By Josh Ryan-Collins

After a decade of austerity and the trauma of a two-year long pandemic, the UK’s public sector workers deserved some respite come 2022. Instead, they are now enduring the largest real wage cuts in recent history.

Average settlements on offer to public sector workers are currently around 3% with inflation at 10%. This 7% cut in real wages amounts to almost a month’s salary not being paid. Furthermore, the private sector is enjoying wage deals more than twice as high at around 7% as shown in Figure 1.

Under such conditions, the withdrawing of labour is an entirely rational response. It is even more understandable when you consider the wider macroeconomic policy regime that appears rigged against the public sector.

The argument being repeatedly made by both the government and the independent Bank of England is that paying public sector workers close to or above the current rate of inflation would be self-defeating because it would lead to higher prices. This is due to the so called ‘wage-price spiral’ where higher prices lead to calls for higher wages which then feed through to higher prices and so on.

There are four reasons this argument is flawed.

Firstly, in capitalist market economies the public sector does not set prices, firms do. So the wage-price spiral can only apply to the private sector in as far as it is a direct relationship between wages and consumer prices.

The only way the government could finance additional wages for the public sector would be raise taxes or borrow more. Taxing directly removes money from the economy so it is difficult to see how this could be inflationary.

Borrowing involves investors spending money buying government debt instead of other assets. Bank of England governor Andrew Bailey has stated this would affect “overall demand in the economy” and force the Bank to raise interest rates, further adding to the cost-of-living crisis facing low paid workers.

There is evidence that bond financed fiscal deficits are associated with higher inflation. But this relationship is almost exclusively found in developing countries with weaker institutions and tax raising powers, not in high income economies like Britain.

Second, current inflation in the UK is mainly driven by supply-side factors, in particular rising energy prices caused by the Ukraine war feeding through to other sectors. There is evidence that rising energy costs have led firms to raise their prices and evidence that other firms have exploited the situation of rising prices to use their market power to raise prices above inflation, generating excess profits. If anything, there is more evidence of a ‘profit-price spiral’. None of this has anything to do with what public sector workers are paid.

Thirdly, public sector workers make up only around 17% of the workforce. Thus inflation-linked wages to help public sector workers catch up with years of real wage cuts would have much less impact on total demand in the economy than they would in the private sector.

Finally, the public sector is suffering from a serious shortage of labour caused by the COVID pandemic and difficulty recruiting workers from the EU post-Brexit. In particular the healthcare sector is in crisis, making up 13% of all jobs advertised in the UK last month.

Keeping wages well below those available in the private sector — which they have been over most of the past eight years (Figure 1) — will make the situation worse as employees are more tempted to leave. In turn, this will require even larger pay increases down the line to bring workers back.

Given flatlining growth, fears about excess demand and entrenched inflation have to be tempered with the risk of rising unemployment and even more individuals leaving the workforce, worsening an already extremely weak macroeconomic environment.

Striking public sector workers have the support of the majority of the public. They seem to recognise, better than the politicians and policy makers in charge of our economy, that a strong public sector is the building block for sustainable economic growth. Let us hope that those taking industrial action succeed in pushing through higher wages for all our sakes.

This blog was first published on 14th February 2023 on the official blog of the UCL Institute for Innovation and Public Purpose | Rethinking how public value is created, nurtured and evaluated | Director @MazzucatoM | https://www.ucl.ac.uk/bartlett/public-purpose/

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Ten Years and Counting…

In 2009, we wrote The Spirit Level, based on our work as epidemiologists researching the social determinants of health and wellbeing. We showed, emphatically, that greater equality – a smaller gap between rich and poor – is the fundamental basis of a better society. The more equal of the rich, developed countries have resoundingly better physical and mental health, which is part of the reason why they weathered the storm of Covid-19 better than more unequal countries.

But economic inequality, and its intersection with inequalities related to ethnicity, gender, disability, language, religion and more, is not just a health issue. In The Spirit Level we showed that all the problems that are more common at the bottom of society, that have a social gradient, get worse with greater inequality. And that body of evidence has continued to grow in the years since, based on our own research and the work of many others across the world. In addition to shorter life expectancy, higher death rates and levels of chronic disease, increased obesity, mental illness and poor child wellbeing, more unequal societies suffer from more violence, including homicides, domestic violence, child maltreatment and bullying. Children and young people do less well in school and have lower chances of social mobility and higher rates of dropping out and teenage births. Drug and alcohol abuse, problem gambling, status consumption and consumerism also rise with inequality, while levels of trust and solidarity, and civic and cultural participation decline.

Countries that tend to do well on any one of these measures tend to do well on all of them, and the ones that perform badly do badly on most or all of them. And not only is the impact of inequality wide-ranging, differences between countries are large; and although the poor are worst affected, inequality affects almost everybody.

And that means that the UK is trailing behind the countries to which we usually compare ourselves, on that long list of problems, and that all of us – young or old, male or female, in the North or the South, rich or poor – ALL OF US, are damaged. We are each at higher individual risk, and our whole society is ground down and trapped by inequality: we, and it, fail to thrive.

We’ve used a robust framework analysis to show that this is a causal problem and we’ve done a lot of work to understand the pathways through which inequality does the damage.³ We know that tackling inequality is the central task in responding to the multiple crises we face: the climate crisis, the cost of living crisis, the North-South divide, food insecurity, the gig economy, threats to our democracy.  Inequality is at the heart of it all.

The lost decade

When The Spirit Level was published we were at first heartened by the political response to the research. Politicians across the political spectrum seemed to understand the evidence and inequality seemed to take its rightful place on the political agenda.

But what has happened in the UK since then – a decade of austerity, followed by a global pandemic, and now a cost of living crisis, means we’re just as unequal now as we were then. And every crisis that comes along seems to be another engine of increasing inequality. 

