Tuesday, 23 September 2014

KNAVES, NOT FOOLS

Dick Pountain/Political Quarterly/03/06/2012

The Cost of Inequality: Three Decades of the Super-Rich and the Economy by Stewart Lansley
(Gibson Square, Oct 2011, 320pp,  £17.99)

Conspicuous economic inequality has supplied the impetus behind radical religious and social reform movements at least since Jesus of Nazareth preached of rich men, camels and needles and kicked over the money-lenders' tables. In the English civil war the Diggers and Levellers fought to construct an egalitarian society, while égalité was one prong of the ideological trident which brought down the French monarchy and the Bastille. In more recent times Richard Wilkinson and Kate Pickett (in "The Spirit Level"), and the late Tony Judt have written powerfully on the deleterious effects of inequality on the fabric of society, included increased crime and mental illness. All these critics of inequality share to greater or lesser degrees a moral condemnation of inequality, as sinful, or harmful to the happiness of the individual and society as a whole.
Economists by and large don't do morality nowadays, but they nevertheless continue to squabble about the causes of inequality and the degree to which it is tolerable or even desirable in a capitalist economy. The present author, Stewart Lansley, is an economist, financial journalist and award-winning television producer, and though his sympathies clearly lean in the direction of less inequality, the central argument of his book is not a moral one: that "Cost" in the title is meant literally, because out-of-control deregulated capitalism has destroyed value in an unprecedented way. He demonstrates very convincingly that excessive and growing inequality was not only the cause of our current economic crisis - the worst since the Great Depression - but that it is lethal to capitalism itself, and if not corrected will lead us into a state of permanent recession. In the process of laying out this argument he constructs a powerful defence of the social democratic consensus that prevailed throughout much of the developed world in the three decades following WWII (precisely that defence which the Labour Party used to make so poorly, and since New Labour has abandoned completely). Lansley does not use the term social democracy himself, but prefers the term "managed capitalism" and opposes it to "market capitalism".
Lansley explains how we arrived at the mess we're in now in a well-paced and readable narrative, employing no more economic jargon than necessary and backing it up with a whopping 440 footnotes that point to rich source materials which represent years of research. Briefly summarised his story is this. Our problems arise because, over the last 30-odd years, the share of global output paid out in wages has been forced down below the level at which the employed population can afford to consume all of the product, while profits have soared to create massive surpluses that slosh around the world economy in a highly destabilising fashion (like water in the hold of a listing ship). It's a fundamentally Keynesian argument, but considerably more sophisticated than the current, ineffective, revival of faux-Keynesianism whereby central governments apply a "stimulus" by printing money to restore liquidity to banks rather than people. It's fairly close to the Marxist analysis made by David Harvey, though Lansley is no Marxist.
To expand this story a little, the post-war consensus broke down around 1973 after the OPEC oil-crisis, the ending of Bretton Woods exchange-rate controls, and a wave of labour militancy that pushed the share of wages too high, engendering high inflation and crippling investment. Right-wing political parties – notably those under Thatcher in the UK and Reagan in the USA – were able to exploit the resulting popular dissatisfaction to enact laws that greatly reduced trade union power and gave management the upper hand again. At the same time they set about permanently reducing the power of labour by policies that favoured the financial and service sectors of the economy over manufacturing. These measures included removing most of the controls on credit and banking activities, for example the City of London's "Big Bang". Over the next decades management was able to push back the wage share of output too far, to 52-54% which is below the 58-60% level required to balance consumption with production. Rather than raise wages they extended cheap credit to workers to enable them to continue consuming. The result was a series of booms, from the Dot Com boom to the Property boom, fuelled by this cheap credit, and massive profits accrued to owners of capital, which they could multiply many times over by deploying innovative financial institutions like hedge funds and private equity, and new kinds of high-risk financial instrument like securitised loan packages and other derivatives. 
I quite often bless my old maths teacher, who gifted to me the ability to read graphs without anxiety, and I did so again when reviewing this book. Lansley makes excellent use of graphs, and figure 2.1 on page 44 raised the hairs on my back of my neck: captioned "The UK's Long Wage Squeeze, 1955 to 2008", this is nothing less than a picture of the British class struggle, distilled down to a steadily-sinking wiggly line :- 

 The UK's Long Wage Squeeze, 1955 to 2008

A big question that Lansley's story raises is, to what extent did the ideologues who initiated this process (who include Chicago-School economists as well as conservative politicians) intend this result? Did they sincerely believe that the spoils of a "dynamised" deregulated economy would "trickle down" to create universal prosperity? Were such basically good intentions then perverted by a locust-swarm of greedy, testosterone-crazed City and Wall Street traders who used this new liberty to loot the economy, destroy the industrial base and create a new super rich class? Or were they always aware that their policies would lead to 1% of the population owning one third of the world's wealth, a concentration not seen since the eve of the Great Depression? In short, were they knaves or fools?
In favour of the fools thesis, one must regrettably look to the record of New Labour. Lansley quotes from Gordon Brown's 2007 Mansion House lecture "I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created". It was one of those sentences (like Peter Mandelson's "intense relaxation") that can sink a career: six weeks later the wheels fell off his new world order. With the mandate given it in 1997 New Labour could have made a start on turning around the decline of labour, but chose instead to embrace the Conservative's credit-fuelled agenda.
PQ readers' blood may boil the way mine did when reading his chapter 9, "The Cuckoo in the Nest", which examines the alternative, knave thesis. He queasily picks through the activities of investment bankers, hedge funds and private equity both during and after the crash of 2008. Nothing substantial was done to curb their activities which continue to this day, concentrating wealth and despoiling industry, but now using tax-payers' stimulus money. He mentions one David Tepper of Appaloosa Management who pocketed $4billion for eight month's work in 2009 - after the credit crunch and bank bailout - a humourist who seemingly keeps a sculpture of a pair of testicles on his desk.
The remedies Lansley proposes in his final chapter "The Scale of the Task Ahead" are all sound, including fighting tax avoidance; re-regulating offshore activities, takeovers and bankers' fees; a Tobin Tax on financial transfers; higher minimum wage and welfare, but time limited and with stringent job search conditions; protecting collective bargaining; and a restoration of steeply progressive taxation to start whittling away those huge fortunes (he mentions with approval Robert Shiller's ingenious proposal to index the gradient of the tax curve to the current level of inequality). However he is not optimistic that sufficient political will can be found to implement them, since the political classes on both sides of the Atlantic have been thoroughly suborned by the big money lobbies, and without such a will he prophecies a state of permanent recession and mass unemployment. This book is nevertheless required reading for anyone who seeks to influence Ed Millibank in the direction of an effective reordering of Labour's priorities.
My own intuition is that it may not be possible to reverse such decline within the bounds of democracy as presently constituted. The post-war social democratic state was not an end to class-struggle but rather a highly-desirable armistice, and now that one side has broken that armistice and shows no will to return to it, perhaps the sardonic Slavoj Žižek will prove to a necessary supplement to the well-mannered Lansley. Žižek wrote in London Review of Books in January 2012 ("The Revolt of the Salaried Bourgeoisie") that "it is a great mistake to think that a reasonably just society which also perceives itself as just will be free of resentment: on the contrary, it is in such societies that those who occupy inferior positions will find an outlet for their hurt pride in violent outbursts of resentment." It's not inconceivable that those testicles on Tepper's desk may end up being his own.