Economic policy after the pandemic

I’m racing to get a draft manuscript of The Economic Consequences of the Pandemic, not helped by the fact that Biden keeps doing pretty much what I think he should do. More of the fold. Comments greatly appreciated, as always.

Like Keynes’ Londoner in the aftermath of the Great War, we are emerging from the pandemic into a world where the certitudes of the past have crumbled into dust. Balanced budgets, free trade, credit ratings, financial markets, above all free markets; these ideas have ceased to command any belief.

The failure of these ideas evident since the GFC and, in many respects, since the beginning of the 21st century. It have sunk in gradually as the neoliberal political class formed in the 1980s and 1990s has passed from the scene, replaced by younger people whose experience of financialised capitalism is almost entirely negative.

But it is only with the shock of the pandemic that the thinking of the past has completely lost its grip on the great majority. The absence of any serious resistance to Biden’s stimulus and infrastructure package reflects the fact that hardly anyone seriously believes the old verities of balanced budgets and free markets

Yet the fundamental realities of economic life remain unchanged. We can collectively consume or invest what we produce, nothing more and nothing less. And our productive capacity is constrained by resources and technology, as it always has been. One way or another we need to decide what goods and services will be produced and who will get to consume them.

What has changed is that the economic system we have used to allocate resources and investments for the last forty years is no longer fit for purpose. Financial markets are not repositories of wisdom and market discipline; rather they are, in Keynes words, gambling houses where ‘enterprise becomes the bubble on a whirlpool of speculation.’ And as Keynes said ‘When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.’.

Unsurprisingly, the casino economy has delivered huge gains for a small number of winners, and losses for everyone else, certainly when compared to the broadly shared gains of the mid 20th century. But contrary to the claims of trickle-down advocates, these massive rewards have not generated increases in productivity. Profits are obtained, not by making a better product at lower cost, but by securing and holding a monopoly position.

How should we respond? The answer must be a combination of past, present and future. First, we need to look at the institutions of the 20th century Golden Age, and ask which can be revived and refurbished to address our current problems. Second, we must consider what elements of the neoliberal era are worth saving. Finally we must consider our future options in a world unlike anything that has come before.

The first step must be to look back at the institutions of the postwar Golden Age. Not all of these will turn out to be useful in our current situation, and some were inappropriate even at the time they operated. Nevertheless, taken all in all, the mixed economy of the mid-20th century worked much better than the system of financialised capitalism that prevailed in the era of neoliberalism.

Most of the policy program announced by the Biden Administration can be understood as a return to Golden Age policies wound back or abandoned in the neoliberal era. Examples include explicit support for unions, investment in physical infrastructure, partial repeal of the 2017 tax cuts, and free community college.

Unions, progressive taxes, expanding education – the case for all of these is as strong or stronger as it was in the aftermath of the Great Wars. Similarly, the need for public investment in physical infrastructure, after years of neglect, is evident. Biden’s measures so far are steps in the right direction, but much more remains to be done.

The innovations of the neoliberal era have mostly been negative. But there have been some positive developments. The movement towards racial and gender equality, which began in the 1960s continued, if slowly and with occasional reversals, through the neoliberal area. And some more specifically neoliberal policy innovations such as the earned income credit and emissions taxes have been value. Similarly, while most financial innovations have been harmful, there have been exceptions such as the rise of venture capital.

Looking to the future, the shift from an industrial to an information economy requires fundamentally new approaches to economics. We are still at the beginning of understanding what is needed here; but it is already obvious that the combination of financialized capitalism and Big Tech is not working out well as a solution.

GM and Google

The archetypal product of the 20th century industrial economy was the motor car, the archetypal technology was the production line and the archetypal firm was General Motors. Each car that rolled off GM’s production line embodied a set of physical and labour inputs; steel for the body, parts supplied by a network of subcontractors, the work of a large body of skilled and semi-skilled workers. Dealers and finance providers distributed the cars to buyers, who then owned and uses the products. Our thinking about how an economy works still reflects this model.

A 20th century firm like General Motors can easily be understood in terms of the economic categories of mainstream classical and neoclassical economists, beginning with Adam Smith. The whole apparatus of national accounting, reflected in concepts like GDP, was developed to deal with such firms.

