Stumbling and Mumbling

A case for fiscal austerity

The Labour party's talk of maxxing out the country's credit card is an obnoxious lie. But this does not mean the party is wrong to want a tight fiscal policy. There is a good case for it to do so, and it's got nothing to do with arbitrary fiscal rules or the Tories having "spent all the money."

Labour itself isn't going to make this argument, and why should it given that politics is about power and not persuasion? So I'll try.

It starts from the brute fact that unemployment is close to a 50-year low, at just 3.8% of the workforce. Granted there are another 1.9 million people (equivalent to over 5% of the workforce) out of the labour market who say they'd like a job, but many of these are unwell or have caring commitments and so are available only for lighter or more flexible work. The question "where will the money come from?" is a stupid one. But "where will the workers come from?" is certainly not.

Yes, there are some answers: immigration; some early retirees could be tempted back to work by better working conditions; and cutting NHS waiting lists would also get some back to work.

Nevertheless, the fact is that the pool of available labour is small. Yes, there are some GPs out of work, but fewer builders and skilled workers than there were a few years ago.

Which means that any significant rise in public spending and hence demand for labour is likely to bid up wages. The Bank of England will see that as potentially inflationary and would raise interest rates. This wouldn't wholly be disastrous: higher rates would help bring down house prices and reduce some of the more egregiously socially useless financial activities. But it does mean you could kiss goodbye to big housebuilding, as this is the most interest-sensitive sector of the economy.

Yes, Labour could prevent this by raising the inflation target. But nobody in politics is arguing for this. And whilst there's a case for doing so, it doesn't solve the physical constraint, of there being just not enough doctors, housebuilders or skilled workers in the green economy.

You might object that there's an obvious solution to all this: to raise taxes. The need to do this is not to raise money: governments can do that anyway by printing or borrowing. Instead, it is to free up real resources. Higher taxes would cut consumer spending thereby depressing demand for labour in retailing and hospitality, thus releasing workers to go into social care, construction, decarbonizing and the other things we want to do.

There are, however, big problems with this.

One is political. There's been no preparing of the ideological ground - no campaign to say that taxes are the "price we pay for a civilized society" or even that they are an economic necessity if we're to have good public services. From this background, tax rises would look like Labour going back on its word, being duplicitous.

And even if taxes were to rise, there'd still be issues.

One is that the mega-rich don't spend much and so higher taxes on them would not free up many real resources. Justice requires that we tax the mega-rich more and help the worst-off. But this does little to achieve the economic aim of shifting resources towards the public sector and away from the private. That requires tax rises upon those who will cut their spending as a result. If we want better public services, we must pay for them ourselves.

But there are problems with this, even aside from the unpopularity.

One is that higher taxes will cut jobs in retail and hospitality but do little to destroy the many socially unproductive but often well-paid jobs: the bullshit jobs created by managers who expand their empire (or promote an image of "wokeness"!) at the expense of shareholders; the lawyers and tax advisors who exploit an overly complicated tax system; bureaucrats who administer a repressive benefits system; fund managers who rip off investors; and producers of various forms of pollution, be they carbon emissions, financial risk which taxpayers pay for; or the intellectual pollution of the media. To destroy jobs such as these requires microeconomic policies which nobody is even thinking about.

And then there's the fact that, quite simply, reallocating labour takes time.

My chart shows this by plotting a measure of labour reallocation. To see how this works, imagine an economy of five workers in each of two sectors. If employment in both sectors grows at the same rate then net labour reallocation is zero; for any worker shifting from one sector to the other another must go in the opposite direction. If, however, the sectors grow at different rates, labour is being reallocated. If employment in one sector falls from five to four and that in another grows from five to six, net reallocation is one. My chart measures this process across 16 main sectors, with net reallocation expressed as a percentage of the labour force.

This shows that reallocation is typically small - usually not much more than 1% of total employment, or less than 400,000 people per year.

The economy, then, is sticky and slow to change. Most people prefer to stay in jobs they know; employers prefer relevant experience; it takes time for people to discover opportunities in different industries; to decide to make a radical career change; and to retrain. It is only times of distress that force many people into such change; note that the highest reallocation rates were in bad times such as the 2009 recession and 2020 Covid outbreak.

