The urban impact of the failure of austerity

I use the descriptor ‘failure’ in a selective way, although it is probably the meaning that that vast majority of citizens would ascribe to the term. In this context, I’m thinking that successful policy improves the lives of the most disadvantaged citizens in a region. A small minority of people might think of success in terms of how rich the top end of the distribution becomes (in wealth or income). Yesterday (January 25, 2016), a UK research group, the Centre for Cities released their latest – Cities Outlook 2016 – which is a comprehensive analysis of how the larger cities in Britain are performing across a variety of indicators. In this release, the theme was centred on the claim by the British Chancellor that his policy design was intending to produce a “higher wage, low-welfare economy in Britain”. The report suggests the British government has failed and that “almost half of lower wages, and higher welfare, than the national average” and “welfare spending since 2010 has grown at a much faster rate in high-wage cities”. I’ve also been trying to disentangle the impacts of deindustrialisation on urban spaces, which began in the 1980s, from the more recent impacts of policy austerity, driven by misguided understandings of the capacities of currency-issuing governments. I want to address the claim from the Left, that the shifting patterns of capitalist production across regional spaces, is inevitable and undermines the capacity of cities to prosper. The shifting patterns might be inevitable but the conclusion that is drawn about the options available to cities are largely incorrect.

The Centre for Cities Report is very interesting and worth reading. It studied the 63 largest cities in the UK, which “account for 54 percent of the population, but generate 63 per cent of all wages in Britain”.

They created a classification by wage and welfare receipt (I will leave it to you to study their methodology, which was rather standard):

1. 29 cities were considered to be low-wage, high-welfare economies (many in the North).

2. 18 cities were considered to be low-wage, low-welfare economies.

3. 14 cities were considered to be high-wage, low-welfare economies (mostly in the South East)

4. One city (Southend) was considered to be high-wage, high-welfare.

The following map is taken from Figure 4 of the Report and shows the distribution of the cities by category.

It shows that Britain continues to be plagued by a substantial north-south division where cities in the North are typically low-wage, high-welfare economies with deficient educational outcomes, poor housing and a lack of jobs.

The division both geographically and by levels of prosperity is driven by the distribution of employment (including the location of certain industries), the levels of education and skills (which tend to follow the pattern of employment) and the patterns of welfare spending on behalf of government.

Between 2010 and 2014, real wages have fallen by 5 per cent in Britain. These declines have been spread more or less evenly over the types of city economies, although the high-wage, low-welfare cities have endured a six per cent real wage decline, compared to a four per cent decline elsewhere.

The Report estimates that in “2014, there were over 1 million more jobs in Britain than in 2010”, yet this strengthening demand for labour has not been accompanied by rising wage pressure.

The Report produced the following graph, which shows the change in employment (public and private) between 2010 and 2014 across the four types of cities noted above.

It is fairly obvious what has been going on. The attack on public employment by the current Conservative government has impacted more harshly on the low-wage economies in Britain. Further, the gains in private employment have been biased against the low-wage, high welfare cities.

The Report says that:

Around one in three net new private sector jobs created in high wage, low welfare cities has been in knowledge intensive business services (KIBS), which tend to be higher skilled, better paid jobs. In the low wage cities that have high welfare spending, this figure was one in four.

Interestingly, while the government has been attempting to impose a austerity narrative on the population in Britain, the Report shows that:

Spending on benefits in Britain has risen sharply in recent years. Between 2004/05 and 2010/11, real benefit spending increased by 24 per cent. But the geography of this is surprising – it was the cities with the lowest benefit spend at the start of this period, rather than the highest, which saw the largest increases.

One explanation for the buyers it increased well for spreading towards high-wage cities is the “larger increases in housing benefit spend” as a result of increasing lack of affordable housing in those cities.

There are two reasons for this phenomenon, one outlined in the report, and the other a frequent message from my blogs on Britain.

First, there are housing shortages not the least due to a lack of investment by the government in adequate public housing.

Second, the Government’s strategy is to reduce its own net spending and rely on increased household spending driven by credit growth to maintain growth, given the appalling performance of private investment spending over the last several years.