But consider a firm like Google. Google doesn’t produce a physical good1; it doesn’t even generate the information that is at the core of its business. Rather, it indexes the information generated by others, with or without their permission, then allows users to search those indexes, with advertising attached.

Google doesn’t fit at all comfortably into the categories of traditional economics. Its output can’t be measured in quantitative terms, nor is there any obvious price attached to it. This hasn’t stopped Google making massive profits, or attaining a stratospheric market valuation. On the other hand, it is far from obvious that this is the best way of making the information resources of the Internet available to everyone.

1 Except for a relatively modest business producing tablet computers that run Google’s Chrome operating system.

18 thoughts on “Economic policy after the pandemic

  1. Jq said “Biden keeps doing pretty much what I think he should do”


    “New York’s House Dems threaten to oppose legislation without SALT-cap repeal
    …” Biden has proposed to increase corporate taxes in order to pay for his $2 trillion infrastructure plan. Repealing the SALT cap would reduce federal revenue, costing the federal government $673 billion over the next 10 years, according to the Tax Foundation. That’s more than Biden plans to spend on fixing roads, bridges and other transportation projects in his infrastructure plan.”…

    “The SALT tax deduction is a handout to the rich. It should be eliminated not expanded

    “2. Lifting the SALT cap much more pro-rich than Trump’s tax bill  

    “It is useful to compare the distributional impact of SALT cap repeal to other tax policies or packages. One obvious point of comparison is the TCJA package as a whole, which skewed strongly towards the rich. Sen. Schumer described it as “a cynical one-two gut punch to the middle class.” Certainly, it was a pro-rich bill overall. Most of the benefits of the TCJA went to the top fifth, and 20 percent went to the top 1 percent. But lifting the SALT cap would be much more favorable to the rich—with almost three times as much of the benefit going to the top one percent(57% vs. 21%): 

    “Lifting the SALT Cap Favors Rich More than TCJA …”

    “It is worth emphasizing that lifting the SALT cap is just one tax change, while TCJA changed myriad elements of the tax code. It is therefore striking that the value of repealing the cap would deliver more than half as big an income boost to the top one percent as the TCJA did in its entirety. “…

  2. “Unsurprisingly, the casino economy has delivered huge gains for a small number of winners, and losses for everyone else, certainly when compared to the broadly shared gains of the mid 20th century.”

    Losses? Even with the last clause inserted this is an exaggeration. Most of us have done pretty well since the 1970s. Many of the downtrodden workers are buying swimming pools and holiday homes as well as taking holidays to Bali.

    You are attempting to be dramatic but consequently, overstate things. Free markets and “financialized” capitalism have delivered many benefits as well as costs, In countries like China, they have brought hundreds of millions out of poverty – the economic development story (in the 1970s dismissed as an impossibility by the “vicious cycle of poverty” idea) has emerged almost everywhere – even in Africa . Free trade has allowed Australians and Americans to take advantage of cheap goods and mobile capital from China to enhance or maintain consumption standards in the face of emerging developing countries.

    The US took an aberrant diversion with Trump but has swung back to elect a surprisingly good, if elderly, replacement. Things are less gloomy than you portray them to be.

  3. The “trips to Bali” have been suspended by the virus although it is this disruption rather than any failing of free markets that has left the Balinese destitute.

  4. “Google doesn’t fit at all comfortably into the categories of traditional economics…”

    But is there a comparison category error here concerning GM and Google – and golden age Madison Ave exploits? Is it a manufacturing, advertising, and medium mix up? Is the medium the message?

    In those ‘golden years’ did the Madison Avenue type advertising produce a physical good? Could the network of economic activities producing goods and services within and around GM have been as they were without Madison Avenue? To generate revenue from its advertising product, and for GM’s products, Madison Avenue used the broadcast medium such as syndicated radio, tv networks, and newspapers, and the narrowcast medium such as magazines.

