Political Reporter surveys the political territory.
Headline: Will a Labour victory solve the UK’s growth crisis?
Sub-headline; Replacing chaos with ‘dullness’ is intended to boost an economy growing at just 1.1% a year. But Keir Starmer might not be able to follow through on his plan Will a Labour victory solve the UK’s growth crisis?
The collapse of the American financial system that occurred in 2008 has since turned into an economic and political crisis of global dimensions.footnote1 How should this world-shaking event be conceptualized? Mainstream economics has tended to conceive society as governed by a general tendency toward equilibrium, where crises and change are no more than temporary deviations from the steady state of a normally well-integrated system. A sociologist, however, is under no such compunction. Rather than construe our present affliction as a one-off disturbance to a fundamental condition of stability, I will consider the ‘Great Recession’footnote2 and the subsequent near-collapse of public finances as a manifestation of a basic underlying tension in the political-economic configuration of advanced-capitalist societies; a tension which makes disequilibrium and instability the rule rather than the exception, and which has found expression in a historical succession of disturbances within the socio-economic order. More specifically, I will argue that the present crisis can only be fully understood in terms of the ongoing, inherently conflictual transformation of the social formation we call ‘democratic capitalism’.
Democratic capitalism was fully established only after the Second World War and then only in the ‘Western’ parts of the world, North America and Western Europe. There it functioned extraordinarily well for the next two decades—so well, in fact, that this period of uninterrupted economic growth still dominates our ideas and expectations of what modern capitalism is, or could and should be. This is in spite of the fact that, in the light of the turbulence that followed, the quarter century immediately after the war should be recognizable as truly exceptional. Indeed I suggest that it is not the trente glorieuses but the series of crises which followed that represents the normal condition of democratic capitalism—a condition ruled by an endemic conflict between capitalist markets and democratic politics, which forcefully reasserted itself when high economic growth came to an end in the 1970s. In what follows I will first discuss the nature of that conflict and then turn to the sequence of political-economic disturbances that it produced, which both preceded and shaped the present global crisis.
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Editor: A collection the sub-headings is instructive:
I. MARKETS VERSUS VOTERS?
2. POST-WAR SETTLEMENTS
3. LOW INFLATION, HIGHER UNEMPLOYMENT
4. DEREGULATION AND PRIVATE DEBT:
Editor: Under the rubric of 4. Deregulation and private debt:
This is not to say, however, that the Clinton administration had somehow found a way of pacifying a democratic-capitalist political economy without recourse to additional, yet-to-be-produced economic resources. The Clinton strategy of social-conflict management drew heavily on the deregulation of the financial sector that had already started under Reagan and was now driven further than ever before.11 Rapidly rising income inequality, caused by continuing de-unionization and sharp cuts in social spending, as well as the reduction in aggregate demand caused by fiscal consolidation, were counterbalanced by unprecedented new opportunities for citizens and firms to indebt themselves. The felicitous term, ‘privatized Keynesianism’, was coined to describe what was, in effect, the replacement of public with private debt.12 Instead of the government borrowing money to fund equal access to decent housing, or the formation of marketable work skills, it was now individual citizens who, under a debt regime of extreme generosity, were allowed, and sometimes compelled, to take out loans at their own risk with which to pay for their education or their advancement to a less destitute urban neighbourhood.
The Clinton policy of fiscal consolidation and economic revitalization through financial deregulation had many beneficiaries. The rich were spared higher taxes, while those among them wise enough to move their interests into the financial sector made huge profits on the ever-more complicated ‘financial services’ which they now had an almost unlimited license to sell. But the poor also prospered, at least some of them and for a while. Subprime mortgages became a substitute, however illusory in the end, for the social policy that was simultaneously being scrapped, as well as for the wage increases that were no longer forthcoming at the lower end of a ‘flexibilized’ labour market. For African-Americans in particular, owning a home was not just the ‘American dream’ come true but also a much-needed substitute for the old-age pensions that many were unable to earn in the labour markets of the day and which they had no reason to expect from a government pledged to permanent austerity.
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5. SOVEREIGN INDEBTEDNESS
Editor: under the rubric of Sovereign Indebtedness
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Financial liberalization thus compensated for an era of fiscal consolidation and public austerity. Individual debt replaced public debt, and individual demand, constructed for high fees by a rapidly growing money-making industry, took the place of state-governed collective demand in supporting employment and profits in construction and other sectors (Figure 4). These dynamics accelerated after 2001, when the Federal Reserve switched to very low interest rates to prevent an economic slump and the return of high unemployment this implied. In addition to unprecedented profits in the financial sector, privatized Keynesianism sustained a booming economy that became the envy not least of European labour movements. In fact, Alan Greenspan’s policy of easy money supporting the rapidly growing indebtedness of American society was held up as a model by European trade-union leaders, who noted with great excitement that, unlike the European Central Bank, the Federal Reserve was bound by law not just to provide monetary stability but also high levels of employment. All of this, of course, ended in 2008 when the international credit pyramid on which the prosperity of the late 1990s and early 2000s had rested suddenly collapsed.
