Stumbling and Mumbling

The futility of economic policy debate

Sam Bowman writes on the divide between boosters and doomsters - those who believe we can boost economic growth and those who don't. He misses, however, an important point.

This is that economic policy is not made by Sam, nor by Giles Wilkes, Stian Westlake, Aaron Batani or Torsten Bell. Policy-making (at least in the UK now) is not a meritocracy in which the people with the best ideas get the most say. Nor of course is it a democracy in which we all have equal say.

Instead, a mere glance at the Tory leadership contest (and a mere glance is all any of us can stand) tells us that policy is made not by the masses, nor by those of ability, but by those who can best appeal to a small minority who have little knowledge of economics and little desire for higher growth.

Given this, talking about what policies will raise growth is futile*. It begs the question: how can we create a polity in which sensible economic policy is even feasible?

The problem is that there are many structural barriers to growth-enhancing policies.

One was described by Joel Mokyr almost 30 years ago:

Sooner or later the forces of conservatism, the "if-it-ain't-broke-don't-fix-it," the "if-God-had-wanted-us-to-fly-he-would-have-given-us-wings," and the "not-invented-here-so-it-can't-possibly-work" people take over and manage through a variety of legal and institutional channels to slow down and if possible stop technological creativity altogether.

These forces of conservatism block some policies that could boost growth. Landlords would oppose any measures to reduce house prices or to shift the tax base from incomes to land. Lawyers and accountants don't want tax simplification (one good benchmark for any Budget should be the question: how many accountants will it make redundant?) Nimbys oppose inrastructure spending, even if it is green. And incumbent companies oppose tougher competition policy, or even anything that fosters business start-ups.

I'd add that the financial sector generally is such a force of conservatism. it benefits from the low real interest rates that stagnation brings. Sure, General Motors favoured pro-growth policies in the 50s as it needed a mass market. But Goldman Sachs has much less need.

Pablo Torija Jimenez and Martin Gilens and Benjamin Page (pdf) have shown how policy is set with regard to the interests of the mega-rich. But many of these are opposed to the reforms necessary to boost growth.

Rentiers, though, aren't the only force of conservatism. Back in 2006 Ben Friedman showed that economic stagnation fuelled illiberalism, racism and reactionary politics. Subsequent events have proved him right. But this means there's another big constituency opposed to growth, and not just gobshite culture warriors such as Farage or GB News. Why should Tories trouble themselves with the tough thinking and difficult admin required to raise economic growth when they can win elections simply by promising to deport migrants?

Yet another such force, of course, is the media. And I don't mean only the mouthpieces of tax-dodgers, rentiers and racists. I'm thinking too of our most influential outlet, the BBC. As Simon Wren-Lewis has documented, it has for years thought of economic policy merely as being about "the nation's finances" with good policy being only about fiscal responsibility - which is of course oblivious to basic economics.

We heard an example of this error on the Today programme this morning, when the interviewer accepted Rachel Reeves' claim that nationalization was inconsistent with Labour's proposed fiscal rules thereby missing the big story - that Ms Reeves is unqualified to be Chancellor because she doesn't know the basics of double-entry book-keeping.

The media, though, is not the only barrier to sensible policy-making. So too are voters. A vote for a hard Brexit was a vote against economic growth. Sure you might think this was because voters were misinformed about its economic effects. But this only raises the question: if they ignored good economics on Brexit, what makes you think they'll accept good ideas to raise economic growth?

I fear there's another issue here - a form of what John Jost calls system justification (pdf). 15 years of stagnant incomes has merely led to resignation, adaptation and learned helplessness. Many voters think we just cannot have nice things, and that any party offering them is dealing in fantasy economics.

Of course, good economists are having the debate Sam describes, of whether policy can raise growth**. But this debate is like writing a menu when you don't yet have a kitchen nor even much hope of ever getting one. Before thinking about economic policy we must think about how to give sensible economics any political influence. Brains are not enough. What matters is power.

I confess to not having answers here. Part of the answer, though, I suspect is to build and support movements which offer countervailing power to the forces of conservatism - movements which tell politicians that there are costs to them of kowtowing to rentiers and reactionaries. This is why some of us welcomed the mass politics inspired by Corbyn - but also, of course, why that met with swift repression.