Who suffered from the Global Financial Crisis? Average real incomes declined, and that was particularly true for the youngest and lowest paid workers.  Who were most likely to be exposed to Covid, to be infected, to be really sick, to die? Death rates were twice as high in the most deprived areas of the UK as in the most affluent. And we know who is already suffering most from rising prices, rising interest rates in the cost of living crisis – those on low incomes, on benefits, families with children, especially lone parents and everyone living outside of London and the south east.

And in all three of these crises, it hasn’t simply been a matter of the poor getting poorer.  In these big existential crises, the rich have got richer, a lot richer.  In the years following the Global Financial Crisis, the world’s richest 1% increased their wealth until they owned more than the bottom half of the world’s entire population. Top investors made billions by buying up shares in failing banks, betting against housing markets that were foreclosing on the mortgages of the poor, basically “buying when there’s blood in the streets” to realize massive gains during recovery. The pay of the FTSE 100 chief executives has sky rocketed, unlike that of their workers. During the pandemic, the rich accumulated wealth, including from government procurement under emergency regulations with lowered scrutiny for corruption. Oil and gas companies have made huge profits since the energy crisis began, and their chief executives continue to be paid millions, some of them many millions.- Huge pay and benefits packages and dividends have enriched the chief executives and shareholders of the UK’s water companies despite their abysmal record on tackling leaks, pollution and investment in new reservoirs.

We need the right (left) kind of active government

The Coalition and Conservative governments have certainly been active since 2010. They have actively failed to tackle inequality; they have acted to benefit the rich and harm the rest of us. Their actions speak much louder than their hollow words on levelling up.

An Active Labour Government could do so much to transform our society from the failing, unproductive, harmful state it is in, to one that promotes and, crucially, achieves the welfare and wellbeing of all its citizens. An active government that puts wellbeing first through tackling inequality would see spin-off benefits and savings across health, education, social care, law enforcement and more.

The courage to change

Labour should take heart from the progressive preferences of British citizens. When polled, the large majority of the public are in favour of progressive policies that are too often dismissed as radical, utopian, or unfeasible by the press or the Westminster bubble.

Close to 80% of the British public believe that the gap between those on high and low incomes is “too large” and this has been a consistent trend (varying between 72-85%) over the four decades that the British Social Attitudes (BSA) survey has been running. In 2018, the BSA concluded that “the public are likely to have more of an appetite for policies aimed at addressing poverty and inequality than they did a decade ago.”

The majority of the British public want water, energy, rail, buses, Royal Mail and the NHS to be run in the public sector, and that includes the majority of Conservatives.

Recent academic research on public opinion research in “red wall” constituencies found consistently high levels of support for Universal Basic Income, even when the policy was presented to voters in terms used by its opponents. There is little evidence that voters with conservative social values – those in left behind communities in Labour’s former heartlands – won’t actually support radical social policy.

The vast majority of the public support action on climate change and they are much more worried about the costs of doing nothing than they are about the cost of tackling the problem.

The triple-win manifesto

So what should the Labour Party do?  We are not politicians, or even political scientists or policy experts.  But we do know that Labour needs a bold and compelling vision that brings people onside by painting a picture of a society that can respond to the climate emergency while at the same time transforming people’s lives for the better and creating sustainable  growth.

What follows is by no means an exhaustive list, but six triple-win active policy options include:

• Joining WEGo, the Wellbeing Economy Governments (currently Canada, Scotland, Iceland, New Zealand, Wales and Finland), a collaboration of national and regional governments promoting sharing of expertise and transferrable policy practices for building wellbeing economies.  It is growth in wellbeing that we need, not growth in GDP.
• Committing to actually tackling inequality by taxing wealth, top incomes and financial transactions
• Giving people resilience and stability through a universal basic income and a proper living wage.
• Enacting the Socioeconomic Duty of the 2010 Equality Act
• Promoting fair work and economic democracy within a Green New Deal
• Putting children and young people at the centre of policy: recommit the country to ending child poverty; end selective education and remove charitable status from private schools; properly fund the comprehensive education system; enshrine in law universal free school meals and free holiday meals for families on benefits; and close the digital divide

Labour needs to act fast and boldly, with energising urgency, to make sure that the policies needed to tackle the climate emergency are politically acceptable to the public because they can see that they are part of a transformation to a fairer, better society in which they and their children and grandchildren can flourish.

What inspired progressive political change in the past was a vision of socialism, embodying the belief that a better society is possible for all of us.  The loss of that ideal has meant political hope has dwindled for so many.  Labour must build a new vision, firmly built on the foundations of an egalitarian and sustainable society.

Kate Pickett is a social epidemiologist, co-author of ‘The Spirit Level’ and ‘The Inner Level’ and co-founder of The Equality Trust.

Richard Wilkinson is Professor Emeritus of Social Epidemiology at the University of Nottingham Medical School, Honorary Professor at University College London and Visiting Professor at the University of York.

This article is published with permission from Labour Tribune MPs. It first appeared in a collection of essays published by Labour Tribune MPs in 2022 entitled “THE CHANGE WE NEED : How a Starmer Government can Transform Britain”

Further Reading

Wilkinson RG, Pickett K. The Spirit Level: Why Equality is Better for Everyone. London: Penguin; 2010.

Pickett KE, Wilkinson RG. Income inequality and health: a causal review. Social Science & Medicine 2015;128:316-26

Wilkinson R, Pickett K. The Inner Level: How more equal societies reduce stress, restore sanity and improve everybody’s wellbeing. London: Allen Lane; 2018.

Greater Manchester Independent Inequalities Commission. The Next Level: Good Lives for All in Greater Manchester, 2020: https://www.greatermanchester-ca.gov.uk/media/4337/gmca_independent-inequalities-commission_v15.pdf

Pickett K, Wilkinson R. Post-pandemic health and wellbeing: putting equality at the heart of recovery. In: Allen P, Konzelmann SJ, Toporowski J. The Return of the State: Restructuring Britain for the Common Good. London: Agenda Publishing, 2021.