The focus of this household spending is increasingly in housing speculation, which is driving up prices and reducing the stock of affordable housing. The high-wage cities are also experiencing stronger population growth, which is exacerbating the problem.

Both these factors are the result of poorly constructed economic policy. Austerity has unintended consequences, which sometimes do not reveal themselves for some years and by then the political debate has moved on. This is particularly the case in areas of state housing where the lack of affordability creeps up until it becomes a major issue.

I would guess that nobody within the British government has done a sensible cost-benefit analysis of the investment outlays required to provide adequate state housing relative to the growth in housing benefit payments necessitated by the lack of such housing provision.

Austerity is mired in myopia.

The Centre for Cities Report argues that the difficult situation faced by the low-wage, high-welfare cities demonstrates that attempted cuts in welfare payments do not generate sensible outcomes.

The Report says:

They can attempt to bring down welfare spending directly through the spending decisions they take – the intention is to reduce total welfare spending by £12 billion by 2020 – but ultimately, the size of the welfare bill and the performance of the economy are interlinked.

The Report recommends:

1. Increased public investment in education and skill development.

2. Devolution of national funding to city authorities to allow them to meet the demands of their local populations.

The problem with the report is that it still emphasises the supply-side of the economy (for example, skill development) at the expense of stimulating the demand-side (that is, the growth in jobs).

In their rush to create justifications for reducing the footprint of government on the economy (and society), economists invented a number of new ‘approaches’ to economic development, unemployment and poverty which rely on an increased private sector presence.

New regionalism became popular as part of the so-called Third Way movement in Britain and Europe in the 1990s and beyond. Concepts such as social entrepreneurship and new regionalism emerged as the governments embraced the so-called ‘Third Way’ – neither free market (right) or government regulation (left) – as a way to resolve unemployment and regional disadvantage.

The Third Way movement included new ideas about space – that is, the global, national and local regional layers which still rely on individualistic and market-based constructs inherent in neo-liberalism.

Unemployent is still rendered as an individual problem – the ultimate ‘privatisation’.

New Regionalism proposes a series of ‘solutions’ or separate policy agendas that build on these individualistic explanations for unemployment and accepts the litany of myths used to justify the damaging macroeconomic policy stances that are now the norm in Europe and beyond.

By failing to ask the correct questions, these ‘solutions’ then appear, on first blush, to have (undeserved) plausibility.

New Regionalism emerged in the mid-1980s and was largely driven by case studies documenting economic successes in California (Silicon Valley) and some European regions (such as Baden Württemberg and Emilia Romagna).

The interlinked ideas that define this approach to ‘spac’ are consistent with the oft-heard claim from neo-liberals that the ‘national’ level of government is now getting in the way of development.

New Regionalism claims that ‘the region’ is now the “crucible” (to use the words of British regional scientist John Lovering) of economic development and should be the prime focus of economic policy.

In this way, the claim is that regions have now usurped the nation state as the “sites of successful economic organisation” (Scott and Storper’s words) because supply chains (in the post Fordist era) have become more specialised and flexible given the need to deal with uncertain demand conditions.

New Regionalism advocates argue that regional spaces provide the best platform to achieve flexible economies of scope that are required to adjust to increasingly unstable markets.

These socio-spatial processes involve localised knowledge creation, the rise of inter-firm (rather than intra-firm) relationships, collaborative value-adding chains, the development of highly supportive localised institutions and training of highly skilled labour.

These dynamics require firms to locate in clusters, often grouped by new associational typologies (for example, the use of creative talent or untraded flows of tacit knowledge) rather than by a traditional economic sector such as steel.

The new post-Fordist production modes emphasise new knowledge-intensive activities encouraging local participative systems. By achieving critical mass of local collaborators, a region could be dynamic and globally competitive.

Most these claims are based on induction of regional ‘successes’ without regard for the specific cultural or institutional contexts, and lack any coherent unifying theoretical underpinning.

It is highly disputable whether the empirical examples advanced to justify the claims made by New Regionalist proponents actually represent valid evidence at all.

