Stumbling and Mumbling

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.

Risk in capitalism

One thing this crisis is demonstrating is that in modern capitalism it is workers and small businesses that bear risk to a greater extent that does larger capital.

As Paul Evans points out, some of the biggest losers are freelance workers who are ineligible for furlough schemes. And Charles Gascon at the St Louis Fed adds that it is low-paid workers who are most at risk of losing their jobs:

The occupations at the highest risk of unemployment also tend to be lower-paid occupations. The average annual earnings of the low-risk occupations is $64,600, about 75% higher than earnings in the high-risk occupations, at $36,600. This indicates the economic burden from this health crisis will most directly affect those workers who are likely in the most vulnerable financial situation.

The UK is unlikely to be much different.

By contrast, most asset-owners could with only moderate care have avoided big losses; in the IC, I’ve shown that simple diversified portfolios have lost only tiny sums.

This contrast is the culmination of several long-term trends which have seen capital de-risk in recent years at the expense of workers. For example:

 - The shift to a two-tier workforce with a core of staff and periphery of gig workers and freelancers means that companies can more easily shift cyclical risk onto workers. As Paul says, firms have “managed to shovel all of the risk related to their industry down the pipe to freelancers.”

 - Some workers are now in fact capitalists in the sense that they supply capital – for example freelance sound mixers supply their own expensive kit; Uber drivers take on debt to supply cabs; and some delivery drivers must supply their own vans and uniform. This exposes them not just to ordinary job risks, but also to the dangers of losing a capital investment.

 - Some capitalists make themselves secured creditors which means they lose little when “their” business fails, whilst the cost falls upon workers and subcontractors – as we saw, for example, with the collapse of Carillion.

 - As Rene Stulz and Kathleen Kahle have shown, stock market listed companies have become older, bigger and more cash-rich in recent years: this is true of the UK as well as US. This means the typical equity investment is less risky than it used to be.

 - The closure of final salary schemes means that the investment risk involved in saving for retirement has been transferred from firms to workers, even though they are unable to carry such risk efficiently.

 - UK companies generally have derisked their balance sheets since the financial crisis. Bank of England data show that their (sterling) cash holdings have doubled since then, and that non-financial firms now hold more cash than debt. (This is partly a reflection of the growing importance of intangible assets, though whether these are any riskier than tangible assets such as machinery is moot.)

 - The shift towards monetary activism and fiscal conservatism tends to benefit asset holders (especially leveraged ones) more than workers, as asset prices benefit from low interest rates and QE.

Now, this is not to pretend that there was a golden era in which workers had security whilst capitalists did not. As Judy Stephenson reminds us, piece-work is as old as capitalism and was one way in which capital transferred risk to labour. Nevertheless, it is the case that recent trends have been for larger capital to transfer risk to workers, subcontractors and smaller firms. The idea that the boss of a large firm is a swashbuckling risk-taker is a fiction as great as any portrayed in Hollywood, as Olivier Fournout has shown.

This raises two questions. One is: what function, then, do capitalists fulfil?

It is certainly not the provision of finance capital. Governments can do this cheaper and in greater abundance, as Rishi Sunak implicitly acknowledged this week with his plan to support innovative businesses. Nor is it clear that they effectively finance smaller firms. The stock of UK bank lending to manufacturing SMEs is a mere 9.4bn. That means that for every pound banks have lent to small manufacturers they have lent £155 in mortgages on houses.

Instead, increasingly, capitalists simply supply platforms. They act as middlemen connecting workers to other workers and to customers.

A second question this poses is: who should own firms? Common sense says that owners should be those with the most skin in the game. If you have most to lose from a firm going bust you have the biggest incentive to ensure that it doesn’t. This points to a case for subcontractors, freelancers and workers to have equity stakes – especially to the extent that they supply firm-specific capital and skills. As it is, current ownership structures give big capital exposure to upside risk whilst its workers and freelancers who face the most downside risk.

What we have here might yet another example of how ideas can outlive their evidence base. We still think of capitalists as like Victorian mill-owners who face the risk of ruin if their investments fail, and so are entitled to ownership and rewards on that account. But this is no longer the case. We must ask: what exactly is it that capitalists do and does this justify – even on narrow grounds of efficiency – their ownership?

When rules don't apply

It’s a cliché that this is a crisis. But what exactly is a crisis? I like Richard Bookstaber’s idea – that it is a time when normal economic rules don’t apply.

For example, in normal times investors can reasonably think about valuations and corporate earnings. But in crises what matters instead is risk and liquidity. In normal times, negative feedback loops dominate: cheap assets will rise in price. But in crises, there’s a heightened danger of positive feedback whereby selling begets more selling.

In the 2008 crisis, for example, some opposed bank bailouts fearing a moral hazard problem. But they were applying normal times thinking. What mattered much more was keeping the financial system alive.

