Bringing the state back in

Bringing the state back in is the title of a much cited volume edited by Peter Evans, Dietrich Rueschmeyer and Theda Skocpol back in the 1980s. The book complained that social science had lost sight of the state as an autonomous political agent in its own right, tending instead to see the state as an epiphenomenon, its dynamics driven by rational individual behaviour or social structures and conflicts. This was blamed on an Anglo-centric perspective which focused on the dynamics of liberal capitalist societies where the state appeared to have a less decisive role.

Three decades later, we can conclude that this appeal to consider the state has failed, at least as regards political science. Even worse, this intellectual neglect of the state has coincided with a political rejection of the state as a useful instrument for achieving social objectives, which has underpinned the liberalizing reforms of the past quarter century. Ironically, this anti-state bias hasn't actually reduced the power of the state all that much, rather it is shifted state priorities away from developing long-term social and economic objectives, and towards propping up the privileges and powers of favoured groups, as well as mopping up the failures of the neoliberal model. But intellectually and politically, the notion that the state could be a useful tool for solving social problems and improving people's lives seems quite dead.

It is striking to read descriptions of the activist states of the 1950s and 1960s, as I've been doing in the last few days (in particular, I've been reading about the state enterprises in Italy, a brief account of which can be found in Andrew Shonfield's masterful Modern Capitalism). In this period, probably naively and over-optimistically, the consensus view was that the state could achieve great things through interventionist policies such as public investment and control of the banking system, and state management and planning in key industrial sectors. Since the 1970s, the neoliberal counter-attack against these ideas - inspired by the 'public choice' school of economics - has won out, to such an extent that even now, with the catastrophic failure of laissez-faire approaches to pull the west out of a deep economic crisis, nobody is talking about the state as having anything much to offer.

So instead, we press on with doling out cash to privately owned and or/managed banks, who are free to decide how best to invest the abundant capital stored up by the winners of the economic changes of the last three decades. Britain's public infrastructure is threadbare, there are large reserves of unused labour, and there is a pile of capital that is looking for a return, and yet what do we do? As far as I can see, print money for banks to lend to speculative investors to buy up property in the few parts of the country where the economy is still alive. This is a coordination failure of massive proportions, and it has been delivered by private actors driven by market forces.

Somehow, we need to change the image of the state. Despite the fact that without strong state intervention there would probably not be an economy left by now, the notion that the state can actually actively contribute not only by kickstarting the economy but also by enhancing the prospects for economic progress into the future is still taboo. Yet looking around, all I see are coordination failures that are holding back growth (chief amongst them at the moment, the inability of the construction industry to build homes for people who are desperate to buy them). I am probably, like the Shonfields of the 1960s, way too optimistic about what can be achieved by concerted state planning and investment, but the least you can say is that the jury is out on the value of the current model. There is no strong intellectual reason for not considering active state involvement in investment and consumption decisions.

So there you have it. Instead of just stockpiling it in the banks, print money to buy government debt allowing the state to build, educate, train and back the people and organizations that will produce stuff in the future. And if that creates inflation, raise interest rates. It might not work, but what we are doing now is clearly not working either. It's worth a try.

Maggie and me

OK, I can hold off no longer. I will have to join the crowd of people compelled to say their thing about Margaret Thatcher. If Oscar Wilde was right that the only thing worse than being talked about was not being talked about, the Lady's life has been a triumph.

For someone of my age, MT loomed large over those delicate years of transition from childhood to adulthood. She was elected shortly after I'd started secondary school, and deposed shortly after I'd started my PhD. Margaret Thatcher changed my life in a sense - if it wasn't for my Dad yelling in apoplexy in front of the TV news every night as I started to become aware of life outside my street and my school, I may not have taken the interest in politics that ultimately led to me making my living teaching and writing about it. I'm sure I'm not the only one in my generation to be fully aware of how Margaret Thatcher's politics made a difference to how my life has panned out.

For the upwardly mobile classes, Thatcherism meant new opportunities to get rich, and many people of similar backgrounds to mine (lower middle/upper working class, state school, in a relatively prosperous area) have done pretty well, even without becoming bankers. So have I, by any reasonable metric. For those without the resources and access to opportunities, it meant a much worse life than their parents had had. The irony is that the social mobility people like me have enjoyed was in part the result of the social settlement Thatcher set out to destroy, and was therefore denied to those that came after. For many people in Britain now, social mobility is an aspiration but a practical impossibility. If you want to know why the lady polarizes opinion so much, the answer is not difficult to figure out.

