Via Naked Capitalism

Yves here. In a recent talk, political scientist Mark Blyth described how past breakdowns in economic policy regimes led to radical change: The gold standard produced the Great Depression, and the Post World War II social democratic era with strong social safety nets and a policy emphasis on creating full employment went off the rails with the 1970s stagflation. We summarized Blyth’s take on the crisis just past:

Blyth stresses that what happened after the 2008 financial crisis, which resulted from the failings of the neoliberal regime, the effort to restore the old system, is an unnatural response which will only lead to intensification of the underlying stressors, like rising levels of private debt, greater income inequality, and even more financialization.

We discussed this response in ECONNED in 2010:

Paradigm breakdown, meaning key elements of the current system are no longer viable, but that is a possibility that no one is prepared to face, since the old system seemed to work well for a protracted period. Thus the authorities reflexively put duct tape on the machinery rather than hazard a teardown….

Advanced economies have become hooked on debt technology, which, like XCrop, is habit forming and hard to wean oneself off of due to its lower cost and the fact that other approaches have fallen into partial disuse (for instance, use of FICO-based credit scoring has displaced evaluations that include an assessment of the borrower’s character and knowledge of the community, such as stability of his employer). In fact, the current debt technology results in information loss, via disincentives to do a thorough job of borrower due diligence (why bother if you are reselling the paper?) and monitoring of the credit over the life of the loan. And the proposed fixes are not workable. The Obama proposal, that the originator retain 5% of the deal and take correspondingly lower fees, is not high enough to change behavior. And a level that would be high enough to make the originator feel the impact of a bad decision would undercut the cost efficiencies that made securitization popular in the first place. You’d have better decisions, but less lending, and higher interest rates. That’s ultimately a desirable outcome, but as in the XCrop situation, no one seems prepared to accept
that a move to healthier practices will result in much more costly and less readily available debt. The authorities want to believe they can somehow have their
cake and eat it too.

A second set of difficult institutional problems results from the internationalization of capital markets. Effective regulation of global capital markets players requires a consistent regime of rules and enforcement across geographies. This approach is unlikely to succeed in the absence of the establishment of powerful international bodies devoted to that task. That in turn represents a major threat to national sovereignty. International “harmonization,” the current compromise, is a step forward but is likely to prove inadequate.

Financial firms are masters of regulatory arbitrage, and as their wealth and influence have grown, they are also showing considerable skill at manipulating political processes. A point of leverage has been to play competing financial centers against each other. For instance, one impetus for the strong dollar policy was the desire to bolster New York’s standing as a financial center. Similarly, the UK, to compete with U.S. deregulation, implemented some rules that were even more accommodating than the ones stateside, a regulatory race to the bottom. For instance, in Lehman’s final days, the firm transferred $8 billion from its UK broker-dealer subsidiary to provide funding to the parent company in the United States. It appears Lehman raided UK client accounts, something prohibited under U.S. law. If the broker-dealer does not go bankrupt, its customers should come out more or less whole. Even though Lehman collapsed, its U.S. broker-dealer subsidiary did not. Neither did Drexel’s in that firm’s implosion.76
But the Lehman example illustrates a broader point: that the pressures on legislators and regulators to grant waivers, to assure the “competitiveness” of their respective financial centers, lead to a pressure to lower standards

Now, of course, there is an alternative to overuse of private debt as a way to stimulate growth: that of higher levels of fiscal spending. The fact that policies that are deemed left wing (yet would have been middle-of-the-road in the Reagan era) are finally being treated seriously in the US, is a major shift. Even so, it is far from a sufficient condition for major change.

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Richard Murphy below gives a hopeful take, that the upcoming UK elections will be a platform for major change, and will demonstrate, as he puts it, that “the era of neoliberalism is over.” Unfortunately, as readers know all too well, if the Tories win, Boris Johnson will get his Brexit approved by Parliament, and that too will usher in major change.

And if Sir Ivan Rogers is correct, and Johnson sticks to his commitment of not seeking an extension to the transition period, and the UK winds up with no trade deal or only a bare bones one, the result will be a plutocratic land grab. It would not be anywhere as aggressive or destabilizing as the one after the USSR fell, and an ugly display of end state neoliberalism.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

There is an obvious follow in thought to my suggestion that this election is not over yet, posted this morning. And that is to speculate on what happens next. That does not mean I have given up on this campaign. It means instead I am willing to think what outcomes now might mean, and hope that such matters are worthy of reflection upon before the vote takes place. In part I also need to do this thinking anyway since I am taking part in a discussion tomorrow that I know will include a question on who might win the 2024 election. 

I general accept nothing is fixed in politics and that forecasting can be a fool’s game, but I think there can be an exception to that rule. The general rule holds true when the broad political consensus is stable. For very long periods at a time (1945 – 1975, 1980 – 2015, for example) that is true. During these periods the over-arching political narrative (social democracy, and then neoliberalism) survives and all that changes is the party delivering the consensus view, with argument as to priority and not substance, dominating debate.

At epochal moments that changes. 1979 here, and 1980 in the States, was an epochal moment. And we are overdue for another one. At these moments forecasting is more important, I suggest.