We’re seeing the same thing now. This crisis means that some normal ideas don’t apply. Here are five.

1. Robert Peston asks whether the furlough scheme is destroying work incentives. He’s not alone. Universal Credit was designed to incentivize work, by making the application process complicated; by ensuring a long wait between application and payment; and by keeping unemployment benefits low.

But this is not the issue now. Quite the opposite. We actually want to disincentivize work, to ensure that people don’t spread the virus.

2. Fiscal rules might be needed in normal times. But we don’t need them now. The same crisis that is raising government debt is also increasing demand for safe assets. This is why gilt yields have fallen this year despite the OBR’s forecast (pdf) that the crisis will add £429bn to public deby by 2021.

3. In normal times we should worry about allocative efficiency, and not bail out lame duck companies. In this crisis, however, this concern is a low priority. James Tobin’s famous remark is more true than ever: “it takes a heap of Harberger triangles to fill an Okun gap.”

4. Economic forecasts are sometimes useful – although as Prakash Loungani has been saying for years they always fail to foresee recessions in time. But they’re not so much now. We know that economic activity is plummeting and that unemployment is soaring. But we cannot know the magnitudes and do not need to. If I were to say that GDP will drop 10 per cent this year rather than 15, it would be daft to infer that we should support the economy less. 10 per cent is still a lot. And given the uncertainty around it, we should err on giving maximum support. If a man if falling from a plane, he doesn’t need to know at what speed he’ll hit the ground: he needs to know how to open a parachute.

5. Ordinarily, we should worry about the distributional impact of support packages, incentive effects and whether systems will be gamed. In a crisis, though, these are low priorities. What matters, as Eric says, is that the support be immediate and large. If your house is on fire, you should not worry about your carpets getting wet. You should put the fire out and clean up the mess later.

Our priority must be to protect valuable economic assets. This means protecting jobs, because unemployment is a source of much misery. It also means protecting companies, because organizational capital and firm-specific human capital are valuable assets. Contrary to the simple-minded Econ-101ers, capital and labour are not fungible.

Yes, supporting firms means keeping some lame ducks in business, such as the many mediocre retailers and restaurants that would have gone bust even if the virus had not struck. But If they are to go bust, let’s have them do so during the recovery, when their labour and assets can be hired by expanding firms.

And there’s tons more the government can do. It could give tax rebates to firms and the self-employed. It could give rent holidays: unlike workers and firms landlords don’t (for the most part) provide useful assets and so should be a low priority for support. And it could also provide loan repayment holidays too, if necessary by taking a bigger place in banks’ capital structures. In this sense, Sunak’s support does not go far enough: the fact that Universal Credit applications are soaring tells us as much.  

In ordinary times, these would not be great ideas, and they'd have to be reversed in the upturn. But these are not ordinary times. And we must all be intellectually flexible enough to spot the difference.

What centre?

The election of Keir Starmer as Labour leader has caused some leftists to fear that the party will move to the centre. Such fears, though, miss the point – that there is no centre.

By this I don’t just mean that there are no votes there, as the LibDems and CUK (or whatever they called themselves) discovered in December. I also mean that there are no ideas there either. One feature of CUK was its utter lack of economic thinking and obliviousness to the fact that the economy has changed a lot since the 90s and so requires new policies. Almost the only substantive thought in its launch document was the notion that government has a “responsibility to ensure the sound stewardship of taxpayer’s money” – an idea that has aged as well as Rachel Reeves desire to be tough on the unemployed.

But this poses a question. Is this vacuity due merely to the inadequacy of centrist politicians? Or does it instead reflect capitalist reality?

To see what I mean, think about two contrasting ideal types of capitalism. Type one relies for its profits on a mass market in consumer goods produced by skilled workers. It has significant profit opportunities but faces a consistent risk of unforeseeable recessions. And it also faces the danger of a socialist uprising.

This type of capitalism would welcome a centrist agenda of Moderate Progress Within the Bounds of Capitalism. Policies to underpin wages would help sustain demand and profits. A decent welfare state acts as an automatic stabilizer, thus reducing capitalists’ risk of recession. The need for skilled workers means capitalists welcome public spending on education and science. High profits mean some redistribution is tolerable – and, indeed, necessary given the need to buy off discontent and so prevent socialism.

In such an environment, there’s plenty centrists can do to ameliorate the worst effects of capitalism whilst respecting the power structures of the system. Centrism should then be healthy.

Imagine instead a very different type of capitalism. Here, capitalists believe they need not a mass market but policies to increase profit margins, and so need profit-led rather than wage-led growth. It also has low profits and few profit opportunities and so resists more fiercely higher taxes, and is less supportive of expansionary macroeconomic policies that might empower workers. Facing no threat of revolution, it has less need to buy off discontent. Being more dependent on unskilled workers it needs guard labour and surveillance methods more than skills. And having a large finance and rentier sector it needs to protect its methods of extracting surplus more than means of expanding real capital. And that same financialization means it wants not a large welfare state and automatic stabilizers but simply looser monetary policy.

