Building the economy of the centre-left

A recent New Political Economy Network and Compass event was charged with developing a centre-left, Labour alternative to the economic plan laid out by the Coalition in the June budget and recent Comprehensive Spending Review.

What emerged from the meeting (and NPEN’s ebook) was a clear dividing line. The Coalition is the party of deficit reduction and a Labour should be a party of economic growth: Tory cuts v Labour growth.

Labour’s economic strategy – rooted in the common-sense orthodoxy of Keynes – is that this growth can only be delivered by investment and consumption, with the emphasis on the former.

While private finance has allowed a fragile consumption-led economy to grow through expanding personal debt, it has failed to deliver the investment in non-financial industry that can create wealth and jobs. So the role of the centre-left is to articulate a social narrative and according political strategy that can deliver investment and more stable consumption.

The solution – outlined in both the meeting and ebook – is for the state to play a central role in fostering both. Why? Financial markets find it more lucrative to take short-term positions in financial products than to take long-term positions in industry. There is a market failure. The state – in the spirit of Keynes – should step in and socialise finance and instead – as part of a wider industrial strategy – pick winning industries to nurture with investment and protection to bring the economic growth that will generate wealth and jobs.

We see it all over the world – Germany, South Korea, Thailand etc – and the same strategy delivered Britain its golden period of post-war growth. It is common-sense social democratic economics. What’s the problem? Selling it.

Progressive voices spend all their time trying to mobilise the political power that can change the ravages of the market. This was the strategy laid out by the Compass and NPEN event, but rarely happens. The danger is if you gain political power – as New Labour did – without the economic power, you can’t deliver fundamental reform. It’s no coincidence that the era of strong unions, mobilising their power in the market, was the era of genuinely social democratic politics but I feel like the left sees it the other way round.

With this in mind I think the state v market dichotomy, outlined routinely by left and right needs considering. It’s assumed that the state – by definition of being democratically elected – acts socially while the market – supposedly a forum of individuals – acts privately. Yet the Labour government’s bailed-out banks failed to act socially, while the market’s private banks acted as a block that was able to use taxpayers money to finance its industry-wide enrichment.

The dichotomy is a hangover from the great political economist Karl Polanyi who insisted that when markets were ‘disembedded’ (dergulated) from society, crises would follow which would demand their immediate re-embedding (via the state). Free markets v the state. The problem is that you lose the fact that markets are always embedded in society, a fact the term ‘free market’ obscures.

The free housing market is embedded in the institutions that make it and is shaped to those who can rally power accordingly. Banks, existing owners, the construction industry etc work to create a speculative market that enriches themselves more than anyone else. Yet if people can mobilise themselves differently to shape a market in their image, it can deliver social outcomes. The labour market, for instance, as a meeting of unions and employers delivered social ends.

A centre-left political economy has to address this and not allow the market to become a preserve of the right. Creating market mechanisms that increase the economic leverage of the majority is essential. In our economy, powered as it is by finance and consumption, finance is the obvious place to start. Savings are always socially organised and easier to mobilise in union than disparate 21st century employees.

*Warning, this now becomes a tad (more) speculative*.

A London social housing bank, for example, could leverage savers’ cash to fund a building programme of affordable housing. The arrangements of renting would be that tenants have to save (in addition to pay rent to) the bank which grows accordingly and is better placed to fund a new round of leveraging and building. If big enough it could then be a better position to demand social terms from the contractors it employs, like a unionised workforce or certain environmental standards.

Which relates to the last point of the NPEN meeting and ebook. There was widespread agreement that finance – again in the spirit of Keynes – had to be reined in. The asset bubbles which have underpinned the last 15 years are depicted as a type of false consciousness (reckless finance, exuberant etc). At its peak in 2007 the total (nominal, and fairly impressionist) value of global finance was estimated at $194trillion – 343% of global GDP. Existing theory demands we think of this swollen figure as a type of ‘mistake’. Finance has got carried away. But instead of busying ourselves with what our theory says should be the case why don’t we look at what is the case? Yes finance is leveraged on the productive economy but when that relationship has loosened to the tune of 343%, perhaps our theory should loosen with it.

Developing social methods of working the dynamism of finance – especially when the productive economy has been in steady decline since the 1970s in the UK – is essential to any project aimed at bringing the economic power to the left which can then underpin a political transformation.

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A savings club – as you spend!

To revive an old theme – so old, in fact, it inspired this very damp place we could home – I was thinking about our savings club/social enterprise.

All because I wanted a fancy haircut. That’s all. Popular culture has told me that I need to look smart to get on in life, so being the diligent go-getter I am, I bought a haircut. To do so I went through MyCityDeal.

I reckon it might hold the clue of how to make a low-income savings union. It works in partnership with a load of retailers in the UK and offers discounts on their services (good for restaurants, good for haircuts, slightly less edifying when offering cosmetic surgery) if you buy through them. So I paid the £30 to MyCityDeal, who then gives a voucher which is taken to the haircut shop.

I presume MyCityDeal take a cut (guffaw) and the retailer the remaining. All of which means that they have a big bank of cash made up from all the people who buy through them.

So, if we were to adapt this slightly, firstly by doing away with cosmetic surgery and then by partnering with a wide spectrum of retailers – from low-income stuff to organic posh crap – and make everyone who signs up (like I had to for MyCityDeal) a partner, we could use the load of payments as a savings bank. Money could be invested in social bonds and returns could be given back to our parters. For low income groups this would be particularly useful because it offers a way of building up a bulk of savings.

Happy?

Give money straight to the poor?

G’day everyone,

Are aid agencies the best way to distribute aid or should we just give money directly to the poor so they can do what they like with it?

Aditya Chakrabortty thinks so, and he’s written about it in the Guardian today:

http://www.guardian.co.uk/commentisfree/2010/jun/29/revolution-global-aid-poor

Logic is that since a good deal of aid is spent on trying to administer aid without it falling into the wrong hands or being wasted, maybe it would be better to give it directly to the people and see what happens. Perhaps the cost of administering is higher than the value of administration.

Lots of positive feeling on the CIF page where it posted but there are some pretty clear problems in my book. Firstly, if suddenly everyone has twice as much disposable local currency isn’t that just inflation? I suppose if you means tested it, it would be redistributive by reducing the value of everyone’s money. I don’t really think it is as simple as this but there would certainly be an effect.

Secondly, practicalities. I’m sure giving out money is harder than it sounds.

Thirdly, I was reading Paul Collier’s the bottom billion and he is all about the large scale infrastructure projects that help countries gear up to an export economy. I’m not saying I agree with Collier but he does raise some interesting points.  He also examines ‘dutch disease’ where mineral wealth or aid pushes up wages and therefore makes other industries internationally uncompetitive. I imagine he would have a problem with the approach described in the article.

Giving out money certainly would reduce some costs of bureaucracy but would this be enough to balance the negative effects on an economy? What does anyone else think?

Rich

The Big Society Post Office bank

I don’t know what it says about the state of things that, as the election draws closer, thebathhouse has become quieter. I feel overwhelmed by rhetoric and wrangling over NI and I sense that a lot of interesting policies are muffled under the force of loud ElectionLive!-type of reporting.

It’s pretty old news already but the two ‘main’ parties have each proposed something interesting on progressive banking. I’ve only looked at this a bit, so if anyone knows better please correct me.

Cameron’s Big Society Bank wants to use the unclaimed money from dormant bank accounts as a base for attracting ‘ethical investment’ bonds and the likes, which will then lend money to social enterprise bodies, who will then invest in social enterprises. It’s an investment bank rather than a bank for lending to people. The idea of using dormant money already exists – at the moment it goes to the national lottery fund, which then lends to charitable organisations to lend to charities. So that’s hardly new.

As for the principle removing the state from care, there must be a worry that relying totally on profit making charities (social enterprises) will affect what type of care is delivered and how. It seems like a useful way of promising care without promising half of the investment needed. I want to know what Will thinks about this, since he’s the one with a street-level view.

