Both Boris Johnson and Keir Starmer chose to address the Confederation of British Industry conference this week. But far more interesting than the party leaders’ paeans to profit or to Peppa Pig were the comments made the same day by the CBI’s new Director General, Tony Danker. Greeted with pearl-clutching in the Daily Mail, rentagob Tory backbenchers providing the copy, Danker has taken careful aim at forty years’ worth of neoliberal economic policy in Britain, specifically calling out the loss of manufacturing jobs under successive governments. And although reported as an attack on Thatcher, Danker picked his words more carefully: “Since the 1980s, we let old industries die… We have spent the past decades living with these consequences.”

It’s not something Labour like to talk about, but if deindustiralisation under Thatcher is notorious today – informing, still, how much of the North of England is perceived – its second round, under New Labour, was also far-reaching.

Source: ONS

Between 1979, when Thatcher entered office, and 1990, when she left, employment in manufacturing fell by 1.8m. But then between 1997, when Labour’s Tony Blair became Prime Minister and Gordon Brown’s exit from No.10 in May 2010, manufacturing employment fell by 1.7m.

The only periods of sustained increase in manufacturing employment occurred under Conservative Prime Ministers: rather weakly, rising around 200,000 in the nine years from 2010 to 2019; and then more dramatically under John Major, rising 190,000 in just four years from 1993 to 1997.

Deindustrialisation

The big picture here is well-known: deindustrialisation from the late 1960s onwards was common to the developed world, with major industries, from coal mining to car manufacture, shaking out jobs on a huge scale. Thatcher’s destruction of industrial employment was more dramatic than elsewhere, but not completely out of line with the general experience. The second wave of deindustrialisation in the West, apparent from the mid-1990s onwards but accelerating from the 2000s, then helps account for the loss of jobs under New Labour.

An overvalued pound – itself the symptom of government monetary policy – is common to both experiences, with recovery in employment being particularly tied, in the 1990s, to the crash in the value of the pound following Britain’s exit from the Exchange Rate Mechanism.

Of course, under New Labour these lost manufacturing jobs were (in effect) replaced with service sector employment, in both the public and private sectors. Overall employment remained high until the Great Financial Crisis, in striking contrast to the searing rises in unemployment under Thatcher. But the swap of typically better-paid, more secure manufacturing work for typically lower-paid, less secure (private) service sector work was keenly felt and, despite some efforts at geographic redistribution under Labour – whether directly via the old Regional Development Authorities or indirectly via public sector employment – the relative weakening of economies outside of London and the South East became all too apparent once the boom of the 2000s ended.

For the entire period, however, until the last few years, the general direction from government has been consistent: that government itself should, as far as possible, “just get out of the way”. At most, it could compensate for “market failures” in the provision of some essentials – basic infrastructure, say, or education. Labour was more expansive in its spending; the Conservatives, and the Conservative-led Coalition from 2010-15, rather less. When Gordon Brown, as Chancellor the Exchequer, told the CBI conference in 2005 he wanted business regulation to be “not just a light touch but a limited touch”, he was simply repeating the neoliberal commonsense of the time – and no doubt his audience would have nodded along with it.

The contrast with Danker’s argument could not be clearer. Noting the “shot of redemption” new industries give to deindustrialised regions, here he is on making “levelling up” work:

This might be a new line from the head of the CBI, but simply saying the market will fix this is simply not good enough. There are free marketeers in the debate who say government should never play an active role like this. But I don’t know a country in the world – including, and especially, the United States – where governments aren’t active in economic geography.

If we go back far enough we can find heads of the CBI disagreeing with Margaret Thatcher during the early years of neoliberalism. In spring 1981, its then-Director General promised a “bare-knuckle fight” with government over their economic policy. The larger companies the CBI represented were in some “panic” from the 1980 onwards about the impact of mass unemployment and industrial recession on their own profits. Thatcher, for her part, tended to view the CBI at the time as corporatist dinosaurs – bureaucratic managers as responsible for Britain’s presumed decline as the over-mighty trade unions. But for much of the last three decades the CBI has been a reliable defender of the free market doctrine.

It’s a sign of the turn against the neoliberal rules of the game – apparent since the financial crisis, accelerating as the pandemic erupted – that the CBI’s director today will make such a pointed criticism of them, and of how they have failed the last four decades. Would that either main party leader had the same confidence.

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An interesting debate was opened by Labour’s MP for Neath, Christina Rees, in Parliament’s Westminster Hall last week on Italy’s “Marcora Law”. This is the legislation introduced there in 1985 to allow workers’ threatened with redundancy the option of exercising a right to purchase the company. Two government-administered funds provide the loan capital needed to the workers, and the law has been credited with saving 13,000 jobs in the years after the financial crisis.

