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Why the left now needs supply-side socialism

by Chris Dillow     March 11, 2013 at 8:45 am

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.

The problem with Labour’s jobs guarantee: a subsidy for companies

by Chris Dillow     January 5, 2013 at 10:06 am

You can rely on the Labour party to live down to its reputation as a party of capitalism.

Its "compulsory jobs guarantee" does so in two ways.

First, the fact that it will be compulsory for the long-term unemployed to take up the jobs panders to a mistaken "divide and rule" rhetoric that distinguishes between skivers and strivers. As Neil says, the party is – yet again – "running scared of the Daily Mail".

Secondly, the policy will, as Liam Byrne says, "provide subsidy" to private sector employers to hire the long-term unemployed.Labour will, in effect, give taxpayers' money to Tesco so it can employ more shelf-stackers.

And herein lies the economic problem with the scheme. At the margin, employers will prefer to hire a subsidized long-term unemployed person rather than an unsubsidized short-term unemployed one. In this sense, Labour's plan improves job prospects for the long-term unemployed, at the expense of the short-term unemployed, and has a deadweight cost of paying companies to do what they would have done anyway*.

Labour's plan thus falls far short of more sensible "employer of last resort"-style policies to combat unemployment. It accepts capitalism as it is, and fails to confront the fact that capitalism is unable to provide work for all.

All that said, there is something to be said for the plan. It starts from the sad fact that public opinion about welfare is ill-informed and ignorant. Faced with this, a sensible party should campaign in lies and govern in truth. It should wibble, as Byrne does, about people needing to be "working or training, not claiming" simply because this is the easiest way to get votes from bigots. In office, when the scheme is up and running, the compulsory element can be quietly dropped, on the grounds that it is costly to administer and enforce.

And then, when the evidence shows that subsidized jobs are of poor quality, and are displacing the shorter-term unemployed, the party can switch from subsidizing the private sector to creating new jobs through a programme of public works, in the way a proper job guarantee scheme would.

In this sense, if Labour's plan has any merit, it is as the thin end of a wedge.

* Granted, there might be an income effect; employers getting the subsidy might feel able to hire more people generally, but this effect might not be large.

Four quick thoughts on British hostility towards immigration

by Chris Dillow     December 20, 2012 at 9:55 am

Sunny draws attention to the "awful" fact that the public are overwhelmingly hostile (pdf) to immigration.

This raises the question: what if anything can be done to change this?

One possibility is to appeal not merely to the facts, but to the evidence of people's own eyes.

A poll (pdf) by Ipsos Mori has found that although 76% of people think immigration is a big problem in Britain, only 18% think it a big problem in their own area, and twice as many say it is not a problem at all.

However, several things make me fear that an evidence-based approach won't suffice to change people's minds:

» Hostility to immigration does not come merely from the minority who lose out in the labour market. People from higher social classes and the retired are as opposed to immigration as others. And even in the 60s, when we had as full employment as we're likely to get, there was widespread anti-immigration feeling. This suggests we can't rely upon improving labour market conditions to improve attitudes to immigration.

» There's little hope of attitudes changing as older "bigots" die off. The Yougov poll found that 68% of 18-24 year-olds support the Tories' immigration cap. 

» Antipathy to immigration has been pretty stable (in terms of polling if not the violence of its expression) since at least the 1960s. This suggests there are deep long-lasting motives for it; I'd call these cognitive biases such as the status quo and ingroup biases.

» There's an echo mechanism which helps stabilize opinion at a hostile level. Politicians and the media, knowing the public are opposed to immigration, tell them what they want to hear and – a few bromides aside – don't challenge their opinion; one of the many appalling features of "Duffygate" was Gordon Brown's abject failure to challenge Mrs Duffy's hostility to immigration. (The BBC is also guilty here: "impartial" debates about immigration often seem to consist of the two main parties arguing about how to control it.)

All this makes me ambivalent about "calls for a debate" about immigration. Part of me thinks: bring it on – let's talk about the facts. But another part of me thinks that rightists just want to raise the salience of an issue on which public opinion is on their side.

There is, though, a deeper issue here. The fact that public opinion is hugely and stably opposed to immigration suggests that there is a tension between liberty – immigration is an issue of freedom – and democracy.