We can't therefore merely flick a switch and move tens of thousands of workers quickly from retailing to healthcare, construction or the green economy. The world just doesn't work like that. Change has to be gradual. Reeves is right to say "we’re not going to be able to turn things around straight away."

There is, therefore, a case for Labour having a tight fiscal policy.

You might object that all this seems to contradict a great point made years ago by Dan Davies: good ideas don't need lots of lies told about them.

I think there's an answer here. Dan's point applies when the audience is intelligent and informed. Which is not the audience for Labour's drivel about the credit card being maxxed out. When Jones, Reeves and Starmer use such language they are speaking not to economists but to political reporters who are institutionally stupid. The arguments they use to other audiences would, I would hope, be a little like the one I've made.

And it is emphatically not a right-wing argument. Macroeconomic policy must not be a matter of ideology but of empirical fact: you should run a loose policy when there's spare capacity in the economy and a tight one when there isn't. Truss's unforgivable error was to not appreciate this.

What's more, a tight fiscal policy is entirely compatible with radical economic policies elsewhere: land value taxes, a basic income, a maximum wage, planning reform, economic democracy, proper regulation of monopolies and so on. And don't think such measures don't address the pressing need to improve public services. They do: anything that gets the economy growing will boost tax revenues.

One of the great failings of social democracy has been think of economic policy too much in terms of public spending and not enough about other policies to foster equality and efficiency. The big failing of Starmer's Labour is not that it is offering fiscal austerity, but that it is offering nothing else.

On lazy moralizing

Politicians prefer lazy moralizing to intellectual enquiry.

I say this because of Sunak's speech last week in which he condemned far-right extremists "who are hostile to our values and have no respect for our democratic traditions." What he did not do in that speech is ask: why has right-wing extremism increased from a nuisance to something more troubling?

His opponents were quick to point out that Sunak's Tory colleagues have been promoting it. But that's only part of the answer. Anderson and Braverman have been sowing their seeds in fertile ground. We now have abundant evidence corroborating Ben Friedman's 2006 finding that economic stagnation breeds illiberalism and hostility to democracy. Ana Sofia Pessoa and colleagues have shown that "fiscal consolidations lead to a significant increase in extreme parties' vote share." Markus Brueckner and Hans Peter Gruener have described how "lower growth rates are associated with a significant increase in right-wing extremism". And other researchers have shown how deaths of despair - which are symptoms of underlying social problems - are correlated with higher support for Brexit and Trump. 

Sunak, however, like Starmer, omitted to mention all this evidence. Public opinion is not an exogenous datum. It is shaped by socio-economic conditions and political activity. Intelligent politics wouldn't merely condemn some beliefs, but inquire into their origins.

This, however, is by no means the only sign that Westminster is divorced from social science.

Another example is the demand from many Tories for tax cuts and a smaller state. What this misses is that achieving this cannot be merely a matter of ideology and will-power. A smaller state requires particular socio-economic conditions, one of which is an economy healthy enough to provide decent public services with a lower tax take*.

Yet another example was Liz Kendall telling youngsters that there'll be "no option of a life on benefits". This is mere punching down which not only begs the question of how many people actually want such an option, but also deflects attention from much bigger economic issues, such as how to end our 15 years of stagnant productivity and real wages.

What we have in all these cases is vacuous moralizing where there should be serious thinking about the social sciences. Gary Younge is dead right to say that the commentariat is "more interested in denouncing what is happening than understanding why it is happening." And Phil Burton-Cartledge is right to say that political commentary is "superficial" with no grasp of the social relations, the articulations of interests". And what's true of commentators is true too of politicians. As Lewis Goodall recently tweeted:

The Westminster (and much of the internal Conservative) conversations continues to miss everything which is driving [the collapse in Tory support] - the quietly radicalising effect of a collapsed NHS, a broken housing market, near bankrupt local government, a still sclerotic economy.