There are two points to note here. First, although co-operative and worker ownership sector in the UK is a fraction of those in Europe and North America, it has been growing rapidly in the last few years, helped along by some recent changes to legislation. 250 new employee-owned business have been established since 2019, taking the total to 720 across the UK: a fraction of the 2m or so registered businesses in the UK, but including at least one very large employer, John Lewis Partnership, and with notable growth in manufacturing firms in particular.

Second, there is a potential here for a government outside the EU to do something radical with this. The original Marcora Law provided for significant government support to those wanting to move a threatened firm into employee ownership, with the Italian state offering to put in up to three times as much additional start up capital as the workers. The European Commission ruled that this was in breach of EU competition law, handing (in its view) an unfair advantage to worker-owned businesses relative to more conventional ownership. But the reality is that this was a clash of two very different conceptions of what a business is. The Commission took (and takes) a pure neoliberal view: that a business is there to benefit its shareholders only, and any one kind of shareholder – someone’s granny with share certificates; your ISA; Black Rock – is much the same as any other. There is, in this view, no case for offering cheap loans to any one type of business over another, solely on the basis of its form of ownership.

That, of course, radically reduces the appeal of worker ownership, and opens up the standard neoliberal objection. If you are employed by a company, you are exposed only to one kind of risk – that the business could fail, and you lose your job. But if you are not only an employee, but a shareholder in the company, you face two kinds of risk: if the business fails, you lose your job – and also whatever capital you have invested. It’s this double risk that tends to weigh heavily against worker buyouts, particularly where employees also face having to borrow money at standard commercial rates.

But there is another way to view a business. Instead of seeing a firm as operating solely for the benefit of its shareholders, we could view it as a social institution in its own right: that whatever a business does includes not only the profit it makes, but the quantity and quality of the work it generates, its impact – good or ill – on the environment, the other businesses and employment it sustains through its purchases, and so on. The evidence that worker ownership performs better on these broader measures of successes is clear: worker-owned firms tend to be more productive, tend to create and sustain more and better jobs, and tend to act as better stewards for the environment.

In this view of a firm as a social institution, government could become a necessary partner, acting as guardian of the broader interests of society alongside those of the workers and any additional shareholders. It would be natural for this additional partner to also take a stake and offer support to a company working in this way. This would be a breach of the neoliberal conception of the company, but would be far closer to the actual

Neoliberalism in law

United Kingdom company law doesn’t think like this. The last major change was the Companies Act 2006, enacted by the Labour government, which did create a weak requirement for directors to “have regard to” environmental and social impacts, but left the basics of shareholder supremacy in place, turning existing common law practice into hard legislation. And for as long as the UK was in the EU, this neoliberal bias reinforced by the EU’s own strict laws and regulations around competition and ownership. Steering around them was possible, but would be an additional hurdle for an economy like the UK if it sought to significantly boost worker ownership.

But outside of the EU, and now subject only to the loose constraints of the EU-UK Trade and Cooperation Agreement, a UK government has more freedom to intervene in the domestic economy. Support for worker ownership could be radically improved, and with the option for further support for specific areas and regions of the country. Cheap capital could be provided at scale for employee ownership schemes; and the opportunity for major expansion is there, too, with potentially thousands of viable small businesses facing closure or sale as their baby-boomer owners approach retirement: nearly two-thirds of UK small business owners are over 50, and two-thirds of them have no succession plan for their businesses. It’s the sort of thing that might appeal to the supposedly “Brexity Hezza” in No.10, but if the government’s response to Rees is any guide, they’ll let it slip. Time for Labour to seize the moment?

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In less than six months since his inauguration as US President, Joe Biden’s administration has staked out a new agenda for US policymaking, breaking with the previous four decades of Republican and Democratic domestic economic policy to focus deliberate government action on job creation, addressing racial equality, environmental goals, and rebuilding American manufacturing industry. A dramatic expansion in trade union rights, pushing back on four decades of draconian restrictions on workplace organising has been pledged, and over $6tr of public spending is lined up, to be funded mainly by taxes on the richest Americans and the biggest corporations.

The UK equivalent for the whole programme (using share of 2020 GDP as the baseline) would be £560bn: £170bn for immediate coronavirus relief; £240bn for investment and business support; £150bn for welfare and education.

Surprising many with the scale and scope of its ambitions, the Biden Administration’s domestic economic programme has raised the bar for progressive governments across the world. This briefing breaks down the emerging details of the programme for a UK audience and lays out the main political conclusions.