Wilkinson R. If it doesn’t work for people, it won’t work for the planet. Club of Rome, 2021: https://www.clubofrome.org/blog-post/wilkinson-inequality-sustainability/

Reed H, Lansley S, Johnson M, Johnson E & Pickett KE. Tackling Poverty: the power of a universal basic income, London: Compass, 2022. Available at: https://www.compassonline.org.uk/publications/tackling-poverty-the-power-of-a-universal-basic-income/

Johnson M, Nettle D, Johnson E, Reed H & Pickett KE. Winning the vote with a universal basic income: Evidence from the ‘red wall’. London, Compass, 2022.

Picture credit: flickr

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We are living in an age of chronic uncertainty, in which crises pile into one another, plunging millions of people deeper into insecurity, impoverishment, stress and ill-health. There was the financial crash of 2008, a decade of austerity, a series of six pandemics culminating in Covid, with more to follow, and now the ‘cost-of-living’ crisis as inflation mounts, possibly reaching an incredible 20% by the winter.

Nassim Taleb coined the term ‘black swans’ to designate shocks that were rare, unpredictable and had devastating consequences. Now, they are not rare. But they are uncertain in terms of when, where and why they occur and who will be adversely affected. As such, you and I cannot be confident that we will not be among the victims.

There is something else too. It looks as if a large proportion of the population will be affected. It is predicted, for example, that 45 million people in Britain will be suffering from fuel-related hardship this coming winter, bringing more deaths and ill-health. Natural disasters could hit numerous communities, and being in a job is far from a guarantee of escaping poverty or economic insecurity.

Three deductions should flow from this bleak scenario. First, feasible economic growth will not overcome the threats. Second, old policies are not valid for tackling the new crises. Third, we need to build societal resilience, a new income distribution system and a new social protection system. ‘Targeting’ on a minority would be futile and inequitable.

The post-war welfare state was built on a presumption of Full Employment of men in full-time jobs earning family wages, in which there was a need for compensation for ‘contingency risks’ or ‘temporary interruptions of earnings power’. It was always sexist. But the essence was ex post compensation. This is inappropriate today where the core challenge is chronic uncertainty, for which one cannot devise a social insurance system. What is needed is an ex ante protection system, one which gives everybody guaranteed basic security.

But our politicians are failing to appreciate the nature of the challenge and are resorting to yesterday’s answers to yesterday’s problems. First, the Conservative leadership contenders and the Labour leadership are making overriding commitments to maximising economic growth. Keir Starmer says that the Labour motif for the next General Election will be ‘Growth, Growth and Growth’, and that he will only consider policy proposals from the Shadow Cabinet if they promote growth. Meanwhile, an adviser to several Tory Chancellors says the next Conservative Prime Minister will commit to an ‘absolute priority of maximising growth’.

A phrase that comes to mind is the one used by Michael Gove to characterise Liz Truss: they are taking a holiday from reality. Both the Conservatives and Labour are misdiagnosing the nature of the recurrent crises. Both are chasing the mirage of high GDP growth, wishing away the awful ecological implications. Starmer says the free market has failed. But we do not have a free market. It is rentier capitalism, in which most income flows to the owners of property – financial, physical and ‘intellectual’. Economic growth has to be unrealistically high for the precariat and other low-income groups to gain anything. This is why real wages have stagnated over the past three decades, and why earnings have lagged GDP growth, the difference made up by rising debt.

The income distribution system has broken down. Across all OECD countries, financialisation has accelerated, and is fuelling inflation for its benefit. In the UK, financial assets of financial institutions have risen to over 1,000% of GDP, with most finance used for speculative activity rather than for productive investment.

A rising share of income is going to capital, and more is going in rent, in excess profits. Within the shrinking share going to labour, more has gone to the top, again in forms of rent. The value of wealth has risen sharply relative to income, while wealth inequality is much greater than income inequality.

All the time, the precariat grows. What should exercise progressive politicians is that for a growing proportion of the population income instability and insecurity have grown by more than is revealed by trends in average real wages. A result is that millions of people are living on the edge of unsustainable debt. People lack income resilience. Desirable as that is, raising the minimum wage will not solve that, and nor will trying to be King Canute in banning flexible labour relations.

So what are our politicians proposing in this context of chronic uncertainty, a broken income distribution system and a daunting ecological crisis? What marks all of what they are offering is ad hoc window dressing that seems deliberately intended to avoid the reality that we have a transformation crisis on our hands. Tax cuts would benefit the relatively secure, price freezes would cost the public finances and distort markets, raising the minimum wage would bypass the precariat and those outside the labour market, and targeting more benefits to those receiving Universal Credit would merely bolster an unspeakably punitive and inequitable scheme.

It brings to mind what William Beveridge wrote in supporting his 1942 Report that led to the post-1945 welfare state. ‘It’s a time for revolutions, not for patching.’ So far, our mainstream politicians seem to lack the backbone. The strategy should be one of dismantling rentier capitalism and recycling rental incomes to everybody. Above all, in the foreseeable future of chronic economic, social and ecological uncertainty, the base of social protection should be the provision of ex ante security. People – all of us – must know that, whatever the shock, we will have the wherewithal on which to survive and recover.

This is when politicians should be looking at ways of introducing a basic income for every usual resident. It would not replace all existing benefits, and would have to involve supplements for those with special needs. It would have to start at a modest level, but would be paid to each man and woman, equally and individually, without means-testing or behavioural conditionality. Legal migrants would have to wait for a period, which does not mean they should not be assisted by other means. And to overcome the objection that it should not be paid to the rich, tax rates could be adjusted to make them more progressive.

Before coming to how to pay for it, I want to emphasise the reasons for wanting a basic income for all. The fundamental justification is moral or ethical.

First, it is a matter of common justice. Our income owes far more to the contributions of all our ancestors than to anything we do ourselves. Even Warren Buffet admits that. But as we cannot know whose ancestors created more or less, we should all have an equal ‘dividend’ on the public wealth. After all, if we allow the private inheritance of private wealth, there should be a public equivalent. The Pope has come round to that rationale for his support for basic income. It is also a matter of ecological justice, since the rich cause most of the pollution while the poor pay most of the costs, primarily in diminished health. A basic income would be a form of compensation.

