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 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.