Aug 072012

Demand Management?

Given the current crisis of capitalism there are many commentators who are arguing that the left, or progressive side of politics, need to return to an over-arching counter-theory to capitalism. Indeed, the shock of the present crisis is leading to a fundamental re-evaluation of the very form of capitalism itself. Not only is the crisis allowing for a reappraisal of the long-standing economic views, it is also generating considerable rethinking on all sides of the political/idealogical spectrum as well. In some cases this reappraisal is allowing us to look again at writers and thinkers who have previously been shunned and written-off. The irony of this crisis is that a re-reading Marx throws-up insightful historical challenges and allows us to find pertinent resonances with today’s political economy. This must be giving many on the left a tingling sense schadenfreude.

As with Karl Marx, so it is with John Meynard-Keynes. I’ve just finished reading Robert Skidelsky’s Return of the Master, a brief account of the relevance of Keynesian economics as a response to the present economic crisis. Originally published in 2009, at the point when the shock of the crisis was being tentatively dealt with, Skidelsky outlines the key ideas of Keynes and how they might be applied in order to ensure that there was no return to recession. Obviously, economic events have continued to zig-zag since Skidelsky put pen to paper, and the early opportunity he describes to embed recovery now seems to have been squandered with the self-defeating drive for austerity. Given the circumstances, then, these are timely ideas that are rightly enhanced rather than diminished, and need to be more fully explored.

Robert Skidelsky argues that Keynes would have said that this ongoing crisis is based on three flaws. The first flaw has been institutional, with the governing and regulatory authorities being unprepared to deal with the high level of uncertainty that the global economy is now struggling with. Secondly, Skidelsky points out, has been a significant flaw in intellectual thinking that has been embedded around economic theory since the mid-1970s. This thinking says that we are all independent, rational economic agents that are capable of always making an optimum decision about our well-being, as long as government doesn’t interfere. Finally, there has been a collapse of moral thinking, where bankers have gambled shareholders and taxpayers money without incurring any personal loss or accountability themselves.

While many have argued that the present crisis is a problem of debt, Skidelsky argues that if we employ Keynesian insights into the origin and management of the crisis we might see the cause and the solution in a different light. Rather than thinking of this financial crisis as a problem of debt, Keynes’ insight is to see this as a problem of excessive saving. Rather than looking at the individual countries that are facing crisis we should, according to Keynes, take a step back and look at the level of aggregate demand in the global economy. If we did step back we would see that there are considerable amounts of capital looking for investment opportunities. The problem is that there is so much uncertainty that investors are not investing and instead are looking for safe-havens in which to hoard their liquid assets, either as cash or bonds. Everyone is battling-down-the-hatches for an imagined on-going storm, and as Keynes points out, the herd mentality takes over leaving the financial system to run dry of lubricating credit and finance.

This is not a crisis of debt, argues Skidelsky, it is a crisis of thrift and hoarding. Overall there is more than enough capital in the international financial system, it’s just that much of it is being locked away. The levels of capital investment by both private companies and by individuals has dropped considerably, and continues to be depressed. In this scenario it is left to the investor of last resort to step-in and provide support for investment until private investment returns to sustainable levels. That’s government acting on our behalf. It will only be when private investment is functioning in a more balanced way that governments can begin to deal with their accumulated budget deficits and start to manage their debt overhangs. This, of course, will take time and effort to achieve, but as Keynes points out, we have to make an assessment about the future anyway, the question is do we have sufficient confidence in that future? Governments role, therefore, is to enhance certainty in the financial system so that investors can make their plans for the future, knowing that they are likely to get a reasonable return. It is this confidence in the future that only government can provide in these circumstances, and which has been so clearly blown away in the present responses of governments around the world, some who have followed the heard and set unrealistic short-term targets and made irresponsible analogies with national credit-cards and household debts.

