This article traces the history of ‘crowding out’, and its use as a justification for austerity and state deflation from its origins in the 1920s to its latest post-2010 incarnation. It examines why governments have kept turning to austerity and continue to justify it on the grounds that public sector activity crowds out more productive private activity, despite the accumulated evidence that this traditional pro-market formulation has failed to deliver its stated goals. It examines three other embedded forms of crowding out that have been highly damaging—leading to weakened social resilience and more fragile economies—but which have been ignored by both governments and mainstream political economists.

THE IDEA OF ‘crowding out’ has long been one of the central canons of pro-market economic theory. The concept was first promoted at an international conference of officials in Brussels in 1920 to discuss ‘sound economic policy’ in the postwar years. Given limited capital, asked the British delegation, will ‘Governments or private industry’ use it more productively? ‘The answer is … private industry’.¹ This argument was then placed at the heart of a strategy of state-imposed austerity through cuts in public spending and wages applied in Britain and other nations in the early 1920s.

Following the short-lived boom at the end of the 1914–18 war, Britain, along with much of Europe, faced growing economic turbulence and surging dole queues, along with high levels of public debt from funding the war. With heightened public expectations of social reform, the coalition government Prime Minister, David Lloyd George, initially promised social reconstruction through higher state spending, especially on homes and schooling. Simultaneously, the Prime Minister faced demands from the owners of capital for a return to the pre-war status quo.

During the war, large chunks of the economy had been taken under state control, with the subordination of private profit to steer resources to the war effort. While the public was calling for a better society in return for the sacrifices of war, business leaders were demanding the dismantling of the heightened state intervention of the war years, lower rather than higher public spending, and the reversal of the strengthened bargaining power labour had enjoyed during the war years. Political and industrial clashes were the inevitable outcome.

Deepening recession and the fear of mounting unrest, fuelled by the shadow of Bolshevism, induced panic among the ruling political and corporate classes. In response, the government dropped its commitment to social renewal in favour of a programme of austerity, or state induced deflation. This involved severe cuts in public spending, including reductions in pay for police, teachers and other public servants—cuts dubbed the ‘Geddes axe’ on the advice of a committee chaired by Sir Eric Geddes, the Minister of Transport.

Economic revival, it was argued, depended on lower spending by the state, lower wages and a return to a balanced budget, with state spending matched by tax revenue. If the state had borrowed more to meet its high-profile postwar pledges on housing and education, it was argued, more efficient and more pro-value private activity would have been ‘crowded out’. The measures, based on the idea of an automatic trade-off between state and private activity, were, it was asserted, simply sound economics based on fundamental laws—and not to be tinkered with—of how the economy worked. These ‘laws’ drew on the doctrines of the early classical economists that free markets and minimal state intervention would bring equilibrium, stability, and optimal growth.

Austerity Britain

Since the 1920s, governments have repeated this strategy of austerity—based on the doctrine of crowding out—on several occasions. These include the early 1930s, the 1970s, the 1980s and the post-2010 decade. Despite the time gaps, these episodes have been marked by almost identical justifications and remarkably similar impacts.

One of the constant themes has been a replay of the balanced budget theory of the 1920s and 1930s. Another has been that public spending cuts and lower wages would release scarce resources for the private sector. In 1975, two Oxford economists, Roger Bacon and Walter Eltis, argued in Britain’s Economic Problem: Too Few Producers that Britain’s economic plight stemmed from too many social workers, teachers and civil servants and not enough workers in industry and commerce. Buying into this argument, the new Chancellor of the Exchequer, Geoffrey Howe, told the House of Commons in 1979, ‘[we need to] roll back the boundaries of the public sector’ in order ‘to leave room for commerce and industry to prosper’.2 In June 2010, launching another rolling programme of spending cuts in his first budget, the Chancellor, George Osborne, repeated this claim that public spending ‘crowds out’ private endeavour.

Again, the presumption was that a more robust economy requires more private and less state activity, along with the counter-intuitive idea that austerity was the route to growth and enterprise. The somewhat crude ‘private sector good, public sector bad’ mantra was widely echoed. ‘The next government is going to have many challenges’, wrote the Times in 2010, ‘but tackling a public sector that has become obese … is going to have to be a priority’.³ Channel 4 went a step further with a programme describing state spending as a ‘Trillion pound horror story’, while The Spectator magazine called it ‘the most important programme to appear on British television this year’.⁴

So, does the austerity/crowding out theory stand up? And if not, why has it been so widely applied? The accumulated evidence shows that it is at best a significant oversimplification of the way economies work. Crowding out of private by too much public sector activity might apply when an economy is operating at full capacity and employment, but the doctrine has only been applied in situations of economic crisis, high unemployment and inadequate demand. Even at full capacity, there is still a choice to be made about the appropriate balance between public and private activity.

Heterodox economists, such as John Hobson in the early twentieth century, had offered an alternative route to growth and out of crisis. His work, which had an important influence on J. M. Keynes, showed that recessions were the product of a shortfall of demand stemming from ‘under-consumption’ and ‘over-production’ triggered in large part by a lack of purchasing power among low- and middle-income households arising from extreme levels of wealth and income inequality.⁵

In the 1920s and early 1930s, slamming on the public spending brakes proved counter-productive. It cut demand and slowed recovery, with private as well as public activity ‘crowded out’. The strategy had minimal effect on improving the state of the public finances, but led to a retreat on social programmes, while unemployment never fell below one million in the inter-war years.

A hundred years on, the Osborne cuts have had a very similar, and predictable impact. They also came with a new label: ‘expansionary austerity’, but an identical message—that a smaller state would generate greater stability via lower interest rates, greater confidence and faster growth. In the event, the strategy turned out to be an additional assault on an already weakened economy, with the cuts in public spending having little or no impact on expanding private activity, while damaging the quality of Britain’s social infrastructure and weakening its system of social support.⁶ One critic, David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, concluded that, by destroying productive capacity and making households worse off, the austerity programme simply ‘crushed the fragile recovery’.⁷ In one estimate, rolling cuts in public spending were said to have shrunk the economy by £100 billion by the end of the decade.⁸ Another study showed that if real-terms growth in public spending at the 3 per cent level inherited in 2010 from the previous Labour government had been maintained and paid for by matching tax rises, Britain’s government debt burden would still have been lowered by 2019.⁹

None of this means that crowding out never occurs. It just takes very different forms from the process advanced in neoliberal thinking. There are three alternative and distinct types of crowding out at work that have consistently had a malign effect on both the economy and wider society, yet have not been systematically addressed in the mainstream economic literature or by relevant government departments.¹⁰ First, the idea that markets know best in nearly all circumstances has shifted the balance between private and public activity too far in favour of the former, thus crowding out the latter. Second, an increasing share of private activity has been geared less to its primary function—to building economic strength and creating new wealth—than to boosting personal corporate rewards in a way which fuels inequality, weakens economies and crowds out economic and social progress. Third, there is the way the return of the ‘luxury capitalism’ of the nineteenth century (triggered by the application of pro-inequality neoliberal policies) has come at the expense of the meeting of essential material and social needs.

The balance between private and public activity

The simple notion—private good, public bad—has long been overplayed by neoliberal theorists. Both have a role to play and the real issue is getting the right balance between the two. State spending plays a crucial role not just in meeting wider social goals, but in supporting economic dynamism and stability. Private corporations do not operate in a vacuum. The profits they make, the dividends they pay and the rewards received by executives stem from a too-often unacknowledged interdependence with wider society, including the state. Business provides jobs and livelihoods, while responding to consumer demand. Society provides the workforce, education, transport, multiple forms of inherited infrastructure and often substantial state subsidies.