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Since January 2021, the Biden administration has spent or committed to spend $1.9 trillion for immediate COVID-19 relief, $2.7 trillion for investment and business support, and $1.8 trillion for welfare and education. This amounts to $6.4 trillion, or nearly 30% of US GDP. The $1.9 trillion already delivered through coronavirus spending will tail off, leaving $4.5 trillion, or about 20% of GDP, to be spent over the next ten years.

The spending will be financed largely by US Federal Reserve bond purchases, with tax hikes coming later. But will it represent the biggest mobilization of US public investment since WWII, or rather an inflationary splurge?

We don’t know yet, because we have no accurate way of measuring the output gap – the difference between actual and potential output, or, roughly, the amount of slack in the economy that can be absorbed before prices start to rise. The International Monetary Fund predicts that the US economy will be growing above potential by the end of this year, and that European economies will be close to their potential. This signals inflation ahead and the need to reverse deficit finance.

Against this static view is the belief – or hope – that government investment programs will increase the US economy’s potential output, and thus enable faster non-inflationary growth. Much of Bidenomics is about improving the workforce’s productivity through education and training. But this is a long-term program. In the short run, so-called supply-side “bottlenecks” could drive inflation. There is thus a palpable danger that an overambitious agenda gives way to abrupt policy reversals, renewed recession, and disillusion.

There is a steadier course available, but the Biden administration has ignored two radical suggestions that might make its life a lot easier. The first is a federal job guarantee. Put simply, the government should guarantee a job to anyone who cannot find work in the private sector, at a fixed hourly rate not lower than the national minimum wage.

Such a scheme has many advantages, but two are key. First, a federal job guarantee would eliminate the need to calculate output gaps, because it would target not future demand for output but present demand for labor. This in turn underwrites an unambiguous definition of full employment: it exists where all who are ready, willing, and able to work are gainfully employed at a given base wage. On this basis, there is substantial underemployment in the United States today, including among people who have withdrawn from the labor market or are working less than they want.

Second, the job guarantee acts as a labor-market buffer that expands and contracts automatically with the business cycle. The 1978 Humphrey-Hawkins Act in the US – which was never implemented – “authorized” the federal government to create “reservoirs of public employment” to balance fluctuations in private spending.

These reservoirs would automatically deplete and fill up as the private economy waxed and waned, creating a much more powerful automatic stabilizer than unemployment insurance. As Pavlina R. Tcherneva of Bard College says, a job guarantee “continues to stabilize economic growth and prices, using a pool of employed individuals for the purpose rather than a reserve army of the unemployed.” No “management” of the business cycle, with its well-known political risks, is involved.

The second radical idea is the economist Vladimir Masch’s compensated free-trade plan. America has lost millions of manufacturing jobs so far this millennium, largely owing to offshoring of production to cheaper labor markets in Asia. The counterpart of this has been a structural US current-account deficit averaging about 5% of GDP.

One of the Biden administration’s main objectives is to rebuild US manufacturing capacity. While the COVID-19 has fostered a conventional wisdom among all deindustrializing countries that they should reserve “essential” procurement for domestic manufacturers, Biden’s “Made in America” efforts echo former US President Donald Trump’s “America First” approach. But Biden’s plan to rebalance US trade by means of tax subsidies for domestic producers, trade deals, and international agreements, rather than tariffs and insults, is vague and unconvincing.

In a world of second-best options, the Masch plan offers the quickest and most elegant way for Biden to secure the balanced trade that he wants. The basic principle is simple: any government in a position to do so should unilaterally set a ceiling on its overall trade deficit, and cap the value of permitted imports from each trading partner accordingly.

For example, China, which accounts for about $300 billion of the current US trade deficit – half of the total – might be limited to $200 billion worth of annual exports to the US. If China exported more, it could either pay a fine equal to the excess over its quota or face a ban on excess exports.

Compensated free trade, Masch argues, “would stimulate a return to the US of the off-shored enterprises and jobs.” It would also automatically prevent trade wars, because “any attempt by the surplus country to decrease the value of its imports from the US would automatically decrease the value of its allowed export.”

Policymakers seeking to stimulate the economy must pay more attention than past Keynesians did to avoiding inflation and ensuring that job creation at home is not offset by a drain of production capacity abroad. The Biden administration will have no choice but to learn these lessons. If it’s wise, it will shun austerity and unfettered trade in favor of full employment and the manufacturing capacity needed to achieve it.

Robert Skidelsky

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Robert Skidelsky

Will Hutton

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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

Photo credit

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Dear Sir/Madam,

Chancellor Rishi Sunak plans to set up a National Infrastructure Bank to “channel billions of pounds into capital projects” (FT 20^th November, 2020).

