claimants were guilty until proven innocent. That means you would be stuck with the six-week period between claim and payment for probably longer than the crisis will endure.

[Ralph Musgrave]

Chris claims the rise in unemployment “is largely preventable.” Well that depends on how much of the rise is due to the ban on various activities: meeting in pubs, restaurants, flying off on holiday, etc. To the extent that the rise is due to the latter cause, the rise is most certainly not “preventable”. Thus Chris really needs to quantify how much unemployment is due to the latter sort of ban before claiming the rise in unemployment is largely preventable.

Re James Peach’s above point, I quite agree.

[Paulc156]

@Ralph Musgrave
You state that the rise in unemployment is certainly 'not' preventable...but why?
It may or may not be desirable to prevent it but if as Chris claims that companies and individuals are largely made whole by the means, as suggested in article then the rise can surely be 'largely' avoided.
Any fall in income falling on gov shoulders. This as pointed out has the advantage of reductions in longer-term structural unemployment which otherwise naturally follows. This is the case even if many of those pilots and waiters etc are sitting idle for some period of time until economic activity resumes its former path.

[Dave Timoney]

@AJ,

The frontline staff who work for the DWP were not hired because they hold particular views on welfare but because they have particular skills. They will moderate the expression of their own views (they need to earn a living), but the inertia you talk about won't come from them (institutional culture tends to be top-down). I'm sure many would be more than happy to operate a more generous, less punitive regime.

To reinforce Chris's point, the state is much more powerful than we generally imagine and it could radically change its operations (if not the institutional culture among DWP management) rapidly. After all, we've just seen a Chancellor agree to pay the bulk of the wages of millions of workers while they sit idle, something that was inconceivable a few months ago.

[D]

Dave T and AJ

I think you're both right. AJ generally, Dave in this case.

Generally it's top, middle and bottom. The top can't just change culture of an organisation with a snap of their fingers. It takes time.

That said, in this case they really can make top down decisions that say these people people are to get this money and it should happen. Maybe with some technical difficulties, but they can do it in such away that any anti claimant culture lower down shouldn't matter.

And you get all sorts working for the DWP. Including those that really want to help, and those that think everyone's a scrounger.

[kardinal bierkutzki]

'between we Marxists'

Grammar please, Timothy!

Should read 'between us Marxists'....

[Ralph Musgrave]

Paulc 156,

The recent sharp rise in unemployment is to a significant extent down to the fact that various categories of employer have been plain forbidden to continue operating, i.e. their workers have been plain forbidden to go out to work: e.g. resturants and airlines.

Any idea that that unemployment can be quickly cut simply by raising demand is plain unrealistic. Of course if restaurants and airlines were closed PERMANENTLY, then consumers would turn to alternative products eventually. But that would take several years.

[Bobby Dents]

I don't think creative destruction creates growth at all. I think science creates growth by creating new products. When science can't do that, growth stops. Which is what we have been seeing lately.

The problem with liquidation now is that the market will demand population to drop as well because growth due to science driven slowdown in products, will demand it. In this regard the damage to market based economies could be bad. In a spiritual and moral senses. I could see capital owners set up dying facilities for older people.

Classical Marxism and Traditionalism have far more shares than either ideology would like to admit too. They hate the current aristocracy. Both seek a "natural aristocracy" which is based on nature and not the stupid divinity the families that battled Rome started taking liberties in around 100CE, destroying its Democratic traditions of merit. Its no wonder Nazi Germany had in many respects, a foundation more built on Marxism than the Russian Soviet, with its Asiatic foundation. History is fascinating that way.

[KG]

"Of course, the lockdown means that output and incomes must fall. But in principle, all of this fall could be borne by the public finances, leaving firms and individuals cocooned." I guess you mean that governments could try harder to redistribute the pain. But if GDP really does fall by a third in Q2, there's not a lot anyone can do? The remarkable thing is that we choose to pay the price: the loudest dissenting voices are those saying governments should have done more, sooner.

[Robert Mitchell]

"The only constraint on government borrowing is inflation."

This orthodox economic catechism is disproved by Lincoln's printing his way through high inflation to a Civil War victory, as well as states such as Turkey and Syria today continuing to access world money markets despite high inflation.

If inflation is mostly noise as Fischer Black proposed in his essay "Noise", then inflation is an arbitrary psychological constraint, not real. Inflation is easily fixed by indexation and unlimited central bank currency swap lines, which effectively eliminate exchange rate risk.

[sohbet]

very blog thanks