History shows that while bad decisions are too common, carefully constructed and evidence-based state intervention can have a highly positive impact. Government responsibility lies in helping to shape markets, prevent market abuse, support innovation, share the burden of risk-taking in the development of new technologies, promote public and private wealth creation and protect citizens. It is now time to ask if these functions—from market regulation to citizen protection—have been underplayed.

Britain is a heavily privatised and weakly regulated economy. Among affluent nations, it has a comparatively low level of public spending, including social spending and public investment in infrastructure, relative to the size of the economy.¹¹ A relatively low portion of the economy is publicly owned.¹² With the cut-price sell-off of state assets, from land to state-owned enterprises, the share of the national wealth pool held in common has fallen sharply from a third in the 1970s to less than a tenth today. This ongoing privatisation process has also greatly weakened the public finances. Britain is one of only a handful of rich nations with a deficit on their public finance balance sheet, with net public wealth—public assets minus debt—now at minus 20 per cent of the economy. The balance stood at plus 40 per cent in 1970. This shift has greatly weakened the state’s capacity to handle issues like inequality, social reconstruction and the climate crisis.¹³

The emphasis on private capital as the primary engine of the economy has failed to deliver the gains promised by its advocates. Since the counter-revolution against postwar social democracy from the early 1980s, and especially since 2010, levels of private investment, research and development, and productivity—key determinants of economic strength—have been low both historically and compared with other rich countries. Several factors account for Britain’s relative private ‘investment deficit’. They include Britain’s low wage history, with abundant cheap labour dulling the incentive to invest, and the perverse system of financial incentives that makes it more attractive for executives to line their pockets than build for the future. There is also the preference given to capital owners—an increasingly narrow group—in the distribution of the gains from corporate activity. In the four years from 2014, FTSE 100 companies generated net profits of £551 billion and returned £442 billion of this to shareholders in share buy-backs and dividends, leaving only a small portion of these gains to be used for private investment and improved wages that support economic strength.¹⁴ With UK corporations increasingly owned by overseas institutional investors, such as US asset management firms, little of this profit flow has ended up in UK pension and insurance funds and back into the domestic economy.

Some forms of financial and business activity have played a destructive role. In a remarkable parallel with the 1929 stock market crash and the Great Depression, the 2008 financial crash and the financial crisis that followed were classic examples of the impact of uncontrolled market failure. They were the product of tepid regulation of the financial system that turned a blind eye to a lethal cocktail of excessive profiteering and reckless gambling by global finance. It was only public intervention on a mass scale to bail out the banks—and many of the architects of the crash—that prevented an even greater crisis.

Claims about the overriding benefits of the outsourcing of public services to private companies have been exposed by a succession of scandals involving large British companies like G4S and Serco and by damning reports of the consequences of outsourcing in the NHS, the probation service and army recruitment.¹⁵ Such claims were also undermined by the collapse of two giant multi-billion-pound behemoths—the UK construction company Carillion and the public service supplier Interserve (which employed 45,000 people in areas from hospital cleaning to school meals). In the ten years to 2016, Carillion, sunk by self-serving executive behaviour and mismanagement, liked to boast about another malign form of crowding out—of how it raised dividend payments to shareholders every year, with such payments absorbing most of the annual cash generation, rather than building resilience.

Extraction

A second form of crowding out stems from the return of a range of extractive business mechanisms aimed at capturing a disproportionate share of the gains from economic activity. While some of today’s towering personal fortunes are a reward for value-creating activity that brings wider benefits for society as a whole, many are the product of a carefully manipulated, and largely covert, transfer of existing (and some new) wealth upwards. Early economists, such as the influential Italian economist Vilfredo Pareto, warned—in 1896—of the distinction between ‘the production or transformation of economic goods’ and ‘the appropriation of goods produced by others.’¹⁶ Such ‘appropriation’ or ‘extraction’ benefits capital owners and managers—those who ‘have’ rather than ‘do’—and crowds out activity that could yield more productive and social value. It delivers excessive rewards to owners and executives at the expense of others, from ordinary workers and local communities to small businesses and taxpayers.¹⁷

Extraction has been a key driver of Britain’s low wage, low productivity and growth sapping economy. Many large companies have been turned into cash cows for executives and shareholders. A key source of this process has been the return of anti-competitive devices described as ‘market sabotage’ by the American heterodox economist Thorstein Veblen over a century ago’.¹⁸ In contrast to the claims of pro-market thinkers, corporate attempts to undermine competitive forces have been an enduring feature in capitalism’s history, contributing to erratic business performance and economic turbulence.

Far from the competitive market models of economic textbooks, the British—and global—economy is dominated by giant, supranational companies. Key markets—from supermarkets, energy supply and housebuilding, to banking, accountancy and pharmaceuticals—are controlled by a handful of ‘too big to fail’ firms. The oligopolistic economies created in recent decades are, despite the claims of neoliberal theorists, a certain route, as predicted by many distinguished economists, from the Polish economist Michal Kalecki, to the Cambridge theorist, Joan Robinson, to weakened competition, extraction and abnormally high profit. This new monopoly power, according to one study of the US economy, has been a key determinant of ‘the declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage, and associated financial instability.’¹⁹

Although they helped pioneer popular and important innovations, the founders of today’s monolithic technology companies have turned themselves from original ‘makers’ into ‘takers’ and ‘predators’. Companies like Google and Amazon have entrenched their market power by destroying rivals and hoovering up smaller competitors, a form of private-on-private crowding out of small by more powerful firms. Multi-billionaires in large part because of immense global monopoly power, the Google, Amazon and Facebook founders can be seen as the modern day equivalents of the American monopolies created by the ‘robber barons’ such as J. D. Rockefeller, Andrew Carnegie and Jay Gould through the crushing of competitors at the end of the nineteenth century.

The House of Have and the House of Want

The third type of crowding out follows from the way the growth of extreme opulence for the few has too often been bought, in effect, at the expense of wider wellbeing and access to basic essentials for the many. Today’s tearaway fortunes are less the product of an historic leap in entrepreneurialism and new wealth creation than of the accretion of economic power and elite control over scarce resources. It is a paradox of contemporary capitalism that as societies get more prosperous, many fail to ensure the most basic of needs are fully met.

In Britain, elements of the social progress of the past are, for a growing proportion of society, being reversed. Compared with the 1970s, a decade when inequality and poverty levels were at an historic low, poverty rates have more or less doubled, while both income and wealth have become increasingly concentrated at the top. Housing opportunities for many have shrunk and life expectancy rates have been falling for those in the most deprived areas. Mass, but hit and miss, charitable help has stepped in to help fill a small part of the growing gaps in the state’s social responsibilities. While Britain’s poorest families have faced static or sinking living standards, the limits to the lifestyle choices of the rich are constantly being raised. The private jet, the luxury yacht, the staff, even the private island, are today the norm for the modern tycoon.

In heavily marketised economies with high levels of income and wealth concentration, the demands of the wealthy will outbid the needs of those on lower incomes. More than one hundred years ago, the Italian-born radical journalist and future British MP, Leo Chiozza Money, had warned, in his influential book, Riches and Poverty, that ‘ill-distribution’ encourages ‘non-productive occupations and trades of luxury, with a marked effect upon national productive powers.’²⁰ The ‘great widening’ of the last four decades has, as in the nineteenth century, turned Britain (and other high inequality nations such as the US) into a nation of ‘luxury capitalism’. The pattern of economic activity has been skewed by a super-rich class with resources deflected to meeting their heightened demands.