In this world, there’s much less room for centrist reforms. Capitalists will protect their own power and extractive institutions whilst socialists will want more radical change than centrists can stomach.

Of course, I’m talking ideal types here. Actually-existing capitalism is an admixture of the two – although post-war Fordism was close to type one. But there can be little doubt that British capitalism has shifted from type one towards type two. Hence the decline of centrism; there’s just no space for it.

This is not to say that there are no centrist ideas at all. I commend Sam Bowman and Stian Westlake and the Radix thinktank. Several of their ideas, however, would face strong opposition from vested interests – for example, the proposals to cap CEO pay, regulate finance more strongly, or introduce a land value tax.

We can imagine a world in which such opposition would be offset by support from a client base within capitalism. Type one capitalists would welcome a shift in taxes from profits onto landlords and curbs upon financial extraction: if you want to hear extreme hostility to bankers, don’t speak to me or Grace Blakeley, just ask anyone running a manufacturing business. The influence of this client base is, however, weak: the vote for Brexit told us that.

A better base for challenging this type of capitalism, therefore, is to have a large clientele opposed to the interests of rentiers and with an interest in radical reform. Corbynism activated just such a base, and it shouldn’t go away.

I’m not, therefore, very worried that Starmer can shift Labour to the centre on economics, even if he wanted to. There is no meaningful, viable centre.

Instead, I have a different concern. The media – including the BBC – is creating a climate which rules out questioning of the Dear Leader and which regards measures to support economic activity as a cost rather than benefit. I fear that Labour will become infected by this poison.  Which is why we desperately need a counterweight in the form of leftist critiques of the media – to remind Starmer that he need not be swayed by it.

There might be no intellectual pressure on Labour to shift to the centre. But it could drift there simply under media influence. Corbynistas, then, should not keep quiet.

"We've established that, madam"

George Bernard Shaw, it is said, once met an actress and asked her: “would you sleep with me for a million pounds?” “I would think about it” she replied. “Would you sleep with me for a pound?” he then asked. “No” she replied. “What sort of woman do you think I am?” He replied: “We’ve established that, madam. Now we are haggling about the price.”

We should think about policies the same way. Sometimes, it is worth establishing the principle, and then haggle about magnitudes and timing.

For example, New Labour introduced the minimum wage at a derisorily low rate in 1999. But having established the principle of a minimum it was easy to raise it, and so the UK’s minimum is now comparable to those of many other nations. Similarly, Thatcher’s privatizations began as a small-scale attempt to reduce government borrowing, but they quickly scaled up. In the same vein, this is why so many of us on the left have zero tolerance for racist or anti-immigration rhetoric and why we were repulsed by Ed Miliband’s “controls on immigration” mug. Once such discourse becomes acceptable, it leads to the hostile environment policy and the Windrush disgrace.

It’s from this perspective that we should regard debates about the policy response to Covid-19. It’s an opportunity to “establish that, madam” – to create a consensus for policy principles which we can expand or refine later.

In the case of fiscal policy, this has already happened. In borrowing to subsidize wages among other things, Rishi Sunak has established that the UK has abundant fiscal space and that the notion that there is a binding limit on the “nation’s credit card” is nonsense. As Eric says, austerity was a “fraud.”

Similarly, Spain is introducing something like a basic income. Whilst purists might worry that it is not as universal or unconditional as a true UBI, I’m not sure this much matters for now, What does matter is establishing the principle. Once a policy is in place, even in mild form, we have overcome a huge obstacle - the status quo bias. It is much easier to reform than to introduce.  

A lot else, though is up for grabs. One reason why so many Germans are opposed to the idea of coronabonds is that they would establish the principle of a euro-wide backed bond and so be a stepping stone to a fuller fiscal union and to fiscal transfers. Which of course is why so many others are pushing the idea.

Also, one thing this crisis has taught us is that we need in place the infrastructure to give support to people quickly. In this regard, whilst the current depression is almost unprecedented in speed and severity, it is not unprecedented in being unpredictable. As Prakash Loungani has shown, mainstream economists and policy-makers have failed to foresee almost all recessions. Which means that monetary and fiscal policies which operate on demand with a lag are insufficient: they might moderate the downturn and accelerate the upturn, but they can’t prevent the downturn. Hence the need for automatic stabilizers.

What I’m arguing for here is to seize the moment, to use this crisis to establish policies and institutions that are hard to reverse. Many of you think this crisis will change public opinion in favour of redistribution and greater public spending. I’ve no such confidence. We tend to project (pdf)  our current preferences too much into the future and fail to see that they’ll change. We cannot, then, rely upon the public mood staying as it is.