    Google built and continuously develops proprietary broadcast and narrowcast mediums that have similar purpose to those exploited by the displaced Madison Avenue, ie., to sell the goods and services that others produce. Selling via “The medium is the message..” hasn’t changed. Google has just better equipped itself and is far better at it than any Madison Avenue firm could have been back in the day. Madison Ave used, say, tv programming as the hook to get eyeball attention, and viewers could search a tv guide. Or the hook for eyeballs, say, could be a special interest magazine (perhaps a tv guide or motorsport mag) that a reader had first searched a magazine rack for.

    There are still loads of cars being made, and with globalised merger and takeover activities a number of car manufacturers are much larger economic edifices today than the GM of the golden yesteryears.

    As for old GM producing tangible goods there is a large network of economic activities producing intangible goods (software etc, and the medium itself) and services (eg the principle Google advertising service and coding, art, analytics, accounting, ) within and around Google. The Google medium is not the underlying web which is akin to the unseen electromagnetic wave propagation required for the medium of tv. The indexed information of others displayed by Google is akin to programs or movies shown on tv – literally so for YouTube!

    Further, surely Google does “generate the information that is at the core of its business”, it being the information content that constructs the Google medium… in other words, all the proprietary software and other ip they have under their hood, no?

  5. Harry,

    I wish I could live in your head. I would be a happy man. In contrast, I have nightmares almost every night about where our world is headed. I am not nearly so sanguine as you. But let me leave aside climate change, sea level rise, ocean death from plastics, chemicals and over-fishing, the sixth mass extinction and great power rivalry as China and the USA plus Western world lurch forward to a final confrontation. Instead let me take issue with this:

    “Many of the downtrodden workers are buying swimming pools and holiday homes as well as taking holidays to Bali.”

    This is actually not true. Indeed, it is laughably inaccurate. Well-off 400something tradies and well-heeled retirees may be doing these things.These would amount to 20% of adults at best in Australia.

    Very few people under 40 and especially under 30 are doing any of these things. What is more, they will NEVER be able to do these things. Let me speak of say a representative, relatively privileged couple under under 30. Both have tertiary degrees and HECs debts. The female could be a clerical worker unable to get more than 28 hours of work a week. The male could be an environmental engineer in a full-time job (not the highest paying kind of engineering by any means). They would be renting and trying to save for a house. No kids yet and probably none planned. They might have a pet dog and each would have an older model, second-hand, small car to get to work.

    They would still many years away from even affording a house as house prices keep rising insanely fast, probably faster than their saving pace. So, they can’t afford a home, let alone a holiday home. Certainly could not afford a pool or a holiday home or holidays beyond a week at the coast once a year.

    Clearly, Harry you move in social circles which comprise only the top 20% of Australians (while personally are probably in the top 2%) and you have no idea how the other 80% live. They certainly don’t have anywhere near the relatively luxurious, upper middle class lifestyle which you imagine they have. I think you are so far out of touch that you have no idea how far out of touch you are. That’s not meant in a bad way. It is very easy to a false impression of our very stratified society, from a privileged position and to not know how poorly many people are living.

    Overall, these arguments and kerfuffles we have on this blog matter not a jot. The bulk of the human race are now doomed. The next 30 years are going to be absolutely horrendous. My guess for global human population in 2050 is 1 billion at best. By 2100, the human race most probably will be extinct.

  6. Ikonoclast, Actually I play golf with taxi drivers, plumbers, painters, journalists, shop assistants, teachers, QCs, and a wide cross-section of the community. I come from working-class origins myself and have never found any acceptance among the wealthy end of town. No loss.

    Of course, I am exaggerating but so too is John. Things are not as bleak and borderline catastrophic as he suggests. A few points:

    I am optimistic about climate change and some aspects of environmental protection. The core difficulty is whether attitudes to nature change in the developing world faster than incomes do. In developed countries, things are changing. In the long-run, conservation of our natural environment is much more important than improving developed country living standards defined in terms of material consumption.

    House prices reflect the supply and the demand for housing. The demand side was being largely driven by immigration which comprises over 50% of the demand for new housing. I would prefer that immigration intakes are permanently cut to levels that ensure ZPG in Australia. Higher wages would result as well as a better quality of life without the necessity of spending half one’s working life paying off a mortgage. Instead, people would be purchasing a largely reestablished stock of housing and most private housing investment would be in renovations and maintenance. That this does not happen is a government failure, not a market issue.