While Britain’s poorest families lack the income necessary to pay for the most basic of living standards, demand for superyachts continues to rise. The UK is one of the highest users of private jets, contributing a fifth of related emissions across Europe. The French luxury goods conglomerate, LVMH—Louis Vuitton Moët Hennessy—is the first European mega-company to be worth more than $500 billion. Resources are also increasingly directed into often highly lucrative economic activity that protects and secures the assets of the mega-rich. Examples include the hiring of ‘reputation professionals’ paid to protect the errant rich and famous, the use of over-restrictive copyright laws, new ways of overseeing and micromanaging workers, as well as a massive corporate lobbying machine.

The distributional consequences of an over-emphasis on market transactions is starkly illustrated in the case of the market for housing. Here, a toxic mix of extreme wealth and an overwhelmingly private market has brought outsized profits for developers and housebuilders at the cost of a decline in the level of home ownership, a lack of social housing and unaffordable private rents. The pattern of housebuilding is now determined by the power of the industry and the preferences of the most affluent and rich. Following the steady withdrawal of state intervention in housing from the 1980s—with local councils instructed by ministers to stop building homes—housebuilders and developers have sat on landbanks and consistently failed to meet the social housing targets laid down in planning permission. Instead of boosting the supply of affordable social housing, scarce land and building resources have been steered to multi-million-pound super-luxury flats, town houses and mansions. In London, Manchester and Birmingham, giant cranes deliver top end sky-high residential blocks, mostly bought by speculative overseas buyers and left empty. The richest crowd out the poorest, or as Leonard Cohen put it, ‘The poor stay poor, the rich get rich. That’s how it goes, everybody knows.’

There has been no lack of warnings of the negative economic and social impact of economies heavily geared to luxury consumption, most of them ignored. Examples include the risk of the coexistence of stark poverty and extreme wealth: of what the radical Liberal MP, Charles Masterman, called, in 1913 ‘public penury and private ostentation’, and what the American radical political economist Henry George had earlier called ‘The House of Have and the House of Want’.²¹ Then there was the influential 1950s’ warning from the American economist, J. K. Galbraith, of ‘private affluence and public squalor’.²² ‘So long as material privation is widespread’, wrote the economist, Fred Hirsch, in the 1970s, ‘the conquest of material scarcity is the dominant concern.’²³

For much of the last century, policy makers have seen wealth and poverty as separate, independent conditions. But that view has always been a convenient political mistruth. If poverty has nothing to do with what is happening at the top, the issue of inequality can be quietly ignored. Yet, the scale of the social divide and the life chances of large sections of society are ultimately the outcome of the conflict over the spoils of economic activity and of the interplay between governments, societal pressure and how rich elites—from land, property and private equity tycoons to city financiers, oil barons and monopolists—exercise their power. In recent decades, the outcome of these forces has favoured the already wealthy, with the shrinking of the economic pie secured by the poorest. As the eminent historian and Christian Socialist, R. H. Tawney, declared in 1913, ‘What thoughtful people call the problem of poverty, thoughtful poor people call with equal justice, a problem of riches.²⁴

Conclusion

These three alternative forms of crowding out have imposed sustained harm on social and economic resilience. Despite this, governments have continued to apply a long-discredited austerity-based theory of crowding out, while ignoring other, arguably more damaging forms of the phenomena. The latest application of the original theory since 2010 has inflicted ‘vast damage on public services and the public sector workforce’, without delivering the declared goal of ‘crowding in’ through faster recovery and growth, or improved public finances.²⁵

Britain is currently being subjected to yet another wave of austerity, with the 2022 Autumn Statement announcing a new package of projected public spending plans, higher taxes and lower public sector real wages, again in the name of fixing the public finances and boosting growth.²⁶ It’s the same short-term, narrowly focussed strategy that, by digging the economy into a deeper hole and cutting public investment, has failed time and again over the last 100 years.

Meanwhile, other damaging forms of the crowding out of key public services, value-adding economic activity and the meeting of vital needs, driven by over-reliance on markets, excess inequality and dubious private-on-private activity, are simply ignored or dismissed.

Notes

¹ C. E. Mattei, The Capital Order, Chicago IL, University of Chicago Press, 2022, p. 156. ² House of Commons, Hansard, 12 June 1979, col 246. ³ J. Tomlinson, ‘Crowding out’, History and Policy, 5 December, 2010; https://www.historyandpolicy.org/opinion-articles/articles/crowding-out⁴ J. Delingploe, ‘Britain’s trillion pound horror story’, The Spectator, 13 November, 2010. ⁵ J. A. Hobson, The Industrial System, London, Longmans, Green & Co., 1909. ⁶ C. Breuer, ‘Expansionary austerity and reverse causality: a critique of the conventional approach’, New York, Institute for New Economic Thinking, Working Paper no. 98, July 2019. ⁷ D. Blanchflower, Not Working, Princeton NJ, Princeton University Press, 2019, p. 172. ⁸ A. Stirling, ‘Austerity is subduing UK economy by more than £3,600 per household this year’, New Economics Foundation, 2019; https://neweconomics.org/2019/02/austerity-is-subduing-uk-economy-by-more-than-3-600-per-household-this-year⁹ R. C. Jump, J. Michell, J. Meadway and N. Nascimento, The Macroeconomics of Austerity, Progressive Economy Forum, March 2023; https://progressiveeconomyforum.com/wp-content/uploads/2023/03/pef_23_macroeconomics_of_austerity.pdf¹⁰ See S. Lansley, The Richer, The Poorer, How Britain Enriched the Few and Failed the Poor, Bristol, Policy Press, 2022. ¹¹ K. Buchholtz, Where Social Spending is Highest and Lowest, Statistica, 28 January, 2021; https://www.statista.com/chart/24050/social-spending-by-country/¹² OECD, The Covid-19 Crisis and State Ownership in the Economy, Paris, OECD, 2021; https://www.oecd.org/coronavirus/policy-responses/the-covid-19-crisis-and-state-ownership-in-the-economy-issues-and-policy-considerations-ce417c46/¹³ L. Chancel, World Inequality Report, World Inequality Database, 2021. ¹⁴ High Pay Centre/TUC, How the Shareholder-first Model Contributes to Poverty, Inequality and Climate Change, TUC, 2019. ¹⁵ National Audit Office, ‘Transforming Rehabilitation: Progress Review’, National Audit Office, 1 March 2019; https://www.nao.org.uk/reports/transforming-rehabilitation-progress-review/¹⁶ V. Pareto, Manual of Political Economy, New York, Augustus M. Kelley, 1896. ¹⁷ Lansley, The Richer, The Poorer. ¹⁸ T. Veblen, The Theory of the Leisured Classes, New York, The Modern Library, 1899; T. Veblen, The Engineers and the Price System, New York, B. W. Huebsch, 1921. ¹⁹ I. Cairo and J. Sim, Market Power, Inequality and Financial Instability, Washington DC, Federal Reserve, 2020. ²⁰ L. Chiozza Money, Riches and Poverty, London, Methuen, 1905, pp. 41–3. ²¹ C. Masterman, The Condition of England, Madrid, Hardpress Publishing, 2013; H. George, Progress and Poverty, New York, Cosimo Inc., 2006, p. 12. ²² J. K. Galbraith, The Affluent Society, Boston, Houghton Mifflin, 1958, ch. 23. ²³ F. Hirsch, The Social Limits to Growth, Abingdon, Routledge & Kegan Paul, 1977, p. 190. ²⁴ R. H. Tawney, ‘Poverty as an industrial problem’, inaugural lecture at the LSE, reproduced in Memoranda on the Problems of Poverty, London, William Morris Press, 1913. ²⁵ V. Chick, A. Pettifor and G. Tily, The Economic Consequences of Mr Osborne: Fiscal Consolidation: Lessons from a Century of UK Macroeconomic Statistics, London, Prime, 2016; G. Tily, ‘From the doom loop to an economy for work not wealth’, TUC, February, 2023; https://www.tuc.org.uk/research-analysis/reports/doom-loop-economy-work-not-wealth²⁶ Chancellor of the Exchequer, Autumn Statement, 2022, Gov.uk, 17 November, 2022; https://www.gov.uk/government/topical-events/autumn-statement-2022

This article was first published in The Political Quarterly 

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Biography

• Stewart Lansley is the author of The Richer, The Poorer: How Britain Enriched the Few and Failed the Poor, a 200-year History, 2021. He is a visiting fellow at the University of Bristol and an Elected Fellow of the Academy of Social Sciences.

picture credit flickr

The post Rethinking ‘Crowding Out’ and the Return of ‘Private Affluence and Public Squalor’ appeared first on The Progressive Economy Forum.