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In the three years since 2008, distributional conflict under democratic capitalism has turned into a complicated tug-of-war between global financial investors and sovereign nation-states. Where in the past workers struggled with employers, citizens with finance ministers, and private debtors with private banks, it is now financial institutions wrestling with the very states that they had only recently blackmailed into saving them. But the underlying configuration of power and interests is far more complex and still awaits systematic exploration. For example, since the crisis financial markets have returned to charging different states widely varying interest rates, thereby differentiating the pressure they apply on governments to make their citizens acquiesce in unprecedented spending cuts—in line, again, with a basically unmodified market logic of distribution. Given the amount of debt carried by most states today, even minor increases in the rate of interest on government bonds can cause fiscal disaster.15 At the same time, markets must avoid pushing states into declaring sovereign bankruptcy, always an option for governments if market pressures become too strong. This is why other states have to be found that are willing to bail out those most at risk, in order to protect themselves from a general increase in interest rates on government bonds that the first default would cause. A similar type of ‘solidarity’ between states in the interest of investors is fostered where sovereign default would hit banks located outside the defaulting country, which might force the banks’ home countries once again to nationalize huge amounts of bad debt in order to stabilize their economies.
There are still more ways in which the tension in democratic capitalism between demands for social rights and the workings of free markets expresses itself today. Some governments, including the Obama administration, have attempted to generate renewed economic growth through even more debt—in the hope that future consolidation policies will be assisted by a growth dividend. Others may be secretly hoping for a return to inflation, melting down accumulated debt by softly expropriating creditors—which would, like economic growth, mitigate the political tensions to be expected from austerity. At the same time, financial markets may be looking forward to a promising fight against political interference, once and for all reinstating market discipline and putting an end to all political attempts to subvert it.
Further complications arise from the fact that financial markets need government debt for safe investment; pressing too hard for balanced budgets may deprive them of highly desirable investment opportunities. The middle classes of the advanced-capitalist countries have put a good part of their savings into government bonds, while many workers are now heavily invested in supplementary pensions. Balanced budgets would likely involve states having to take from their middle classes, in the form of higher taxes, what these classes now save and invest, among other things in public debt. Not only would citizens no longer collect interest, but they would also cease to be able to pass their savings on to their children. However, while this should make them interested in states being, if not debt-free, then reliably able to fulfil their obligations to their creditors, it may also mean that they have to pay for their government’s liquidity in the form of deep cuts in public benefits and services on which they also in part depend.
However complicated the cross-cutting cleavages in the emerging international politics of public debt, the price for financial stabilization is likely to be paid by those other than the owners of money, or at least of real money. For example, public-pension reform will be accelerated by fiscal pressures; and to the extent that governments default anywhere in the world, private pensions will be hit as well. The average citizen will pay—for the consolidation of public finances, the bankruptcy of foreign states, the rising rates of interest on the public debt and, if necessary, for another rescue of national and international banks—with his or her private savings, cuts in public entitlements, reduced public services and higher taxation.
6. SEQUENTIAL DISPLACEMENTS
7. POLITICAL DISORDER
Editor: The final paragraphs of the Streeck essay… does this essay answers some of Mr. David Smiths questions, about the vexing question of ‘low growth’ ?
As we now read almost every day in the papers, ‘the markets’ have begun to dictate in unprecedented ways what presumably sovereign and democratic states may still do for their citizens and what they must refuse them. The same Manhattan-based ratings agencies that were instrumental in bringing about the disaster of the global money industry are now threatening to downgrade the bonds of states that accepted a previously unimaginable level of new debt to rescue that industry and the capitalist economy as a whole. Politics still contains and distorts markets, but only, it seems, at a level far remote from the daily experience and organizational capacities of normal people: the us, armed to the teeth not just with aircraft carriers but also with an unlimited supply of credit cards, still gets China to buy its mounting debt. All others have to listen to what ‘the markets’ tell them. As a result citizens increasingly perceive their governments, not as their agents, but as those of other states or of international organizations, such as the imf or the European Union, immeasurably more insulated from electoral pressure than was the traditional nation-state. In countries like Greece and Ireland, anything resembling democracy will be effectively suspended for many years; in order to behave ‘responsibly’, as defined by international markets and institutions, national governments will have to impose strict austerity, at the price of becoming increasingly unresponsive to their citizens.footnote19
Democracy is not just being pre-empted in those countries that are currently under attack by ‘the markets’. Germany, which is still doing relatively well economically, has committed itself to decades of public-expenditure cuts. In addition, the German government will again have to get its citizens to provide liquidity to countries at risk of defaulting, not just to save German banks but also to stabilize the common European currency and prevent a general increase in the rate of interest on public debt, as is likely to occur in the case of the first country collapsing. The high political cost of this can be measured in the progressive decay of the Merkel government’s electoral capital, resulting in a series of defeats in major regional elections over the past year. Populist rhetoric to the effect that perhaps creditors should also pay a share of the costs, as vented by the Chancellor in early 2010, was quickly abandoned when ‘the markets’ expressed shock by slightly raising the rate of interest on new public debt. Now the talk is about the need to shift, in the words of the German Finance Minister, from old-fashioned ‘government’, which is no longer up to the new challenges of globalization, to ‘governance’, meaning in particular a lasting curtailment of the budgetary authority of the Bundestag.footnote20
The political expectations that democratic states are now facing from their new principals may be impossible to meet. International markets and institutions require that not just governments but also citizens credibly commit themselves to fiscal consolidation. Political parties that oppose austerity must be resoundingly defeated in national elections, and both government and opposition must be publicly pledged to ‘sound finance’, or else the cost of debt service will rise. Elections in which voters have no effective choice, however, may be perceived by them as inauthentic, which may cause all sorts of political disorder, from declining turnout to a rise of populist parties to riots in the streets.