  7. Google also sell smartphones – it bought Motorola, a physical electronics company, a few years back. ARM is another pure IP company; interesting as for once it’s monopoly is beneficent, and actually enables do

  8. Harry Clarke,

    We agree on some matters. I too advocate the cutting of immigration intakes permanently to levels that would ensure ZPG for Australia. I also advocate wage rises and the concomitant and necessary reduction to the profit share of the economy (including higher taxes on high earnings and wealth).

    Government failure and market failure are often entwined. Perverse incentives distort markets. Examples are the fossil fuel subsidies in Australia, which are currently reckoned at over $10 billion per annum, and of course negative gearing which distorts the real estate market and stock market. Another form of market failure grows out of failure to regulate correctly thus permitting and generating monopolies, speculation, bubbles, dubious financial instruments and so on.

    When it comes to golf, that is an interesting survey method. It is far wider than my social circle so it ill-behooves me to criticize your anecdotal survey method. However, it is still a self-selected group comprising those who chose to play golf and can afford to play it. It admits itself to a certain kind of socioeconomic critique. Your list comprises many of the petite bourgeoisie plus semi-professionals and professionals. To plagiarize and update the Wikipedia definition:

    “The petite bourgeoisie or petty capitalist class, in Australia today, comprise the self-employed trades, small-scale proprietors, small-scale merchants and professionals and semi-professionals whose politico-economic ideological stance in times of socioeconomic stability is determined by reflecting that of a haute bourgeoisie (rich capitalists) with which the petite bourgeoisie seeks to identify itself and whose bourgeois morality it strives to imitate.”

    Most of your list are petite bourgeois in the above sense. Shop-assistants for sure sound out of place. But the list in the main sounds like it comprises people who accept and reflect the core values of capital, the exploitation and underpaying of labor and so on.

    The definition I have pinched from Wikipedia is subtle. The phrase “in times of socioeconomic stability” is crucial. In times of socioeconomic instability and/or de-growth portions of the petite bourgeoisie will split off and defect from the “liberal capitalist consensus”. The capitalist tide on the flood does not lift all boats but it does lift most of the boats of the petty capitalist class. In capitalist good times they will support capitalism, calling it amorphously and glowingly, “enterprise”. But the capitalist tide on the ebb drops many of the small-medium boats of the petty capitalist class onto the mud along with the leaky rowboats of the working poor and unemployed. In this part of the cycle, the petty capitalist class are no longer so enamored of capitalism or of free markets. Suddenly, they want (more) special deals, (more) government subsidies than usual or else, if not bought off in this way, they will gravitate to the support of either tepid social democrats or reactionary populists (like Trump or Morrison).

    Below the over-privileged ranks of the baby boomers, (even retired clerks like me can live an upper middle class life or something close to it [1]), there is a new reality of post-post-boomers are far less well off and in general living far more precariously economically. Most baby boomers (of which I am one) really don’t seem to understand what is happening. I flatter myself I understand (this bit of reality at least) because I read widely and pay attention to the under-30s because I had children relatively late, becoming a father at age 40. I have children in their 20s who are fully affected by these new phenomena which most baby boomers really do not seem to understand.

    Note 1: A life based on accumulations enabled by:

    (a) free tertiary education and no HECS
    (b) double income marriages / partnerships from times (1970s and 1980s) when wages were not nearly so depressed as they are now, that is from when it really was a double income;
    (c) defined benefit pension schemes far more generous than any market linked schemes today and which defined benefit schemes are no longer available;
    (d) much cheaper houses, as a multiple of annual income at that time, purchased just before the long boom in housing asset prices.

  9. JQ said “The absence of any serious resistance to Biden’s stimulus and infrastructure package reflects the fact that hardly anyone seriously believes the old verities of balanced budgets and free markets”

    Hardly anyone – except Larry Summers.

    Cory Doctrow said “Securitization converted “advanced” economies into shambling, undead debt-zombies.”