US President Biden has called for ‘regime change’ in Russia, a statement that should recall previous US-led regime change crusades – in Chile (1973), Iraq and Afghanistan, among many. To put it mildly, they have not been unmitigated successes. But the regime change initiative that deserves our scrutiny today was the United States’ most ambitious and most relevant to the latest demand for change, which one would dearly like to see. This is because it embraced Russia and Ukraine thirty years ago.

Let me preface this article by saying that, fortuitously, I witnessed what the USA, the UK and others did on the ground. In 1990, on behalf of the International Labour Organisation (ILO), I organised an international conference on labour policy in Moscow, which emerged as a report just as the Soviet Union was dissolving. I was then appointed director of a programme set up by the ILO to advise governments in the region on social and labour policies in what was euphemistically called the ‘transition’ from ‘communist’ to a ‘market’ economy. 

Based in Budapest, for about four years I interacted with senior government ministers and officials of Russia, Ukraine and neighbouring countries while also having numerous meetings with economists and officials from the USA, other countries and international bodies such as the World Bank, the latter all committed to their version of regime change. It was a bizarre experience. I even met the Queen, the Duke of Edinburgh and the Queen of The Netherlands as they played walk-on parts in helping to legitimise the expensive regime change plans.

From the outset, I strongly opposed what was happening, and gave numerous speeches and published articles and several books to that effect. Today, I believe that the Russian invasion of Ukraine in 2022 is partly attributable to the neo-liberal strategy led by the USA in that period. The precise details of what has been happening were not predicted or predictable, but it was clear at the time that the fault lines leading to today’s quagmire lay in that strategy. One way of putting it is that it failed to lay the ghost of Stalinism, and created fertile ground for its resurgence. 

Shock doctrine

So, what was the foreign-directed strategy? Although different proponents had variants, it enshrined a doctrine fostered by economists at Harvard, LSE and elsewhere known as ‘shock therapy’, designed with one objective, turning Russia and Ukraine into capitalist economies. This was based on three premises. First, it was reasoned that pro-market reforms had to be introduced quickly, so that there was no time for ‘socialist’ forces to regroup and block reform. 

Second, a more technical premise was that priority had to be given to macro-economic policy, backed by aid conditionality to force the Russian (and Ukrainian) government to adhere to it, over and before micro-economic (structural) policy. This was based on the orthodox economic view that macro-stabilisation was a necessary prior for structural reform. This was the dominant reasoning of the International Monetary Fund. The third premise was that there had to be a particular sequencing of the macro-economic reforms. The combination of these three premises was literally the fatal, hubristic mistake.

Before describing what the shock therapy advisers prescribed in their frenzy of activities in Moscow, Kiev, St.Petersburg and elsewhere, I should mention that as soon as I was appointed to my ILO post we mobilised funds to conduct a series of detailed surveys of hundreds of industrial enterprises in Russia (1991-94) and in Ukraine (1992-96), and extensive household surveys covering many thousands of households in both countries. In effect, the data mapped the context and outcomes of the shock therapy doctrine. This seemed an essential task, but the shock therapy advisers charged ahead without worrying about evidence.   

Folly and hubris

It was an exercise of hubristic folly. The first set of reforms in the sequencing were price liberalisation, coupled with removal of price subsidies (except on energy). Bear in mind that production had collapsed, that strict price controls had existed for generations and that the production structure consisted of huge industrial enterprises with monopolistic characteristics, dominating whole sectors and regions. 

The effect of price liberalisation was thus an extraordinary burst of hyper-inflation. While we were working in Ukraine, in one year inflation was estimated at over 10,000%, and in Russia it was estimated at over 2,300%.^[1] The impoverishment was lethal. Millions died prematurely; male life expectancy in Russia fell from 65 to 58 years, female from 74 to 68; the national suicide rate jumped to over three times the high level of the USA. 

In a collective state of denial, the western economic ‘advisers’ were almost Stalinist in their zeal. Their second policy was to slash public spending, with the double objective of squeezing inflationary pressure by curbing monetary demand and weakening the state. This had the immediate consequence of intensifying the rising mortality and morbidity. But it did something else that is affecting the whole world today. Wages and salaries in the public sector fell so low that the state ceased to function. This created a vacuum in which the kleptocrats thrived. I recall government ministers asking for $50 bribes just so they could feed their family. They were easy prey to ruthless gangsters, who in turn were bedfellows with ex-KGB officers, led by the new First Deputy Mayor of St.Petersburg, a certain Vladimir Putin.

One cannot overemphasise the folly of the anti-state ideology, when what was needed desperately was the nucleus of a professional civil service, backed by a proper legal system. But all the RCAs wanted was full-blown capitalism, which they saw as leading to a ‘Russian Boom’, in which ‘democracy and free markets have taken root for good’.

Mass privatisation

The third plank of the shock therapy sequencing was mass privatisation. It began as a bit of a joke, with privatisation ‘shares’ being handed out like confetti. I still have one somewhere, given to me by the Mayor of St.Petersburg. But it soon became a wild-west plunder. The World Bank, USAID, the new European Bank for Reconstruction and Development (EBRD) in London and other foreign bodies allocated vast amounts to assist in speeding up the transfer to the new ‘entrepreneurs’. Over 15,000 state firms were sold off; kleptocrats became oligarchs overnight; their American and other foreign ‘advisers’ became multi-millionaires. This is when the criminality stretched across the Atlantic.

One still has to be circumspect in how one puts this. However, it was widely known that prominent economists in the ‘regime change’ community were linked to the rising oligarchy and making millions of dollars. Eventually, one case was brought to the Massachusetts High Court, where several professors pleaded guilty to insider trading. They paid modest fines, with Harvard paying much more, but the main one was allowed to continue his stellar career. Rest assured, he and others did very well.

Meanwhile, there was the awkward onset of the fourth phase of the sequencing, characterised as the ‘therapy’ after the ‘shock’. This was touted as building a new social policy system, based on standard neo-liberal lines, that is, a residual welfare state with as much privatisation as possible, beginning with pension systems and education. As some of us had argued from the outset, the erection of a universalistic social protection system should have been done before any ‘shock’ policies. Callously, implementing social policies was left to afterwards, and then only done patchily, with interminable delays.  

Carnage

The carnage was palpable. In this period, two personal events occurred that epitomised the madness of what was happening. In 1992, I was invited as a ‘labour market expert’ to give a lecture to Ministers of Finance and Ministers of Education from eastern European countries, organised by the World Bank in a Dutch castle, symbolically with its own moat. There I listened while the Ministers were told what policies they should be introducing if they wanted foreign loans or grants. 