In this sense, I’ve mixed feelings about Frances’ claim that now is not the time for a universal basic income or helicopter money. She might be right speaking of them as technical fixes, but now is the time to establish the case for them in principle, and to lay down the plumbing to enable them to work – such as, for example, ensuring that everybody has a bank account.

Much of what I’m saying here might seem obvious, even cliched. “Thin end of the wedge” and “slippery slope” have long been conservative objections to mild social reform.

But I’m not sure it is. What I’m saying here contradicts some common views of policies. Technocrats see them as fixes of current problems whilst some naïve leftists always complain of their inadequacy. What both perspectives miss is that policy-making is not merely an engineering matter of pulling levers and fixing things. Even apparently mild policies can lead to bigger things.

We must always ask, therefore of any policy: where will this lead? Sometimes, it opens a door to further change – as with the NMW. At other times, though, it can be a dead end. New Labour’s increases in public spending died with its electoral defeat, whilst its embrace of new public management (pdf) alienated many traditional Labour supporters and failed to increase public sector productivity.

But of course, policy doesn’t merely change the intellectual climate. It also changes the material base of support for future policy change. Thatcher, for example, both destroyed the unions and – via expanding the financial sector and selling off council housing - enlarged the client base for financialization. And in expanding universities, New Labour expanded the cohort of immaterial labour with a globalist outlook: it was Blair who laid the foundations for Corbyn.

My point here is a simple one that’s often overlooked. Policy-making is a dynamic, not a static process. It is not merely a matter of getting the right technocratic fixes.

Inequality, morals & Marxism

One thing this crisis is demonstrating is that there are plenty of bad employers: the Guardian and Labour List both have lists of them. Another is that, as Sarah O’Connor says, “the people we need the most are often the ones we value the least.” As Paulo dos Santos says, society “grossly undervalues” care work and other jobs essential to fighting the pandemic.

Both these facts show the need for a Marxian perspective.

First, we must ask: why are care workers and others so underpaid? It is certainly not because they lack moral desert. Nor is it because they lack skills: caring demands immense “soft skills” such as patience, discipline and an ability to get on with people as well as physical ones. From a purely technical point of view – that is, one divorced from socio-economic factors – it would be cretinous to claim that a nurse is less skilled than the grifter opinion-mongers who pollute the media.

Instead, care workers are badly paid because they lack power. Some of this is the result of longstanding norms: work done by women and immigrants has long been stigmatized, devalued and regarded as “unskilled.” But another part of it is simply a lack of outside options and hence of bargaining power. As Paulo says:

Market wages and conditions reflect the precarious social positions and sometimes utter desperation of those who typically perform them.

The point, of course, broadens. As Rick said, “all pay is, ultimately, a function of power.” It is trivially true that labour is the source of value, as this lockdown is reminding us. But how that value is distributed depends upon power. Your “skills” are only one element in your power: parlaying these into a decent income is another matter.

Power also lies behind the fact of bad employees. Big firms have a degree of monopoly power: they wouldn’t be profitable if they did not. Good employers use this power to share rents with workers. Bad ones, however, use their monopsony power to jack up the rate of exploitation.

What should be done about this? Some leftists think we need to make a moral case for paying key workers more and that we need to shame bad employers into improving.

Moral exhortation, however, might work sometimes but it is not enough. We do not reduce burglary or murder merely by appealing to criminals’ better nature. We use force as well. Similarly, we won’t abolish poverty pay and bad working conditions merely by asking nicely.

We must instead realize, as Marxists do, that material conditions matter. As the late great Norman Geras wrote in his essay Marxism and Moral Advocacy, ethical analysis and advocacy:

Need to be done with some thought for the social and material conditions of attaining any given ideals, the means of and agencies for attaining them, [and] the social interests and movements that can conceivably be coupled with or become attached to the ideals and imperatives in question.  

It is easy to see how we might abolish the material conditions that give rise to inequality, bad employers and poverty wages. Macroeconomic policy must be aimed at ensuring over-full employment. We need strong trades unions and a high citizens basic income to empower workers to reject bad pay and conditions. And government (and local authority) procurement should be used to encourage coops. 

Most social democrats would agree with this. We Marxists, however, have two doubts.

The first concerns how to get there. How do we mobilize the social movements and interests that would deliver a government committed to these, and weaken those that would prevent such a thing? 

The second is that these policies are only stepping stones, part of what Erik Olin Wright called an interstitial transformation (pdf). They will lead to a squeeze on profits. When this happened in the 70s, it led to a backlash against social democracy and to Thatcherism. The challenge is to ensure that it leads instead to socialistic forms of ownership. Historically, social democrats have resiled from this challenge.

This crisis has increased the salience of inequality and injustice. But there’s a huge distance between an issue being salient and it actually being properly addressed. We have little hope of closing this distance without a Marxian perspective.