    “Political economy vs inflation 

    “If you’re trying to figure out whether Summers is right and inequality, poverty and crumbling infrastructure are the price of American stability, it’s worth checking out the political economists.

    “Here’s a great place to start: Brown University economist Mark Blyth’s interview with The Analysis, available in audio, video, and as a transcript:

    “The point of long-term debt isn’t to get paid off – it’s to generate ongoing cash-flows that can be securitized and turned into bonds. Securitization converted “advanced” economies into shambling, undead debt-zombies.

    “It’s securitization that led to the 2008 financial crisis, and it’s securitization that sustains Wall Street’s speculative acquisition of every single-family dwelling for sale in America as part of a bid to turn every home into an extractive slum.

    “Blythe explains that if the rich have nothing to buy and the poor use most of their stimulus to get out of debt, it will likely reorient the US economy to useful things: creating jobs to make stuff that people want to buy.”…

  10. I’ve lost track of who started this derailment, but please take it to the sandpit – JQ

  11. Yes. Done. (It was a question posed perhaps to yourself in the first comment by someone Anti-Reagan.)

  12. Enjoy a look at the full google hardware range. A non-trivial collection that exceeds the mentioned products somewhat, albeit the full collection has little mass market success:
    The point that the hardware hardly matters still stands. The collection even proofs the point, since the major focus seems to be to collect as much additional user data as possible. Guess only the early smartphones were a serious attempt at making money with hardware.

  13. May as well quote Bush the younger:

    “Washington (CNN)Former President George W. Bush again criticized what he sees as a Republican Party that is not inclusive enough, arguing that if it stands for “White Anglo-Saxon Protestantism, then it’s not going to win anything.”

    “The comments by the 43rd President — who has recently critiqued the modern GOP with a candor that has been unusual for him in retirement — speak to a rift in the party that has one side urging a doubling-down on former President Donald Trump’s brand of nativist politics and another that wants to return to the more traditional GOP that Bush once led.

    “Bush made the remark in a podcast interview with The Dispatch last week in response to a question about members of the Republican Party who planned to start a caucus pushing for “Anglo-Saxon political tradition” and Republicans who peddled the falsehood that the 2020 election was stolen. Bush, who said he does not believe the election was stolen, told The Dispatch that while he believes Republicans will eventually govern again, “if the Republican Party stands for exclusivity — you know, it used to be country clubs, now evidently it’s White Anglo-Saxon Protestantism — then it’s not going to win anything.””…

  14. Or… Lewis Powell
    ” In her 2002 book, The Majesty of the Law, Justice Sandra Day O’Connor wrote, “For those who seek a model of human kindness, decency, exemplary behavior, and integrity, there will never be a better man.”

    Book Review: 
    A Brief History Of Neoliberalism

    “He ably charts the existence of various neoliberal lobbying groups, explains how corporate funding flowed into think tanks, and quotes important business figures saying that neoliberal reform would help their bottom lines. For example:

    [book quote] “In the US case I begin with a confidential memo sent by Lewis Powell to the US Chamber of Commerce in August 1971. Powell, about to be elevated to the Supreme Court by Richard Nixon, argued that criticism of and opposition to the US free enterprise system had gone too far and that ‘the time had come—indeed it is long overdue—for the wisdom, ingenuity and resources of American business to be marshalled against those who would destroy it’. Powell argued that individual action was insufficient. ‘Strength’, he wrote, ‘lies in organization, in careful long-range planning and implementation, in consistency of action over an indefinite period of years, in the scale of financing available only through joint effort, and in the political power available only through united action and national organizations’. The National Chamber of Commerce, he argued, should lead an assault upon the major institutions—universities, schools, the media, publishing, the courts—in order to change how individuals think ‘about the corporation, the law, culture, and the individual’. US businesses did not lack resources for such an effort, particularly when pooled.”

    [book quote].” And it is not clear either that the mass of the working people in the US, who have over this last generation often willingly voted against their own material interests for reasons of cultural nationalism, religion, and moral values, will for ever stay locked into such a politics by the machinations of Republicans and Democrats alike. Given the volatility, there is no reason to rule out the resurgence of popular social democratic or even populist anti-neoliberal politics within the US in future years.”…

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