Tuesday, December 17, 2013

Bringing the State Back In. Really.


As we near the end of the fifth year of this economic crisis, there isn't much reason for optimism, despite the UK economy apparently reemerging from its austerity-driven slumber, and entering the usual housing-led recovery. The stuff I've been reading around the blogs in the last few weeks all points in the same direction: the postwar period of growth, shared prosperity and strong democracy has well and truly hit the buffers. And there is one conclusion that just about everybody is trying their best to avoid drawing, but that I think we'll probably get to in the end: the government needs to get a grip of the economy once again. Why?

First, after 1945 we, here in the advanced world of Europe and the Anglosphere, got used to economic growth as a kind of law of nature. There could be recessions, but the economy always recovered. Productivity gains could reliably be expected, giving us a trend rate of growth which allowed us to predict rising living standards into the future. Since 2007 that seems to have stopped. Many have argued that this is down to the wrong policy reaction to the financial crisis, but a recent debate has raised the possibility of an emerging 'secular stagnation', a permanent landscape of low growth because the natural rate of interest is below the zero lower bound. In this scenario, the capitalist economy can only generate growth and jobs through unsustainable bubbles.

Second, inequality has become a fact of life in the advanced economies. Increasingly, any income growth the economy generates is concentrated in the hands of investors and the managerial class, with the bottom 90%, or even the bottom 99%, largely losing out. Policy responses, such as tax credits for low earners and targeted investment in early years education to encourage social mobility, barely scratch the surface. Todays' economy, when it manages to create any income growth at all, simply directs it to an elite of super-rich individuals and those who think they have some chance of joining them.

Third, in these circumstances the social compact that allows democracy to work - a sense of shared fate and a sense that others can be expected to play by society's basic rules - starts to break down. Social classes and generations become intolerant and hostile to each other's demands, and increasingly the poor and ethnically distinctive are blamed for the broader problems of the economy and society. Extremist parties emerge and grab frightening shares of the vote, but even the mainstream parties adopt an increasingly intransigent approach.

Why on earth should anyone believe the government can provide any answer to these problems? After all, 2/3 of British voters believe political parties are corrupt, and satisfaction with the political system and its representatives is at all time lows in many countries. Government already spends around half of GDP in advanced democracies, and has little room to grow further.

This may be true, but I'm increasingly convinced we have no option. All the above problems require coordinated, collective action, and the state remains the only viable vehicle for achieving this. If the capitalist class cannot be induced to invest by market conditions, then government is the only one who can act, either by extending its fiscal role by taxing the wealthy, or even by simply exploiting the high demand for safe assets to borrow and invest. The Keynesian arguments for addressing the output gap through increased government borrowing are looking pretty healthy after the predictable failure of austerity to produce recovery. The 'secular stagnation' argument suggests we need to go further.

Current arrangements are also doing a lousy job of distributing income in a remotely balanced way, and here again government is the only answer. Redistribution through the tax and welfare system has a long and largely successful history, effectively banishing real poverty in the West after the Second World War. 'Predistribution' through a more interventionist approach to regulating the economy can also do a lot here. And even if you are skeptical this kind of intervention can achieve much, what is the alternative? Declining living standards into the foreseeable future for the bottom 90%, or more, of the working age population? Can democracy survive this in the long run?

By acting as the guarantor of coordinated action for the public good, government can revive democracy. The current trend towards technocracy and non-partisan expertise has not worked. Allowing government to act on behalf of the electorate, rather than committing it to abstract policy  rules designed by economists,  is probably the only way to revitalise the democratic process and overcome increasing hostility towards parties and politicians.

'Government' and the 'state' have become dirty words in the last few decades, but the alternative has failed. The evidence that state action never worked was always weak - the heyday of interventionism produced not only fairer shares, but also higher growth. Increasingly influential figures are arguing for a greater role for the state in the economy and society. There has never been a better time to make the argument.