Ironically personal debt is being paid off at record levels, but as Paul Krugman points out, ‘Your spending is my income, and my spending is your income’, so demand is being further depressed because of the ongoing lack of confidence. Promoting and directing demand, therefore, is the number one priority for governments in these circumstances. Since the 1980s demand in the UK economy has been stoked by privatising debt. The rise in home ownership, personal loans, credit cards, tuition fees, and so on, have given many the sense that their relative economic position has improved. However, there is good evidence, suggests Skidelsky, that overall growth rates have been lower following the Reagan-Thatcher period than in the previous Keynesian, demand-management period. It is going to be difficult, therefore, for the UK and US economies to be rebalanced on the basis of the expansion of conspicuous consumer activity. Instead, the expansion of the economy is going to have to be directed through investment in collective and shared resources, manufacturing, transport and energy services. The time to worry about debt, argues Keynes, is not in the slump but in the boom.

In the meantime we have an opportunity to renew much of our crumbling infrastructure on the basis of the long-term loans that Britain has access to on the markets at record low rates. How we prevent the hoarding of resources that could otherwise be invested is going to be the greatest political challenge of our recovery. How do we ensure that the resources we direct into the economy are going to have any effect? Well, the £350 billion that has gone into the banks as part of the quantitative easing programme run by the Bank of England doesn’t seem to have had any impact in the real economy. The banks are hoarding this cash as insurance against uncertainty. It’s not being invested directly. The job of government in these circumstances is to focus this investment directly and urgently into the economy. Many argue that there is nothing worse than leaving our children with our debts. There is something far more pernicious though, and that is keeping them in poverty now and depriving them of the resources to make a difference in the future. As Keynes is often quoted saying, in the long run we are all dead anyway, so why deprive yourself something that you need now?

So what can be done? Are we past the point in which the standard approach to stimulus packages can be effective? Tinkering at the edges is not going to solve this problem. Instead, government is going to have to take charge of developing a full, extensive and considerable investment plan for the economy. It is essential that a national investment bank is established that has the capital to lend directly to businesses at favourable rates, and can support local government and other state institutions to renew our social infrastructure. We have to avoid a return to consumer credit bubbles, but cash needs to be flowing in the economy. Wages have to rises, benefits have to rises and charges for daily activity – such as transport and media – have to be slashed. Our transport network is patchy at best, so a long-term boost will be welcome by millions. Our rail services need major investment. Our cities are in desperate need of integrated, modern transport infrastructure; our town and city centres need to be refocussed to priorities urban life. Families have to be able to live in city centres, free from excessive and oppressive traffic, anti-social behaviour and crime. Our communication and IT networks need boosting significantly just to keep pace with investment in emerging economies. Sustainable development and green technology needs to be rolled-out and embedded everywhere. Support for knowledge creation and learning is a lynch-pin priority. Our healthcare and social care services need continuing improvement.

There is so much to do to even out the collective share of our national wealth. This is just a start, there are many more services and resources that need to be developed, but rather than thinking that this has to be done privately, the emphasis has to be on high-quality collective provision. We need to be bold about our working lives as well. The French have got some things right. The cap on hours worked each week, the ‘Tobin’ tax on finical transactions, increases in the top rates of tax, increases in inheritance tax and death duties. To balance the rises in inheritance duties we can cut national insurance taxes and income taxes. End the tax subsidies on second homes. Tax rental income for landlords of residential and business properties, but balance these with tax-breaks on investment in these properties that renew the physical infrastructure.

These are radical actions that are aimed to shifting investment out of the vaults and the savings accounts and into peoples pockets. There is no point locking-up savings while living in poverty now. What virtue does that serve? Anywhere that wealth pools, collects and is hoarded should be taxed to avoid usury, exploitation and gate-keeping. This alternative approach should have one primary purpose, to get wealth flowing and circulating around the economy. One of the great lessons from capitalism, which underlines the importance of getting this process right, is that it is not necessarily the amount of wealth that people have per-se, but the extent to which this wealth is creatively deployed, recycled and recirculated – invested in other words – in things that matter. This is the time to invest in our public services for the good of all. In doing so we will enrich us all. In doing so we will moderate the vast extremes of income and wealth accumulation that has done so much damage to our country. And in doing so our towns and cities will become, as Keynes wanted, more harmonious places to live.

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