Mark Blyth is a political economist I greatly respect – his interdisciplinary range is rivalled only by sociologists such as Wolfgang Streeck and economic historian Adam Tooze. And the new little book Angrynomics he has co-authored with Eric Lonergan is a model not only of clarity and presentation but of how to help readers find their way through the torrent of reading with which we are deluged. I suggested recently that – given the apparent reduction in our attention span - publishers should be offering shorter texts. Angrynomics is a superb exemplar……reviewed nicely here -
A
fascinating new book, Angrynomics, by Eric Lonergan and Mark Blyth, analyses
what has been happening, and gives a highly plausible explanation. They set up three versions of capitalism,
beginning around 1870.
·
Capitalism 1.0
was the liberal laissez-faire version that had its heyday before 1914. Under
this system, governments did not manage the economy; they assumed that the
markets would do it for them. But the first world war destroyed the
international cooperation that made the system work and required heavy
government intervention to produce the armaments that armies needed. And then
the Great Depression showed that markets do not automatically correct. And it
produced its own “angrynomics” in the form of fascism.
·
Capitalism 2.0
emerged after the second world war. Economic policy was designed to avoid the
excesses of the 1930s by keeping unemployment as low as possible, with the help
of fiscal policy. To keep this system stable, banks were highly regulated and
capital flows were tightly controlled. This model was highly successful until
the early 1970s; growth was high, living standards of the poorest rose sharply
and inequality fell. The period was known as the wirtschaftwunder in
West Germany. But it broke down, the authors say, because low unemployment
empowered trade unions and led to a wage-price spiral. The system also enraged
the owners of capital who suffered high taxes and low returns, and were unable
to move their money. They started to finance conservative politicians and
thinktanks who argued for a change in approach.
·
This led to
Capitalism 3.0, what some call the neoliberal model. This was marked by the
reduction of high tax rates, “flexible” labour markets and the decline of trade
unions, along with the rise of privatisation, globalisation and free capital
movements. For a while, this system was heralded as the “great moderation”
because it produced a long boom with low inflation. But Capitalism 3.0 was also
marked by an uncontrolled banking sector, which eventually brought ruin in 2007
and 2008.
One of the delightful things about the book is its (rare) use of a Socratic-type conversation between the two authors (the other being a hedge-fund adviser!). I am surprised that this device is not used more – the only previous example I can think of is the fascinating “Life – and how to survive it” (1996) by therapist Robin Skynner and comedian John Cleese.
This, the
authors rightly assert, set the stage for “angrynomics”, usually known as the
populist movement. Voters had gone along with Capitalism 3.0 while it seemed to
deliver growth but for them, “flexible labour markets” meant less job security,
while globalisation meant a squeeze on their real wages. When the banking
sector caused a crash, the bankers were bailed out but poorer voters suffered
from austerity in the form of lower social benefits and squeezed public
services.
Inflation
may have fallen but real wages were not rising. And unemployment may have been
low but many jobs were poorly-paid and had fewer rights. At the heart of all
this, in the authors’ view, is that capitalism has tended to treat labour as a
“commodity”, along with land and capital. But “labour is the only commodity
capable of generating a social reaction to its movement in price”. When workers
banded together in trade unions, and worked closely together in factories, they
could use their negotiating power. Nowadays, with workers more dispersed, their
frustration is expressed in the political sphere.
But anger
can be a dangerous thing. As Messrs Lonergan and Blyth argue, anger can find
vent in “tribal rage”, like the hostility of rival football fans; it is often
expressed as hostility towards some outside group such as foreigners, or
religious or ethnic minorities. The alternative is “moral outrage” which
protests against legitimate wrongs, such as the exploitation of the system by
rent-seeking plutocrats. To quote the book: “The challenge for politics today
is to listen carefully to, and redress, the legitimate anger of moral outrage
while exposing and not inciting the violent anger of tribes”.