Second, it would enhance personal freedom, including community freedom. Although paid individually, that would not make it individualistic. Experiments have shown that when everybody has basic income, that induces stronger feelings of social solidarity, altruism and tolerance.

Third, it would enhance basic security, in a way that means-tested, conditional benefits cannot possibly do. Politicians seem reluctant to offer ordinary people basic security, which they would always want for themselves and their families. Insecurity corrodes intelligence and induces stress and loss of the capacity to make rational decisions. We are experiencing a pandemic of stress and rising morbidity. None of the existing policy proposals would reduce that.

Finally, there are instrumental reasons. Experiments with basic income around the world have shown it results in improved mental health, less stress, better physical health, more work, not less, and enhanced social and economic status of women and people with disabilities.   

Basic income is not a panacea, but it should be part of a transformational strategy, complemented by putting public utilities, most notably water, back in public hands and by rent and energy price controls. There must also be fiscal reform that would help in the fight against the ecological decay while helping to overcome chronic uncertainty. Progressives should accept that taxes on income and consumption should be raised, because they are relatively low in this country and because more revenue is needed to pay for our public services, and in particular reverse the privatisation of our precious health service.

The call for Universal Basic Services is state paternalism and would not help with the nature of the crisis. People need financial resources to overcome the economic uncertainty and lack of resilience. No government can know the particular needs of particular people, and so subsidising some services would be both arbitrary and distortionary.

However, in addition to higher taxes on income to pay for services, we should think of ‘the commons’, that is, all that inherently belongs to every citizen of the UK, beginning with the land, air, water and sea, and the minerals and energy underneath. Over the centuries, they have been taken from us illegitimately, without us or our ancestors being compensated. This includes all the land that has been ‘enclosed’, the forest and public spaces that are being ‘privatised’, the seabed that is being auctioned off, and the oil and gas sold for windfall gains given away in tax cuts for the wealthy.

This line of reasoning leads to the proposal that levies should be put on elements of the commons that we have lost, with the revenue put into a Commons Capital Fund, which would be charged with making ecologically sustainable investments, from which ‘common dividends’ would be paid out equally to every resident citizen.

The initial base for paying for a basic income would be conversion of the personal income tax allowance, which benefits higher-income earners and contradicts the view that in a good society everybody should be a taxpayer. If the revenue from that were put into the Fund, it would provide enough for £48 a week for every adult. Then add a 1% wealth tax, justifiable because wealth has risen from three times GDP to seven times, wealth inequality is much greater than income inequality and over 60% of wealth is inherited, unearned. A 1% wealth tax would be sufficient to pay a modest basic income. And more revenue could be raised by rolling back on many of the 1,190 subsidies and tax breaks given mostly to wealthy people. A modest Land Value Tax, based on size and value of land, is also justifiable on common justice grounds, especially as the value of land has grown from an already high 39% of non-financial assets in 1995 to 56% in 2020.

Then add a Carbon Tax, vital if we are to reduce greenhouse gas emissions and global warming, but which will only be politically popular and feasible if all the revenue from it is recycled as part of Common Dividends. Other levies into the Fund could include a Frequent Flyer Levy and a Dirty Fuel Levy on all those cruise liners and container ships that keep their engines going all the time they are in port, poisoning the atmosphere and causing widespread throat cancer.   

Here we have the basis of an income distribution system suited to the era, with supplements for all those with extra needs. It is an approach that would open up a vista of multiple forms of work, unpaid as well as paid, putting care at its centre. It would be an era in which basic security was regarded as a fundamental right, and it would be one in personal freedom would be enhanced while precarity would be reduced, the precarity that comes from dependency on a discretionary state and undignified charity. At this moment of omni-crisis, we need to march in that direction.            

Postscript:

In their response to the cost-of-living crisis, the New Economics Foundation proposes ‘free basic energy’ for all households. Besides penalising those outside households, this presumes that all households’ poverty and insecurity is due to high energy prices. For many that will be so, but for some other factors may be more important.

It would also raise moral hazards. Some people may not need the full free allocation, but would be inclined to waste what they did not need, because it was free. The amount given free would have to be based on some ‘average’ household. But many are in non-average households, or are outside them more, for whom the free allocation would be too little or exceed our basic need.

Some people might prefer to cut energy use a little if given the choice of spending on food, debt reduction or extra clothing. Better to enable them to make the choice that suits their particular needs.

The NEF also propose to top-up Universal Credit and legacy benefits. But we know these do not reach many of the poor, due to sanctions, the humiliating application process and long delays. What about the millions in need who would be excluded? Much better than relying on paternalistic measures and behaviour-conditioned targeted benefits would be a basic income, with supplements for those with special needs, coupled with a modest wealth tax and land value tax. 

Guy Standing is a Professorial Research Associate, SOAS University of London and a council member of the Progressive Economy Forum. His new book is The Blue Commons: Rescuing the Economy of the Sea, published by Pelican. He is a technical adviser to the basic income pilot being conducted by the Government of Wales.  

photo credit flickr

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On the economic front, this period saw the theories of John Maynard Keynes provide the sound intellectual framework for the views which trade unionists had always instinctively known to be right.

Trades Union Congress, The History of the T.U.C. 1868-1968, p. 85

The bond between Keynes and workers – obvious to trades unionists in 1968 – is obscured in the latest commentary on working hours by Keynes’s own biographer, Lord Skidelsky.

As the pandemic eases, Lord Skidelsky on 17 February warned Daily Mail readers that it was “deluded to think that working from home and a four-day week is anything other than a looming disaster for the UK.” Twice he appeared to condemn “Labour leaders [that] have long advocated a world where their members work fewer hours for more money”.

Er, yes. And – up to a point – workers have been incredibly successful.