Lord Freud displays his class bias towards welfare claimants

by Chris Dillow     November 25, 2012 at 9:28 am

Lord Freud says:

People who are poorer should be prepared to take the biggest risks; they’ve got least to lose.

This seems ignorant of basic economics and psychology. Yes, the poor have less to lose. But the little they have is more important to them. A loss which means you don't eat is more painful than one which means you can't replace the Merc this month. That's the diminishing marginal utility of wealth.

For this reason, we should expect the poor to be less prepared to take risks than the rich. And the econometric evidence seems (pdf) to roughly support this.

Granted, the poorest 10% spend proportionately more on gambling than the rich – but it accounts for only around 1% of their overall spending compared to less than 0.2% for the better-off (table A6 here). And some of this difference, I suspect, reflects the fact that the rich gamble on better odds (eg spread bets versus the lottery) and so reduce their net spending, and also do some of their gambling by buying shares.

The facts that the City is "rife" with gambling addicts, that horse-racing has traditionally been "the sport of kings" and that Monaco is renowned for its casinos tell us that many of the rich have long been tolerant of risk. Which is consistent with diminishing marginal utility of wealth. 

Why, then, is Freud making a claim which has such a suspect empirical basis?

Class, that's why. Take these statements:

The rich should take more risks. They should use their wealth and their so-called skills to set up new businesses and create jobs, rather than stay in cushy rent-seeking jobs in management and finance.

The problem with the rich is their selfish reluctance to pay tax. They should be more responsible citizens with better tax morale.

Such views are not often expressed by the likes of Freud.This is because of a class bias. Rulers often see the attitudes and behaviour of the poor as a problem to be solved by exhortation and policy, whereas the attitudes of the rich are givens, to which governments must adapt. Hence Freud's hectoring of the poor but not the rich.

This asymmetry is an old one; I suspect you could find it in ancient Rome. Here's C.B. Macpherson on the 17th century:

The Puritan doctrine of the poor, treating poverty as a mark of moral shortcoming, added moral obloquy to the political disregard in which the poor had always been held…Objects of solicitude ot pity or scorn and sometimes of fear, the poor were not full members of a moral community…But while the poor were, in this view, less than full members, they were certainly subject to the jurisdictions of the political community. (The Political Theory of Possessive Individualism, p226-27)

There's not been much intellectual progress in these last few centuries.

Three reasons why conservatives should want to delay spending cuts

by Chris Dillow     September 20, 2012 at 9:12 am

In the Times yesterday, Danny Finkelstein argued against temporary fiscal loosening:

Summoning up the will and retaining the minimum of political support is incredibly difficult. And fragile…Once we return to a policy of borrow and spend, how will we ever summon up the will to stop again?

I'm not sure about this. If I were a Tory wanting smaller government – and this, rather than concern about the national debt, is the reasonable argument for cutting public spending – I'd have three concerns.

1. Delaying cuts gives us the chance to make more intelligent ones. It gives us the opportunity to consult workers on where best to make efficiency savings; these are better identified from the bottom-up than from the top down. Quick cuts are bad cuts, which risks discrediting the aim of shrinking the state. 

2. Cutting spending at a time when the private sector is weak isn't just a bad idea on Keynesian grounds. It's a bad idea politically. Support for cuts could be undermined by guilt by association with a weak economy.

3. History suggests that cuts now are a substitute for cuts in the future. My chart shows the point. It shows five-yearly growth in real total managed expenditure. Since the 70s there have been three periods of significant restraint: the five years to 1981, the late 80s and late 90s. All three were followed by periods of high spending. "Prudence", then, has not been a habit in the past. Quite the opposite.

This poses the danger that spending cuts now will be followed by a splurge later. Not only might this be a bad idea on Keynesian grounds – the splurge might add to strong growth and be potentially inflationary – but it would also unravel any progress towards a smaller state.

What I'm suggesting here is that it's not just Keynesians who should argue for postponing restraint. There's a case for intelligent Conservatives to do so as well. But this is the opposite of what's planned; on current policy, real TME sees its biggest fall this year, and a rise in the years after.

But then, do the Tories want to cut spending out of a genuine desire to see a sustainably smaller state?