* Well, maybe not entirely. Such talk could be a transitional demand - a way of saying "here's what you could have if our system wasn't so dysfunctional", and thus a way of raising discontent with the system.

** FWIW, I incline to the doomster camp but believe that many potentially growth-boosting policies (tax reform, better immigration policy, competition policy, better vocational training) are free hits: even if they don't boost growth much, they'll not hurt it either.

Tories' structural stupidity

There’s widespread dissatisfaction at the low intellectual quality of the Tory leadership contest, with no candidate having any answer to our long-term productivity stagnation or cost of living crisis. As Phil says, they are “lightweights with no answers to the serious problems the country faces.” The Tories themselves share this discontent, having cancelled the third leadership debate for fear of the party being further damaged by being seen to be so inadequate.

This acute lack of talent among leadership contenders is, however, no accident. It is not merely a problem of inadequate personnel. Instead, it has its roots in material facts about politics and capitalism.

One is that the mechanisms that select for MPs have changed to reduce the calibre of politicians. Party membership has declined, meaning that cranks have more influence and that local parties are no longer so rooted in the interests of small businesses. And increased inequality means that even half-able people can earn good money outside politics with the result that the latter politics becomes dominated by people not good enough for careers in business or finance.

One of these selection mechanisms is our general culture. Nadine Dorries and Penny Mordaunt raised their profiles by eating ostrich arse and belly-flopping in a swimming cozzie, whereas Jesse Norman’s fine books on Burke and Smith did nothing for his appeal. That tells us that there has been a general dumbing-down which selects against people of ability. 

The media is of course part (but perhaps only part) of the problem here. There mere fact that it devotes time to asking what is a woman at a time when the planet is on fire, the economy trapped in long-term stagnation and real wages are collapsing shows that it is the enemy of intellect and seriousness.  

But there’s more than this. Even if Tories had the ability to find economic ideas, they don’t have the incentive. Voters don’t want economic growth: they voted against it in 2015, 2016, 2017 and in 2019. And why should they want it? Economic growth entails creative destruction which undermines communities and generates uncertainty. It means higher real interest rates, which would cut house prices and reverse the financialization from which Tory donors have greatly benefited. And, as Ben Friedman has shown, growth increases liberalism and tolerance which would diminish the Tories’ ability to fight atavistic culture wars.

We can put this another way. There’s a big difference between Thatcher and her epigones. Thatcher had clearly defined enemies (“the enemy within”) which she saw as barriers to economic growth: trades unions and nationalized industries. But who are today’s enemies? They are those the Tories cannot identify as such: monopolists, financiers and rent-extractors. Yes, Suella Braverman did try to portray benefit recipients as the enemy, but this was not so much economic analysis as soiling herself in public.

But the Tories have another problem. The last three Tory approaches to the economy were all one-off, time-limited. On a kind reading (there are others!) Thatcherite reforms raised potential GDP but output has long since converged to that higher potential, meaning that other growth-enhancing policies are needed. But what? Tory/Lib Dem austerity has left the NHS, local government and the criminal justice system semi-derelict, meaning that spending cuts are just impossible. And the thing about "Get Brexit Done" is that you can only do it once unless you look like a charlatan. 

The Tories therefore need something new. Which brings us to the fact that the current conjuncture of capitalism makes it very difficult to come up with something. There are three inter-related problems here:

 - How much legitimation does the system need, and what form should it take? Historically, one role of the Tory party has been to either suppress discontent (such as the Six Acts or Thatcher’s attacks on unions) or to buy it off (eg Disraeli’s electoral reform or the post-war accommodation to the welfare state and mixed economy). But which should today’s Tories do? Yes, they’ve introduced a windfall tax to ameliorate the most egregious unfairness of the cost of living crisis. But how much further should they go? Would increases in public sector pay and benefits be sufficient vote-winners to outweigh their costs in terms of higher inflation and interest rates? Or could it just garner support by continuing the culture wars?