The current almost unchallengeable truth is, I suggest, that the era of neoliberalism is over. This was apparent in 2008 even if its protracted expiry has been painful. But now its death is regularly foretold. The FT has declared capitalism in need of a reboot. The US Business Roundtable has declared that profit maximisation has ceased to be a useful, let alone desirable, business ethos.  

That this is true is very apparent. Business is not delivering shared prosperity. Its products are destroying the planet. In the process inequality, with all the dire social consequences that can flow from it, is increasing. Those most impacted by all this – who have been denied so many of the chances that this mode of political organisation was meant to deliver – are a growing part of the electorate and so, of course, of society at large. And as we now know this factor of age is, in itself, the most likely indicator of political opinion in the UK

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The failure of the logic that the pursuit of self interest and the profit motive would naturally bring prosperity for all is going to have massive ramifications for politics. I would suggest that this failure is what will underpin the next epochal change.

It is readily apparent that Johnson is seeking – and may get – election on the basis of a single objective, of getting Brexit done. That objective is inexplicable. The consequences are unknown. The supposed identity that drives some to support this objective is that of a, quite literally, dying part of our society. And that those who want to ‘get Brexit done’ do not know how to do so or what it means is more apparent than ever. 

But what is also apparent is that this incomprehensible goal has been grasped at by the Tories precisely because they have no idea what else to do or say. This is clear from Johnson’s behaviour in the election, in which I would suggest he is failing badly. 

His manifesto says almost nothing, expecting almost meaningless Brexit references. 

He is being kept away from the public.

When he does appear it is apparent that those forced to share his company do so reluctantly.

He is avoiding press conferences.

He ducked a leaders’ debate.

And it is not clear he will be interviewed by Andrew Neil. 

I accept, he remains ahead in polls. But that does not change the fact that he is having a bad election campaign. A man who will not partake in the election he called must, by definition, be suffering in that way.

So, why is that? The answer is that he has nothing to say. There is no Tory policy. And the harsh, neoliberal, pro-market policies that it could for so long rattle out as evidence that it was on the side of those who, by its definition, were succeeding in society, are now being rejected by those very same people. And that leaves the Tories high and dry.

Just as it also leaves the LibDems high and dry as well, since so many of them, from Ed Davey onwards, appear to be wedded to the same mantra.

And let’s also be clear about it; this leaves the SNP’s Growth Commission based policies in a difficult place as well.

None of these parties can claim that they must now keep government out of the economy to ensure business has a free hand to do what it wants if it’s now the case that business does not want to fill the available space that government might leave, which it is readily apparent that it will not do. Nor can any government say that it must do so to permit market forces to deliver what only those markets can do to best effect when business says that it now recognises its role as being simply a part within the society that the government is turning its back on by promoting market forces above all else. 

So, if you want to understand why we must have epochal change it is because the business community, now only too well aware that they cannot solve the biggest challenges that we face, whether they be poverty, climate change, inequality, falling productivity as conventionally defined, or prejudice in its many forms, is saying that this epochal change is required. It would have been convenient to claim that the change is being driven by the left. But it isn’t. It’s being driven by business admitting that it is unable to use what is literally its business model to address these issues. Critically, what it’s also recognising in that case is that someone else has to do so. And if the partnership it is seeking is with society then the only partnership option it has is with government.

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The consequence is that business is saying it’s time to move on.

And it is business that is saying that the solution is not further to the right, because that is not where society is.

And it is business that is also saying, as it has done throughout the Brexit debate (minor exceptions apart) that they see the role for an internationalist, broadly based outlook for society.

I say that to make clear that what business is actually signalling is that populism is ver clearly not the way to go. If business has an influence left, and clearly it does, they’re using it. And the message they’re delivering is to look to new models of integration in society.

That, I suggest, is epochal change. 

I’d also suggest that it is not a signal for old style socialism. There is no indication that, outside some very obvious cases for natural monopolies, that there is need for radical change to the structure of overall business ownership. There is need for it to be more accountable. There is a need for better pension arrangements. There is most certainly a need that taxes be paid. And the transformation that climate change demands must be imposed if necessary. But beyond that? I suggest there will be a need for a strong private sector, playing by the rules, in whatever comes next in society.

But there will also be a need for stronger government too. I once called that vision of government ‘The Courageous State’ because in this approach government believes it does have the right to determine that action is required and to actually deliver the necessary change itself if it is apparent that it is the appropriate agency to do so. 

In that case we will have a bigger state sector.

We will have different taxes as a result.

And, I hope, different forms of democratic accountability.

As well as different forms of delivery of state services, which are adaptable to need more than at present.

But that these are the foundations for the new epoch appear obvious to me.

As obvious as the fact is that at this election no one from any party has been able to present that vision. Or in some cases anything even vaguely approximating to it.

The consequence is that we will face a period of almost inevitable continuing failure after the election. Too many (but not all) politicians are still dedicated to a form of politics that no longer really reflects almost any real interest in society. They are bound to fail as a result. 

But, I suggest that societies eventually get the politics that they want. And if that is the case a new epoch will emerge, driven by a demand from business, from people, and from enlightened politicians and thinkers, all of whom  will demand a new paradigm. We just have to get on with it very quickly. That’s the overwhelming need. And we have to work to make it happen. But I think it will.

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