Or are they instead motivated by silly fears about the national debt and by a hatred of public sector workers and benefit claimants?

Why conservatives should support Trade Unions, not cheer their demise

by Chris Dillow     September 11, 2012 at 9:15 am

Trades union membership has fallen to its lowest level since the 1940s. In principle, this should trouble conservatives.

This is because trade unions are an example of non-statist self-reliance, of people organizing to help themselves rather than looking to government.

I say this because of a fact pointed out by Philippe Aghion and colleagues – that there is a strong negative correlation across countries between union membership and minimum wage laws.

Countries with strong unions, such as the Nordic nations, tend to have no minimum wage laws whilst countries with lower union membership, such as Greece or France, have stronger minimum wage legislation.

The UK had no national minimum wage in the 50s and 60s, believing that collective bargaining could better regulate wages. It was only after the collapse in union power that a NMW was enacted.

I suspect that what's true of minimum wages might also be true of other aspects of regulation. Elf n safety laws also increased after the decline of unions.

Unions, then, are an alternative to state intervention.There's a simple reason for this. Workers, naturally, will always want their working standards improved. If they cannot pursue this aim through unionization, they'll do so through politics instead.

But the thing is that collective bargaining is a more efficient way of protecting workers than the law.One reason for this is that the law inflexibly applies to everyone, whereas bargaining allows for workers to accept worse wages or working conditions where it would be prohibitively expensive to improve them. Also, the complexity of the law creates uncertainty which can be worse for business than good working relations with a union.


These considerations lead me to this chart. Drawn from the OECD and other sources, it plots union density in 1991 (admittedly an arbitrary date) against GDP growth since then.

You can see that there is only a negative correlation between the two because of that Korean outlier.If Korea is excluded, there is a positive correlation (0.25) across the 22 advanced nations in my sample between union density and subsequent growth.Highly unionized Finland and Sweden have done better than less unionized Japan or the US.

This isn't so robust as to suggest that unions are definitely good for growth. But it does mean they aren't obviously bad*.

In this sense, people who want less state intervention and stronger growth should be sympathetic towards unions. So, why aren't Tories mourning their decline? I mean, it's not as if they just blindly hate the working class, is it?  

* There is a strong negative correlation between the change in union density and GDP growth over this time; faster-growing economies have seen bigger falls in union density. But there's an endogeneity issue here. It could be that fast growth is associated with more creative destruction, which sees the decline of unionised workplaces and emergence of more non-unionised ones, whereas a sclerotic economy preserves unionized workplaces.

Four reasons why the BBC gives a platform to extreme voices

by Chris Dillow     August 31, 2012 at 4:15 pm

Yet again, the BBC gave airtime this morning to the scaremongering Andrew Green.

This raises the point that there is adverse selection in political debate: fanatics are given attention whilst sober, rational voices are overlooked.

There are four channels through which this happens:
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Why the government’s austerity isn’t working

by Chris Dillow     August 21, 2012 at 8:30 pm

Yet again, government borrowing has exceeded expectations. So far this financial year, the deficit on current borrowing* has been £42.1bn compared to £30.9bn in the same period last year.

This puts in doubt the OBR's forecast that this deficit would fall this year, from £98.9bn to £95.3bn.

Duncan says this shows how austerity is self-defeating; a squeeze on spending weakens growth and thus reduces tax revenue.
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Why the Olympics are anti-Capitalist in spirit

by Chris Dillow     August 10, 2012 at 3:59 pm

It's sometimes said that sport is a mirror of society. Watching the Olympics, though, makes me think the opposite is the case, as Olympians represent values which are disappearing from society.

I'm thinking of Macintyre's distinction between external goods (such as power, wealth and fame) versus the internal good of excellence at a particular practice. Olympians pursue the latter.

Yes, money and fame can follow from gold medals, but only as a by-product. There are surely countless easier ways for Anna Watkins to get rich than by getting up at stupid o'clock to torture herself.
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The coming crisis of Conservatism

by Chris Dillow     May 16, 2012 at 8:40 am

Tory ministers have told British business to stop whinging and work harder.

These remarks are more significant than generally thought.

I suspect they are the bewildered howls of frustration of men who realize that their god has failed them.
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