Why the left now needs supply-side socialism


8:45 am - March 11th 2013

by Chris Dillow    


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Let's say we wanted to get unemployment down from its current 2.5m to one million. How many jobs would we need to create?

The answer is NOT 1.5m. This is because many jobs would be filled by those out of the labour force – the retired, home-makers, students on marginal courses and, OK, immigrants. For example, in the last year employment (pdf) has risen by 584,000 but unemployment has dropped by just 156,000. This tells us that reducing unemployment by 1.5m would require well in excess of 3m new jobs. That's an increase of over 10%.

This requires a massive expansion in GDP. Once we allow for the possibility that productivity will begin to rise again, we probably need a rise in GDP of over 15%. And we'd need a bigger rise in money GDP to achieve this, simply because a large part of any fiscal or monetary expansion would raise prices rather than real GDP: the Bank of England estimates (pdf) that its first £200bn of QE raised real GDP by 1.5-2 per cent and inflation by up to 1.5 per cent.

Getting unemployment down to one million would therefore require a rise in money GDP of perhaps 30% – over £400bn. Nobody is proposing a fiscal or monetary expansion anything like this.

Instead, the belief seems to be that a small policy stimulus will kick-start the economy, get the normal capitalist engine of growth purring again.

But this is questionable, for at least two reasons.

- There's a dearth of investment opportunities. There are many reasons for this: a (maybe temporary) slowdown (pdf) in technical progress; the migration of low-wage industry to the east; an inability to monetize what new technologies there are; or perhaps a wising up to the fact that innovation never really paid off anyway.

- Inequality has become a barrier to growth. This could be because it reduces the marginal propensity to consume. More likely, I suspect, it's because it has added to debt and because the same institutions that create inequality – managerialism – also give us bad decision-making and rent-seeking.

Policy-making, then, requires more than (very mild) stimulus and the hope of return to business as normal. We must think about ways of increasing trend growth.

It should be obvious to anyone not blinded by ideology that the right's ideas here – of reducing the power of the working class – no longer work. Instead, Duncan Weldon, Stewart Wood and Ha-Joon Chang are right; the left must think about supply-side socialism.

Now, you might object that I've argued that history shows that long-run growth doesn't much change. This fact, though, might not be so hostile to supply-side socialism. For one thing, it shows that "moderate" policies don't work, so perhaps we need something radical.

And for another thing, it shows not just that few policies raise growth, but also that few depress them. And this suggests that perhaps radical leftist policies are a "free hit": they might not be disastrous for the economy. As for what such policies might be, I'll suggest some later.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments


1. David Ellis

Inequality is THE barrier to growth which suggests that what is needed is not supply side `socialism’ (printing money, borrowing, etc), that way lies a British Weimar, but a massive redistribution of wealth. We need full employment by sharing the available productive work, a state bank lending at base rate and facilitating social investment according to a democratic, sustainable plan, a fair income tax and the seizure as social property the job-slashing, money-hoarding, asset-stripping monopolies and their giant surpluses.

Let us not bewail the inability of capitalism to grow any more and its death but celebrate the fact that this is the opportunity we’ve been looking for to end an economic system that destroys people and planet.

Much as I enjoy hearing from the ghost of Roy Jenkins, I prefer the OP’s approach which has the benefit of being plausible.

From what I recall of the 1990s recession, the political focus on unemployment was relentless, partly because the press were constantly baying about it. It was the BFD that time round. Now, IIRC, that time round unemployment hit the office-working middle class particularly hard, in the 45-65 age bracket. This time it has hit the working poor hardest, and mostly in the 18-35 bracket. Far be it from me to suggest that our politicians and press know and care about more middle-class people in their fifties (who mostly still have work) than poor people in their twenties (who mostly don’t).

“The answer is NOT 1.5m. This is because many jobs would be filled by those out of the labour force – the retired, home-makers, students on marginal courses and, OK, immigrants”

Surely it would depend on where the jobs were created and in what sectors?

More part time vacancies in retail probably would be filled by students. More full time vacancies in construction in the north of england would not.

I think you’ve hit an interesting discussion though, the question isn’t so much whether we need a stimulus, but on what type of stimulus? A tax cut or rise in benefit levels would largely not be effective and would largely drain abroad on imports.

OTOH a massive programme of infrastructure, housebulding and retrofitting would be more effective. Main issue though here is need to rebalance economy away from south east – the homes are needed in the south east to depress house prices, but the unemployment is largely not in the south east.

