Against schoolteacher politics

There's a common mistake in looking at politics which is shared by the left and right - to regard bad policy as mere intellectual error.

Here, for example, is Mike Denham of the TPA complaining that Jeremy Hunt "has not tackled the big problem" of "excessive public spending", as if the Chancellor were simply not just clever enough. What he fails to say is that such a high and rising share of public spending in GDP is not just the result of demographic forces and a lack of productivity growth in the NHS. There's something else - economic stagnation.

Some back-of-the-beermat calculations show the point. Since 2007 real GDP has grown by just 1% a year. Had it instead grown by 2% (which is still less than it did in the 40 years before then) the economy would be 16% bigger than it is. Which means that for the same level of government borrowing we could have £100bn more public spending and still have lower shares of spending and taxes in GDP than we have now. Alternatively, with the same tax take, we could have eliminated the deficit and still had £13bn higher public spending. Or, if you prefer, we could have the same deficit and a six percentage point lower share of spending in GDP, or five percentage point lower share of taxes.

In other words, "excessive" public spending is the product not (merely) of regrettable political choices but of weak growth. The share of public spending in GDP is driven much more by the state of the economy than it is by the will or ideology of governments. Had we had happier economic circumstances, it's highly likely than Denham's complaints would have less force.

But why have we have such weak growth? Here, we encounter another example of the mistake I have in mind: the financial crisis of 2007-08 is often attributed to bankers' bad decisions and/or the failure of regulators*.

What this misses is the point made (pdf) by Ravi Jagannathan and colleagues - that the crisis was "the symptom not the disease". High savings by fast-growing emerging economies such as China forced down western interest rates. In a better world, this would have financed a boom in useful capital spending, thereby increasing productive potential and real incomes. But it didn't because there was, as Ben Bernanke said in 2006, a “dearth of domestic investment opportunities” in the west. The upshot was therefore a boom in property speculation and a reach for yield that fuelled demand for mortgage derivatives. In this way, falling yields led not to greater wealth for all but to financial fragility and bust.

The crisis, therefore, was not (merely) the result of individuals making bad decisions. Yes, they did, but people make mistakes all the time; blaming the crisis on mistakes is like blaming a plane crash on gravity. Instead, it was the product of fundamental forces within capitalism.

Yet another example of what I have in mind is fiscal austerity. Countless economists have pointed out - correctly - that this is terrible economics (pdf). What this misses is why such a bad policy was selected for. The fact is that austerity served many interests - low interest rates suit financiers and rentiers - and the media, partly because it represents these interests, fails to scrutinize adequately such policies. Austerity wasn't just an intellectual failure, but an institutional one.

A further example lies in policies towards economic growth. Intellectually, these are trivial; most economists would agree upon half a dozen pro-growth policies even if they disagree about their weighting: planning reform; tax reform; rejoining the market; better competition policy; infrastructure investment; better vocational training; and so on. The absence of these policies, however, is not an intellectual error. It's because powerful vested interests would be opposed to them. Achieving pro-growth policies is a matter of power, not brains.

A final example is Peter Stefanovic, whose regular videos expose Tory dishonesty. The problem here is not that his work is wrong. It's not. It's that it begs the question: so what if the Tories lie? All informed Tory voters knew in 2019 that Boris Johnson was a serial liar. And they didn't care. Dishonesty is a path to power. In this context, the truth doesn't matter.

What's going on here is, I suspect, an example of how even good schools inculcate an ideology into us. We learn at school that if you are clever and honest you will get a reward or at least avoid punishment. And we carry this lesson with us even into domains where it is not true, such as politics. It might be no accident that the mistake I'm describing is often committed by academics. Take for example this from Case and Deaton:

If technological change and globalization have been responsible for hurting the working class, it is not because that is what technological change and globalization must do; it is because policy was neither wise nor imanginative. (Deaths of Despair p222).

They treat bad policy as if they were marking a bad student's essay. Which is professional deformation. Bad policy is not mere intellectual error. It is the product of capitalism - of economic stagnation and of how capital exercises power over the state. This is true whether you regard bad policy as "excessive" public spending, austerity or lax regulation.

My point here is that political analysis and change requires much more than intellect and knowing the truth. Politics is not merely a matter of asserting one's intellectual or moral superiority. It requires an analysis of capitalism: why it has delivered stagnation, and why it holds so much power over government.

You might think this is a Marxian claim. Well, not entirely. It's also Econ 101 - the idea that people, including politicians, respond to incentives. It is incentives that got us into this mess. And it is different incentives that will get us out of it.

* Regulatory failure is the kindergarten theory of economics: it regards bankers as being like unruly children who need constant close supervision. If such a theory is correct, it is hardly a defence of capitalism.

