We are fast approaching a decade of what will be called in the annals of history a depression, and not a finance crisis or credit crunch. There has been economic growth in many western economies, if lack lustre, while others have faced virtual collapse due to the failure of the global credit system to self regulate by market mechanisms.
Neo Liberal/Conservative governments and central banks have responded with crypto keynsian policy and initiatives. ‘ Quantitative Easing’ and interest rates so low that it costs more to manage the credit than any meagre return. In this it subsidisation, it is the financial system which benefits most, or rather it benefits directly with a degree of stabiility and flow of credit then to productive industries and consumers.
However the crypto keynsian nature of Neo Liberal economic policy stretches far longer back in time, and continues today in the atittude to outsourcing manufacture in China.
A corner stone of Neo Liberal policy has been removal of employee rights to be replaced by the ‘natural law and justice’ of market mechanisms. This has meant that for many average and even skilled employees, the value of their wages has been stagnant and erroded over time especially in relation to the cost of housing. They have lost negotiating power and are reduced to the old threat of unemployment and a rapid route to homelessness. Wages have not kept line with productivity gains either in manufacturing and many service industries. Yet the economy grows and people find more money to pay for that expensive housing. How is this possible?
Credit Fuels the Rentier Economy
The key area in which Neo Conservative policy behaves as a crypto keynsian model, with injection of huge sums of ‘printed’ money has been through credit. Credit and tax cuts are inexorably linked together. Reduction in taxes of one dollar means for many they can lever three dollars in credit.
In the first decade of this sea-change to Neo Conservative economic policy, it was always that productive industry would recover with this availability of cheap credit and large scale flexibility in employment laws. Yet in fact manufacturing industries have flattened off in the number of employees and hence the amount of relatively high wage monies which are recirculated within national economies.
Rather the massive growth in consumer credit and the financial industry around this, was a house of cards with the valuation of property at its base, being a weak and vulnerable foundation as the crash of 2008 revealed. We had moved from ‘ propping up’ production to supporting the rentier service economy with tax money and loose policy, something we the ordinary average people, have all paid for in the last decade.
China Does What is Economically ‘Incorrect’ in the West
Meanwhile China are fairly open about their economic policy which is printing money centrally for a private capitalistic market system to distribute and create investment and wealth with, while also protecting their markets, manipulating material supply and pricing of new high volume proiducts like solar panels. In addition to this of course, that the major economies invest in industry there or simply buy and outsource goods from Chinese companies, exacerbates the balance of trade situation rather than making for the often touted huge potential of selling into China. We have manufacturing keynsian policy through the back door in very much of what we buy as consumers or within industrial supply chains.
Western conservative economists point then to the natural succession of higher value added industries in the west as counter balancing this inexorable trend to developing countries gaining traction in industrialisation and modernisation. However when we look at the key Neo Liberal driven economies we actually see that very much of this ‘sunrise’ industry is dependent on the tax payer and government policy for its fundamental income. Pharma and biotech are two such ‘western intellectual success industries’ but are both directly subsidised by payments for high price treatments and indirectly when those paying with their health care plans are by in large public employees with the state picking up the tab. The same is true of course of the defence industry, and to a lesser extent railway technology, national electricity grids and the new renewable generation sector.
What western economies are left with after imports from China and highly subsidised government supported industries like defence and health care, and of course service industry and in particular consumer services, retail and those privatised public services. On the latter, we do see of course that the need for public sector borrowing should have declined over time, or evaded the potential inflation we saw int he 1970s. Yet some of these privatised monopolies set out to tender exhibit the highest inflation of anything consumers pay for, such as electricity and water utilites and rail transport in the UK.. We see on the one hand a credit system for such investment bolstered by ‘quantitative easing’, while on the other a new layer of beaurocracy of purchasing and policing on the public sector side and bidding, financial compliance and legal contract battling within the private providers.
Market Mechanisms for the Poor, Socialism for the Rich
Despite lack lustre growth in the western economies since the mid ’00s’ there has been a large growth in one area – capital wealth. This has not of course been spread evenly through the economy, because of course capitalism is by nature the accumulation of wealth in few hands.
