Looking Back in Anger
It has dawned on the majority of people in the Western democracies that they have been dudded. Forty years of neoliberal policy regimes has left them feeling that something is just not right. In spite of all the promises, simply getting by has become more and more difficult. They are struggling to keep a roof over their heads, educate their children, pay their bills. Their children are struggling to find good, permanent jobs, even after completing tertiary education. Buying that first house is out of reach. At least, this is the picture for those children not fortunate enough to have parents employed in the higher reaches of business, government or the professions.
For a minority of families, life is good. Their disposable incomes have soared, assisted by generous taxation policies underpinned by a remorseless attack on the role of government. Economic policy has focused on chasing ever greater ‘efficiency’, in both government administration and the economy at large. The three traditional public finance functions of government – allocation, distribution and stabilisation – have congealed into a particular conception of allocative efficiency. ‘Leave it to the market’ has become the mantra repeated ad nauseam by the leaders of all major political parties and by governments of both the centre-left and centre-right. Shrinking the government has become the avowed aim of the moderate and alt right. In practice, this has meant concerted attempts to cut back social expenditures that most benefit lower income and poor people, through increasingly stringent and targeted eligibility criteria and lags in adjusting benefit levels to rises in the real cost of living. Parallel attacks on trade union power, while leaving the growing market and political power of the concentrated corporate sector untouched, has ensured that wages have flatlined. Productivity growth in the Western economies, though sluggish by post-War standards, has swelled profits at the expense of wages. These political forces overlay and reinforce basic structural changes unleashed by digital technological changes and the growing economic and political power of global financial networks.
The consequence of these changes – still unwinding – has been growing economic inequality that appears to be feeding back into slowing economic growth, an unlovely loop creating ‘a new normal’ of economic stagnation. The growth of the interconnected global financial sector underpins and energises this process. As inequality and stagnation bite, ordinary people reach for their credit cards in order to maintain accustomed standards of living. The massive build up of household debt is a time bomb waiting to explode. The first detonation occurred in 2008. The global financial crisis and subsequent recessions that raced around the world blindsided governments, central banks and, of course, the economics profession. The response of economists was a mixture of annoyance and bewilderment. The world wasn’t supposed to work like this. Hadn’t several Nobel Prize winners pointed out that recessions were dead? It wasn’t hard to work out why mainstream economists missed the main event; their models ruled out the possibility of recession by assumption.
What is more difficult to explain is why the profession refused to revise their models and forecasting methodologies in the light of experience. Why after a moment in which they and the governments they advised rediscovered their Inner-Keynes during 2008-09, did they revert to type? It was a case of ‘never mind the facts, what about the theory?’ By changing the parameters of their models, they could retrospectively recast their ‘forecasts’ to ‘explain’ what actually happened. But what good is that? The damage was already done and continues to this day in the form of lost growth, employment and incomes that will never be retrieved. After the panic of Lehman Brothers and the political reflexes that ‘saved the furniture’, governments and international bodies like the IMF imposed a restorative regime of ‘austerity’ on the fragile economies of Europe. The result was that countries like the USA that joined active fiscal stimulation to prompt ‘unorthodox’ monetary policy, recovered fairly quickly, while those that relied on the 1930s ‘Treasury view’ and forced national governments to constrain their budget deficits, stagnated and in some case suffered double dip recessions well into the second decade of the new century. Thanks to the orthodox macroeconomic policies of the IMF, European Central Bank and European Commission – the infamous ‘Troika – peripheral European economies like Italy, Spain, Portugal and Ireland saw growth disappear, unemployment soar and political chaos ensue. In Greece, the situation approached revolutionary proportions. Australia more closely followed the American lead and put in place a moderate fiscal stimulus package, though the fortunate boom in China’s demand for Australian minerals meant that the conventional monetary policy of low interest rates sufficed to aid our recovery. The bells and whistles of ‘quantitative easing’ – printing money – was not necessary.