As someone
who has written a couple of books of economic history (Paper Promises and
More), I would like to add another layer to the argument. The Capitalism 3.0
model was driven by monetary policy, which focused on low inflation, a target
pursued by independent central banks. But globalisation by itself was driving
inflation lower (as the former communist bloc joined the market-based economy)
and technology cut the costs of manufactured goods. This created a feedback
system whereby central banks cut interest rates in response to lower inflation,
delivering capital gains to those who owned financial assets and those who had
borrowed money to buy real assets like property. Higher debts made the system
unstable, and when that stability resulted in a financial crisis, central banks
propped up the system with lower rates and more liquidity.
The lesson
learned by many traders and bankers was that taking risks paid off in the long
run. Each crisis led to lower rates and more debt until 2009, when the only way
that the system could be made to work was for central banks to buy bonds
outright, cut interest rates below zero, and all the rest. This system is very
fragile. The US has just enjoyed its longest boom in history. But the Federal
Reserve was only able to raise interest rates in baby steps, and had to bring
them back down to near zero at the first sign of trouble.
Far from
debt “not mattering”, it matters a lot. But
the mistake is to focus just on government debt when it is the total of
consumer debt, corporate debt, financial system debt that matters. This
debt is very high and needs to be refinanced on a regular basis; the only way
it can be sustained is with very low rates. This explains the puzzle in the
first paragraph; why governments can borrow at low rates despite needing to
issue so much debt.
In political
terms, this matters because the system has undermined the interest of the
middle classes as well as the working classes. In the 1920s, German
hyperinflation wiped out the savings of the middle classes creating a well of
support for Hitler. The corollary this time is the effect of low rates on
pension pots; middle class people could once retire on a generous final salary
pension. But such pensions have gone and their replacements (defined
contribution pensions) are dependent on bond yields to generate income. These
have plunged meaning that many middle-class people have pension pots that won’t
pay a decent income; they must work longer or live in reduced circumstances.
Anyway,
enough of defining the problem: how to
deal with it? The authors’ solutions are intriguing, but (in my view) skate
over some of the practical issues.
·
One proposal is
to take advantage of negative real interest rates. The government could issue
bonds and use the proceeds to buy global assets, such as equities, setting up a
National Wealth Fund. The expected return on those assets will be much higher
than the yield on the bonds, and the profits from the National Wealth Fund
could be distributed to citizens every 15–20 years. The obvious danger is that
global equities have a prolonged slump, akin to that suffered by Japan where
the stock market is still below its end-1989 level. The authors argue such an
extended slump is unlikely at the global level. That may turn out to be right,
but a more fundamental problem is that 15–20 years is a very long time to wait;
it will not help people now. Angry voters, and the politicians they elect, can
do a lot of damage in the interim. Another issue is that the authors propose
distributing the proceeds to the “80% of households with the fewest assets”.
Sounds fine, but we don’t have a register of assets by households, and the
practical difficulties might be immense: the make-up of households
(flat-sharing twenty-somethings, for example) can change quickly. Does a household
with eight people get the same as a single person?
·
The other ideas
include a tax (in the form of a royalty or licence) on tech companies to
reflect the use they make of our data, with the proceeds paid out to all those
who allow access to the data. Since most of these companies are American, it is
not clear how Washington would react to this proposal (tech tax plans from
France raised the ire of President Trump). Let us say it raised £20bn a year;
with more than 50m adults in the UK, that would be £400 each. You would need to
raise an implausible sum for this to generate a large income each.
·
The third idea
is to borrow money (again at low rates) to invest in green projects such as
wind power. Again, this seems entirely sensible; this is a good moment to
invest in infrastructure. Whether it will assuage voter anger is another
matter.
To be fair,
this is a short book and the authors write that “our aim has been to introduce
these ideas, not to seek to prove them or make the case that nothing else matters”.
More focus could, I think, have been placed on land and inheritance taxes: the
latter were very effective at destroying the fortunes of the aristocrats who
lorded it over British society before 1914.
But as I
hope this essay has demonstrated, this is an excellent, thought-provoking book
that should be read by anyone with an interest in economics or politics.
Angrynomics is a new term to me but one that should be at the heart of
political debate.
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