This contradiction - dangling opportunity in front of people's noses, whilst omitting to mention only a few will get it - is both the secret of Thatcherism's success and the key to overcoming it. The story Thatcher told was an intensely appealing one to many people of low to middling social status. Coming from a family background of mostly middle to low incomes who almost all vote Conservative (out of my two dozen uncles and aunts, barely a couple vote Labour), I think I have an intuition about how this works. They see hard work giving them some reward (usually house price inflation), and are resentful towards those who haven't done so well and require help from the state. Maggie told them: don't feel any responsibility to those who didn't try as hard, you should be able to enjoy the fruits of your labours rather than sharing them out. They fail to make the connection between this self-centred view and the various social problems - crime, failing schools, stagnant real wages, growing costs of social care, traffic - which result from refusal to consider the needs of the collective.

The answer for the left is to develop a discourse which recognizes that people have a right to aspiration, choice, and personal consumption, whilst making clear that collective provision and pooling of resources is indispensable if these rights are to have any meaning. The language of the left has not managed to get away from the rhetorical drone of solidarity, uniform provision, redistribution, even though policy has moved on. We need a way of talking about things that gets us out of the trap of having to defend welfare payments of £60,000 to the Mick Philpotts of this world. That means emphasizing how collective delivery of services and sharing of resources is what allows the maximum number of people to have aspiration, choice, and - yes - cheap stuff. Quite how you do this I haven't yet figured out. I think I'm going to have to learn Swedish.

Saving the Welfare State by Dealing with Housing

OK, some thoughts on the government's welfare reforms.

First up, most of it is nasty, reactionary, vindicative and driven by class hatred. But, there is one part of it which, although it will cause a lot of undeserved suffering, may have positive longer term consequences: the changes to housing benefit.

The Tory press like to portray Britain as having a generous welfare state, a 'soft touch' for welfare tourists everywhere. This is ******ks of course. Britain's welfare spending is around the European Union average, and that of course is an average that includes Latvia and Rumania as well as Sweden. Moreover, almost half of the 'welfare bill' of over £200 billion is paid to retirees, which most people would not consider to be 'on welfare'. Of the rest, around £12 billion goes on child benefit, which is independent of income except for higher rate taxpayers, and £29 billion on tax credits for working households (source: IFS). So the actual amount being paid in what most people think of as 'welfare' - cash transfers to working-age people who are not in work - is actually pretty small, as you would imagine given that Jobseekers' Allowance, the main form of unemployment compensation, is a meagre £73 per week.

But there is one big exception to this picture of a miserly welfare state, and that is housing benefit. Britain is actually a big spender on social housing, not only higher than average in Europe, but actually the highest in the OECD, both in terms of the number of recipients and the amounts paid out (source: OECD). The £23 billion housing benefit spend is anomalous amongst advanced democracies - so at least we are generous towards the poor in one respect. Or are we?

In fact the housing benefit spend doesn't benefit the poor all that much. They still tend to live in the worst accommodation, since housing benefit is payable only on properties at the low end of the rental market. The big winners with this spending are landlords, who get to benefit from the higher rents resulting from an injection of demand into the rental market that amounts to more than 1% of GDP. 40-50% of the housing benefit spend goes to private landlords, an estimated 1/3 of whom don't declare their rental income for tax. So this huge chunk of welfare spending turns out to be a big subsidy to middle class rentiers who on the whole contribute nothing to the productive economy.

Not only is this spending wasteful - it is divisive and politically toxic. Middle class left-wing intellectuals, safely ensconsed in their owner-occupied properties in nice neighbourhoods, probably miss the point that benefits recipients are competing, with taxpayers' money, for scarce housing against working people who are paying ever higher shares of their post-tax income for housing. The Guardian can scoff that only five housing benefit claimants received more than £100,000 a year in 2010, but the fact that anyone at all can receive such a sum should alert us that something is badly wrong. 

The problem is that reforming housing benefit inevitably results in suffering. The only way to reform the system is to reduce or withdraw the subsidy, and this will lead to evictions and disruption of family lives. For this reason no government - even Thatcher's - has had the heart to take these steps. But this government looks like it is going to. 

It will be nasty. But Labour needs to take a position on housing. The answer is not to spend public money on subsidizing middle class investments, but to spend that money on providing housing, which is what social spending on housing used to go on before the Thatcherite 'right to buy' reforms of the 1980s. RTB meant a shift in public expenditure on housing from capital investment (building houses) to  current spending (subsidizing rents). This needs to be reversed, and the Tories' cack-handed attempt at reform will create the conditions for fairer reform to happen. What kind of reform? I like this one.