 - Are we in a wage-led or profit-led regime (pdf), to use Marglin and Bhaduri’s framework? Thatcher thought we were in a profit-led regime, wherein attacks on workers would restore profit margins and business confidence and so kick-start economic growth. But this might not be the case today. In curbing consumer demand, weak real wages depress profits and hence motives to invest. Instead, we might now be in a wage-led regime (pdf), wherein wage rises, full employment and stronger worker rights would lead to sustained growth not just by boosting consumer spending but also by encouraging companies to invest in labour-saving productivity-enhancing new techniques. Unless you have an answer to this conundrum, you’ve no hope of having a coherent economic strategy.

 - Which sections of capital should the Tories serve? Falling real wages aren’t just bad for workers. They are also bad for those sections of capital dependent upon consumer spending. From this perspective, capital and labour would both win from policies that ameliorate the cost of living crisis. Such policies, however, are potentially inflationary to the extent that they would raise aggregate demand. Given the Bank’s current remit, that would mean higher interest rates and hence lower asset prices. That’s bad for rentier capital. Which is what Sunak means when he says he wants to “get a grip of inflation”: he doesn’t want to hurt rentiers with unnecessarily higher rates.

These three dilemmas are perhaps more acute now than they were under Thatcher. Which means that the task of developing a sensible economic policy would be daunting even for people of much greater ability than the current candidates.

Many people are complaining that these – especially Truss – are cosplaying at being Thatcher, with cargo cult talk of tax cuts and (unspecified) deregulation.

True, these are no answer to our problems. The 2008 financial crisis should have taught us that economic growth cannot be achieved merely by the state backing off.

But it’s human nature to retreat into one’s comfort zone when faced with uncertainty. And cleaving to old ideas in the face of contrary evidence is normal. The Labour right does it: it still struggles to face the fact that its no longer the 1990s. And the left – certainly in the 80s and 90s and perhaps beyond – has also failed to fully adapt to new times. There’s a name for this: Bayesian conservatism. And it’s not confined to politicos: one reason why there is momentum in asset prices is that equity investors cling too much (pdf) to their prior beliefs.

We mustn’t therefore blame the Tory candidates for clinging to Thatcherism.

In fact, talk of their personal weaknesses – obvious as they are – misses they key point. The fact is that our political structures, incentives and the nature of current capitalism all militate against adequate Tory responses to our crises.

Trinkets of frivolous utility

We’re living in an “age of anti-ambition” says Elle Hunt. And Stefan Stern says increasing numbers of over-50s are taking early retirement. As one of that happy band, let me suggest why.

It’s because with a modest effort, you can live well on around an average income, having days out, city breaks and good holidays. And – which is insufficiently remarked – such an income gives you access to the greatest books, films and music (unless you want to go to the opera or god help you, an Adele gig.)  

Beyond a certain point therefore – attainable by most middle-class 50-somethings – the acquisition of wealth becomes futile. There’s not much point buying a big house because you can only sleep in one bed at a time. Fancy cars will just get caught in traffic jams or by speed cameras. Expensive restaurants often serve bad food to the world’s worst people. And cruises are, a friend tells me, the Daily Mail at sea. His point generalizes. Expensive pastimes such as golf, horse-riding or yachting are all excellent ways of meeting people I would pay good money to avoid*.

One look at the mega-rich shows the futility of great wealth. Jeff Bezos, for example, goes on amusement park rides alone and makes brief trips into near-space, thereby only emulating a mid-ranking Soviet Union Air Force officer of 61 years ago. That’s a pathetic return on billions of pounds.

Scientific research corroborates all this. Whilst there is some albeit mixed evidence that money does buy happiness, it does not buy much. That’s why things like a good social life have such high monetary equivalence in terms of their impact on well-being: they, more than money, make for a good life. Which is nasty, because the hours spent accumulating money can prevent you developing a fulfilling social life.

As Porter Wagoner sang

Money can't buy back your youth when you're old
Or a friend when you're lonely, or a love that's grown cold
The wealthiest person is a pauper at times
Compared to the man with a satisfied mind

He was echoing some other great thinkers. Wealth and prestige said Adam Smith “are mere trinkets of frivolous utility”:

Power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniencies to the body…They keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death.