The other event was even more bizarre. In 1993, I was chairing a small conference in France on minimum wages and basic income policies for eastern Europe when I received a phone call from a US Ambassador inviting me to Washington to give a briefing in the State Department. After doing background checks, I accepted and so found myself taken to the basement of the State Department. Sitting at a long table with a ‘minder’, I was surprised to find 12 men come in to sit on the other side. Chaired by an Under-Secretary of State, they identified themselves individually, and most said CIA.  

I told them that their policies were disastrous, that huge numbers of Russians and Ukrainians were dying as a result of shock therapy and that contrary to what they were reporting, real unemployment was about 25%, concealed by the fact that enterprises were retaining the work history books of workers to claim subsidies. I argued that the people with whom they were working at the political level were deeply corrupted, and that they should focus on providing direct aid to ordinary people if a lurch to neo-fascism was to be avoided.

I argued that restructuring of enterprises and the substitution of rules of regulation and law should take precedence over macro-economic reforms and privatisation. I poured as much scorn as I could on claims being made by the World Bank and prominent RCA economists that there was no unemployment, and argued that it was crazy for the Bank to withhold a large loan to aid the unemployed on the presumption that as one Bank report claimed, the unemployment rate was only 1%, backed by the statement, ‘Contrary to initial expectations, unemployment remains not only low but declining.’^[2]  

This was ridiculous. It was clear that the neo-liberal strategy was simply creating a kleptocratic capitalism, a virulent form of rentier capitalism that was taking shape globally. A new class structure emerged, with a plutocracy of oligarchs, a tiny salariat (including educated people trying to build a decent society), a lumpenised proletariat (ageing, atavistic) and a rapidly growing precariat. The oligarchs in Ukraine were split, with Russian-speaking heavies allied to their Russian counterparts in mafia-style conflict with Ukrainian-speaking oligarchs. There were also a few Bulgarians, Romanians and others in their orbit, and they all soon found they could mingle comfortably with the financial and other plutocrats in London, Wall Street and elsewhere. 

Venal kleptocracy

After the State Department meeting, I returned to Hungary. Several months later, I was invited back to Washington to brief the Department of Labor. Afterwards, they gave me a cocktail, and at the back I saw two of the CIA officers who had been in the State Department briefing. I asked them what had happened after the first briefing. One said to me, conspiratorially, ‘Quite frankly, it went right to the top….and he doesn’t believe you.’ He meant President Clinton. 

Several months after that, the Russian elections took place, and the new party of the neo-Stalinist ultra-nationalist Vladimir Zhirinovsky, who advocated invasion of Ukraine, gained 23% of the vote, with the US-backed neo-liberal party reduced to a rump. I sent a one-liner telegram to one of the CIA officers, ‘Does the State Department believe me now?’ I was told later that this caused some wry amusement.^[3]

In sum, the regime change strategy had generated a venal kleptocracy, and in line with that today we have globally a morally indefensible form of rentier capitalism where plutocrats are funding major political parties and politicians in their interest. It is the most unfree market economy ever conceived and it is not sufficient to see the UK as Butler to the World, however apt that description might be. The state is deeply corrupted, and we will not escape the quagmire until a new progressive, transformative politics emerges, one that could mobilise the precariat in all parts of the world. 

The evil being perpetrated by Russia will not be defeated by military means alone. Of course, we should all admire and support the incredibly courageous Ukrainians. But it is a transformation of our own societies that must be achieved. In response to the rush towards an ecological dystopia and a grotesquely unequal and insecure existence for so many, progressives in politics must have a coherent, well-articulated strategy for dismantling rentier capitalism.

Today, neo-liberalism is not the primary enemy. Today is the time for a new radicalism based on principled opposition to the global plutocracy and to the system of rentier capitalism that is based on rapacious plunder. We need a new Renaissance, to revive conviviality, commoning, republican freedom and equality. So far, in Britain and elsewhere, that transformative vision is being held back by excessive pragmatism by old-left parties. However, just as Nature abhors a vacuum, so does the human condition. We need a progressive revolt, one that crosses national boundaries and that is ecologically redistributive. One can see the green shoots, but must just hope there is time for them to grow. 

Guy Standing is Professorial Research Associate, SOAS University of London, a Fellow of the Royal Society of the Arts, and a councillor of the Progressive Economy Forum. His new book is entitled The Blue Commons: Rescuing the Economy of the Sea.

^[1] These and following statistics were collated for two books at the time. See G.Standing (ed.), The Ukrainian Challenge: Reforming Labour Market and Social Policy (Budapest, ILO-UNDP, 1994); G.Standing, Russian Unemployment and Enterprise Restructuring: Reviving Dead Souls (London, Macmillan, 1996).

^[2] This view was backed by leading shock therapy advocates, such as Jeffrey Sachs and Anders Aslund. For references, see my book. 

^[3] [Zhirinovsky remained in the Duma until his death from Covid, ironically on April 6, 2022, with his dream of invasion of Ukraine realised. His original party had been funded by the right-wing French politician, Jean-Marie Le Pen, with whom he remained close.]

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Overshadowed by the appalling news from Ukraine, Chancellor Rishi Sunak presented the annual Mais Lecture in London a couple of weeks ago. Traditionally used by Chancellors (and, sometimes, Shadow Chancellors) as a space to fill out the detail of their economic plans, and (they hope) give the impression of some depth of thought behind them, this was, as other commentators have pointed, out a comparatively rare insight into Sunak’s mind a few weeks of what will be, for him, another Spring Statement severely rattled by external events.

Battered by the pandemic, and subject to the whims of a once all-powerful Prime Minister, Sunak has spent two years in office cranking up government spending whilst offering variations of St Augustine’s prayer: “Lord, make me fiscally conservative, but not yet!” Mais Lecture was no different in this respect, once again promising the faithful that he would soon, very soon, start cutting taxes.

And of course you have to read the whole thing through a potential Conservative Party leadership battle. It helps to read British politics in general through the prism of a never-ending Tory leadership contest: like other semi-democracies, squabbles amongst factions in the ruling party matter far more than debates between the ruling party and the tolerated opposition – whatever the likelihood of any actual changes at the top.

But with Liz Truss letting her Tory MMT tendencies be known early on, judiciously making sure news of her indifference to deficits was leaked to the Times just ahead of Tory Party Conference last year, Sunak had to establish some clear blue water on the question of spending. Truss wants to cut taxes, regardless of the impact on government borrowing. Sunak “firmly believes” in low taxes but is “disheartened… by the flippant claim” that taxes pay for themselves. Tut tut. Once again, low taxes, but not yet.

What’s more striking is, as per usual, what Sunak doesn’t talk about. For a decade Tories noisily insisted that the government debt and the government’s deficit were the most important problem in the world, and that all other government spending could be sacrificed to shrinking both. Former Chancellor George Osborne used his own Mais Lecture to spell out the argument for immediate action on government spending, back in 2010. Osborne offered a cogent and closely-argued case for finding the poorest and most vulnerable in society and fiscally waterboarding them for a decade.

Never mind that the gurus he cited, Kenneth Rogoff and Carmen Reinhart, turned out to have made a spreadsheet error in their calculations on the impact of government debt on growth which rendered their most eye-catching claims useless. And never mind, too, that by the time he left office, Osborne had overseen the longest decline in living standards since the dawn of industrial capitalism, even as the government debt burden continued to rise. What matters here is the intellectual framing of the discussion around the role of government in the economy as entirely negative: that government, with its shocking debts and yawning deficits, was little more than a deadweight on a long-suffering private sector, yearning to be free.  Aided and abetted by a compliant media, who didn’t know better, and the Institute of Fiscal Studies, who should’ve known better, the economic illiteracy of the story mattered less than its political purpose in justifying the reshaping of the British economy back around the interests of its financial system in the years after the 2008 crisis.