The Grasshopper and the Ant Revisited

Some interesting posts on debt from Antonio Fatas and Noah Smith which I'd recommend to anyone tempted to believe that debt is necessarily a bad thing (also Krugman here, here and here making similar points after David Stockman's rant). Noah Smith's post is headed by a picture of Aesop's fable of the Grasshopper and the Ant, a typical metaphor used by the debt phobic.

Just in case you want the short version, the story is basically that headline debt figures don't tell us that much about their consequences, and we have to consider two important variables: what the debt is actually spent on (Smith), and the ratio of assets to liabilities (Fatas). Put simply, getting into debt to finance consumption probably places a burden (in the form of lower than otherwise consumption) on future generations, but doing it to finance investment all else equal has the opposite effect.

Drawing on Smith's analysis, we can see that the remedy of debt reduction can end up being more damaging than the debt itself. The UK, for instance, has succeeded in cutting its government borrowing only by cutting government investment, which in the current climate means cutting investment in the economy generally (given the private sector's pro-cyclical reluctance to invest). This reduces the productive capacity of the economy in the future, reducing future consumption. In this case then, debt reduction, not debt itself, is what is placing a burden on future generations, since George Osborne is (rightly) preserving the current consumption of the growing elderly population, which constitutes the lion's share of social spending.

Fatas' point about balance sheets is another way of making the same point. Debt corresponds to assets; or as Krugman keeps pointing out, at the level of a whole economy debt is largely money we owe to ourselves. We can see that clearly enough by looking at Germany, whose headline gross debt number is actually pretty high, but whose net external investment position is comfortably in the black. Ignoring the assets that correspond to liabilities is like equating a student loan with credit card debt to pay for a holiday.

So the emphasis on debt is missing the point. It is investment that is important for future generations, not debt. And of course, by squeezing current consumption debt reduction in a recession squeezes current production, reducing the ability to pay off the debt without unnecessary pain. In the periphery countries of the eurozone, unemployment is driving the young - the future productive workers - to migrate, perhaps never to return, whilst the old - who are current consumers, but relatively unproductive - remain. In Aesop's terms, austerity kills the ants, leaving only the Grasshopper, sitting unhappily under a leaking roof. Why are we doing this to ourselves? Well that's for a future post.

The Euro crisis as "Cheese Touch"

My favourite scene in the first 'Diary of a Wimpy Kid' movie is the 'cheese touch'. A piece of mouldy cheese is left in the schoolyard, and the kids keep well away from it as it gets greener and slimier. Until, one day, someone touches it - and they are ostracised until they can pass it on to someone else who will get the same treatment. The cheese touch is passed around the school, creating horror and fear in everyone. It's kind of Camus' La Peste for pre-teens.

The euro crisis is starting to look a bit like the cheese touch. The banking crisis of 2007-8 created a financial blackhole, and at some point we are going to have to come to terms with the losses and start from scratch. But of course none of us want to take the losses ourselves. In the absence of some kind of sensible and credible agreement to spread the pain, each group/nation/individual has to try to protect themselves from taking a disproportionate share of the losses, and assume others will do the same. In short, we'll keep well away from whoever has the cheese touch. Today, it's the unfortunate small savers of Cyprus.

The answer has got to be that the burden of adjustment is shared. This is for moral, political and economic reasons. Morally, because, well, life isn't fair but it shouldn't be Mad Max. Politically, because unless we give up on democracy, the victims of adjustment will protest and remove representatives who impose unfair burdens. And economically, because the weakest groups politically tend to be the weakest groups economically, and they simply can't take the losses - witness the brutal yet futile welfare reforms in the UK.

Who decides how to share the pain of adjustment? In Wimpy Kid, the responsible adult - the school janitor - is also disgusted by the mouldy cheese and sweeps around it. The EU is probably our demotivated janitor. And in Wimpy Kid, the cheese touch's journey around the school ends when it lands on Dieter Muller, a German exchange student. Baffled by zey cheese touch, Dieter takes it with him back to Dusseldorf. My guess is that ultimately the euro crisis will end the same way.

The Italian Election: Why it's Actually Good News

So, with all the usual commonplace reactions to the Italian election: 'chaos', 'ungovernable', and so on - it's time for a contrarian view. In a number of ways this is a great outcome.

First, Berlusconi will be happy with the result for sure, because it gives him huge bargaining power - no majority in the Senate is feasible without him. But let's remember that his coalition won only 29% of the vote, down from 47% in 2008, and his party, the PDL, won 21%, down from 37%. So the worst expression of Italian corruption and conservatism took a battering in the polls. Italians are not as forgiving as we feared.