For example, John Lovering (1999: 382) examined the claimed made in the 1990s about Wales and concluded:

If one factor has to be singled out as the key influence on Wales’ recent economic development … it is not foreign investment, the new-found flexibility of the labour force, the development of clusters and networks of interdependencies or any of the other features so often seized upon as an indication that the Welsh economy has successfully ‘globalized’. Something else has been at work which is more important than any of these, and it is a something which is almost entirely ignored in New Regionalist thought … It is the national (British) state.

[Reference: Lovering, J. (1999) ‘Theory led by policy: the inadequacies of the New Regionalism’, International Journal of Urban and Regional Research, 23, 379-395]

That is, a supportive macroeconomic policy framework – read deficit spending from the currency-issuing government.

While many criticisms can be levelled at New Regionalism, its major weakness is that perpetuates the notion that regions can entirely escape the vicissitudes of the national business cycle through reliance on a combination of foreign direct investment and export revenue.

It is a different spin (a variation) on the “business cycle is dead” notion and amounts to a denial that macroeconomic policy – that is, at the national level – can be an effective response to global trends that penetrate via the supply chains defined by trade patterns to the local region.

New Regionalism thus supports neo-liberal claims that fiscal and monetary policy is impotent and, in turn, it constructs mass unemployment as an individual phenomenon.

By ignoring the fact that mass unemployment demonstrates the unwillingness of the central government to spend sufficient amounts of currency given the non-government sector’s propensity to save, the neo-liberal position is left unchallenged and is actually reinforced and a new style of Says Law emerges with claims that post-Fordist economies need to focus on ‘supply-side architectures’.

This is the trap that the Centre for Cities Report falls into.

Modern Monetary Theory (MMT) provides us with a way of understanding that currency-issuing monopoly embedded in the national state is still powerful and can be used to advance domestic prosperity independent of the way in which global changes manifest.

That is not to say that these major changes in supply chains and changes in the pattern of energy demand etc are not major events which are forcing national economies to adapt. That clearly is the case and I have written about it at length.

But even with the pressure of these changes, the national state remains relevant.

The reason why mass unemployment occurs hasn’t changed as a result of globalisation. It still remains that if aggregate spending is not sufficient to purchase the total supply of goods and services, there will be an unplanned increase in inventories leading to a rise in unemployment and/or underemployment.

To avoid this situation, net government spending (the fiscal deficit) must fill the spending gap. So mass unemployment always reflects a choice made by government to provide lower net government spending and accept higher unemployment.

When involuntary unemployment exists, nominal (or real) wage cuts cannot ‘clear’ the labour market unless they somehow eliminate the desire of the private sector to net save, and thereby increase its overall spending in the economy. That is, of-course, unlikely in the extreme. The opposite is highly probably.

Furthermore, individual search endeavour or improving skills cannot eliminate the macroeconomic constraint imposed on the labour market. In other words, the unemployed cannot search for jobs that are not there.

Extending the model to include the foreign sector makes no fundamental difference to the analysis, because private domestic and foreign sectors can be consolidated into the non-government sector without loss of analytical insight.

Only government deficit spending can accommodate any net desire to save overall by the non-government sector and eliminate unemployment.

In contradiction to mainstream rhetoric, the systematic pursuit of government fiscal surpluses must be manifested as systematic declines in non-government sector savings.

Mass unemployment thus arises because the fiscal deficit is too small, whatever global forces are operating to shift the pattern of production between nations.

The non-government sector depends on government to provide funds for both its desired net savings, and for payment of taxes. To acquire the currency it needs, the private sector offers real goods and services for sale.

Unemployment therefore occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save. In general, given that the non-government sector desires to hold currency, deficit spending will be the norm if high levels of employment are to be maintained.

As long as the national government can enforce tax obligations in the currency it issues then these conclusions will hold. Globalisation might shift tax bases off-shore if government regulation permits. But ultimately, military invasions aside, the national government maintains the capacity to determine the regulative and policy environment that global businesses have to operate within.

Global businesses do not sell at some abstract global level – they sell to you and I in our local shops (predominantly – that is, notwithstanding the rising proportion of on-line shopping). Even as on-line shopping becomes more commonplace, the goods and services will still have to cross national borders.

Irrespective of globalisation, there are no financial constraints on a national, currency-issuing government spending.

