April 16, 2010

Privatized Keynesianism: Rebirth After a Life That Never Was?

Writing about web page http://www3.interscience.wiley.com/journal/122498671/abstract?CRETRY=1&SRETRY=0

"Privatised Keynesianism: An Unacknowledged Policy Regime," published in the British Journal of Politics & International Relations11:3 (2009), pp. 382-399  by my Warwick colleague Colin Crouch, has been deservedly recognized and cited by scholars and journalists. The paper starts from the idea that it is a problem to maintain stability and consumer confidence under capitalism. These were secured for thirty years after the war by Keynesian demand management. After that, Crouch writes:

In those countries where capitalism was moving into full partnership with electoral democracy, it was acquiring a new vulnerability. In a fully free market, wages and employment were likely to fluctuate; would workers, who were dependent on their incomes for their level of living and lacked the cushion of wealth of propertied classes, be confident enough to consume at levels adequate to enable capitalists themselves to sustain confidence to invest and maintain profit levels? Would the very characteristics of the market that constituted its strength—flexibility, especially of labour—undermine its own ability to thrive? It should be noted that we are not here talking of the market producing social problems of insecurity in workers’ lives—that might be dealt with by an adequate welfare state—but of its producing problems for itself through its own dependence on workers’ willingness to maintain and increase their consumption. It can be assumed that the level of living at which social policy will sustain purchasing power will be below that needed to sustain an expanding, consumption-driven economy.

And he continues:

In the 1940s it had seemed that only state action could solve this problem for the market. But now, absolutely in tune with neo-liberal ideology and expectations, there was a market solution. And, through the links of these new risk markets to ordinary consumers via extended mortgages and credit card debt, the dependence of the capitalist system on rising wages, a welfare state and government demand management that had seemed essential for mass consumer confidence, had been abolished. The bases of prosperity shifted from the social democratic formula of working classes supported by government intervention to the neo-liberal conservative one of banks, stock exchanges and financial markets.

I have thought about this a lot recently, partly because my students love it -- and reproduce it for me in their essays! I have to say I don't buy it -- at least not in this form. Why am I sceptical? Well, Crouch's argument seems to be that capitalism is vulnerable to underconsumption. From 1945 through the 1970s, the argument goes, the British government ensured demand was sufficient. After the 1970s, Crouch suggests, government retreated and banks stepped in. In his eyes, British capitalism survived on credit.

The big thing here that is clearly true is that as the public debt declined, household debt rose. My problem is with the counterfactual. Implicitly, without government spending in the first phase, and credit expansion in the second, there would have been a problem: not enough demand. In the first phase, that is for most of the period up to the 1970s, it's clear that British capitalism actually suffered from too much demand; that's why there was rising inflation. In the second phase, after the 1970s, the government didn't so much step out of the picture as try to limit demand more fiercely (and hamfistedly at first), eventually delegating the job to the Bank of England. In this phase I don't really see any evidence that British capitalism was going to fall into decline if we hadn't been able to lend lots of money to the workers that they couldn't afford to pay back.

With less household borrowing and less equity realization, what would have happened? Most likely, interest rates and the exchange rate would have been a little lower, and exports would have been a little higher. With more export competitiveness, our manufacturing sector would have declined a little more slowly (and our universities might have expanded a little more). That's about it. Oh, and I guess we would be in slightly better shape today.

Ironically it is only now, in the current recession, after a huge credit crunch and collapse of private demand, that privatized Keynesianism has truly come to life. Hence, in my view, its rebirth, after a life that never was. Here is some evidence, which you'll note is tri-partisan:

  • BBC, July 23, 2009: Chancellor Alistair Darling has urged banks to lend more to small firms, during a meeting with banking bosses ... Alistair Darling has said he is "extremely concerned" that banks may be charging firms too much for loans.
  • Reuters, October 26, 2009: British retail banks should stop paying big cash bonuses and use the money instead to support new lending and contribute to an economic recovery, opposition Conservatives’ finance spokesman George Osborne said on Monday.
  • The Guardian, February 23, 2010: A new government should tear up "ineffectual" lending agreements with Britain's taxpayer-owned banks and force them to lend billions of pounds more to small and medium sized businesses, Liberal Democrat Treasury spokesman Vince Cable said today.