Capital value in metropolitan real estate, the key area of wealth, has recovered and grown in many of the cities and connurbations, despite low wage rises.
There has als been the concentration of wealth within the higher paid employee sector who can afford to invest in buy-to-rent and second homes, and of course the richer, non employee. Te hbaby boomers have of course benefited hugely from the avialbility of good career paths and affordable housing in the 60s and 70s, and then the large increase in the value of their real estate and pension funds as they near retirement now.
Now we come back to the service economy. Consumer services such as restaurants, cafes and bars and of course retail and the logistics sector which supports this. These are areas of the private economy which should be able to look after themselves. However as in Wallmart Economics, we see that a large proportion of employees are part time, seasonal or otherwise temporary and eminently disposable if there is pressure for profits. They have no protection and few rights in the key Neo Liberal economies, yet this under-employment leads to a dependency for many on welfare payments and medicaid.
Also in these economies, very many are ‘proudly’ taken out of paying income taxes, thus they do not pay for the public services they recieve and they are not paying for today’s elderly people’s state pensions. Also very many are students, who are utilised only at peak times and employers can rely on their metropolitan availability because of their subsidised student loans, and eventually the low availability of graduate career paths in these areas. There is an over supply of graduates, engineered by the availability of subsidised credit.
The service economy has seen a very large amount of growth, and in particular business to business services within computing and financial services in particular. However very much of the consumer service economy would exist and thrive without the need for hidden subsidies. Instead of these jobs paying a living wage to those without higher skills, and taking up those who want to work part time or seasonally, they are dominated by the ‘procariat’ and are sustainable only because of welfare support and tax credits or being under the tax threshold completely.
Liberal governments have been fooled into supporting this long term subsidy dependency by being neurotic about unemployment amongst unskilled workers, while also swallowing the Neo Liberal philosophy of disposability of the workforce , aka flexibility, creating more jobs – it certainly creates more wealth, but the subsidies in effect support marginal business ideas and artificially stifle prices for many basic shopping items.
So we see that via ownership of real estate (housing), welfare support for part time and temporary (disposable staff), public funding of some high profit private industries and the money supply via Central Banks the wealthiest in society have been able to enjoy a flow of tax money upwards to them. Instead of lifitng people out of poverty by their own efforts in a fairer society, we are actively subsidising poverty and a reduction in average personal wealth while being told that this is a free-market-economy.
The Rise of the Rentier
We understand then that services, real estate and the support financial system have enabled the upper third and in particular top 3% to become very much better at rentier economics or ‘trickle up’. In other words extracting rent from people’s bare existence before we start to take higher value activities into account. A roof over your head, utility payments, public transport, a coffee on your way to the office, your daily food-shop.
Growth and inflation or margin in these areas was sustainable in the post war period up to the oil crisis of the early 70s when inflatory processes took grip. Following that time we have seen deregulation in these markets, which we should remember would exist anyway, in terms of everything from land redevelopment and employment law to animal welfare laws. Those who own have been able to extract more money from those who work, and in housing in particular, created a run away inflation in real estate prices in areas where there is job creation, which when combined with anarchy in the place of regulation in the credit system, precipitated the finance crisis and subsequent depression.
Oridnary workers now experience that they have far less discretionary income and they are far more in debt to cover housing and of course education, than their baby boomer parent & grand parents. That money is little realised in personal capital as it takes years to break the back of owning even 50% of your home due to the means in which interest works and the high ‘ticket price’ for housing in areas near employment. In essence you buy your house on newly developed land from the rich, and you pay the rich rent to live there via enormous interest payments over 25-30 years, all be that at a relatively low (%) APR, they are on very much larger gearings relative to income, 4 to 5 times in many suburban areas and 6 to 9 times in metropolitan hot spots.
The post crisis ‘cure’ was to exclude the possibility for a credit via reserve ratio demands, and this vastly inbalances the market towards older established owners who can leverage into second properties to rent out or speculate with. This personal capital requirement laid down by the central bank, in the post crash cure, means that young people must either save, depositing ‘dead money’ at marginal rates of return in the bank for the bank to make money on, risk-invest small savings, or rely on their baby boomer parents to cough up the cash or downsize to release the capital. The average age of first house purchase in the Neo Liberal countries has increased steadily in the last 20 years, and there is now a proportion of even graduates who will never own their own property.