So tightly were austerity’s mind-forged manacles that it took the triple shock of Brexit, Jeremy Corbyn and covid to break them. Brexit gave us a Tory Prime Minister who wanted to talk about the “burning injustices” of the economy. Corbyn, in turbulent years after the 2017 election, gave us a different Tory Prime Minister who consistently increased spending. And covid has given us a Tory Chancellor who scarcely references the government debt.

The contrast between Osborne and Sunak, then, is stark. The current Chancellor reflects a new consensus, apparent across the business press in recent months, that government spending in the future is going to be higher: on (his words) “health, pensions and social care” for an ageing population; on the “legacy of covid” in annual vaccination programmes, antivirals, and testing; on education; on government infrastructure investment, praised by Sunak; and of course on the military, where demands have been raised for a 25% increase in the current budget.

This isn’t the austerity economics of the 2010s. It is a higher-spending, bigger-state Toryism that means, come 2024, the difference between the two main parties’ spending plans – widening in elections 2015 onwards – is likely to be substantially reduced. Reduced, too, will be their rhetoric on the fundamentals of the economy: both accept a significantly increased role for government investment, including on renewable energy; both accept the need for  intervention in the economy to address inequality, beyond using the tax system alone (aka “Levelling Up”); both accept the idea that intervention can address the productivity problem. And both have decided to foreground economic growth as the key to a successful economy.

Market morality

It’s here that Sunak gets interesting, once we get past the boil-in-a-bag Treasury policy prescriptions for growth. Sunak wants to cut taxes on investment by businesses, invest more in “adult skills”, and spend more on R&D – so far, so familiar, although Sunak at least throws in the possibility of scooping up “entrepreneurs and highly skilled people” from all over the world, post-Brexit.

Instead it is when Sunak tells us about his desire to create a “new culture of enterprise” that we should be paying more attention. Sunak’s carefully-curated public image has been of a man somewhat wary of big ideas and book-reading (“all my favourite books are fiction”), but it is to Adam Smith he turns to make the link between culture and economic growth: not via the Wealth of Nations, but its forerunner, the Theory of Moral Sentiments: that a free market not only ensures outcomes that are economically efficient, but that markets themselves are grounded in morality, Sunak here referencing the late Jonathan Sacks’ own Mais Lecture. The process of market interaction itself (says Sunak) shapes morals and therefore culture. “Moral responsibility,” he claims “can only come from being exposed to the consequences – whether good or bad – of our own actions.”

This isn’t a conventional, libertarian-inclined defence of the free market, often associated with the Wealth of Nations, in which freely-transacting individuals are magically guided by the “invisible hand” to produce the best possible outcome for society. This “invisible hand”makes no claims about the morality of your choices, simply that everyone’s preferences will be met best if we allow it do work its mysterious magic. Sunak says this is reading Smith wrong: “Smiths account of the market economy, is not as some have suggested a values free construct which rationalised social choice.”

But this argument for market morality is also not quite that of Sacks’ original Mais lecture, which was a slightly more conventional take on how free markets, desirable as they for producing economic growth and productive cooperation, also require stable social institutions: family, religious organisations, community groups, and so on. We get on with our social interactions, the market sorts out that section of them we call the economy, and the greatest happiness of the greatest number is ensured. We learn our morals and “habits of cooperation” in “the domain of families, congregations, communities, neighbourhood groups and voluntary organisations”.

The invisible hand of Sunak, on the other hand, has a decidedly morally interventionist streak. We will have better moral characters if we allow a market-type process of rewards and punishments to shape them, facing the “consequences… of our own actions”. Happily, the shaping of our characters in turn shapes a culture which then creates the conditions for economic growth through the “universal and laudable desire to better the condition of ourselves and those we love”. A free market fosters an “enterprise culture” which will, in turn, make Britain more receptive to economic growth delivered by a succession of terrific new technologies, lead by Artificial Intelligence (as always).

Note the firm limits to “laudable” bettering here, and what it should be aiming for; and whilst Sunak identifies the need for government to provide some minimum level of support where needed, the boundaries for government action are constrained. Whereas Sacks suggests that economic growth, engendered by the free market, is just one part of a what makes a good society, and that this culture provides the necessary foundations of the market, Sunak’s rather darker argument is that the desirable culture is one that produces growth, and that market outcomes themselves are crucial to shaping that culture.

Sunak may talk up economic growth. He suggests he is an optimist on its future. But if the growth pessimists he cites are right, we left with only the moral claims. What he establishes here looks more like the moral and intellectual framework for a low-growth and significantly more authoritarian version of capitalism.

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LONDON – Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?0

Between 2009 and 2019, the Bank of England injected £425 billion ($588 billion) – about 22.5% of the United Kingdom’s 2012 GDP – into the UK economy. This was aimed at pushing up inflation to the BOE’s mandated medium-term target of 2%, from a low of just 1.1% in 2009. But after ten years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming, and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BOE has bought an additional £450 billion worth of UK government bonds, bringing the total to £875 billion, or 40% of current GDP. The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalization is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefiting the holders of these assets. A small proportion of this increased wealth trickles through to the real economy, but most of it simply circulates within the financial system.

The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding. Money flows into reserves, and saving goes up, while spending goes down. This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy. Government has to be the “spender of last resort” to ensure that new money is used on production instead of being hoarded.

But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.” During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation. Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.” A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation.

So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fueled asset speculation, thus creating financial bubbles, while prices and output as a whole remained stable.

One implication of this is that QE generates its own boom-and-bust cycles. Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics. Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation, and Ponzi. At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan. Then, it needs to be high enough to meet only the interest payments. And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending. When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability. Today, there are already clear signs of mortgage-market excesses. UK house prices increased by 10.2% in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.” And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BOE’s Monetary Policy Committee estimated that there was a one-third chance of UK inflation falling below 0% or rising above 4% in the next few years. This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself.

In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development center that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus. The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness […] the patient would either get well or die just before all of his or her money runs out. It’s a fine calculation.”

With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes. That is why questions about the timing of its withdrawal are such “fine calculations.”

But the antidote is staring us in the face. First, governments must abandon the fiction that central banks create money independently from government. Second, they must themselves spend the money created at their behest. For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.

Doing this will bring about a recovery without creating financial instability. It is the only way to wean ourselves off our decade-long addiction to QE.

Robert Skidelsky

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Jan Toporowski

TO PURCHASE THIS BOOK click here and use AGENDA25 to obtain a 25% discount

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And what extraordinary fruit it has produced. Lockdowns both collapsed economic activity, leading to a sharp fall in the tax take, and, through the demands of furlough expenditure, other benefits increases, and increased health spending, saw government spending increase hugely. Over the last year, the British government spent an additional £280bn last year because of the coronavirus. The deficit (the gap between government spending and taxes) has risen to a peacetime record, and the government debt (the total amount it has borrowed throughout history) has shot up to almost 100% of GDP. Yet the sky has not fallen in: despite a brief wobble in March last year, interest rates on government borrowing have remained very close to the lowest they have been in human history.