The available data (shown on the charts here) suggest that real wages advanced decisively from around the beginning of the nineteenth century. And, likewise, hours have fallen continuously from roughly the same point. Henry Pelling, the author of A History of British Trade Unionism (1963, p. 24), reckons this is the point at which trade unions became a force to be reckoned with: “The extent and efficacy of combinations in the later eighteenth century” he observes, “provoked the active hostility of parliament”. By 1833 the ‘Factory Acts’ began gradually to restrict working hours. Even Karl Marx, no great believer in the reforming virtues of the bourgeois state,[1] celebrated the “legally limited working day, which at lasts makes clear ‘when the time which the worker sells is ended, and when his own begins’. Quantum mutatus ab illo [What a great change from that time, from Virgil’s Aeneid]” (Marx, 1976, p. 416).

But Lord Skidelsky only judges trends in hours against Keynes’s prediction that ‘our grandchildren’ might enjoy working only a 15-hour week.  He thus sidesteps the still profound achievements that have so far been made. Moreover, his reasoning here is important. Keynes may have anticipated increasing automation (so permitting more efficient production), but Skidelsky argues he failed to anticipate the insatiable demand for goods and services on the part of workers (meaning more production necessary overall). With the latter meaning upward pressure on hours, Keynes’s idea of a 15-hour week was, sadly, wrong.

However, it doesn’t therefore follow that those who advocate reduced hours today, have, in Lord Skidelsky’s words, a “dismal understanding of economics”. Apparently ignorant of the insatiable appetite of their members for more work and more consumption, union leaders are alleged to reason simplistically as follows:

The demands of trade union leaders for a four-day week are still rooted in the idea of work-sharing. In their eyes, the labour force should be spread as widely as possible to ensure there is no unemployment. Each worker ‘needs’ a job, so by cutting the number of working hours, the number of jobs increases.

In effect Lord Skidelsky is arguing that trade unions adhere to the lump of labour/wage fund fallacy, which can be traced back to at least Ricardo in 1815. Nor is he the first to do so: Sidney and Beatrice Webb claimed likewise from their ivory tower at the London School of Economics. This is the belief that the quantity of work and wages represent nothing more than the total capital of society divided by the population, and takes no account of the complex dynamism of capital itself.

As the economic historian R.V. Clemens pointed out as long ago as 1961, the accusation is unfair to trade uinon leaders: “[a]s for the wage fund theory, union leaders never accepted it in any significant sense, since it was shattered by practically everything they did”.

Ironically Lord Skidelsky’s argument simply modifies the lump/fund fallacies, with technology and taste allowed to change the size of the lump/fund over time. If the workers want ‘indoor toilets’ or more than ‘two sets of clothes’, Lord Skidelsky asserts they will have to work more, not less, because there is only so much capital to go around.

Keynes’ alternative

Keynes’s approach was very different. In the General Theory he took these factors as ‘given’ and not relevant to the argument he was making (“we take as given the existing skill and quantity of available labour, the existing quality and quantity of the available equipment … the tastes and habits of the consumer …”, p. 245). He showed that increasing aggregate demand would lead to a permanently stronger economy. His primary focus was releasing previously contained (and disrupted) aggregate demand through a lower long-term rate of interest, a point I was at pains to make in Keynes Betrayed.

In contrast, the so-called ‘Keynesian’ economists who took his work forwards after the Second World War, have tended instead to focus exclusively on the role of government expenditure. The labour movement (and many ‘post-Keynesian’ economists today, e.g. Stockhammer and Lavoie, 2013) have given more emphasis to the role of higher pay in stimulating aggregate demand. ‘Wage-led growth’ is a critical priority for the Trades Unions Advisory Committee to the OECD – see the report ‘Framing the Recovery: Pathways for a World in Transition’ submitted and presented to the OECD liaison Committee in February 2022. Today ‘wage-led growth’ is a critical priority for the Trades Unions Advisory Committee to the OECD.[2]

Trade union leaders have, since the movement began, understood the basic macroeconomic truth that higher pay will not only be better for workers but better for the economy. And as we have always argued – for example most recently in A future that works for working people – reduced hours are then an additional way to share that increased prosperity. As the charts show, so it has proved in practice.

It is all too easy to revert to the orthodoxy of the industrial revolution, that somehow technology alone set us on the trajectory to today’s prosperity. And even ‘Keynesian’ economists impose the same underlying scenario on their gravely diminished Keynes.

But Keynes’s theory and the view from the labour movement tells us that causality is the other way around. Advanced technology hasn’t created more prosperity, more prosperity has advanced technology!

Slowly improving labour conditions and some rebalancing away from wealth meant a greatly advantaged economy, and set in motion a virtuous cycle of higher pay, more consumption, increased activity, improved technology and lower hours. The consumption was not insatiable, it just reflected what an economy operating less badly could deliver. Workers do not demand unending and unlimited consumption, they demand what they have always demanded – their fair share of what they themselves produce. 

Keynes’ idealism against the struggle for power

Keynes’s 15-hour prediction is of greater interest from the point of view of his failure to influence policy.  As his more streetwise colleague Joan Robinson put it:

The great trouble with Keynes was that he was an idealist. He thought that when people could understand his theory, could understand how the capitalistic system actually works, they would behave in a reasonable manner and operate the system in such a way as to produce favourable results, to produce in particular a high and stable level of employment.

Kahn, 1984, pp. 203-4

For some decades after the Second World War policy was closest to – but still a good distance from –Keynes’s and Labour’s ideal; from the 1980s, as we all know, Thatcher and Reagan led the charge in reversing Labour’s advance. This, as we also know, was not a question of rational economics, but a struggle for power between competing interests.

Incidentally, if we project hours to 2021 at the pace of improvement over 1945 to 1975 then by 2021 a 20-hour week would now be the norm.

Lord Skidelsky not only does not discuss the long-term trend, but also neglects to mention what happened in the most recent decade. In a unique and disastrous departure from a two-century old trajectory, both real pay declined and hours rose. The likely explanation is that people have had to work more hours because pay has for the first decade gone into reverse. Skidelsky’s argument does not account for this change.

We should regard this reversal as indicative of the end point of the decisive restoration of the dominance of wealth over labour and, with it, the diminishing influence of any sane economics. Further: any perceptions around the impact of the pandemic must be tempered by the understanding that COVID19 ensured that wealth enjoyed even greater gains.