One factor here is that the arenas of distributional conflict have become ever more remote from popular politics. The national labour markets of the 1970s, with the manifold opportunities they offered for corporatist political mobilization and inter-class coalitions, or the politics of public spending in the 1980s, were not necessarily beyond the grasp or the strategic reach of the ‘man in the street’. Since then, the battlefields on which the contradictions of democratic capitalism are fought out have become ever more complex, making it exceedingly difficult for anyone outside the political and financial elites to recognize the underlying interests and identify their own.footnote21 While this may generate apathy at the mass level and thereby make life easier for the elites, there is no relying on it, in a world in which blind compliance with financial investors is propounded as the only rational and responsible behaviour. To those who refuse to be talked out of other social rationalities and responsibilities, such a world may appear simply absurd—at which point the only rational and responsible conduct would be to throw as many wrenches as possible into the works of haute finance. Where democracy as we know it is effectively suspended, as it already is in countries like Greece, Ireland and Portugal, street riots and popular insurrection may be the last remaining mode of political expression for those devoid of market power. Should we hope in the name of democracy that we will soon have the opportunity to observe a few more examples?
Social science can do little, if anything, to help resolve the structural tensions and contradictions underlying the economic and social disorders of the day. What it can do, however, is bring them to light and identify the historical continuities in which present crises can be fully understood. It also can—and must—point out the drama of democratic states being turned into debt-collecting agencies on behalf of a global oligarchy of investors, compared to which C. Wright Mills’s ‘power elite’ appears a shining example of liberal pluralism.footnote22 More than ever, economic power seems today to have become political power, while citizens appear to be almost entirely stripped of their democratic defences and their capacity to impress upon the political economy interests and demands that are incommensurable with those of capital owners. In fact, looking back at the democratic-capitalist crisis sequence since the 1970s, there seems a real possibility of a new, if temporary, settlement of social conflict in advanced capitalism, this time entirely in favour of the propertied classes now firmly entrenched in their politically unassailable stronghold, the international financial industry.
Stronger growth is by no means guaranteed, but we should not give up hope. In a presentation to clients, the economic consultancy Fathom asks the question, “The UK’s economic malaise — would a new government help?” It finds some evidence that governments with large majorities, which is what election polls suggest, deliver stronger growth. That was the case after the 1997 Labour landslide, when, admittedly in a friendlier global environment, the UK economy averaged 3.1 per cent growth for ten years. Fathom does not see the UK getting to that level, but in one scenario it has growth topping 2.5 per cent by the second half of 2026.
As the consultancy puts it: “Our initial premise is that there is scope for more and better investment. Greater government support for [research and development] spending could help … and according to recent research, every additional pound of publicly funded R&D may call forth as much as £8 of additional privately funded R&D.
“Our optimism is further boosted by the presence of long-term catalysts, such as the climate transition, as well as economic and national security concerns. These are compelling policymakers to expand their policy horizons and adopt a more strategic approach. Ultimately, creating a dynamic economy is about embracing risks and turning them into opportunities through strategic planning and investment, rather than suppressing risks with short-term, temporary measures.”
We need a bit of optimism. Let us hope it is not misplaced.
My attempt to find an explanatory frame, is to say the least, not exactly on target. Yet the Streeck essay offers what just might be a vital contemporary history of a Capitalism, whose servants like David Smith and The Times, offer a certain kind of faith, in a system that pays their salaries!
Rootless cosmopolitan,down at heels intellectual;would be writer.
'Polemic is a discourse of conflict, whose effect depends on a delicate balance between the requirements of truth and the enticements of anger, the duty to argue and the zest to inflame. Its rhetoric allows, even enforces, a certain figurative licence. Like epitaphs in Johnson’s adage, it is not under oath.'
https://www.lrb.co.uk/v15/n20/perry-anderson/diary
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