It still remains, no matter how integrated economies are globally, that the currency-issuing government’s spending provides the non-government sector with the currency they need to discharge their tax liabilities and to net save.

This spending precedes the tax payments and logically cannot be financed by the same. If the private sector desires to net save then total government spending must exceed taxation; therefore, there must be a fiscal deficit.

Fiscal surpluses thus squeeze the desires of the private sector to hold financial assets, net save and pay taxes. Ultimately, they must lead to mass unemployment due to insufficient spending.

And then we arrive in Flint, Michigan.

Distressed cities – centres of the shifting production frontiers of capitalism, the de-industrialisation and, more latterly, the short-sighted belligerence of conservative public officials intent on driving the aspirations of citizens throughout the urban space into despair, as long as it is not themselves or their families and friends.

When we think of distressed cities we have images of abandoned buildings and big factories closing.

We should also overlay the physical aspects of the space with understandings of institutionalised racism, deliberate poverty creation by public officials and the hollowing out

Flint, Michigan was the homeof the Buick Motor Car company, which moved there in 1903. It was soon taken over by General Motors, which began production there in 1908.

Its population peaked around 1960 at 196,940 persons (according to the US Decennial Census). A large proportion of the population worked at GM. In 1978, the GM factory employed around 80,000 people in Flint.

Flint might be cast in the role of creating the American middle class with stable, well-paid full-time employment and the material prosperity that went with that.

And then the shocks came. First, it was the industrial shifts which devastated Michigan as a result of its concentration of motor vehicle production employment.

In the 1980s and 1990s, GM abandoned Flint. By 2006, GM employment only 8,000 people in Flint. By December 2010, the last of the employees were laid off at the old Buick site.

In 2013, the city was named the “most dangerous city in America” (Source)

Flint, Michigan shows once again the myopia of fiscal austerity and its problems go beyond those introduced by the relocation of GM.

It is true that its industrial base is largely gone as global supply chains have shifted motor vehicle production, assembly operations.

Its population base has also shrunk quite dramatically.

The following graph shows the population of Flint since the decennial census in 1940 and annual observations after 2000. The impacts of the deindustrialisation is clear but then some stability are merged in the early 2000’s as the worst of the industrial wipeout was absorbed.

In fact employment started growing again in the year 2000 and was relatively stable until 2007. The unemployment rate which was 12 per cent in 1992 at the height of the factory closures fell to 5 per cent in the year 2000, partly due to shrinkage in the labour force but also due to growth in employment.

In 2009, Flint’s unemployment rate was 15 per cent having nearly doubled in two years. By 2010, Flint’s unemployment rate had risen to 23.2 per cent.

The population decline exhilarated in 2009 as a result of the GFC and the subsequent policy austerity that the Michigan State government imposed.

The following graph shows the population change in Flint between 2002 and 2015. The population in 2014 was 99,166 and some forecasts are suggesting that by 2040 the population will be down to 65,000. The decline clearly is in two stages: (a) the impact of the deindustrialisation; and (b) the impact of the policy austerity.

The Governor of the State of Michigan has been engaged in a fiscal war on the citizens of his State and of Flint, in particular.

The Michigan Muncipal League, which is “dedicated to making Michigan’s communities better”, has documented the Revenue Sharing Heist in Michigan under the current Governor.

Essentially:

… a record number of local governments that find themselves in the midst of a financial crisis … [as a] … esult of a dramatic disinvestment by the state in local government.

Certainly, lower property values have impacted on local government revenue in Flint.

But the “dramatic reduction in state revenue sharing”, which is “paid from sales tax revenues … have been a remarkably stable source of income” for States. In “recent years”, this source of revenue for states has experienced significant growth”.

What has been going on in Michigan is that between 2003-2013, “sales tax revenue went from $6.6 billion to $7.72 billion”. However:

… statutory revenue sharing declined from over $900 million annually to around $250 million. The state is now in an enviable position-revenues that exceeded expectations. It is posting large surpluses but has failed to take steps to restore local funding.