The whole European mess that has culminated in the impossible political bind of Brexit, illustrates with startling clarity the (in this case) baleful power of ideas. Keynes one famously commented:
“… the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood…. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas not vested interests, which are dangerous for good or evil.”
Keynes was surely right to target the ‘generals fighting the last war’ among the economists of his day trying to make sense of the Great Depression. But just as surely, we can see the same stubborn refusal of mainstream economics, and the governments in thrall to its shibboleths, to revise outdated and failed theories of how real-existing capitalist economies work and fail. But Keynes’s liberal political philosophy blinded him to the class inequalities of privilege and power that were served so well by the ‘dangerous ideas’ of his day and in ours that have driven many countries to worsen and delay recovery over the past decade since the GFC. Vested interests reflect and reinforce the capacity of the dominant class, especially the much-vaunted ‘top 1%’ to shore up their dominance. Late, if not soon, it is power and privilege that are dangerous for good or evil.
In an increasingly unequal world, riven by geopolitical, geo-economic and socioeconomic cleavages, crosscut by gender and ethnic-religious divisions, politics as normal in the western democracies appears to have hit the wall. A publishing bandwagon has noisily arisen questioning whether democracy itself has had its day. Dozens of books and articles pose some variant of the question appearing in the title of Robert Kuttner’s 2018 book – Can Democracy Survive Global Capitalism? His first chapter borrows from the musical Les Misérables – ‘A sound of angry men’. The sporadic but continuing outbreak of popular opposition, like the Occupy protests in the early days after the GFC, have been followed by ‘populist’ outbreaks from across the political spectrum, at one place and time expressing leftist causes, at other times, right wing nationalistic rallies reprising the images and memories of a fascist past. I am writing in the wake of three months of regular street demonstrations by the loosely articulated ‘yellow vest ‘movement’ in France; not so much a movement but a massive, noncomprehending cri de coeur.
The protests are diverse, disarticulated and cut across the conventional axes of political expression and action. The year 2016 looks like a watershed in the demise of politics-as-usual. The election of a political chancer and incompetent to the White House and the yet-to-be resolved decision of the UK to leave the European Union have thrown the rules out the window. New cleavages of age, geography, historically embedded nationalism, gender and sexuality are making the primary opposition of capital and labour inchoate without rendering it obsolete. Indeed, the very confusion of populist responses serves well the global dominant class or 1%, fragmented between two basic but interlinked capitalist models – democratic and authoritarian capitalism. The technologies of surveillance and control in this digital age make it easy for governments of all stripes to monitor, disrupt and control opposition as and where it erupts.
Looking back, the past decade seems to be an exercise in anger management. Looking forward to the next decade or two may foretell a politics increasingly out of control as the clear failure of national governments to deal with the macro-environmental crises of pollution, over-population, resource depletion and climate change destroy the biophysical givens that have silently supported life in the industrial and digital ages. During the same time frame, GFC II may also enter stage right, thanks to the continuing vulnerability (and moral hazard) of the big banks, the heavy debt overhang of the household sector, the timidity of responses by and the over-indebted position of national governments which have fired off their fiscal ammunition, in an economic environment experiencing ‘The Great Stagnation’. If this example of history repeating as farce occurs, we can expect the same puzzled and angry response by economists – how dare the messy world of facts confound our beautiful theories!
Well may be look back in anger; we must also look forward in trepidation. If, as Keynes once said, “in the long run we’re all dead”, the long run may not be very far away.
Postscript
In my view the best and most detailed analysis of the world post-GFC is to be found in Adam Tooze’s book Crashed: How a Decade of Financial Crises changed the World (Penguin books, 2018).
Also useful for understanding the giant ‘bait and switch’ efforts of the Troika to turn a major European banking crisis into a sovereign debt see the following:
Mark Blyth, Austerity: The History of a Dangerous Idea (OUP, 2013).
Might I also modestly point to the chapters in Part III of my book, Morality and Power: On Ethics, Economics and Public Policy (Edward Elgar, 2017), the paperback edition now available at: