Economic policy after the pandemic

by John Quiggin on April 30, 2021

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 has been 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.

{ 15 comments }

1

Tim Worstall 04.30.21 at 12:39 pm

This is true:

“Its output can’t be measured in quantitative terms, nor is there any obvious price attached to it.”

This connects with this:

“The whole apparatus of national accounting, reflected in concepts like GDP,”

At which point we’ve a certain problem using measures like GDP to discuss the success and or failure of neoliberalism or even financialised capitalism. Because we’re already insisting that the archetypal firms of the neoliberal era aren’t well measured by GDP.

So insistences that growth was faster back in that Golden Age and so on become a little more difficult. So too insistences that living standards rose faster and all that.

We also end up with difficulties over something like this:

“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.”

OK, Facebook, monopoly and all that. But increases in productivity? WhatsApp. You can talk to 1 billion people for free. OK, people might not say very much but still. There’s nothing of this in GDP – there’s no fee nor even advertising. Last time I asked Facebook about this they said “couple of hundred engineers” work on this. So, we’ve the costs of a couple of hundred engineers – $100 million including stock awards and office space? – in the national accounts. We’ve no corresponding output. This is a reduction in productivity.

But we’ve 1 billion people getting telecoms for free and this is a reduction in productivity?

Precisely because you’re saying that GDP doesn;t measure all this new economy stuff well it becomes very difficult to insist that this new economy stuff hasn;t worked well if the measure is going to be GDP…..

2

John Quiggin 05.01.21 at 12:35 am

That’s a problem with posting extracts. I’m well aware of these points and will deal with them. No time to respond in detail now, as I need to submit ASAP.

3

nastywoman 05.01.21 at 3:55 am

and perhaps to the:

‘Profits are obtained, not by making a better product at lower cost, but by securing and holding a monopoly position’.

could be added:

‘Profits are obtained by the Predominant Producing countries, by making better products at higher cost, not only by securing and holding monopoly positions’.

4

MisterMr 05.01.21 at 4:41 pm

It seems to me that Google is, essentially, a giant marketing company that produces informaton services as an externality of its business model.
So from this point of view Google’s product is already priced in the price of the stuff that is sold after being advertised through Google (directly or indirectly).
As for the value of the externality produced, I think it might be overstated: the cost of transmitting information fell big time due to technology, and this means that the economic value of the marginal information fell also big time.
The economic value of a commodity depends on the value of its marginal unit for traditional business too.

5

J-D 05.01.21 at 11:15 pm

Its output can’t be measured in quantitative terms, nor is there any obvious price attached to it.

So from this point of view Google’s product is already priced in the price of the stuff that is sold after being advertised through Google (directly or indirectly).

The people who pay money to Google are the advertisers. What they are paying Google for is advertising space. So Google’s product is advertising space. They create advertising space and sell it. Advertising space generally has a price. It is the price paid by advertisers to whomever it is that provides the advertisers with the advertising space. That’s not something new. It works for Google the same way it works, for example, for commercial free-to-air television and radio broadcasters. Their viewers and listeners are not the people who pay them for their product (just as Google users are not the people who pay Google); the advertisers are the people who pay them, and they pay them for the use of the advertising space which they have produced.

6

likbez 05.02.21 at 3:45 am

@J-D 05.01.21 at 11:15 pm (5)

So Google’s product is advertising space.

No only. Google was/is integral part of PRISM. So mass surveillance is probably another major product and like Facebook it has several “faces”. With one is being a government sponsored surveillance company with Gmail and Android as the major franchises.

Any site that have Google advertisement can be considered as monitored by Google as Google essentially replicates Web logs via its advertising inserts. In this sense Google is an essential part of NSA.

They now try to diversify and get some foothold in the cloud but that’s also fit surveillance company profile.

All is all the old question “Is Google evil?” is an interesting one. IMHO it needs to be split into several companies.

7

Tim Worstall 05.02.21 at 10:03 am

” It works for Google the same way it works, for example, for commercial free-to-air television and radio broadcasters.”

Yes, that’s true. There have always been such things. Free to air TV got valued in GDP etc by the advertising income or the cost of production (depends upon which approach is used) not the consumer surplus or perceived value to watchers.

But it’s possible to believe that the relationship between the measurement and the living standard has changed. That GDP measurements etc miss more of the rise in actual living standards than they used to.

8

Robert King 05.02.21 at 9:40 pm

3rd paragraph, 1st sentence I think needs a verb somewhere.

Thanks! Fiexed now, I hope – JQ

9

LFC 05.03.21 at 2:20 am

This may be the first posted extract from JQ’s book-in-progress that I’ve actually read. There are a couple of typos (that a copy editor should catch), but it’s clearly written and the sentences flow very smoothly. One might think that that’s a minimum expectation one should have for a writer aiming at a broad audience (or really any audience), but unfortunately it can’t be taken for granted. So if the rest of the book is as lucidly written as this extract, it will be a job well done, at least as far as the prose is concerned. (I’m not addressing the substance in this particular comment.)

10

John Quiggin 05.05.21 at 3:36 am

Tim @7 I agree that GDP measurements miss more of the rise in actual living standards than they used to. But that can only be true if the relationship between living standards and the production of market goods and services is weaker than in the past.

That in turn means that it is unlikely that the revenue of companies like Google is as closely related to the social value they generate as was the case for, say, General Motors (leaving aside questions like how that social value was divided between capital and labor).

11

John Quiggin 05.05.21 at 3:38 am

@LFC Thanks, that’s very encouraging.

12

J-D 05.05.21 at 5:05 am

That in turn means that it is unlikely that the revenue of companies like Google is as closely related to the social value they generate as was the case for, say, General Motors (leaving aside questions like how that social value was divided between capital and labor).

Google generates its revenue (as I mentioned) by making advertising space available. I wouldn’t go so far as to say that there’s no positive social value produced by advertising (taking in all varieties), but whether the net social value of advertising (taking in all varieties) is positive is hard to judge. This isn’t just about Google, though, there was advertising long before Google (and long before digital media of any kind). Is there, in aggregate, more advertising now than there used to be? That’s also hard to say.

13

John Quiggin 05.05.21 at 8:42 am

” Is there, in aggregate, more advertising now than there used to be? That’s also hard to say.”

Two of the top five companies in the S&P 500 make their money from ads. AFAICT, no combination of ad agencies and media companies ever came close to this in the past.

14

Cranky Observer 05.05.21 at 11:52 am

= = =
” Is there, in aggregate, more advertising now than there used to be? That’s also hard to say.”
Two of the top five companies in the S&P 500 make their money from ads. AFAICT, no combination of ad agencies and media companies ever came close to this in the past. = = =

However 80% or more of what used to be the advertising revenue from thousands of local and regional newspapers and magazines is now concentrated in Google and Facebook. The Chicago Tribune Sunday edition used to be 600 or more pages per week of which half were ads, plus ad-specific circulars. Today maybe 1/6th that size on a good week, and I think a lot of their revenue comes from the pay site where the ads are managed by Google and the login system by Facebook. In aggregate are there more ads? I’m not sure either, and I’ve been a voracious media consumer for a long time.

15

J-D 05.05.21 at 11:44 pm

As between the two different explanations (the advertising sector has become larger or it has become more oligopolistic), I don’t know which to regard as more likely and I also don’t know which to regard as more harmful.

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