Comments

[ltr]

Since 2007 real GDP has grown by just 1% a year. Had it instead grown by 2% (which is still less than it did in the 40 years before then) the economy would be 16% bigger than it is....

[ An exceptional essay, simply perfect. ]

[Aaron Headly]

We see a version of this in the States where journalists treat 'centrism' and capitalism as givens rather than as political inventions. Defenses of 'The Center' and capitalism are the cover the journalists use to claim impartiality/objectivity, and that leads to weird distortions.

Most* U.S. politicians themselves do not engage capitalism as a subject (they will attack socialism with vigor and without fear, but they do not address capitalism directly), and the few politicians who do embrace 'centrism' as though it has a constituency are either venal or ludicrous.

* The exceptions are notable for the loneliness of their voices.

My 2¢, anyway. Er, 2p worth.

[Some Guy]

I struggle with differentiating two possibilities:

1) Growth is lower now because of the power dynamics you describe above: inequality, media concentration, declining labour unions, etc. have all combined to create a situation where stagnation is fine with the people in charge, so that is what we get.

2) Growth is lower because we have failed to find an energy source better than oil, and with respect to oil (and coal and gas), we have used the best resources first and are having to work harder and harder to sustain consumption. Meanwhile, without better energy sources, we struggle to maintain all the infrastructure and complexity we developed following the switch to an oil based economy. This view is supported by the fact that we continue to see technological progress in any field that lacks mass (IT, communications, genetic engineering, biotech) and stagnation in any field that has mass (construction, transportation, food production).

In the same way that academics are trained to see questions as based on intellectual prowess and absent power dynamics, economists are trained to see questions as being based on incentives and absent physical constraints such as energy availability - something to consider, anyway.

[Some Guy]

I should add that I don't disagree with anything you've said in your post, it is all 100% true in my view. Just that there could be aggravating or less proximate factors causing what you are observing.

[Blissex]

«a common mistake in looking at politics which is shared by the left and right - to regard bad policy as mere intellectual error. [...] Politics is not merely a matter of asserting one's intellectual or moral superiority.»

So far the clearest indication from our blogger that he has abjured wykehamism :-).

«The fact is that austerity served many interests - low interest rates suit financiers and rentiers [...] Austerity wasn't just an intellectual failure, but an institutional one.»

The thoroughly imaginary austerity was no intellectual failure, no institutional failure either, but a political success, well explained by George Osborne: “A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.”

«Achieving pro-growth policies is a matter of power, not brains.»

Whose growth? As far as the UK upper-middle and upper-classes are concerned, pro-growth policies have been achieved for decades. The question is sometimes "who is 'our own'?".

[Blissex]

«the crisis was "the symptom not the disease". High savings by fast-growing emerging economies such as China forced down western interest rates.»

That is only part of the story, and anyhow those high savings rates were themselves engineered by trade policy (WTO entry) and IMF policy (Asian crisis) driven by "Washington Consensus" power and goals.

«In a better world, this would have financed a boom in useful capital spending, thereby increasing productive potential and real incomes. But it didn't because there was, as Ben Bernanke said in 2006, a “dearth of domestic investment opportunities” in the west.»

That was a weird claim: western corporates invested fantastic amounts offshore. The investment strike in the "west" was largely engineered to discipline workers, by moving productions and jobs from unionized countries to non-unionized ones.

«The upshot was therefore a boom in property speculation and a reach for yield that fuelled demand for mortgage derivatives. In this way, falling yields led not to greater wealth for all but to financial fragility and bust.»

What? Property and USA stocks have been booming for the past 14 years, is that "financial fragility and bust"? From the point of view of the upper-middle and upper classes 2008 was just a blip, papered over by treasuries and central banks "money no object".

«So what if the Tories lie? All informed Tory voters knew in 2019 that Boris Johnson was a serial liar. And they didn't care. Dishonesty is a path to power. In this context, the truth doesn't matter.»

The truth does matter a lot: they voted for him because he was delivering robustly and authentically on making them a lot of money quite fast via property and finance; tory voters don't worry much about lies on the irrelevant details, but are absolutely focused
on reliability where it matters, ask Major or Brown.

«You might think this is a Marxian claim. Well, not entirely. It's also Econ 101 - the idea that people, including politicians, respond to incentives. It is incentives that got us into this mess.»

Which mess? I look around when I visit the south-east and go through tory towns and suburbs and I see comfortably affluent tory voters filling John Lewis and M&S shops. Sure, inflation at 14% is no joke, but with rents growing contractually at 14+3%, and the real reference interest rate being minus 9%, I see no problems for finance and property rentiers.

[Blissex]

«I struggle with differentiating two possibilities:

1) Growth is lower now because of the power dynamics you describe above [...] a situation where stagnation is fine with the people in charge, so that is what we get.