4. Luis Enrique

DE,

printing money, borrowing is demand-side policy. Your proposals are supply side.

Dust off that old 1983 election manifesto? Whatever happened to the Third Way?

Candidly, I doubt either would be an election winner – more likely an answer to Cameron’s prayers for something to turn up.

6. Man on the Clapham Omnibus

Dave Ellis is right . Efforts to stimulate the economy are futile if the vast majority are unable to maintain it through spending. The fabric of capitalism is collapsing simply because the capital that should be circulating is being hoarded. However having said all this the big question is how do Nation states control Multinational enterprises in a global economy? In the end the powerful will prevail just because they are powerful both monetarily and politically. For the rest,it wont be pretty.

6

“However having said all this the big question is how do Nation states control Multinational enterprises in a global economy?”

We weren’t doing too badly until the (avoidable) financial crisis of 2007/09, brought on by under-regulation of the banking system, the credit-rating agencies awarding triple-star ratings to financial derivatives which turned out to be worthless, subprime mortgages under-pinning financial derivatives, asset-price bubbles bursting etc – despite warnings in the press going back years, governments took no action.

Contrary to wide expectations of a post-WW2 slump, the period 1950-73 has been dubbed the Golden Age of Capitalism by economic historians comparing growth rates in western Europe with pre-war history.

Sam Brittan writing in the FT:

“The relative decline of the British economy in the century up to the late 1970s has been reversed. Since then, the UK has caught up with and even overtaken its principal trading partners. The previous two sentences are neither a typing mistake nor a daydream. They are the sober conclusions of the country’s leading quantitative historian, Prof Nicholas Crafts”
http://www.samuelbrittan.co.uk/text399_p.html

Osborne has just woken up to multinational companies reducing corporation tax liabilities by shifting the profits they make to subsidiaries operating in countries with lower tax rates through manipulating “transfer pricing”. The fact is that the implications of “transfer pricing” by multinationals were under discussion back in the 1970s and 1980s – there is a policy literature on the issue dating back to then.

8. David Ellis

Luis: the supply will be paid for by financing demand just as it was with the `monetarist’ thatcher who gave us a thirty year credit bubble turned Ponzi scheme based on speculating on housing and property.

No need to be down-hearted Clapham Ominbus Man. That the fabric of capitalism is rotting away very quickly is a good thing because capitalism is a horrible form of physical and mental slavery. Soon there will be a realisation that if we are to defend centuries of accumulated national, European and global wealth, consolidate economically and protect the poor and vulnerabable the monopoly capitalists and their political lakeys will have to be buried.

“That the fabric of capitalism is rotting away very quickly”

Hardly. The 1% are by and large doing very well, and the main beneficiaries of loss of trust in political instiutions in England are not far left parties (who themselves are having to answer real questions about how trustworthy their own leaderships are) but reactionary right wing parties advocating fewer workers rights.

Hardly. The 1% are by and large doing very well, and the main beneficiaries of loss of trust in political instiutions in England are not far left parties (who themselves are having to answer real questions about how trustworthy their own leaderships are) but reactionary right wing parties advocating fewer workers rights.

Seems to be a recurrent problem – http://en.wikipedia.org/wiki/The_Ragged-Trousered_Philanthropists

A good quote from that book:-
“Poverty is not caused by men and women getting married; it’s not caused by machinery; it’s not caused by “over-production”; it’s not caused by drink or laziness; and it’s not caused by “over-population”. It’s caused by Private Monopoly. That is the present system. They have monopolized everything that it is possible to monopolize; they have got the whole earth, the minerals in the earth and the streams that water the earth. The only reason they have not monopolized the daylight and the air is that it is not possible to do it. If it were possible to construct huge gasometers and to draw together and compress within them the whole of the atmosphere, it would have been done long ago, and we should have been compelled to work for them in order to get money to buy air to breathe. And if that seemingly impossible thing were accomplished tomorrow, you would see thousands of people dying for want of air – or of the money to buy it – even as now thousands are dying for want of the other necessities of life. You would see people going about gasping for breath, and telling each other that the likes of them could not expect to have air to breathe unless the had the money to pay for it. Most of you here, for instance, would think and say so. Even as you think at present that it’s right for so few people to own the Earth, the Minerals and the Water, which are all just as necessary as is the air. In exactly the same spirit as you now say: “It’s Their Land,” “It’s Their Water,” “It’s Their Coal,” “It’s Their Iron,” so you would say “It’s Their Air,” “These are their gasometers, and what right have the likes of us to expect them to allow us to breathe for nothing?” And even while he is doing this the air monopolist will be preaching sermons on the Brotherhood of Man; he will be dispensing advice on “Christian Duty” in the Sunday magazines; he will give utterance to numerous more or less moral maxims for the guidance of the young. And meantime, all around, people will be dying for want of some of the air that he will have bottled up in his gasometers. And when you are all dragging out a miserable existence, gasping for breath or dying for want of air, if one of your number suggests smashing a hole in the side of one of the gasometers, you will all fall upon him in the name of law and order, and after doing your best to tear him limb from limb, you’ll drag him, covered with blood, in triumph to the nearest Police Station and deliver him up to “justice” in the hope of being given a few half-pounds of air for your trouble.”