Three cheers to those who have secured reductions in the working week for unchanged pay.  However it remains unlikely that the majority of the workers in an economy with 14 million children in poverty will be able to duck out of the labour force very easily – let alone enjoy the comfort of an en-suite bathroom. The existence of zero hours’ contracts simply tells us how far down the road to casualisation we have travelled and the sooner they are banned the better. Workers on these exploitative contracts do not ‘want to work more’ as Skidelsky claims, they want to be paid properly and to enjoy the security their parents’ generation took for granted.

We have been grateful for Lord Skidelsky’s dogged campaigning against austerity policies for the past 13 years. But, as trade union leaders of the past understood, the common ground between Keynes and the Labour movement goes much deeper. The need is to begin again to construct an economy that puts workers in front place, while constraining wealth. Keynes does not lambast workers for wanting to escape the present, profoundly dysfunctional economy, he is on their side.

References

Clements, R. V. (1961) British Trade unions and popular political economy 1850 – 1875. Economic History Review.

Kahn, Richard E. (1984) The Making of The General Theory, Cambridge University Press.

Lavoie, Marc and Engelbert Stockhammer (2013) Wage-led Growth: An Equitable Strategy for Economic Recovery, Palgrave Macmillan and the International Labour Office.

Marx, Karl (1976) Capital: A Critique of Political Economy, Volume One, Penguin Books in association with New Left Review.

Pelling, Henry (1963) A History of British Trade Unionism, Penguin Books Ltd.: Harmondsworth

Ricardo, David (1817) On the Principles of Political Economy and Taxation.  

Tily, Geoff (2010 [2006]) Keynes Betrayed, Basingstoke: Palgrave Macmillan.

Trades Unions Advisory Committee (2022) ‘Framing the Recovery: Pathways for a World in Transition’, submitted and presented to the OECD Liaison Committee with Non-Governmental Organisations, 21 February 2022: https://tuac.org/news/oecd-tuac-liaison-committee-meeting-policies-for-framing-the-recovery-en-fr/

TUC (1968) The History of the T.U.C. 1868-1968 A Pictorial Survey of a Social Revolution

TUC (2018) A future that works for working people: https://www.tuc.org.uk/research-analysis/reports/future-works-working-people

[1] Many thanks to my colleague Rob Maisey for helping further to bridge between Keynes and left.

[2] See the report ‘Framing the Recovery: Pathways for a World in Transition’ submitted and presented to the OECD liaison Committee in February 2022

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The policy is uniquely flawed, with multiple faults. Of course, if government throws over £60 billion of subsidies to a minority of firms and workers, that will be popular with the recipients. But a scheme should be judged by what it does for the many, not the few, and for its opportunity cost.

The government’s furlough scheme was possibly the most regressive social policy in modern history. Recall that it paid 80% of the wage of those earning up to £3,000 a month. So, it meant that somebody earning £3,000 received £2,400 only if they did no labour, whereas somebody earning £800 a month received £640. So, a high-wage earner received nearly four times as much as a low-income one. And for a low-income earner losing £160 would make it less likely they could service debts or pay the rent, risking homelessness and abject impoverishment. Under the scheme, those laid off or without employment contracts obtained nothing, as did those on Universal Credit or legacy benefits. My grandmother would have described this as ‘nutty as a fruitcake’.

If the Left believes in policies that reduce inequality and that increase economic security for everybody, the CRCS should be regarded with contempt. Perhaps, 11 million people gained income from it or the equally regressive scheme for the self-employed. That means only a minority of the labour force benefited, or a much smaller minority of the population. One could understand the IMF backing such a policy, because it props up capitalism. But why should the Labour Party, the TUC and progressive commentators do so? Surely, they cannot be indifferent to inequality

The inequities are also extensive. Suppose you worked in a firm struggling to survive and had your earnings cut by 30%. You were penalised relative to those furloughed, who only lost 20%. In which economics textbook or ideology would that be regarded as fair? The scheme was also unfair to those who lost jobs, who obtained much less in benefits, simply due to bad luck.

There is also something Labour and others should take up. With benefits for the unemployed and others in poverty, the government imposes strict conditions on those wanting help, or sanctions them by denying them benefits. In the case of help to firms, they do not apply any behavioural conditions. That is double standards.

So, for example, under the furlough scheme Donald Trump received over £3 million for furloughed staff on his luxury golf resorts, but his managers laid off hundreds of staff anyway. Trump is a multi-billionaire and surely could have afforded to cover the wages. No whiff of means-testing for corporations. Major multinationals making billions of pounds in profits gained from the furlough scheme, while the near destitute had to prove destitution before obtaining a pittance.   

Furlough schemes generate huge moral hazards. They pay people not to do what they might wish to do, creating a new ‘poverty trap’. If you did some labour, you would probably lose more than you would gain. And they pay high earners on condition they do not work, while welfare claimants receive a pittance only if they do everything possible to find work. How does that make sense?  

Immoral hazards are worse. When the CJRS was introduced, I predicted in the Financial Times that it would be subject to massive fraud. Even the head of HM Revenue and Customs said so. Sure enough, an early survey found that one in three on the scheme was actually working. Another survey suggested the figure was much higher. Later, the HMRC estimated that over £6 billion had been paid to organised criminals or fraudsters. In one case, a man was caught having invented a huge number of employees and fake national insurance cards, having received millions of pounds under the scheme. He was surely not alone. And, as is well known, high earners were more able to ‘work from home’ while receiving furlough support than low earners, further contributing to the scheme’s regressive character.

Belatedly, the HMRC set up a taskforce of 1,265 staff to try to combat fraud; there have been over 26,500 investigations so far, representing a waste of resources that could have gone to the impoverished queuing at food banks. Most who cheated will go undetected, because adequate evidence will be hard to obtain or not merit the cost of investigation. Confronted by the evidence, the government had the temerity to say the priority had been ‘to get money to those who need it as fast as possible’. That was not what the policy was intended to do. It gave nothing to those most in need. But what was meant was that the likelihood of fraud was tolerated in the interest of speed. It is surely amoral to support a policy that is prone to massive fraud. Any furlough scheme would have that feature. Yet progressive commentators seem indifferent to fraud.