In one respect, this ignorance is unusual. Thatcher and Blair both entered office with some ideas about society and the economy - Thatcher about how we needed to curb trades union power and bring down inflation and income tax rates down and Blair about how social democracy could be updated to tackle late 20th century social problems. Starmer's Labour, by contrast, shows no similar sign of engaging with social or economic analysis. There is, in media-speak, no "narrative."

Why is this?

Partly, it's part of a general decline in intellectual standards, which has seen the expunging of intellectuals from public prominence. It's always easy to prefer lazy moralizing to serious thinking: such moralizing, of course, has as much connection to serious moral philosophy as economicky talk has to proper economics.

One reason for this decline lies in the dominance of the worst sort** of journalist, the Westminster political correspondent who views everything through the single lens of what plays well to their own tiny minds. Starmer can get away with drivel about the Tories maxxing out the nation's credit card because it is a good "attack line". The truth? Well who gives a damn about that?

The dominance of that sort of journalism has another effect. Politicians' priority is to respond to 24-hour news, and news itself has a bias in favour of salient individual events and against slower-moving trends. This means that important emergent trends - those underlying forces shaping public opinion - are neglected: the rise of immaterial labour which has contributed to liberal attitudes among the young; the economic stagnation that's led to illiberal reaction among others; or the rise of an unpropertied graduate cohort that feels alienated from politics.

Such ignorance is of course reinforced by the media's class bias: although most journalists are poorly paid the most dominant media figures are not, and come from a privileged elite (pdf) which feels little need to understand society and economics.

Such insularity and incuriosity means that the political class has been systematically surprised by important developments such as Brexit, the popularity among the young of Corbynism or the sudden collapse in support for the Tories.

But there's something else. Labour and the Tories are scared to look at the economy for fear of what they might find. It's unlikely that productivity and real wages can be raised much by mere tweaks acceptable to the forces of conservatism and their gimps in the media. Instead, thinking people who are not especially leftist now realize that promoting growth requires changes in property rights: higher taxes on landlords; less power to nimbys to block new building; the break-up of big companies; less restrictive intellectual property law; and tax simplification. All of these measures would be opposed by powerful interest groups. And that's before we even consider the possibility that inequality and even capitalism itself might be barriers to growth.

Attacking benefits claimants or migrants is easy. Attacks upon the powerful - land-owners, financiers, rentiers and monopolists - are not.

Taking the easy line, of course, runs into the dilemma: either we see public services decline even further, or taxes have to increase still more. Either risks further enflaming hostility to the political class - a hostility which will not take an intelligent or enlightened form.

You might think there's a way out of this dilemma: politicians should show some intellect and courage. But then, to call for this in the absence of socioeconomic conditions that produce such people is itself another form of lazy moralizing.

* There are other pre-conditions. Marxists would point to an absence of class struggle, whilst the right might point to a society and culture of individual or community self-help. All agree that a smaller state is the product of social conditions, not merely a moral desideratum.

** There's stiff competition, from financial journalists who can't distinguish between expertise and vested interest or from music journalists who don't know an ostinato from off stump.

You're a Marxist!

Many of you are Marxists - even though you might not realize it.

To see what I mean, consider the following:

One reason for Britain’s high costs in construction may be the result of NIMBY power. We need therefore to reduce this power, perhaps by allowing home-owners to vote (pdf) on schemes that would enable higher-density building. We also need to reform the tax system by replacing business rates with a commercial land value tax, which would be payable by the landowner, not the business. We need also to rethink intellectual property laws as the present patent system restricts growth and innovation. We must break up inefficient monopolies such as Openreach to foster more competition. And we must enforce the end-to-end and right-to-exit principles in order to weaken big tech and so foster new tech start-ups and the development of the internet.

There's a common theme behind these proposals. It's a belief that we need to restructure property rights - reducing those of patent-holders, landlords and monopolists and big tech - because existing ones constrain growth. Which is just what Marx thought happened:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters.

Those calling for these changes, however, don't think of themselves as Marxists: I've quoted Sam Dumitriu, Sam Bowman, Ben Southwood, Stian Westlake and Cory Doctorow*. But in claiming that property relations have become fetters on growth, they are thinking in terms consistent with Marx.

