The tax extreme wealth to increase funds for government spending narrative just reinforces neoliberal framing
Despite the rabble on the Right of politics that marches around driven by conspiracies about…
I get a lot of E-mails that accuse me of being politically naive. The accusations were rekindled by yesterday’s blog – British labour lost in a neo-liberal haze. I imagine if I wrote a blog where I outlined support for Marine Le Pen in the context of a two-way fight against the worse-of-the-worst neo-liberals Emmanuel Macron the accusations would turn uglier even. My support for Brexit was met with similar hostility from a range of (self-styled) ‘progressives’ as being naive and offensive. Why, Brexit was a conservative plot wasn’t it? How could I have missed that? Progressives are now advocating votes for Macron even though they know he is an archetype neo-liberal – the anathema of what they believe. And they tell me every day in these E-mail tirades and other blogs that I should give people like Jeremy Corbyn some slack because he knows better than me that to advocate a major departure from the neo-liberal macroeconomic narrative would be political suicide. So why don’t I just shut up and recognise that politics is beyond my grasp and I should desist. Basically that is the message I get regularly. Well, I am sorry to say, such views completely misunderstand the role of an academic and the way in which resistance is constructed.
Yanis Varoufakis’s article (May 2, 2017) – Why we support Macron in the second round – which was reprinted in the French newspaper Le Monde (May 1, 2017), is a classic example of the tension that exists on the Left side of politics.
He we have the argument – we will support our enemy (who advocates “dead-end, already-failed neoliberalism”) because his (Macron’s) enemy (Marine Le Pen) is worse.
I note that Jean-Luc Mélenchon (who gained 19.6 per cent of the vote in the first round) has taken a different stance – urging supporters not to vote for Macron. He didn’t advocate a vote for Le Pen, rather a protest blank ballot vote. 36.1 per cent of his supporters surveyed said they would put in a blank vote while 29.1 per cent said they would abstain altogether. 34.8 per cent said they would vote for Macron.
The Left is becoming locked into a sort of confused #SansMoiLe7Mai movement – lost in other words.
As a contrary view see (April 29, 2017), Is There a Case for Le Pen? and the follow up (May 3, 2017), The European Crisis, where the author considers that Le Pen mimics the nationalist Charles de Gaulle rather than her racist father Jean-Marie or, earlier, the Vichy Right leader Marshal Pétain.
Remember it was de Gaulle who held the French out of entering closer monetary ties with Germany.
The New York Times article notes that while “perhaps de Gaulle’s style of nationalism is too chauvinist and mystical for our era”:
… our era’s “enlightened” governance has produced an out-of-touch eurozone elite lashed to a destructive common currency, and an experiment in mass immigration that has changed French society faster than integration can do its necessary work.
And Macron is Brussels neo-liberalism elitism personified despite his noises to the contrary. It will be a harsh deregulative agenda with banksters eating at the table and the rest left behind. More of the same.
He was the person who drove the worst neo-liberal aspects of François Hollande’s government.
Workers will face reduced wage outcomes and increased job insecurity and the constant threat of unemployment.
The French situation is somewhat different to politics in say Britain. In a cabinet-based Westminster system, the Prime Minister is a creature of the Parliament. In the French case, the President can be derailed by the National Assembly, which some think means it is okay to vote for Macron as long as the Left win control of the Assembly.
But the same argument could be used for Le Pen.
For progressives, what changes are the most difficult to undo?
Le Pen is accused of being a fascist although an understanding of the term would suggest she is something different, perhaps no less objectionable, but not a black shirt Nazi.
And it is clear that the Macron-style approach is hardly a harbinger of a democratic revival. He supports the Eurozone elite who have trampled democratic intent. Read Varoufakis’s latest on Brexit – The six Brexit traps that will defeat Theresa May.
So which candidate exhibits ‘fascist’ tendencies?
The point is that the situation has become a battle of two evils because the Left has lost its way for exactly the same reasons the constant flow of E-mails accuse me of being naive.
The Left has been seduced by power and the objective is to win (and, ‘then we will act differently’) rather than condition the political milieu through education and principle.
To some extent this dilemma makes me think back to Britain in the 1920s.
The claim that advocating a position that is not well understood or currently politically acceptable, which then justifies Jeremy Corbyn spouting unmitigated neo-liberal macroeconomic nonsense, resonates with what was going on in that period.
Apparently, I am naive or do not have political nous because I advocate positions that the ‘electorate’ are currently unwilling to accept and which guarantee the neo-liberals will remain in office.
Well, there are two points to this.
First, as I have said often over the course of my career, which some have described as being iconoclastic (which I take as a complement even if it hasn’t been meant that way often), my role as an academic is not to provide a marketable package that some aspiring politician can run with and gain electoral success.
If I was interested in that role, I would not sit for hours of my life with my head in books and documents and barely pass words with anyone. I also would have taken a different educational route.