The Paradigm Shift in Subsidies
We begin to see then that the neo conservative model is more about where government money goes. Rather than supporting productive industry and basic living standards for the poor, subsidy goes to supporting the credit system and industries which are highly reliant on complex policy making in health, defence and utilities. Hence lobbying and buying out politicians.
Neo Liberalists often quote the inflation – productivity fall off and inevitable demise of general production industry in the west. The super rich decided as long ago as the 60s that they could control more of the metropolitan housing markets, and encourage the trend to move to the major financial centres, which would present a better ROI at a lower risk than investing in productive industry.
However in fact the USA and UK still have a substantial primary and seconday economy, and it is this which underpins the real wealth creation to this day, while the credit mountain fuels a substantial amount of the economy above this like a pyramid selling scam. IN this way the economylevers the real productivity and wealth creation, with credit fuelled and government under written financial systems. The tax payers and corporate returns in these areas fuel the furnace and are a form of working capital for the whole credit system, which amplifies the availability of money many times over that which productive industry generates.
In effect the super richest of the world demanded a regulation free credit casino game, and when it imploded, they blamed the sub prime loan scheme for precipitating it, and then could rely on socialist bail outs for their failed industry. ‘Qauntitative easing’ and central bank credit supply and bail outs are keynsian by nature, but instead of supporting jobs and distributiuon of wealth via productive activity through society, they support the flow of credit downwards and value upwards in soceity, We still have the recipe for another credit crash and another malaise of austerity and the super elite demanding government bail out such that the whole system does not collapse.
“There has been a class war for the last 20 years, and it is my class that have won this war” – Warren Buffet, one of the world’s most successful investors.
The alternative is clear. Give workers back their rights to negotiate wages against productivity and inflation, and remove top up benefits from service industries. Instead flow tax money to production industries by supporting apprenticeships and true life long learning and re-skilling. The ‘flexibility’ in the labour laws means essentially no rights for any employees unless their skills are rare.
Another major area we need to address is removing the disincentives for employing people full time, permanent by making employer contributions and personal taxatiion pro-rata per hour for all types of employment, thus removing the penalty employers experience in offering more working hours and a living take home pay cheque to workers. In turns of employer contributions to what is evenutally paid out as health, pensions and education and today’s workers have to pay for today’s pensioners unfortunetly in most western economies.
Part time / temporary marginalisation has been a key stumbling block for the left wing, who have accepted that job creation per se , no matter how many hours per week or how short a contract, is a necessary means to get the unemployed into work. In reality on the one hand, we make long estbalished existing business models more profitable, and marginal ‘hipster’ start ups possible, via tax money keeping people off the bread line, and the avoidance of higher on-costs and thus social responsibility on two fronts – living take home wages, and tax contributions to society.
Calling China Out
Also address as Donald Trump mooted in his policy, the balance of trade with China, a keynsian driven economy, and protect against imports from countries which have virtually slave labour conditions, disposession of land rights and environmental destruction.
A Universal Basic Income?
A universal basic income can be one means to combat the misuse of employees and this could be cheaper to administer than current welfare systems, but the difficulty lies in eligibility and weaning people off this. With the threat of automation of many unskilled and semi skilled jobs in retail, logistics and many other consumer services, we can be faced with a sudden leap in unemployment. UBI allows for people to redefine their economic activity, from a game-play basis that they do not need to work to feed themselves, only to better themselves and make an active contribution to society and the economy.
New Wealth and Property Taxes
Apart of the cure is also taxation on property which is used speculatively and the freeing up of such land which is withheld from the market by the super rich or corrupt local authorities. Further to this, in the fully digital broad band age, the dissemination of government employees to smaller units outside the major metropolii and the removal of the ‘power meeting’ culture from layers of governance. This feeds house prices and rents in metropolitan areas, and often centralisation has little cost saving effect.