And not just on this point. They presume that their proposals are feasible. They believe therefore that when there is a mismatch between what economic growth requires and actually-existing property relations it is resolved by the latter changing rather than by us having to accept stagnation**. This is what G.A. Cohen, in his Karl Marx's Theory of History: A Defence, called the primacy thesis: "the nature of a set of production relations is explained by the level of development of the productive forces".

This is historical materialism. I therefore welcome our new Marxist colleagues.

In being Marxist in this sense without knowing it they have an illustrious predecessor - Mrs Thatcher. The defining feature of her government was the belief that production relations had become a fetter on growth, and that these had to (and could) change. Hence the cuts in income tax - increasing income-recipients' property rights - and reductions in trade union power, which shifted the balance of power within production relations in favour of capital.

Thatcher was a better Marxist (and more successful politician!) than most of her Labour critics. Except for a short-lived sign of intelligence under John McDonnell, the party has not had in recent years a well-worked theory of how property relations must change to facilitate growth. Marxists and Stian and colleagues know something that social democrats often miss - that fostering economic growth sometimes requires more than merely looser fiscal policy.

Of course, accepting one Marxian proposition does not make you a Marxist, any more than my accepting Burke or Hayek's points about bounded knowledge and rationality make me a Burkean or Hayekian***. You can accept Marx's historical materialism which rejecting some of his other ideas such as alienation and reification; ideology; the labour theory of value; tendency for the profit rate to fall (pdf); and the centrality of economic class. I suspect you'd be wrong to do so, however, but then I also suspect that many non-Marxists haven't so much considered these ideas and rejected them so much as they just haven't thought about them at all.

Equally, of course, we Marxists aren't so confident that the incompatibility between the development of the forces of production and current property relations can be solved merely by moderate tweaks to the latter. It's possible that low profit rates (and expected profits) are stifling innovation and investment; that the crisis-prone nature of capitalism is also doing so (we're still living with the legacy of 2008); and that capitalist hierarchies are also inefficient. If so, more radical changes are needed than Dumitriu, Bowman, Southwood and Westlake are calling for. My view on this is merely empirical: we should go down their road and then see if we need to go further.

The fact that so many people are historical materialists in a loose sense does not of course make the theory true. Many of us would resile from its teleological element - the idea that it must inevitably lead to socialism. Others have questioned Marx's idea that production relations will change to enable the forces of production to develop on the grounds that it invokes functional explanations which can sometimes be suspiciously like just-so stories****: Wright, Levine and Sober's Reconstructing Marxism is good on this debate. And yet others might question whether we need big organizing theories at all: what's wrong, they say, with small-scale granular ideas of history or economics?

These are open questions. My point here, though, is to emphasize something that's often forgotten. Marxism is not just a normative theory of what should happen and it's certainly not, as Tories want to claim, some sinister conspiracy of loons. Instead, it is part of the western intellectual tradition - a set of ideas (many derived from Marx's predecessor's) which can help organize our ideas today. Non-Marxists shouldn't be so squeamish about borrowing his ideas or acknowledging his influence upon them.

OK then: some people distinguish between Marxians (those influenced by Marx's ideas without subscribing to revolutionary socialism) and Marxists. If you like this distinction, the Sams and Stian are Marxian. But, hey, why spoil a good title?

* I suspect, however, that Cory Doctorow, who advocates breaking up big tech firms, wouldn't be so surprised or alarmed to be called Marxist.

** Yes, dear reader, I am eliding here the distinction between what should happen and what does happen. But then, I'm not sure Marx wasn't doing the same.

*** Perhaps the difference between me and some others is that I acknowledge the fact that I think within intellectual traditions and make no claim to originality.

**** It's possible that the process is a little like natural selection in biology. "Goodish" production relations do eventually get selected for because people with an interest in developing the productive forces sooner or later get the power to change them. Such a process is consistent with there being long periods of tension between the productive relations and productive forces, just as somewhat maladapted species can survive for a while.