It is often misunderstood what the role of an academic is. I see the role as one where ideas are generated. Sometimes these ideas are abstract, while other times they will have a closer mapping with reality.
The role is to examine the veracity of these ideas – to allow them to transition from conjecture to knowledge. Knowledge has to have some empirical traction – that is, sit with the real world, although I am fully aware of the difficulties and dead-ends that arise in debating what ‘sit’ might mean and how we might determine it.
But when an economist says that governments that issue their own currency have to borrow to spend more than they receive in taxes (as if it is a cardinal law rather than a statement of a particular ideological construction of institutional restrictions) we can safely conclude that is ‘fake’ knowledge. A lie in other words.
So my role is to get things ‘right’ and to present an articulate body of ideas that stand up to empirical scrutiny. The end product is knowledge. Not strategic political information. Knowledge.
But how that knowledge is used is not something that is my professional responsibility (as opposed from my concern as an individual).
It is for other professionals to take that knowledge and craft it in ways that construct a political dialogue. So to suggest that it is politically naive for me to point out that the British Labour Party is lost in a neo-liberal haze and to outline why and what the alternative language and narrative could be is to miss the point altogether as to what my role actually is as an academic thinker.
I am not a political advisor. I am not a strategist. I am not a pollster. I am not a journalist. I am not a marketing advisor. I don’t care what people wear, how they comb their hair, or whether they whiten their teeth or not!
Second, knowledge is, in one sense, for posterity. It predates political change – it has to in the most obvious logical way. Think back to Britain in the 1920s, particularly the period 1924 to 1931 when the Gold Standard was finally scrapped and the ‘Treasury View’ ruled.
A definitive book that is worth reading is that by G.C. Peden (200) The Treasury and British Public Policy, 1906-1959, Oxford University Press, Oxford.
I have also written about this period previously – We can conquer unemployment – which discusses the ‘Treasury View’ in some detail.
Fiscal policy (government spending and taxation) became more significant in the period after the First World War, which had elevated government spending for military purposes but also served to provide improved social infrastructure and social services.
In 1914, for example, total managed expenditure of the public sector was £434 million (20 per cent of GDP). In 1915, this jumped to £1,173 million (44 per cent of GDP). While spending was cut after the war’s end, by 1925, it remained at £1,096 million (28 per cent of GDP).
The fiscal deficit jumped from 5 per cent of GDP in 1914 to 30 percent by 1916. With unemployment high in the early 1920s the deficit remained high (around 7 per cent of GDP) and the resistance to using fiscal deficits to increase growth and reduce unemployment was strong in Britain in the 1920s.
The dominant view was that ‘budgets’ had to be balanced such that spending could only be backed by taxation.
But with unemployment stuck at persistently high levels, the Lloyd George government established the ‘Cabinet Committee on Unemployment’, which proposed increasing discretionary fiscal deficits to generate spending growth and reduce unemployment.
The Treasury resisted the proposals and the ‘Treasury View’ became one where unemployment was considered to be caused by higher than profitable wage levels rather than a deficiency of aggregate spending.
This view was dominant. The Government of the day established the infamous ‘Committee on National Expenditure’ which was chaired by Sir Eric Geddes a British businessman and Conservative politician.
Geddes became infamous himself, not only for the so-called ‘Geddes Axe’ (the expenditure cuts resulting from his Committee Report) but also because of his vehemence against the Germans that influenced the outcomes of the Versailles process
He was firmly in the “Make Germany Pay” camp and claimed while electioneering in 1918, declared that “Germany is going to pay. We will get everything you can squeeze out of a lemon, and a bit more. The Germans should hand over everything they own.”
A very good account of this Committee is found in McDonald, A. (1989) ‘The Geddes Committee and the Formulation of Public Expenditure Policy, 1921-1922’, The Historical Journal, 32(3), September, 643-674.
The result was that British government spending fell dramatically in 1921 and the economic situation worsened. The government’s fiscal deficit disappeared but so did employment growth.
The ‘Treasury View’ was articulated by one of its employees, economist Ralph Hawtrey. Hawtrey’s views were conservative and not out of kilter with what goes for mainstream (neo-liberal) macroeconomics these days.
In his 1913 book, he argued gainst the view that government spending was beneficial (p.260):
The underlying principle of this proposal is that the Government should add to the effective demand for labour at the time when the effective demand of private traders falls off. But the writers of the Minority Report appear to have overlooked the fact that the Government by the very fact of borrowing for this expenditure is withdrawing from the investment market savings
which would otherwise be applied to the creation of capital.
In modern language – the ‘crowding out’ claim.
[Reference: Hawtrey, R.G. (1913) Good and Bad Trade: An Inquiry into the Causes of Trade Fluctuations, Constable and Company Ltd, London. LINK]
These views were embodied in a major Treasury statement published in 1925, which advocated sound finance and balanced budgets.
In his 1925 paper, ‘Public Expenditure and the Demand for Labour’, Hawtrey clearly outlines the ‘Treasury View’ that the existence of unemployment (p.40) :
… means that at the existing level of prices and wages the consumers’ outlay is sufficient only to employ a part of the productive resources of the country.