Thanks to Colin Crouch, we know what to call it: Privatized Keynesianism. It is Keynesian because it uses debt finance to add to aggregate demand. It is privatized because the debt is private and stays off the government's books.

Now, the question is: Is privatized Keynesianism a good idea for today? Hmm. Why are we in the mess we are in? I think it might have been that we had too much private debt in the first place, so banks lent too much to firms and households that had no chance of repaying their debts unless house and stock markets floated ever upwards; and because banks did not keep enough in reserves. Where are we now? House and stock prices are still too high, and they are rising. And the solution these politicos favour is ... more private debt! The bankers are letting us down! They should be out there trying to persuade us to take out more loans! They should be keeping less in reserves! 

You couldn't make it up, could you?

At this point I am going to offer one of those dire aphorisms that runs: "The only thing worse than X is -X." I apologize in advance, but there is no alternative, so here it is:

  • The only thing worse than having bankers making lending decisions is to have politicians making lending decisions.

This does not mean I am complacent about the need for better financial regulation. Politicians have a role to play, and it is in setting prudential rules, limiting guarantees to retail depositors, and removing the incentives for banks to grow "too big to fail." That is a lot, but that is all. Politicians should not be making lending decisions! That is the bankers' job; let them do it.

- 2 comments by 1 or more people Not publicly viewable

  1. Wyn Grant

    I don’t want to question the economics, but I think an important political implication of Colin’s work is that the structural political displacement of the financial sector (see also Andrew Gamble) is increased and this has important impacts in relation to economic policy-making.

    11 May 2010, 12:13

  2. Colin Crouch

    Mark’s criticism of my privatized Keynesianism argument mainly argues that, had consumer debt not expanded, other variables would also have changed, leading to other means of sustaining demand. In particular manufacturing exports might have risen or at least held up. I see no reason to disagree with this. I was not arguing that the expansion of consumer debt was the only path available, just that in the event it did play an important role. Mark’s argument enables us to see that it might have foreclosed other possibilities. One interesting implication of all this is when, or whether, these tendencies in the British economy passed from being just ‘stuff that happened’ to being actual policy. I think that it was far more of the former, but the stuff that was happening suited several preferences of policy-makers. They therefore did not want to do anything to stop it – assuming they had noticed it – and now, as Mark argues, they may actually want to make it into policy.

    To concentrate on Mark’s point about manufacturing exports: the Thatcher government came into office in 1979 with some concern to aid manufacturing. In particular, Japenese firms were encouraged to set up plants to show the Brits how to make things again. By the mid-1980s this started to change. Ministers began to notice the employment creation potential of the services sectors, and were launching the deregulation of the financial sector that was to transform the City of London into the country’s major global economic force. the fact that private services employment was in general less unionized than manufacturing may also have attracted them.

    By the time that the Labour government was elected in 1997 there was a strong preference in public policy for seeing employment creation in services (public as well as private in Labour’s case) and global competitiveness in financial services in particular. Manufacturing became less and less interesting. Trade balances seemed less and less important as overseas investors seemed happy to keep buying UK debt. Something similar was happening in the USA. In this period – the late 1990s until the financial crisis – an economic model based on domestic production and consumption of services seemed far more effective in sustaining growth and employment than one (followed in particular in Germany) based on exports. The terms of international trade were turning against high income countries, exerting downward pressure on export-sector wages and requiring productivity improvements that reduced labour demand. For the first time for many year’s UK economic performance started to out-perform that of Germany. Services sector incomes were relatively protected from external competition and/or, in the case of the many low-productivity activities in services, on incomes that were low enough to keep prices low and demand high. Access to consumer debt enabled British consumers, not just to suck in imported manufactured goods, but also to keep each other employed in services activities that were not externally traded. It seemed a winning formula.

    It might still be such. Given that the banks of countries whose populations did not join the debt model were themselves fully engaged in the Anglo-American banking behaviour, we have managed to externalize the burden of our model on to these countries too, which means that when the thing starts going again – and it is already showing signs of doing that – we shall not be at a particular disadvantage. Unsustainable debt still seems a good idea, provided one can dump the crisis it provokes on to the rest of the world. And can anyone stop us doing that if the rest of the world’s banks enjoy the system, and are happy to conspire in keeping it all going, knowing that governments everywhere believe them to be too big to fail?

    12 May 2010, 11:56

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I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).

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