2) Growth is lower because we have failed to find an energy source better than oil [...] technological progress in any field that lacks mass (IT, communications, genetic engineering, biotech) and stagnation in any field that has mass (construction, transportation, food production).»

But they are two completely different types of "growth":

* The 1) strong "growth" is growth of monetary income (purchasing power) of the people who matter. It is very real "growth" of their own GNI.

* The 2) weak "growth" is the growth of physical production per worker.It is quite clean stagnation of real GDP per worker.

How can case 1) "growth" happen at the same time as case 2) "growth"? No problem, it is an old mechanism called "redistribution", that manifest itself as rising rents/prices or doubling-up in housing, and low inflation and moving production to areas with lower wages followed by high inflation and stagnant wages, etc.

[Blissex]

«"growth" of their own GNI. [...] stagnation of real GDP per worker.»

The national statisticians of several countries have been making clever and honest (as far as "methodology" footnotes go) efforts to reconcile the two. :-)

An example:

https://www.ons.gov.uk/economy/inflationandpriceindices

"The Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 9.2% in the 12 months to February 2023, up from 8.8% in January. [...] On a monthly basis, CPIH rose by 1.0% in February 2023, compared with a rise of 0.7% in February 2022."
"RPI All Items: [...] Not a National Statistic. Change over 12 months 13.8 % 2023 FEB"

RPI 1988 FEB: 103.7; 2023 FEB: 364.5. [3.51 times growth, 3.65% compound per year]

CPIH 1988 FEB: 47; 2023 FEB: 126. [2.68 times growth, 2.86% compound per year]

[ltr]

There's a common mistake in looking at politics which is shared by the left and right - to regard bad policy as mere intellectual error....

[ This is precisely the reason that the current Labour elite need to remove Jeremy Corbyn from the Party. The traditional labor-supporting ideas of Corbyn are as intolerable for the likes of a Starmer as for Tory leaders.

This to me is frightening. ]

[rsm]

What if economic stagnation is only a problem for models of economies and not the non-ergodic experience of real humans living in the real world? Why should my forest sanctuaries be logged and turned into plantation forests, all in the name of economic activity?

[aragon]

All you need is a different Weltanschauung and and not a green one.

The crisis was short term greed by the rich. They captured 100% of what growth there was and immiserated the rest of us with asset inflation, outsourcing (globalisation) and immigration.

It wasn't lack of investment opportunity, but the empty suits occupying power.

The bias towards the abstract, was an abuse of Energy Return on Energy Invested. ERoEI

Equity Return on Equity Invested. ERoEI

As if making money (rather than Energy) was an end in itself.

Money needs to work, do something useful, produce something tangible or it is just inflation.

House price inflation is just part of the money illusion.

We could always take their toys away.

As yanis varoufakis explains:

https://www.wired.co.uk/article/future-economy-yanis-varoufakis

Yes to the first and second (Keynes), no to the third (Green) and no to the distributed ledger (Blockchain) :)

[aragon]

Spectator Coffee House.

https://www.spectator.co.uk/article/is-it-time-to-tinker-with-vat/

No Ed, no-one should tinker with VAT, it is already at it's theoretical maximum (20%) and too few goods and services are exempt.

Even those of meagre state benefits, get to pay VAT as well as Food and Energy (5%) inflation. Energy also contains numerous green levees.

Look at Unearned income for a source of Tax rises. Rishi Sunak - 22% Tax rate on income! (Net Worth £700 million).

[aragon]

https://hindenburgresearch.com/block/

"It has been an effective modern marketing approach—Dorsey has been celebrated by regular people, Silicon Valley elite, and investment bankers alike on his path to becoming a muti-billionaire.

But a close look at Block shows that it has not actually changed the game—like traditional financial services companies, its key focus seems to be on dressing up predatory loans and fees as revolutionary products, avoiding regulation and embracing worst-of-breed compliance policies in order to profit from its facilitation of fraud against consumers and the government.

The company seems to be betting that the consequences will either be a ‘cost of doing business’ or at the very least, come later.

Either way, we expect the luster will wear off and investors will realize that Block is really a money-losing, undifferentiated loan & fee originator. Like many of its peers in fintech and banking, it will eventually trade closer to its net tangible book value.

In the meantime, Dorsey and top executives already sold over $1 billion in equity near the top, ensuring they will be fine regardless of the outcome for everyone else."

RoFL... to further emphasise...

"like traditional financial services companies, its key focus seems to be on dressing up predatory loans and fees as revolutionary products, avoiding regulation and embracing worst-of-breed compliance policies in order to profit from its facilitation of fraud against consumers and the government."

[rsm]

@ aragon

Where's the harm, since the Fed can insure innocent bystanders as the SVB bank run shows?