There are three reasons the government has been able to fund all of its expenditure. The first is that as a simple technical fact, if a government with its own currency (like Britain with the pound sterling, or the US with the dollar) wants to spend more money, it can do so by issuing currency  – the complications emerge after the spending has taken place, not before. As economist Jo Michell has explained, the challenge is that whilst a government with its own currency can ultimately always produce more of the currency as it wishes, and therefore in theory spend whatever amount it wants to, the ability of government to offer (in the UK case) unlimited pounds sterling in payment doesn’t necessarily guarantee the goods and services are available to be paid for. This could result in price rises, as supplier push up prices to meet demand. Or those receiving the new money may decide to use it to buy assets, inflating their prices, or sell the pounds to buy different currencies, pushing the value of the pound down relative to other currencies. In most circumstances, then, governments will find they need to not only decide what spending they wish to make, but also show how the economy’s real resources will be directed towards meeting them.

Borrowing is very cheap

For most governments in the developed world over the decades since the Second World War, making good the gap between what the government spends and what resources it can call on has involved raising taxes, and raising borrowing through government bonds – effectively today a certificate sold to those in financial markets to raise funds, with a promise to repay (usually with interest) later on. A government that can sell these bonds quickly will be in a better position than one which struggles to do so, since a struggling government may well have to offer higher interest rates to lure potential bond-buyers in to the market. Governments that are seen as “safe” by bond traders (that is to say, committed to the interests of bond traders) are likely to face lower interest rates. But since 2008, with some crisis-ridden exceptions like Greece, interest rates demanded by bond traders across the developed world have been exceptionally low. The great fear of the 1990s, of “bond vigilantes” poised to swoop and attack governments not obeying their wishes, does not hold.

This is the second reason funding has not been a problem: if the British government chooses to borrow, it can do so very cheaply. The graph below is from the House of Commons Library, and shows how much the government has been paying in debt interest, relative to GDP, since 1970. Low interest rates mean that even with exceptional levels of borrowing, the government is paying much less (relative to the size of the economy) in interest than it used to.

The third reason is that this government has continued to rely on the ability of its central bank, the Bank of England, to issue new money as it wishes. This is what “Quantitative Easing” amounts to: for Britain, it is a slightly peculiar process whereby the Bank of England creates new money to buy British government bonds from their current owners – typically major financial institutions like pension funds and banks. But by buying the bonds, and using new money to do so, the Bank is making it far easier for the government to issue bonds now and in the future. The process is a bit more roundabout, since the Bank is buying bonds that are already in circulation, but the effect of the process is to finance government borrowing with new Bank of England money. Over the last year, this has been exceptionally important in keeping government going: government borrowing is £340bn higher than expected in March last year, but the Bank of England had issued £350bn of new money through QE. In other words, the entire cost of government borrowing has been (in effect) financed by QE. The Bank is, as some City investors also believe, very close to “monetising” the government’s debt.

This isn’t a cost-free process: the effects of all that new QE money sloshing around has been to increase asset prices, which in the US has primarily meant rising stock market prices, and in the UK has meant largely rising property prices. This happens because those holding the QE money look for other assets to invest it in, driving up their prices: but the overall impact on inequality is bad, and the effect on the whole economy is to steer more resources into asset ownership, rather than useful spending in the real economy.

But we are simply nowhere near the point at which we should be worrying about the debt, despite its increase. If we were, we might find (for example) that the government was finding selling its bonds difficult. But that isn’t happening. There is a consensus in the economics profession on this point, marking a distinction with the period after 2008 when some prominent economists favoured austerity, but too often we find some politicians and, worse, some senior political journalists repeating nonsense about the government running out of money, or about how concerned we must now be about the debt.

The truth is that we had an exceptional public health emergency to deal with and, like other national emergencies, such as the Second World War, we simply had to spend the money to deal with it. Just as we didn’t panic about repaying the debt as fast as possible after WW2, instead building the NHS and the welfare state, so today we shouldn’t be panicking about it, either. And, looking ahead, it seems likely that much higher public spending will be needed to cope with coronavirus – and meet the demands for improved public services that we are crying out for after a decade of austerity. A sensible balance between some increased taxes on the wealthy – many of whom have done incredibly well financially out of the crisis- and higher government borrowing would take care of this. What we cannot risk, and should give no credence to those calling for it, is another lost decade of spending cuts and austerity.

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Edited by PEF Chair Patrick Allen and council members Suzanne Konzelmann and Jan Toporowski

Publication Date 29th April 2021. Agenda Publishing

40 years of neoliberalism has failed to provide prosperity or stability to the UK economy. Instead it has led to low growth, turbulence, grotesque inequality , poverty and ill health for millions . This is the outcome of damaging economic polices driven by free market dogma, rentier capitalism and ideology. It’s time for a change.

This book contains 18 essays by PEF council members and academics who outline the essential features of a progressive economy dealing with the five massive challenges of our times to the economy – Covid-19, austerity, Brexit , inequality and climate change.

PEF calls for bold public intervention. Shrinking the state and weakening our public institutions has undermined social and community resilience and promoted an out-of-control, value-sapping and high-inequality model of capitalism. 

The authors say the resources of the state must build a fairer and more dynamic post-Covid society, using a mix of regional and industrial policy and investment to revolutionise our public health, housing and social services. A progressive new society should construct a new income floor and new measures to spread wealth and give everyone an equal stake in the economy. 

The financial crash of 2008 proved that only the state can rescue the economy when all else fails including the biggest banks. Covid has shown how only the state can rescue us from death and the collapse of the economy during a devastating pandemic. Only the state can steer the economy and deliver the investment needed to cope with climate change

The 2008 crash showed the breathtaking incompetence of the private financial sector. Now Covid has once again laid bare the myth than private is best – outsourcing to companies the job of track and trace at a cost of £37bn has so far failed to show any discernible benefit say the Public Accounts Committee.

By contrast, the selfless work of millions of NHS workers and volunteers has delivered one of the most outstanding vaccination programmes which has been the envy of the world. This has been done at modest cost and was only possible with a national health service drawing on the vocational drive of its workers for the common good.

The Biden adminstration is today showing the mighty power of the US State with Biden’s Covid and infrastructure bills. The results are expected to cut child poverty in half. The UK government should follow this lead and bring in new models of public intervention to deliver a pandemic-resistant, green economy which works for all citizens.

For an outline , list of chapters and authors and to order a copy go to this webpage

You can obtain a 25% discount on the cover price by entering code AGENDA25 on the Agenda page here

Launch event on Zoom – Wednesday 19th May 2021 at 11am . Joining details to follow.

The launch will be chaired Miatta Fahnbulleh , CEO of NEF and attended by Ed Miliband, Shadow Secretary of State for Business, Energy and Industrial Strategy . Martin Sandbu of the FT will attend as commentator.

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This week’s budget appeared at first to be seismic shift away from conservative economic orthodoxy by the government. Alongside a further major expansion in borrowing to support jobs and incomes over the next six months, the chancellor adopted the previous left-wing Labour party’s policy of a major rise in corporation tax (from 19% to 25% of profits) to close a record peacetime budget deficit.

But as the dust has settled and the numbers interrogated, the budget looks rather less radical.

Firstly, it cannot be described as a rejection of austerity. The budget contained no explicit additional resources beyond the coming financial year for public services to deal with the legacy of the pandemic. Rather, as pointed out by the government’s own spending watchdog, the Office of Budget Responsibility (OBR), it involved an additional £4bn spending cut, alongside £11bn previously announced, beyond next year. For the most vulnerable, the proposed £20 cut in universal credit remains, even if pushed back to September. The freezing of income tax thresholds will also hurt lower paid workers, assuming wages do rise.

Annual revaccinations, ongoing test and trace capacity, a huge NHS catch up program on thousands of missed operations, and rising unemployment bills will all be somehow funded on pre-pandemic spending plans. Meanwhile, NHS workers can look forward to a miserly 1% pay rise in return for their heroic pandemic efforts.