Then there are the economic effects. If you pay people not to work at all, it encourages inactivity rather than merely reduced production and short-time working. Furlough schemes depress production more than it would otherwise be. And they prop up ‘zombie firms’. In the past two years, the bankruptcy rate has declined during what was a major recession. A German bank estimated that 2.5 million jobs covered by the UK’s furlough scheme were ‘zombie jobs’, i.e., were unviable anyhow. Sunak implicitly recognised that by introducing a ‘job retention bonus’ of £1,000 if firms kept employees once the subsidy ended.

Furlough schemes also discourage firms from restructuring in the face of the pandemic. They also deter labour mobility. If somebody is offered 80% to do nothing, why move to a firm in which they might earn 70% of what they were receiving? And there is bound to be ‘deadweight’ – paying for employees who would have been covered by their firm. The CEO of Bet365, who received £300 million in 2019, could easily have paid laid-off employees.  

In sum, a minority do well, but furlough schemes worsen inequality, are inequitable and contribute to economic inefficiency. Above all, by diverting funds from providing universal basic security they erode the societal resilience so vital in an era of pandemics. No progressive should support them. A new furlough scheme would ‘certainly make no sense’.

Guy Standing is author of The Corruption of Capitalism: Why Rentiers thrive and Work does not pay (2021). He is Professorial Research Associate, SOAS University of London, and a council member of the Progressive Economy Forum.      

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Latest inflation figures from the Office for National Statistics put average price rises in the 12 months to September at 4.2%, its highest rate of growth since November 2011. Back then, a post-financial crisis surge in prices pushed inflation to above 5%, and it stayed high until mid-2014 when OPEC’s decision to maintain oil production helped bring down prices across the globe.

Whilst last year’s lockdowns and subsequent recessions kept inflation very low, as we would expect – with spending falling dramatically, there is little to no pressure to raise prices – reopening since earlier this year has coincided with a dramatic rise in prices. Despite some optimistic claims that this would be “transitory” shift in prices, dependent solely on the unusual demand conditions caused by reopening, nearly 12 months it is harder to sustain the view.

Some of this is due to Brexit, which even prior to Britain’s exit from the EU had pushed domestic inflation up as a result of the fall in the value of the pound, relative to other currencies, after the 2016 referendum. But most of it is from the bigger impact – global, even – of covid-19. Developed countries across the world are seeing similar combinations of supply chain stresses, shortages of key goods, rising energy prices, and higher inflation.

The big question in all this is whether these price rises will fade away as the initial shock of the pandemic wears off – perhaps stretching out into next year, but not much further – or whether they will become entrenched, moving us into a permanently higher inflation regime.

Incorrect models and tighter monetary policy

More conventional Keynesian economists would be far happier with a temporary surge in prices, since the usual belief is that price rises register an economy that is “overheating”: too much demand chasing too little supply and that (therefore) governments should either cut their own spending, raise taxes or, if they are unwilling or unable to do either of those two, to raise interest rates. So persistently high inflation tends to lead to demands for interest rate rises – which, of course, are now starting to happen. Central banks’ own mandates are typically, in this era of their “independence”, modelled on the “Taylor Rule” linking interest rates to inflation, with rates increases mandated as inflation also rises. The Bank of England avoided this temptation at last month’s rate-setting meeting of its Monetary Policy Committee, but the voices demanding a tightening of monetary policy are getting louder.

Latest in this growing chorus is the Financial Times’ widely-read chief economics commentator, Martin Wolf, who sees today the first glimmerings of a return to the 1970s: “as price rises became more general and real wages were being eroded, workers became increasingly militant. Finally, a general wage-price spiral became all too visible.”

Under circumstances where strike numbers in Britain remain close to their lowest since records began, where union membership in the private sector is amongst the lowest in the developed world and – crucially – where average wage growth has been near-zero for a decade, a “general wage-price spiral” should be the last concern anyone has right now. Frankly, a little more “union militancy” would be good for the economy – pay rises would pull back on skyrocketing inequality, and put more money into the hands of people who are more likely to spend it.

But Wolf, instead, sees the problem of pay rises as being one in which inflation can move from being merely “transitory”, driven by exceptional post-lockdown circumstances, and moves into a permanent or at least long-run problem. He cites US economist Jason Furman as noting a tightening of labour markets, with “seven unemployed workers for every 10 openings”. Rattling around in people’s heads is the idea that, if pay rises are won by workers, these will turn into firms putting up prices, causing further demands for wage increases, and so forcing firms to raise prices again, and so on. This is the “wage-price spiral” Wolf refers to.

But the evidence from the last decade is that the British labour market, at least, has not been functioning like this. From mid-2014 onwards, as the OPEC “reverse oil price shock” worked its way through the global economy, inflation has consistently undershot both forecasts and the Bank of England’s own target – and this despite ultra-loose monetary policy of near-zero base rate and huge Quantitative Easing. Austerity, and the public sector wage freeze, certainly played its part, undermining the ability of those seeking work or in employment to bargain for higher pay. But so, too, does the “flexible” labour market, especially after 2010, with its mass creation of deeply insecure, low-paid work like the notorious zero hour contracts.

A model of the economy that didn’t include this extraordinary undermining of labour’s bargaining position – that instead assumed something closer to the labour market institutions of the 1970s were still in place – would be one that persistently overestimates inflation. This happened in the 2010s, and, to the extent that people think a wage-price spiral is a realistic possibility, and blame inflation on it, I think it’s happening again today. And to the extent that this leads to inappropriate calls for monetary policy tightening, it will cause problems today, too.

