Actual Productive Capacity

I do not know what The Guardian is coming to, publishing this, but I am very glad that it is. Yanis Varoufakis writes:

If Kwasi Kwarteng’s mini-budget survives the storm it triggered, a banker on a million-pound annual salary stands to receive £50,000 of income tax relief – on top of the extra bonuses the bank can throw in, now that the Liz Truss government has removed the cap on them. Meanwhile, a Deliveroo rider gets a pep talk on the emancipatory value of aspiring to be wealthy, presumably as an incentive to pedal harder.

This is the gist of the government’s growth strategy or, according to former Brexit minister David Frost, its antidote to stagnation and defeatism. While it’s tempting to draw the obvious analogy between zombie ideas such as the trickle-down growth effect, and the classic Hollywood horror film Night of the Living Dead, a more appropriate response to the seriousness of the situation is to follow the banker’s extra cash. The government claims the banker will invest it, thus promoting growth.

If it were not a blatant lie, it might have passed as a touching example of unfounded faith. But unlike Adam Smith’s bakers, butchers and brewers, who would invest any spare cash into better and more bread, ale and meat, the banker will buy into some fund that will, in turn, purchase shares, derivatives and bonds.

These recipients of the banker’s extra money have a long track record of not investing in actual productive capacity. Why would they, when the masses out there can’t afford to buy new, high-value products?

Instead, big businesses use any funds that come their way either to buy back their own shares (to boost their share price and, consequently, their bonuses) or to speculate in the derivatives market or in real estate. The dirty secret behind the zombie idea of trickle-down economics is that only one thing can prevent the vicious financial cycle from spinning out of control: the government’s (and, sometimes, the central bank’s) power to feed it.

Margaret Thatcher, whom Liz Truss pretends to idolise, understood this dirty little secret. She learned the hard way that tax cuts for the wealthy merely shifted income to the ruling class without delivering growth dividends. For her neoliberal policies to deliver a semblance of growth, she had to throw into the vicious financial cycle pre-existing public wealth: council houses and public utilities (gas, electricity, water) in particular.

In short, Thatcher’s policies boosted growth not because trickle-down worked, but because swathes of society’s common wealth was liquidated at cutdown prices and thrown into the City’s cauldron. Thatcher’s business model for the UK has remained more or less the same ever since. While the last Labour government did use its revenues from taxing the City to fund the NHS and social services, the UK’s productive capital base continued to shrink.

Tony Blair and Gordon Brown not only maintained the financialisation cycle that Thatcher had begun, but boosted it in two ways: by removing all remaining regulatory constraints on the City, and by throwing into its circular flow the proceeds from deregulated public services. Then, in 2008, under the weight of its hubris, the financialisation vicious cycle had its famous collapse.

At once, the Bank of England combined forces with the government to re-float it. To that splendid example of socialism exclusively for the financiers, George Osborne added austerity, which, by suppressing aggregate demand further, eradicated any remaining drive toward actual investment in Britain’s productive base.

Four decades after the neoliberal experiment began, the evidence is in: trickle-down economics is dangerous make-believe. Growth is in fact impervious to the top income tax rates. Paul Krugman recently showed that neither Ronald Reagan’s tax cuts nor Bill Clinton’s tax hikes affected the US’s income path significantly.

Similarly in the UK, the data dispels the Tory conviction that Thatcher put Britain on to a brave new path to higher growth. We find that in 1979, the output per hour worked in the UK was trailing France and Germany by 17% and 18% respectively. Did the UK catch up after four decades of trickle-down tax policies and assorted deregulation measures, which never happened in France? No, in 2019, France’s productivity remained 18% higher than the UK’s, and Germany’s 17%. 

From this historical perspective, the recent backlash against Liz Truss seems almost unfair. Sure enough, the new prime minister and her chancellor blundered monumentally. Nevertheless, it is disingenuous of the Truss trashers to try to pin on her the sins of a business model inspired by Thatcher, modified by Blair, shored up by Osborne, undermined by Brexit and neglected by Boris Johnson.

The hapless new PM’s rookie mistake was to try to beat Rishi Sunak (while also jettisoning Johnson’s levelling up agenda) by doing … a Thatcher. Alas, because she lacked Thatcher’s access to plentiful public assets to be injected into the financial sector, and with the Bank of England too spooked by inflation to print more money to revitalise financialisation, Truss ended up trying to achieve the impossible: to do a Reagan, but without the mighty dollar in support. 

The problem with zombie ideas that refuse to die is that, once they re-emerge, they encourage other deadly undead ideas to rise up too. There are already signs that Kwarteng, instead of killing off the trickle-down zombie, will instead revive the austerity zombie. Impervious to the fact that tax cuts never generate growth, and austerity never arrests the growth rate of public debt, the UK is destined to be haunted by these two zombies for two more years. The silver lining is that Trussonomics has almost guaranteed the Tories’ defeat in the next election.

And then? Does Keir Starmer’s Labour have a plan to break up the doom-loop of state-maintained wealth appropriation centred upon the City? The UK’s future, and any hope of undoing four decades of unnecessary damage, will depend on it.