StartUp Loans – neo-liberal smokescreen which denies macroeconomic reality

In the New Scientist last year (June 13 , 2011) there was an interview – A field guide to bullshit – with London-based academic philosopher Stephen Law about his book – Believing Bullshit: How not to get sucked into an intellectual black hole. I thought about that when I was reading the documentation relating to the latest con by the British government – its StartUp Loan scheme which will give tiny loans to vulnerable youth to launch businesses into a recessed economy. In fair times, the failure rate of small business is very high. Put inexperienced youth in the frame and it gets higher. Overlay a double-dip recession that will get worse (with perhaps an Olympic blip delaying the decline) over the next 12 months and you have another policy that will do very little to bring the 1 million plus youth unemployed back into productive life. The neo-liberals in the UK are increasingly chanting slogans like “MAKE A JOB DON’T TAKE A JOB” to extol the virtues of people creating their own work as a way of covering up the fact that the Government is deliberately destroying employment prospects (especially for the young). Schemes like the StartUp Loans join a long history of proposals designed to deal with mass unemployment which fail to understand the cause of the problem. Modern Monetary Theory (MMT) tells us that mass unemployment arises because the budget deficit is too small given the saving intentions of the non-government sector. Aggregate demand has to rise to reduce unemployment. Providing a pittance to small businesses will not relieve the demand constraint on the labour market. It might redistribute the unemployment but will not do anything to significantly reduce it.

By way of background reading – please see the following blogs – The Big Society aka BS and Social entrepreneurship … another neo-liberal denial.

The StartUp Loans scheme is being promoted by one of those archetype Tories – the Rt Hon Lord Young of Graffham – what is right or honourable about him is anybody’s guess. On his WWW site you will see that you are instructed to address him as Lord Young. Oh, the English!

But David Young will be remembered for:

1. On January 19, 1988 – as Secretary of Trade and Industry 1987-89 he introduced the 12-page White Paper – DTI, the Department for Enterprise under Margaret Thatcher’s prime ministership, which sought to change the name of the Department and introduce a free market focus rather than sectoral policy framework.

Check out the Hansard entry from February 19, 1988 when he moved that the House of Lords “takes note of the White Paper DTI-the department for Enterprise”. There is a lot of self-congratulation among the lordships. Oh the English!

2. More recently, in October 2010, he was given the post of Enterprise Advisor to the British Prime Minister ostensibly to hack into regulations governing small business. But his tenure was short-lived.

In November 19, 2010 – he was forced to resign the position because he told the Daily Telegraph in an interview (November 18, 2010) Top Conservative: recession? You’ve never had it so good:

For the vast majority of people in the country today they have never had it so good ever since this recession – this so-called recession – started … He added: “I have a feeling and a hope that when this goes through, people will wonder what all the fuss was about.”

Its up there with the more recent disdain from William Hague reported in the article (May 12, 2012) – Work harder, William Hague tells Britons that the critics of austerity should stop complaining and:

There’s only one growth strategy: work hard.

Or work smarter – but the first condition is to have work. Austerity is putting more and more British workers out of work.

Anyway, Mr-you-have-never-had-it-so-good is now championing the latest electoral con by the British government – its so-called StartUp Loans scheme – administered by the British Department for Business, Innovation and Skills (BIS).

It will provide £82.5 million to so-called young entrepreneurs (18-24 year olds). Each loan will be up to £2,500 with a repayment period of up to five years.

David Young at the launch said:

There are one million young people out of work. By opening up funding which will cover the cost of starting up, we hope to create an environment where setting up on your own is viewed widely as a real and valid career choice … We’re expecting tens of thousands of young people to benefit from the StartUp loans, creating tens of thousands of new businesses.

I did some arithmetic. The program has an allocation according to BIS of £82.5 million. If everyone gets the maximum stated loan (£2,500) that means 33,000 loans will be provided.

I suppose at a pinch that is “tens of thousands”.

The Prime Minister said of the David Young’s Report – Make Business Your Business – which was released to accompany the announcement:

There can be no better inspiration of the ‘can do’ spirit that is needed in business than Lord Young; and his report is a must read for anyone thinking of starting up.

I certainly hope Britain’s young entrepreneurs can spell better than the Department administering the loans (BIS). I went looking for David Young’s so-called inspirational – Make Business Your Business report today and found the link on the BIS site as shown in the screen capture that follows – oops:

But at the end of it the inability to spell will be a small problem for the entrants into this scheme.

There are two inter-related issues:

1. Treating unemployment as a micro problem fails to deal with the demand constraint associated with mass unemployment.

2. Small business entrepreneurship doesn’t appear to be a very viable way to get more than 1 million young British workers who are currently unemployed back into work.

The UK Guardian article (May 28, 2012) – This StartUp loan scheme won’t inspire young entrepreneurs – considers the second question.

The Guardian article asks one of the essential questions:

… can a new loan scheme for young people really help the economy by making entrepreneurialism more likely to flourish?

And they answer it in the negative pointing out the obvious fact that – small business (startups) have very high failure rates.

The internationally accepted research suggests a range of reasons for the high failure rate in the first 12 months.

– Lack of experience.
– Lack of capital.
– Poor location in relation to market.
– Inadequate credit lines.
– Poor working capital management – blurring of business and personal funds.
– Poor inventory management.
– Growth without adequate working capital (cash).
– Poor product differentiation.
– Poor sales volume.

Notwithstanding the last reason (poor sales), which I will come back to later, the cohort being targetted by this scheme would be highly ranked under those most vulnerable under the other factors.

The Guardian says that “young people are less likely to be equipped for success than other more seasoned operators”.