The Michigan Municipal League Report shows that while:

… the state is trumpeting its sound fiscal management and admonishing local governments for not being as efficient. What the state fails to mention is that it balanced its own budget on the backs of local communities … What is most shocking is the difference those revenue sharing dollars would have made at the local level … Flint will have lost $54.9 million dollars by the end of 2014. The deficit in its 2012 financial statements is $19.2 million. Flint could eliminate the deficit and pay off all $30 million of bonded indebtedness and still have over $5 million in surplus.

The revenue-sharing formula was altered by the Governor Snyder in 2010 and he implemented a sort of deal the Troika in Europe would be proud of. Cities get money if they implement “free market reforms” to reduce the public intervention and provision.

The cities were forced to cut health care staff, educational expenses, police etc.

One of the consequences of the harsh fiscal cutbacks in Flint has been the disastrous water crisis.

You will find a good analysis of the water crisis in Flint in this article (January 22, 2016) – Flint’s Water Crisis Is No Accident. It’s the Result of Years of Devastating Free-Market Reforms.

This reference provides a – TIMELINE: Here’s how the Flint water crisis unfolded .

Basically, Flint enjoyed treated water that it bought from Detroit since 1967. Then, under receivership, the city:

… in a 2014 effort to save money, emergency manager Darnell Earley (now the head of Detroit’s school system), switched Flint’s water supply to the Flint River. The expected savings amounted to roughly $2 million per year … because the city was under emergency financial management, the elected mayor and city council held no official power to change …

And guess what?

Studies of the quality of the local water “pointed to widespread lead contamination”, which the citizens had complained about.

We learn that “Increasingly, these events suggested a cover-up at the highest levels of the state government, where officials appear to have known of lead contamination long before Edwards made his findings publics.”

The Michigan state is essentially poisoning the citizens of Flint in the name of ‘free market’ reforms.

The other obvious consequence of the fiscal cuts has been in the crime rate.

The US Federal Bureau of Investigation produces excellent annual – Crime Statistics for the US by City – which I have used here.

The following graph shows thenumber of police officers per 100,000 persons in Flint since 2001. The decline in 2009 was 22.6 per cent, which was followed by a further 39.5 per cent cut in 2010.

As the number of police were cut, the crime rate increased sharply. Flint was classified as the most violent city in AMerica in 2010 using FBI statistics.

I will write more about the urban aspects of austerity in future blogs.

I discussed the work of French writer Viviane Forrester in this blog – L’horreur economique.

In her 1996 book called L’horreur Economique, Forrester proposes that governments are failing to generate enough employment but at the same time they are promoting a backlash against those who are jobless.

She wrote that:

The panaceas of work-experience and re-training often do nothing more than reinforce the fact that there is no real role for the unemployed. They come to realize that there is something worse than being exploited, and that is not even to be exploitable…

The Book ventures into the notion that governments (elected by us) have made the unemployment dispensable to ‘capitalist production and profit’ and have instead been content to keep them alive. But soon, why would it not be implausible to declare this growing group of disadvantaged citizens totally irrelevant.

So when the unemployed also become aged – what then?

Conclusion

What about Flint, Michigan? What purpose does it serve the capitalist machine now that car manufacturing has gone?

We have allowed the Flint, Michigan’s to decline and become a human catastrophe due to a lack of imagination and a passive acceptance of faux financial arguments about the capacity of our governments.

We learn to recite that “the government cannot afford to create jobs for all the unemployed” when the opposite is the truth.

We are conditioned to believe that there is nothing that these workforces can do that is productive, which is a lie, but diverts the debate into a series of non-sequiturs.

If the unemployed are ultimately dispensable for capitalist production (and that is what persistent long-term unemployment suggests); and they cannot do anything productive if we employ them in the public sector (that is the overwhelming view of the deficit terrorists); and they are a nuisance to manage (you know all the arguments – income support corrupts etc) – then ultimately society might start asking “what is the point of the unemployed?”.

Then different solutions might be advanced. Don’t think this is off the track … after all only 80 odd years ago Germany decided that a definable cohort was dispensable and could be exterminated.

L’horreur Economique is one of those books that you just go back to from time to time to remind yourself of the message – just in case you have moved on to the vilification of the aged and left the unemployed behind.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.