The real causes of persistent inflation

However, Wolf and others are right to worry about inflation becoming persistent, even if the mechanism they imply isn’t quite there. One part of this is the argument made by Charles Goodhart and Manoj Pradhan about demographics: that the exceptionally loose labour markets of the last forty years, the product of two enormous one-time expansions of the global labour force as China and Eastern Europe were integrated into it, are now tightening as this demographic exception approaches retirement. There is no second China out there. There will be no further loosening of labour markets in the future. And so wages, and – in their argument – prices and interest rates will finally start to rise.

It’s an interesting (and intuitive) argument that, incidentally, calls into question some cherished beliefs about the role of central bank “independence” in promoting low inflation over the last two decades or so. And for those with one eye on inequality, it holds out the possibility that the great shift in power towards capital and away from labour that characterised the neoliberal period may finally be coming to an end. This would, of course, over time move us back towards a kind of 1970s world, with higher inflation, higher interest rates – but also, potentially, stronger worker organisation able to win higher pay and better conditions, just like Wolf and others think already exists.

But the other part is significantly less positive. What Wolf calls “special factors”, citing the “surging price of gas” are likely to become less special over time. If there’s a disconnect between some conventional macro modelling and the reality of how labour markets have behaved in the last decade or more, there’s an even bigger disconnect between macro modelling and the reality of environmental decay. As a point of construction, conventional macroeconomic models tend to assume that, whatever is happening today, strong forces in the economy will pull it back to a stable growth path in the long run. But for this to happen, the conditions for growth to occur must themselves be stable. When all our environmental models are saying (for example) that extreme weather events, crop failures and disease outbreaks are all going to become more frequent, the assumption of environmental stability no longer applies.

So if (for another example) there is a frost in Brazil that has damaged coffee production, helping drive its price up to a seven year high today, that is a one-off shock that we would expect to fade away over time – prices would rise once, but the impact on inflation would disappear, since inflation measures price increases over time. But this seemingly one-off, specific environmental shock will be followed by other, similar shocks in the future, most likely at an increasing frequency: more droughts, more frosts, more wildfires and so on. The result will be a sustained increase in costs and prices: or, in other words, higher inflation.

It’s environmental breakdown that we should be worrying today’s inflation hawks, not the possibility of workers winning pay rises. And the prescription for dealing with this kind of ecological ratchet on prices is the exact opposite to the hawk’s usual package: not interest rate rises, but low rates to encourage investment and expand supply – particularly targeting ecological investment, as the People’s Bank of China is now doing. And not panic about rising wages but an insistence that the costs of ecological decline should be borne fairly, with pay increases across the board – paid for out of profits and interest as needed.

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The pandemic has exposed how dependent on care we are not only as individuals, but as a society. But our care system, already struggling well before the outbreak of the coronavirus, has failed to cope. Care work is poorly-paid and insecure, whilst the entire system suffers from chronic underfunding. Government promises to fix the system have concentrated only on funding, which is important, but falls well short of a comprehensive plan for care.

This new essay from PEF Council member Susan Himmelweit puts today’s crisis in its border context. A new approach is needed, recognising the immense importance of care to our economy and society, with care work properly supported in all its forms, effective support from the public sector, and an integration of the care system into our wider social and physical infrastructure.

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I’ve written elsewhere on what a poor way the National Insurance Contribution (NICs) rise would be to fund the contribution cap, amounting to a perverse redistribution from mainly younger and poorer workers to at least some better off elderly. Almost any tax alternative currently on the table – from increasing income taxes, with its broader base, to Capital Gains Tax increases, to introducing a proper, progressive wealth tax – would be fairer and preferable.

That the NICs rise currently polls ahead of other options is a tribute to the framing of NICs (and the polling question asked!) more than anything else: it isn’t called a tax, and there’s still a firmly held belief that NICs payments go into a grand national pot that people can draw from later. This was the original intention of the system, dating back to the 1944 Beveridge Report and beyond, in which “national insurance” would act as a genuine, contributory insurance system, providing for those who had paid in during times of need. It has never really functioned like that: the Treasury, as its wont, has always treated NICs payments as just another flow of tax payments (with some slight complications).

But the seeming popularity of NICs rises is likely to prove fragile if the case against them is made, and – crucially – if the case for an alternative is clearly presented. Labour have now indicated that they will oppose the hike, but to clinch the argument they will need to present an alternative. Otherwise, it really will look like the party is just moaning about the world: you can’t look like an alternative government if you don’t have alternative policies. And if they can bite the bullet on wealth taxes for social care – in whatever form here – it can force open the argument about wealth and taxation more generally: a must if the party is to go into the next election with something approaching a serious, long-term programme to solve Britain’s chronic economic problems. And wealth taxes, as the polling evidence keeps showing us, are popular. (Unsurprisingly: by definition, almost none of us are in the top 1%…)

Party Conference

Labour Party Conference, returning to Brighton at the end of the month after a two-year covid-induced pause, will be the biggest opportunity the party and its new leadership has had to date to present its case. You don’t often get a free hit at the following day’s front page headlines as the Opposition, but that’s what Conference can offer, Keir Starmer has offered some rather broad hints about his own speech, and of course it’s the leader’s closing address that gets the bulk of the media attention. But Shadow Chancellor Rachel Reeves’ own speech is going to be worth keeping an eye on. She has already marked out a few key commitments, including a strikingly anti-neoliberal Mariana Mazzucato-style policy to support domestic supply chains and jobs. This was particularly noteworthy: the first time that I can recall Labour offering a genuinely post-Brexit policy under Starmer’s leadership. Now that we have left the EU, there is a seam there to be mined – with a bit of policy imagination.

But the challenge for Reeves and her team in three weeks’ time will be to not only throw in some headline-grabbing policy announcements – essential for the front pages – but to start to create a convincing story about what sort of economy the next Labour government wants to shape. Credibility doesn’t come from parroting the economically illiterate nonsense that clutters Westminster political reporting; it’ll come from having a clear, simple story that potentially millions of people can grasp and understand. The Tories’ NICs hike has given Labour a free gift, the chance to show they are the party that will look after your pay packet. Tax the wealthy, not the workers has a certain ring to it.

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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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