[Reference: R.G. Hawtrey, ‘Public Expenditure and the Demand for Labour’ (1925) 13 Economica: 38-48 JSTOR Link.]
The problem is excessive real wage levels impeding profitability.
Should the government engage in public works expenditure, all that would happen would be the “money borrowed … [by the government] … must come out of the consumer’s income … The effect of this diversion of a part of the consumers’ outlay into the hands of the Government is to diminish by that amount the effective demand for products”.
Why? Because investment is lower as a result of the Government taking the savings of the consumers.
In modern language – loanable funds theory and crowding out. The belief that there was a finite level of savings independent of the national income was dominant before Keynes’ General Theory in 1936 was published.
The ‘Treasury View’ rejected the idea that public works programs were beneficial – they apparently provided the state with no capacity (revenue) to pay for the outlays.
For the rest of the 1920s, the full employment that had reigned during the pre-war period never returned.
My blog (cited above) – We can conquer unemployment – examined the 1929 election in detail.
As the Great Depression started to bite, and tax revenue fell, the ‘Treasury View’ was that spending had to be cut to keep the fiscal balance at zero.
And so it went. Public spending fell in 1932 by 2.7 per cent, and then by a staggering 5.6 per cent in 1933. GDP slumped 7.2 per cent in 1931 and the unemployment rate exceeded 20 per cent (doubling almost in the course of the year).
The ‘Treasury View’ was still dominant. When the so-called National Government (a coalition between the Conservatives and the Liberals after the Labour Party withdrew because they refused to agree to mass austerity) was formed amidst the crisis of 1931, the response was to enforce the ‘Treasury View’.
Tax hikes, spending cuts were made and the crisis deepened.
The crisis spread to the sterling and in September 1931, the Bank of England were in trouble with a shortfall of foreign exchange (trying to defend the value of the pound).
At that point, Britain went off the Gold Standard – forever.
But the narrative was almost identical to what we read and hear on a daily basis today.
Excessive deficits, excessive support for the unemployed, unemployed should search harder, public spending is wasteful, it takes good money away from the private sector and all the rest of it.
History tells us that Britain was in crisis throughout the 1930s, even after Keynes published his 1936 General Theory. The downturn in 1937 and 1938 was particularly severe and the ‘Treasury View’ remained a dominant feature of policy.
It was not until Britain went to war and was forced to increase spending and fiscal deficits (including a substantial rise in borrowing) that growth was restored and the experience of the next several years conditioned the political debate significantly with respect to macroeconomics.
By the end of the War, the ‘Treasury View’ had given way to the ideas of Keynes and there was a wider political acceptance of the use of deficits to stimulate growth.
The point is that Keynes and others were introducing ideas in the 1920s and throughout the 1930s that had little political support and were totally at odds with the prevailing ‘Treasury View’.
In his 1926 paper, The End of Laissez-Faire – Keynes had argued strongly against the view that the ‘free-market’ capitalism would deliver superior outcomes.
In that paper, he said (p.14):
I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution [‘the state’]
In his work as a member of the Committee on Finance and Industry 1930 (aka ‘The Macmillan Commitee’) he was strident in his criticism of the ‘Treasury View’ proponents such as Arthur Pigou, D.H. Robertson and Lionel Robbins.
Austrian school economist Friedrich von Hayek wrote in his 1944 book The Road to Serfdom that the Macmillan Report “served as a venue in which J. M. Keynes challenged the ‘Treasury View'” because the foundations of the Post War Full Employment framework (nationalisation, bank regulation, protection, use of deficits) were laid.
But it was not until the Second World War finished that these interventions really became embedded in peace-time policy.
So were Keynes and his associates politically ‘naive’?
Were they without political nous?
Should they have just gone along with the ‘Treasury View’ and argued around the edges – the modern ‘austerity lite’ approach of the British Labour Party and other Left parties?
Were they ignorant raising a coherent theoretical body of work in contradiction to the mainstream of the day?
You can answer the questions yourselves.
Quite clearly, without that resistance during the 1920s and 30s to the ‘Treasury View’ and the production of new knowledge which supplanted the ‘fake’ knowledge embodied in the dominant policy ideas of the day there would have been no dynamic for political change.
That change came as a result of the demonstration during the Second World War that the ‘Treasury View’ was erroneous. Its prediction capacity was about zero.
Its application made things worse.
But it took a long time for that to become obvious and tractable to the political classes even though Keynes and others were highly critical of the political classes at a time when their ideas had no political currency.
That is a lesson for all of us.
Academics have a role to play for posterity and to produce a body of work that can be drawn on during the period of resistance but also once the tide has turned in the political sphere.
Without an on-going Modern Monetary Theory (MMT) critique the options available for activists to oppose neo-liberalism are limited and will not be game changing.
That is why I write (other than because I like to).
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.