Secondly, the budget was singularly lacking in ambition when it came to the government’s role in creating a sustainable, inclusive and investment-led recovery.

There was no mention of investment in social care, a sector that is badly organised, extremely low paid and clearly vital in improving the resilience of an ageing population and economy to future pandemic-type shocks.

There was no new green stimulus despite the UK facing a £100bn funding gap to reach its net-zero by 2050 target and despite its hosting of the global COP26 climate change summit this November. Neither was there any major program to help young people find work. Both the latter two challenges could have been tackled with green jobs and apprenticeships program focused on renewable energy and environmental conservation.

Meanwhile, the new National Infrastructure Bank will be capitalised with just £12bn (equivalent to just 0.5% of GDP) and again, be heavily reliant on private sector co-investment.

Indeed, it appears the government may have abandoned industrial policy altogether, shutting down the Industrial Strategy Council lead by Andy Haldane and moving industrial policy out of BEIS and in to HMT.

Reverting to economic orthodoxy

Instead, the Treasury is reverting to free-market economic orthodoxy, relying on business and the housing market to do the heavy lifting.

A 130% ‘super deduction’ tax break for capital investment by businesses in machinery and plant was the key pro-growth policy announcement. Whilst it makes sense to reduce tax on productive investment, it is highly questionable whether the majority of British firms believe there is sufficient demand in the economy for major new capital investment outlays. The OBR is predicting not, forecasting a return to anaemic growth of just 1.7% in 2023, following a boom in 2022.

“The Treasury is reverting to free-market economic orthodoxy, relying on business and the housing market to do the heavy lifting.”

The policy may bring forward some existing planned capital spending but is unlikely to create the structural shift in investment the economy needs. The exception may be those firms already doing rather well in pandemic conditions. Amazon, for example, has racked up record profits over the past nine months as physical retail has collapsed and may use the supertax break to wipe out its UK tax bill completely.

The corporate tax profits hike is a sensible policy. However, its timing — not being introduced to 2023 — is suspect and will likely mean it is subject to ferocious counter lobbying if the economy improves. If businesses are to be taxed, a more sensible approach would have been a phased in rise in corporate tax starting immediately, accompanied by a windfall tax on those companies — like Big Tech, Private Equity and the Supermarkets — that have done so well out of the pandemic.

On housing, the budget was an opportunity to push forward a big capital investment in public housing and retrofit of existing stock and rethink the country’s highly regressive property taxation system. Reducing property tax for the poorest would be a fair way of stimulating stagnating demand.

Instead, the government extended the stamp duty tax cut on home purchase into the summer and announced it will guarantee 95% mortgages. These are expensive policies that reveal the Treasury remains fixated on the idea that ever-rising house prices are the best way to stimulate the economy and private sector house building. This debt- and consumption-lead economic growth model is inefficient, leads to greater financial fragility as well as increasing inequality as more people are priced out of the housing market.

Meanwhile, there was no sign of any reform of property taxation, nor even a commitment to raise capital gains and remove exclusions as had been rumoured.

In summary, whilst the extension of government support to the Autumn should be welcomed and will help the country avoid a much more severe recession, this Budget was not the economic reset the country needed. It will do little to stimulate a sustainable recovery and help Britain on to a more progressive economic trajectory. Now was surely the perfect time to shift the focus of taxation on to economic rents and away from labour. Instead, it is a budget that mainly favours the rentier sectors already doing well — Big Tech, banks, developers, homeowners — at the expense of the public sector, lower paid workers and renters.UCL IIPP Blog

This blog first appeared on the blog for the UCL Institute for Innovation and Public Purpose

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To start with the first. The economy has shrunk  by 10% since last March. In that time the government has spent over  £300bn ‘supporting jobs,incomes,and businesses’. The OBR expects  the economy to  have recovered all this lost output  by mid 2022,  4%  this year, 7% next year. As  a consequence, government borrowing  to ‘support the econmy’ will  tail off from £355bn today to £234bn next year and decline  thereafter,  the cancellation of the furlough in September being the biggest saving.  The national debt will peak at 97% of GDP in 2023-4 and then start falling.

The  thought processes underlying this rosy prospectus seem somewhat as follows.  The lockdown stops this summer.  ‘Non-essential’ businesses reopen, helped by tax breaks and subsidies. Customers flock back, free at last to spend their ‘forced’ savings.   Employment picks up. The economy starts booming.   Inflation –the dog which failed to bark  for ten years –is set to take off at last.

It may go like this –no one knows for certain. But I am highly sceptical about this story of ‘pent-up demand’. A shrinkage  in national  income by  10% implies a fall, not rise, in national saving. Saving out of income may go up, but income itself is lower.  That’s why it’s not like in a war, when you have full employment and rising wages, but  less to spend money on. Today, the  wealthier sections of the population,  whose incomes haven’t fallen,  will now be free to spend more on restaurants, entertainment, holidays, and so on; but what about all those  whose incomes have fallen? Where is their ‘pent up demand’ supposed  to come from?

So it is dangerous to assume that the reopening of the economy will be automatically followed by a strong recovery. To give the economy a cushion of extra spending power  the Chancellor  has wisely kept furlough going till September. I would have preferred that this money, some £60bn, be given to local authorities to create public jobs in their areas, especially for young people.   Now it is too late, because no one in the Treasury was thinking along these lines. Only someone with a bit of history can tell   30-year old Treasury officials  that there used to be something called ‘public works’.

Since the 2008-9 financial crisis, macro economic  policy has been in a mess, like a ship without a navigation system, responding to storms as they blow  up. A start has been made  on the necessary job of developing a proper policy  framework.  Mr. Sunak means three things by ‘sustainable’ public finances: first, in ‘normal’ times the state should balance its day- to- day (or current spending) budget; second,national debt should not be rising over the medium term, and  ‘we need to pay attention to its affordability’; third, it makes sense when interest rates are so low ‘to invest in capital projects that can drive our future growth’. (The Chancellor put his money where his mouth was by     announcing    a UK Infrastructure Bank to invest ‘in public and private projects to finance the green industrial revolution’ .)

 Further, in a significant  passage Mr. Sunak said  that  the Bank of England’s  2%  inflation target  should reflect ‘the importance of environmental stability and transition to net zero’ –the first hint we have had of a formal modification of the Bank’s mandate.  

 These principles give  the start of a   sensible policy of fiscal and monetary coordination which we have lacked for ten years.

But the Treasury still finds it hard  to get rid of old habits of thinking.  For example, ‘it will take years to pay back the  debt’. Pay it back to whom? Most of the debt incurred since last March to support the economy has been borrowed from the Bank of England. Paying back the Bank is simply transferring money from one government  department to another.

Then,  what did Mr. Sunak mean which he  talked about the need to ‘fix’ the public finances,  as though they were  broken? In fact they are not broken, they are doing exactly what public finances should be doing,  which is to balance the economy, supporting it when it is collapsing and withdrawing support when it is booming. This is not just policy for emergencies: it is part of the state’s normal  stabilization function. It reflects  the fact that economies do not  automatically self-balance at full employment. The state budget is the balancing factor.  Therefore,  provided we have in place a policy which supports recovery,  we should not worry about the deficit: it will reduce automatically.

My worry is rather the reverse; that the measures to support the economy during the pandemic will be withdrawn,  without  being replaced by measures to stimulate the recovery.   If that turns out to be true, we will be in for a very severe recession and the Chancellor will have to come back in six months time to announce further  recovery measures. It’s important to start thinking now about what they should be.
Robert Skidelsky

This article was first published in the Catholic Herald

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