Saturday, 17 November 2012

Zero sum nonsense

There has been another splurge of economic doom-mongering this week, following Mervyn King's prediction of weak growth. Some, such as Martin Kettle in the Guardian, believe we're facing 50 years of austerity, while others, notably the Social Market Foundation and Royal Society of Arts, see it as a shorter-term problem that will necessitate another £48bn in public spending cuts over the next 5 years. Kettle (not for the first time) is talking nonsense, and not just because predictions over such a distant horizon are worthless. The SMF/RSA crew have identified a real problem (George Osborne's predictions on growth were pants), however they have used it to justify another round of neoliberal welfare reform and (more pertinently) a bid for a government contract.

Kettle's case is based on two sources. The first is an OECD report that predicts global growth will be healthiest among developing nations (they're sticking their necks out there). The OECD's reliability in these matters has already been questioned, but in fact their prediction that UK GDP will grow at an average of 2.1% per annum over the next 50 years (1.6% per capita, due to an ageing population), is little different to the long-term historical growth rate. What's caught Kettle's attention is the continuing shift of economic power to the developing world, which is where the zero-sum fallacy comes in: "Economic power is shifting to China ... while the world will have more, we will have less of it – and maybe less in real terms, too. We are confronting scarcity of a sort we have forgotten." Given that the UK has been in relative decline since the 1880s, i.e. losing share of world output, this isn't as worrying as you might at first think. The reason why we can bear it is because we're still experiencing positive growth, even if others are growing faster (the OECD predicts global growth will average 3% over the next 50 years). It should hardly need stating that growth from a low base is always faster than growth from a high base. The wider point about growth is that it is not zero-sum, despite the tendency of politicians to cast competition between nation states in this light. Thus David Cameron recently insisted that we were in a race, which implies winners and empty-handed losers (a cynic might argue that the whole "batting for Britain" bollocks is just cover for politicians acting as salesmen for privileged industries, such as defence and The City).

The gloom does not let up: "Growth in Britain will often decline over the coming half-century. It will not resume. We can talk all we like about stimulus and investment, ... but, during the next 50 years, growth is going to be halting and uneven and will sometimes be negative." Pretty much like the last 50 years, then. There are two broad drivers for growth: a push and a pull. The push is the product of technological advance, improved labour skills and organisational efficiency, all of which increase productivity: same inputs, more outputs. This underlying trend is estimated at 1.3% p.a. You've got to be dysfunctional as a country not to be able to take advantage of it. The pull is the result of demand, which can be both external (exogenous) or internal (endogenous): more outputs requiring more inputs. For example, industrial development in China and elsewhere has led to increased demand for German machine tools (exogenous), while recovery from the 2011 tsunami in Japan is generating domestic growth (endogenous).

Kettle's ideological colours are shown when his pessimism about growth segues into pessimism about democracy: "In China ... a new leadership is seamlessly introduced for another 10-year span. In Europe, by contrast, a series of weak leaders ... struggle to assert some degree of control over a floundering currency and unification project. Meanwhile in the US, a re-elected but domestically weak president faces a series of defining political battles over spending and taxes." In trying to convince us that "austerity in some form is the context for most of the foreseeable political options in countries like Britain", he also references Thomas Byrne Edsall on the coming scarcity of resources. The resources in question are not raw materials or human capital but public money: "Although the 20th-century social democratic project may have stalled amid economic decline, the financial crisis has undoubtedly opened up a fresh opportunity to redefine the terms on which the rich and poor can coexist without social unrest in times of greater scarcity." Note the assumption about the persistence of "the rich and poor". The underlying postulate is that a real-terms increase in public spending can only be funded through the fruits of growth. In other words, it is a bonus available only in the good times, not a persistent exercise in the redistribution of wealth. This is a central neoliberal tenet that encourages the industry in doom-mongering. "We can't afford it" is the cry of the hour, despite the continuing advance in living standards (due to that 1.3% thang).

The SMF/RSA report, Fiscal Fallout, focuses its doom-mongering on the likelihood that growth will be lower than anticipated by the Chancellor, and in particular that we may face both sluggish growth in productivity and a smaller output gap than previously thought. The latter is the headroom between current output and potential output come a recovery. If this is small, because we have lost capacity for good, then the recovery will produce a correspondingly smaller bounceback in tax revenues. To hit the government's deficit targets, we may therefore need to cut public expenditure further.

The first point to make is that there are varying opinions on what has caused the drop in productivity and what this implies for a recovery, which the SMF/RSA acknowledge. They are probably right in thinking that there is a combination of factors. Labour-hoarding would imply there is spare capacity, though if it has been biased towards overhead roles this could mean that any expansion might largely be met through automation, offshoring or by new jobs at lower wages. Another factor might be the erosion of skills and a consequent decline in innovation, though you would expect this to take a good few years to have an effect. The forebearance of banks in respect of loans may be preventing the weak going to the wall, creating "zombie businesses", which is relevant as much productivity is the result of market entry/exit. One factor we know is present is constrained capital investment due to insufficient bank lending, hence QE and the funding-for-lending scheme. Though some businesses have large cash piles, those wanting to expand or retool (both of which would boost productivity) are struggling to secure finance.

Up to this point, the report is the work of the Social Market Foundation. Though a centrist think-tank (the legacy of David Owen), the SMF's analysis of the productivity decline is reasonable, and even their speculation about the output gap and the resulting deficit impact is logical. The problem with the report is the second half, the work of the RSA. This suffers from three flaws:

First is the instrumental view of welfare. Their mantra is that you can "drive productivity through public spending". This is a classic liberal concept - the idea that the role of welfare is to make labour more efficient and pliable, whether through health (minimising sick days and the avoidable death of skilled workers who have been invested in), education (providing preliminary skills of value to industry), or unemployment benefit (maintaining a reserve army of labour). This leads to the deployment of that pernicious phrase "value for money", which is (predictably) colouring current debate on welfare in the Labour party. In this light, the angst over rising health and social care costs can be seen for what it is: a distate that a growing share has to be devoted to non-productive labour, i.e. coffin-dodgers (the old), the unemployable (i.e. those on disability benefits), and people who have made "bad lifestyle choices" (the fat, smokers, alkies etc).

The second flaw is the report's lazy employment of policy nostrums that were drained of all meaning over the last 20 years, such as: "rebalance public finance away from Whitehall", implement "more collaboration and integration", focus on "prevention rather than cure", encourage "local engagement" and "devolved design", seek "negotiated autonomy". The report does not explain why these never happen in practice, so I will. Intermediaries (from management consultants to social enterprises) have a vested interest in maintaining the concentration of power, as it makes their job (i.e. interposing in spending decisions) easier.

The third flaw is a weakness for fashionable nonsense: "Flexicurity is a welfare model based on a balance between flexible labour-markets, active labour-market policies and benefits that are designed to smooth transitions between unemployment and work." In other words, welfare-to-work rebranded. Another example: "Open-source policy making" is interpreted as "there should be an open invitation to research centres, academia, think tanks and pressure groups to contribute their own data and expertise." That's not open source, that's just lobbying. Significantly, this is not open to anyone but to specific "civil society institutions", such as the RSA.

The depressing conclusion is that the self-identifying "left of centre" in British politics remains utterly committed to the neoliberal programme. There will never be a time when welfare is not under the cosh, and what little remains must be concentrated on those of most value to capital. There will always be winners, and losers. The rich man in his castle, the poor man at his gate.

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