Second, the two parties that represented continuity in sticking to the absurd commitment to austerity - the PD and Monti's Scelta Civica - both performed way below expectations. Monti's result is hard to read as anything but a rejection of European technocracy and its perverse insistence on pain and sacrifice as the way to recovery. Greece and Spain have largely caved, Italy, the biggest and most important Southern economy, and probably the most self-confident despite its problems, has said 'basta'. This has got to be good for Europe - better we accept this now, then have to wait for Golden Dawn to win in Greece.

Third, Italy's venal and reactionary political class is obviously a huge problem, and the amazing performance of Beppe Grillo's Five Stars Movement - at 25% the most voted individual party - shows that many Italians, and especially the young, have had enough of their politicians. Again. Of course, Berlusconi himself emerged out of the ruins of the last exercise in eliticide, back in the early 1990s. He then proceeded to piece together a new regime of rent-seeking and policy paralysis which is responsible for Italy's long-term decline. Grillo may have no policies, but as a protest vote you can't get much better than that. If nothing else, Grillo sends a clear signal to the crooks that a large number of Italians have had enough of the stealing and incompetence.

Now, this does not mean I'm optimistic. But if we add this result to the steady shift in the debate towards the inescapable conclusion that austerity is a disaster (even Olivier Blanchard thinks so now), then perhaps Europe will edge towards some more sensible approach to preserving the euro. Will this solve all our problems? No. But if Merkel wants the euro to survive, she'll have to start listening to Southern European voters as well as her own.

Why we hate parties

So Mariano Rajoy received dirty money (dinero 'B') from secret accounts controlled by the Partido Popular's Treasurer, accounts filled with kickbacks paid by construction companies in exchange for building permits delivered by PP politicians (read all about it here). Meanwhile, the likely winners of the coming Italian elections, the Partito democratico (PD), seem to have been closely involved in the decisions that have dragged Monte dei Paschi di Siena close to failure. In these circumstances, it's hardly surprising that Spanish and Italian voters view their political parties and elected representatives with mistrust and loathing.

They are not alone. Political parties are increasingly unpopular throughout the advanced democracies, calling into question the ability of elected governments to deal with the political fallout of the crisis. This is not a new phenomenon: political scientists have been discussing party decline for decades. But the evidence keeps mounting that parties are organizationally ever weaker, with fewer members, a smaller and ever less loyal electoral faithful, and less popular leaders. The crisis is brutally exposing the limitations of these parties.

Are voters right to distrust politicians? Yes, but unfortunately democracy makes it inevitable. Parties can please some of the people some of the time, but they can't please all of the people all of the time, and the disappearance of economic growth makes this more and more acute, since benefits can only be redistributed to one group at the clear expense of others. Not surprisingly, voters are dissatisfied with politicians' ability to solve their problems. But how exactly could politicians solve everyone's problems? One voter's problem is another voter's pay check. In the low growth scenario, politics is a zero-sum game.

At the heart of the problem is the increasingly individualistic way in which voters experience electoral politics. Electoral behaviour studies have moved away from the group-based paradigm of the post-war era (reflected in the work of Butler and Stokes or Lipset and Rokkan) towards a more choice-based analysis of voter behaviour, in which voters act as consumers of politics rather than as citizens. The consumer-oriented voter expects to receive what she wants in return for her vote, but is in competition with many other consumers who may want something quite incompatible. There is no way of the political market 'clearing', given there is no price mechanism. Everyone's vote is worth the same. Except...

Some voters count more than others because they can top-up their vote with something politicians badly need: cash. Political parties mostly organize on a national scale, and need to select candidates throughout the electoral territory, provide them with resources and help them campaign for votes. Yet the mainstream parties' turnover is a fraction of that of other nationally organized groups such as trades unions, churches or private companies. They need more money than the paltry state funding provides, and the obvious way to get it is to offer special treatment to well resourced organizations in exchange for cash or services in kind. If you're wondering why the Levesen recommendations are going to be ignored by the current UK government, this logic provides 99% of your answer.

So back to Rajoy. Is it any wonder that an organization which has huge responsibilities and a limited revenue stream should leverage its institutional power to raise a bit of money to help keep the show on the road? Hardly. In some ways the 'costs of politics' (to use a term deployed to spectacular effect by Beppe Grillo in Italy) are extraordinarily low, and we shouldn't be surprised if politicians look for ways to raise more cash. We also shouldn't be too disappointed if the votes that we get for free don't buy us exactly what we want. Democracy can't be 'consumed', it's made with our own engagement and involvement in the political process.