Course that’s all ‘student politics’ innit, unlike the grown-up thrusting politics of nationalists and conservatives.

10 Cylux

Monopolies, market dominance, and market rigging were recognised as threats to general welfare long before Adam Smith. Even so, I don’t go along with the claim that monopolies are the ONLY cause of poverty. That claim goes nowhere near explaining poverty as the consequence of underdevelopment.

With Britain’s long history, we have data series going back to medieval times. What that data show is that average real wages stayed more or less constant on trend from mid 16th century until about the 1830s when industrialisation brought general improvements in real wages and living standards. In the course of the 19th century, Britain’s population about tripled and average life expectancy at birth rose from about 40 years to 50 years.

For a data series, try this:
http://www.measuringworth.com/ukearncpi/

Btw we have a challenging problem of what to do about natural monopolies when economies of scale and scope would not be exhausted at the point where average enterprise costs are equal to market price. This is not some theoretical curiosity as this is a likely situation with several digital technologies.

Another problem is the “resource curse” where the discovery and exploitation of an internationally valued natural resource can create an enclave of affluence in an economy and impoverish the rest of the national economy by driving up the exchange rate of the national currency, thereby rendering the rest of the economy uncompetitive against international competitors.

In short, Tressell’s economics is seriously underdeveloped and not to be taken seriously.

@11 I was more interested in his social analysis to be quite frank, which is why I posted that particular excerpt.

11

Industrialisation certainly creates an increase in average life expectancy, in the Soviet Union from 1917 to the 1960s, average life expectancy showed a massive increase and even surpassed the USA. Unfortunately, from the 1990s this trend has reversed and in some areas of the former Soviet Union, it now stands at around 60years.

SteveB: Dmitryi Orlov has work on this. Basically, what happened to Russia’s avg. life expectancies is that during the state failure / Orlov Collapse L4 in the 90s, a very very large number of old people stopped being able to afford heating and adequate food, and simply died over the first few winters. Lowered the average age very significantly and alarmingly fast. If you look him up on YouTube there’s an excellent interview with a US journalist where he talks about it in detail.

Cylux @10:

Have you ever read Heinlein’s The Moon is a Harsh Mistress? It’s by no means the only speculative fiction which explores the economics of space habitation (and thereby an economy in which air is, more or less legitimately, not free). It is, however, one of the earliest and one of the best. :)

14

Thanks for the reference Chris, it looks like the elderly are suffering a similar fate here as our economy and welfare state are seriously close to collapse.

SteveB @16:

Heh. Not really, or more accurately: not yet.

Again, if you believe Orlov, we will see a Collapse scenario, he thinks of either level 3 or 4 (out of 5, where 0 is a ‘fully functional’ state, 1 is a state that’s as close as the real world can get, and 5 is the Sudan). He thinks that both the US and the UK will undergo such a collapse within 25-30 years, but the situation currently pertaining in the UK is most definitely not a state failure. If it were, large things would be on fire, there’d be a lot more dead people, a lot less food, and no-one would be enforcing parking regulations, among other indicators.

17

I haven’t yet followed up your reference to Orlov and his analysis of the state, however, in the UK we have two ‘states’, one upholds the current economic system plus law, order, infrastructure etc and a welfare state which addresses market failure. Increasingly the latter has grown out of all proportion to its’ original purpose and also has taken on the mantel of holding-up the economy.. This isn’t particularly apparent until you dig deeper; the welfare state is now handing out billions of pounds each year in order for its’ citizens to continue spending.

How long the centre can hold is guesswork, but I’ll go along with 25 to 30 years.


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