Consider the macroeconomics of the scheme.

An outlay of £82.5 million will have very little impact on aggregate demand and will be swamped by the cutbacks in public spending that are gathering pace as the austerity program deepens.

Which brings me to my main focus – macroeconomics.

Approaches such as StartUp are in the family of individualistic and market-based constructs that are inherent in neo-liberalism. They somehow think that an individual can relieve an aggregate constraint on the number of jobs by their own actions.

The Great Depression taught us that capitalist economies are prone to lengthy periods of unemployment without government intervention. From 1945 until 1975, governments used fiscal and monetary policy to maintain levels of overall spending sufficient to generate employment growth in line with labour force growth.

The maintenance of true full employment in most countries also was associated with declining inequalities. Most of the work generated was full-time and real wages grew in line with labour productivity. For those who slipped through the gaps in the distribution system there was a strong supportive welfare state.

The advanced economies grew at much more higher rates of growth than they have exhibited in the neo-liberal era.

The period since the the commitment to maintain full employment was abandoned by governments after the 1975 OPEC oil price shocks has been marked by persistently high unemployment and rising underemployment which put pressures on the welfare services provision and has been exacerbated by the regionally-specific declines in manufacturing and ancillary employment.

What we know is that mass unemployment results from a systemic failure of the national economy to produce enough jobs. Given the fact that most governments are sovereign in their own currencies we know that expansionary fiscal policy can always generate enough jobs to match the needs and desires of the available labour supply.

The failure of governments to pursue those options does not reflect any actual financial constraints on their capacity to spend but rather ideological choices to reduce their responsibility for providing sufficient work for all.

The StartUp Loans scheme is akin to the Social Entrepreneurship scheme that dominated the Third Way approach of New Labour in Britain and has spread, like a cancer, world-wide.

The common element is that government fiscal and monetary policy is considered impotent and that individuals have to be empowered with appropriate market-based incentives to create their own work.

The failure to see mass unemployment in macroeconomic terms represents the first false premise of this approach.

Local entrepreneurship is fraught in a spending constrained macroeconomy. And the the scale of job creation required at present is beyond the capacity of local schemes to redress.

The specific-to-general logic of the StartUp-like schemes pervades neo-liberalism and formed the basis of the Keynesian attack on orthodoxy during the Great Depression.

The infusion of the individualistic rhetoric throughout the public debate, driven by a blind acceptance of binding financial constraints on sovereign national governments has led these “solution packages” to lean firmly towards market solutions and maintain the notion of full employability rather than advance full employment in any meaningful way.

By largely disregarding the macro-economy these solutions will fail to deliver full employment. As a consequence, the neo-liberal position is left unchallenged and is actually reinforced.

Unemployment is couched as a problem of welfare dependence rather than a deficiency of jobs. StartUp-like schemes consider that they can break welfare dependency by shifting responsibility from government to the individual.

Britain’s government is currently making a choice between its two options as a currency-issuing sovereign entity with a floating exchange rate.

The national government always has a choice:

• Maintain full employment by ensuring there is no spending gap – that is run budget deficits commensurate with non-government surpluses; OR
• Maintain some slack in the economy (persistent unemployment and underemployment) which means that the government deficit will be somewhat smaller and perhaps even, for a time, a budget surplus will be possible.

The British government is taken the second option to the detriment of its workforce.

While the zeal associated with individualism is fine – and the StartUp Loans scheme abounds with that – we also have to understand the reason why mass unemployment occurs.

Clearly, I don’t consider the government has a role in dictating social actions. So as a social libertarian, I don’t see much role for government in making policies to control the way we interact.

But we always have to be careful not to conflate these “limits” on government in directing our social interactions with the national government’s fiscal policy capacities where there are no financial limits. We should always understand why we bother with government in the first place.

We want government to advance the well-being of the populace which I often refer to as advancing the public purpose role of government. The dimensions of this are clear in my mind and most of the commonly considered constraints on the national government pursuing this role are illusory.

The state should maximise the potential of its population – a zero waste of people – which at least requires the state to maximise employment. Once the private sector has made its spending based on its expectations of the future, the government has to render those private decisions consistent with the objective of full employment.

The non-government sector typically does not spend all of its income over the business cycle. That means that non-government spending gaps over the course of the cycle can only be filled by government.

The British economy is suffering from persistently high unemployment at present because there is a deficiency of demand promoted by inappropriate fiscal and monetary policy.

The Tories have deliberately sought to erode aggregate demand and hide that intent by promote illusory ideas – think about those black holes I noted at the outset – such as “fiscal contraction expansion” – “austerity is growth” – “don’t take a job, make one” – “thousands of young entrepreneurs – etc.

In doing so, they have grossly mislead their citizens as to the true opportunities that they have as the issuer of the currency.

MMT tells us that budget deficits are necessary to maintain full employment if the private sector is to pay taxes and has a positive desire to net save.

Government spending is only constrained by what real goods and services are offered in return for it. There is no financing requirement if the Government chooses to take advantage of its intrinsic capacities.

Conclusion

The emergence of approaches such as the StartUp Loans scheme are just different versions of the neo-liberal failure to understand macroeconomics.

By failing to address the constraint on aggregate demand that a cut back in the deficit would create and its implications for the number of jobs that this would damage, schemes like StartUp ignore the main game.

While individual community endeavour might produce 100 jobs here and there – which is nothing to bemoan – millions of jobs are needed. More are needed again in developing countries.

Small-scale entrepreneurial ventures cannot ease a macroeconomic constraint on aggregate demand coming from an inadequate sized budget deficit.

That is enough for today!