We write to urge the Chancellor to broaden his vision. The regeneration of Britain’s ‘national infrastructure’ must include investment in ‘social infrastructure’ such as childcare, schools and universities, regional theatres, orchestras, common spaces, and local sports. The pandemic has shown these economic activities are just as vital to society and the economy as the physical infrastructure of tarmacked roads, green energy and safe bridges. And research demonstrates that investment in care has multiplier effects many times those of investing in construction, while generating far fewer GHG emissions.  Furthermore, these investments can be kick-started in less time than construction projects.

Under-investment in social infrastructure before the pandemic was a false economy; it would be even more so as we move into the recovery phase. Channelling money into Britain’s social infrastructure and especially into its care, education, arts and training sectors would create jobs, generate income for workers, the Treasury, and the wider economy, and contribute to a more robust and sustainable economy.

Yours faithfully,

Patrick Allen

Carolina Alves

Danny Dorling

Daniela Gabor

Stephany Griffith-Jones

Susan Himmelweit

Will Hutton

Michael Jacobs

Sue Konzelmann

Natalia Naqvi

Ann Pettifor

Kate Pickett

Josh Ryan-Collins

Guy Standing

Robert Skidelsky

Jan Toporowski

Council Members of the Progressive Economy Forum

photo credit flickr

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In his spending review this week, the Chancellor made clear the scale of the economic crisis facing the UK. Much discussion has followed as to the sustainability of the current spending commitments and public sector debt. Announcements of public sector pay freezes and cuts to foreign aid have been met with dismay.  

Might there be a better way of dealing with the longer-term economic costs of the pandemic? In a new report for the UCL Institute for Innovation and Public Purpose, we argue that the government should consider taking equity stakes in firms at risk of collapse to boost a sustainable recovery. Not only would this be preferential to piling up more publicly guaranteed debt on already highly indebted firms, but, once the economic situation has improved, it could generate a fiscal return.

The advantage of equity investment is that the state and taxpayers can recovery their money when an ailing firm gets back on its feet and is either sold off; or, in other cases, the state can make a longer-term investment, hopefully attracting in other forms of finance to support firms that private investors are not yet prepared to invest in. This avoids the socialisation of losses and privatisation of risk problem that has often occurred during financial and economic crisis.

Widespread government equity ownership in hundreds of thousands of small firms is neither desirable nor practically possible. But well-targeted state investments could help pull economies out of the recession and support longer term policy objectives at the same time. 

However, how to govern public assets to generate value has received little attention compared to the vociferous debate over whether or not to nationalise or privatise. If poorly managed, public equity bailouts risk damaging growth prospects.

Reviewing the evidence on state-owned enterprises across many countries, we find that they can be run effectively providing that the government ownership is institutionalized according to the highest standards of corporate governance and structured as ‘public wealth funds’ (PWFs) that combine arms-length independence from day-to-day politics with active and competent public governance.

The report argues for the creation of five different specialised PWFs: a National Wealth Fund in charge of mature assets such as airlines or energy companies; ‘mission-driven’ venture capital funds focused on innovation, climate transition and regional growth; and regional Urban Wealth Funds to support housing and urban renewal.

Successful examples of PWFs include Singapore which used these vehicles to help turn themselves from an economic backwater to one of the world’s richest countries in the space of a few decades from the 1970s onwards anda number of cities, such as Copenhagen’s City & Port Company and Hamburg’s HafenCity.

The costs of financing PWFs would be low. Even assuming that the suggested equity investments lose their value, the direct fiscal cost of investing in the above-mentioned funds would be small, only around 0.1 percentage points of GDP per year. Moreover, over time some of these investments would likely turn a profit. Historically, the yield on equity has been around 6 percent.

Managing public assets more professionally would also incentivise a wider rethink of public sector accounting, which is currently too focused on debt and short-term cash measures, and largely neglects public sector assets. A better approach for public sector accounting would be to focus on net worth (assets less liabilities) as the most comprehensive fiscal measure using accrual-based accounting. This takes into account both sides of the balance sheet and, when linked to the budget, would incentivise public sector investments.

As the IMF argued in report published last year, if the entire portfolio of public assets were properly accounted for and professionally managed, they could potentially generate some 3% of GDP in additional revenues to government budgets.

The holy grail of public asset management is an institutional arrangement that both removes governance from a government´s direct responsibilities, but at the same time encourages active commercial governance of public assets with the aim of generating value for the public and a dividend that can benefit society as a whole.

This blog was first posted on the IIPP web site

picture credit: www.learningVideo.com

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