Brown’s Post Office Bank is so nearly brilliant, but then, being New Labour it can’t help but slip up in a crucial way. It’s less an investment bank and more a high-street lender. The focus is on lending at normal rates to poor people who are normally charged extortionate rates. This is heady news indeed and could be a step towards reform that will break the massive power of elite private finance firms, who act as cartels when setting distorted high interest rates to poor people. Yet rather than keep this as a public service, it is a join venture with the Bank of Ireland (who were given the contract to provide financial services through the post office a while ago).

So the profits made from expanding finance to the majority will be channelled up into the hands of a tiny elite, all of this using public money. The Post Office Bank will invest in credit unions, but why not make the Post Office Bank a credit union instead. That way the profits could go back to members and would have the majority wielding the financial power of a big bank.

Ever thought about piracy as a career?

Just read an article about the the organisational structure of Somali piracy. Article is here but I’ve reproduced an extract from a UN report that the article drew attention to. I don’t really have point I’m trying to make, but these sorts of things always make me think about the parallels between legal and illegal business. Even with somali prirates someone is having to make sure all the invoices get paid and trying to identify and mitigate risks to the business.

For the avoidance of doubt, I’m not condoning piracy.

Extract from UN report (http://www.un.org/Docs/journal/asp/ws.asp?m=S/2010/91 )

“A basic piracy operation requires a minimum eight to twelve militia prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat. The costs of the operation are usually borne by investors, some of whom may also be pirates.

To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

At least 12 other volunteers are recruited as militiamen to provide protection on land of a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

When ransom is received, fixed costs are the first to be paid out. These are typically:

• Reimbursement of supplier(s)

• Financier(s) and/or investor(s): 30% of the ransom

• Local elders: 5 to 10 %of the ransom (anchoring rights)

• Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum — the profit — is divided between class-A shareholders.”

Credit where it’s due

You would be hard pressed to find anyone who thought economics and politics were not related, yet too often we don’t discuss them as such. Instead ‘the economy’ is referred to as a separate entity that we are all subjected to.

This is apparent in the way the Credit CrunchTM is debated. By constantly waiting for the ‘storm clouds to blow over’ or praying for a ‘V-shaped recovery’, we end up missing out how people go about shaping the recession as they survive, drown and profit from the situation.

It has emerged that over a million Britons are using credit card loans to pay for rent and mortgages. It is a vulgar development. Banks were bailed out with taxpayers money, and interest-rates were reduced to a whisker over zero by the Bank of England. This gave banks a favourable environment to lend cheaply in and, in theory, start a consumption-fuelled recovery. Instead they have used the money to swell their balance sheets and, as is shown here, have profited from the lower interest-rates by deliberately failing to pass on the decrease to their customers.

Now these same banks can use more lucrative credit card loans to squeeze poor people further and, when people are unable to repay their loans, use the harsher conditions of credit card lending to ramp-up charges and repayment rates. Alongside this, there are the significant penalty fees that banks command ($20.5 billion in the US, I can’t find UK data) through credit cards.

It is a political and economic (political economy, you could say) scandal that it can happen and shows, once again, how fruitful stronger unions in the financial sector would be for the majority of savers and borrowers.

The myth of budget deficit

The budget deficit has become the new swine flu for the political classes. Parties are mobilising around the deficit and, in the case of the Tories and New Labour, almost defining themselves by their ideas for the deficit.

It is, of course, a hyped-up lot of nonsense,  used by different interest groups to pursue their own ends. For many on the right, the deficit is a ‘massive spending binge’ that ushered in financial ruin. Accordingly, they demand money be withdrawn from front-line services and governments privatise public resources. The picture below is revealing, taken from Rich’s excellent Guardian datablog link (April 2009).

The UK deficit is well below France and Germany, who, especially the latter, have fared okay through the crisis.

So when Mandelson chops up up public services (like universities) in the name of tackling the ‘deficit problem’, you know he’s not being entirely truthful.

As an interesting aside, UK personal debt is up to £1.5 trillion (100% of UK GDP). Given stagnant real wages for most of the population and ballooning house prices, this is hardly surprising is it? Yet I haven’t heard many parties asking for higher wages and public housing.