In 1930 Keynes looked forward to the economic problem – that of securing subsistence – being solved, a stage which some of us have achieved. When this has happened, he wrote:

It it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.

From this perspective, the question is not why people like me are stopping working or downshifting, but why more well-paid people do not do so.

One answer is that they’ve made imprudent life-choices. Ex-wives, private education for one’s children, drink and gambling habits, yachts, fast cars and a desire to live in London all keep the City supplied with senior staff.

So too does something else. Many successful people don’t regard work as something to be escaped at all, but as a means of fulfilment.  Warren Buffett and even Elon Musk think what they are doing is fun. Paul McCartney and the Rolling Stones have kept working into their 70s and 80s, but their contemporaries who became accountants have mostly stopped.

This might help explain why the UK has relatively few unicorn businesses. At some point in a company’s history, running it stops being a fun job of solving engineering and coding puzzles and becomes instead grunt bureaucracy. Why not then sell up to some bureaucrats and live off a few million? There are several reasons: ego gratification; power; prestige; a sense of being a success; or a desire to beat your peers or father. A desire for what money buys, however, is, I suspect, low on the list. 

For those of us without these other motives the one great thing that wealth buys is not so much goods and services as freedom – the ability to step out of the rat race.

If they’ve read this far, younger readers will be screaming their heads off: “all this is the solipsism of a privileged boomer.”

Which it is of course. They don’t have my luck in being able to retire early, simply because the unaffordability of housing means that cash that would otherwise go into pension savings is diverted towards mortgage or rent payments or paying off student loans. High energy prices, of course, have the same effect. Rather than save for retirement, as I could in my 30s, today’s young people must support rentiers.

Their righteous discontent, however, demonstrates my point. They take little comfort in consumer goods such as smartphones and flat screen TVs because these are indeed trinkets of frivolous utility. What really matters to them is the freedom that would come from being able to live cheaply – a freedom that has been stolen from them.

Capitalism today does a good job of supplying youngsters with new affordable gadgets. But it does not give them the greater goods of real freedom and autonomy.

You might think this is a feature, not a bug. Even if most individuals – beyond a point - don’t need to accumulate material goods, capitalism as a system does: accumulation is its very nature. This isn’t a contradiction. For one thing, even if only a minority of rich people do want to become even richer, it is this minority that gets to run companies. And for another, capitalism is an emergent process which constrains even of the privileged and in which outcomes are independent of individuals’ wishes. As Marx said:

Capital is reckless of the health or length of life of the labourer, unless under compulsion from society…But looking at things as a whole, all this does not, indeed, depend on the good or ill will of the individual capitalist. Free competition brings out the inherent laws of capitalist production, in the shape of external coercive laws having power over every individual capitalist.

You might also think that a system that requires the accumulation of profit also requires a big supply of workers. From this point of view, debt bondage is a good thing: it forces people into employment thus enlarging the pool of pliant labour-power. Elementary economics says that if skilled older people drop out of work the economy loses human capital and hence potential output and (more importantly) profits.

In this sense, Keynes was naïve in thinking that the problem of adjusting to an affluence that makes leisure possible was merely a psychological one – a naivete that arose from his lack of a class analysis. The problem is also that capitalism cannot cope with a society of frugal leisure-seekers.

Or can it? Perhaps this view is too harsh on capitalism. Older people can be one of what Joel Mokyr calls the “forces of conservatism”. They can be cantankerous, hard to manage, resistant to change, and uncomfortable with new technology; to this extent ageism in the workplace has a rational basis. Letting them go might therefore pave the way for productivity improvements and innovation.

Few people claim that the post-mid-2000s productivity slowdown was due to a loss of talented people, nor that the post-1945 productivity surge was caused by an influx thereof. And nor should they. The biggest determinants of productivity are institutions: organizational capital, state capacity, well-functioning markets and so on. Capitalism can survive seeing its more privileged subjects drop out or downshift. Whether it can survive increasingly dysfunctional institutions is another matter.  

* In fact, if you come from a poor background and are in a well-paid job the mere act of going into the office will surround you with people you don’t feel comfortable with. This, I suspect, is an under-appreciated cost of social mobility.