Macro Economic Policy
Surely though you can as a centre right, reasonable jobbing economist, say that the banking system is the best means to deliver credit in terms of investment and loans, while the Central Banks are the best to police the supply of money, credit/asset holding ratio and behaviour of banks? The system then is self regulating to a large extent, with they whom recieve monies being worthy recipients in a market system? Well the asnwer depends on how much money you are making out of the whole financial pyramid. At the foot of the pyramid stands the broadest and largest step in terms of payments and interest rates – the consumer and the small business. Every layer above this makes money moving this credit around. For example in the top 100 companies on the london stock exchange, in 2017 the majority are banks and other financial institutions.
Through quantitative easing, printing money, bank bail outs and the requirement for the national reserve ratio, central banks in the UK and the USA in particular the whole system gets topped up, and a lot of that top up is tax payer’s money. The alternative post 2007/8 crash would be the collapse of the national and international credit system, or at least large portions would be whiped out. Neo Liberal economies live and breath by credit and in parcticular, home loans based often on inflated real estate investment, and consumer credit cards and short/medium loans. Banks of course can borrow from other creditors such as international banks, but they are limited in how much they can borrow and lend out by the central bank anyway.
Now when it comes to paying for this it comes from tax income, and growth in the econonmy on the repayments side is an important factor. So to stimulate growth while there are financial restrictions such as reserve ratio loans/ capital holding, then you can lever 3 times each penny, pound, dollar or krone in new creditability from consumers when they release one in tax cuts. So the amount of demand for credit goes up, and the reserve ratio does too most likely, so more tax money has to be used for reserves, and that is substantial when like the USA, you have over 12 trillion dollars of consumer credit. Public services are then cut per political colour, which puts more people out into under-employed ‘precariat’ more reliant on short term loans and credit cards….which feeds the cycle. This is part of the reason for the overall economic cycle – promise to pay back, maxing out the national credit card limit, not being able to payback or borrow anymore, defaults on the rise.
The alternative is what China is doing, directing investment into productive industry and improved infrastructure and public provision. However it is more ‘economically correct’ in the west to fuel credit and call it the ‘free market’ and allow China to manufacture our trinkets, while we allow underemployment in the consumer services sector to grow, and fund it via welfare support to stop peoplke going hungry and rioting. Those who live of the richer shavings from the finance pyramid or real estate don’t want to change a thing, and will pay good money to keep it that way to political parties and politicians.
An End To the Madness of Crypto Keynsian Economics
In the longer term there are only two ways that these cycles of crypto keynsianism will be stopped in the neo “liberal” west. One is another credit crash, which could cause a bigger crisis in confidence that the last. The other is when natural resources become limiting for the USA and Uk – which in effect means mostly petroleum reserves or a crash in the prices for these. Primary extraction is a key factor underpinning the entire system, a kind of national reserve balancing the ratio of value by creating somethign from nothing but geographical and geological fortuity. This perspective is longer term, and we could as well talk about catastrophic climate changes or that infamous asteroid, but that would not be the system itself imploding.
Well paid jobs in mineral extraction, farming, fishing, forrestry and other primary production are important, but under threat as resources limit, and neo liberal anti union ‘flexibility’ forces wages relative to outgoings downwards. Manufacturing is allegedly stable at 15/20% of the work force and around 10-15% for GDP, but how much of that is not driven by public purchasing like defence and healthcare? We are left with those financial pyramid and real estate jobs payiing well but also being subsidised to a percentage by the central bank’s stimulus mechanisms. Below this we have declinging standards of living for service sector workers who are unable to negotiate their wage relative to their outgoings, and increasingly marginalised into part time work.
The BBC and the Economist Magazine pondered the UK’s ‘productivity conundrum’ – growth in the economy but not growth in productivity, and this is because so many service jobs have ‘peaked’ in efficientcy for a human, and they have bottomed out in return in total weekly wages. In terms of productitivty the next phase for employers is to robotise and automatise these many millions of menial jobs. However the procartiat only make up 20 – 30% of most political constituencies and have become easily swayed to the post neo liberal politics of anti immigration, rather than solutions for fair wages and considering paying people to be productive in society via taxation.