The Lies of Neoliberalism; Governments Don’t Create Jobs or Economic Growth by NY Brit Expat
It may be my masochism, but I actually watched the Presidential debates. I also regularly watch the news over here in the UK. Cameron and his cronies constantly spout this argument that governments cannot create economic growth. During the Presidential debates, Mitt Romney even went a step further; he argued that governments cannot create employment. The Tory argument is a bit more sophisticated, but both arguments have their roots in the fantasies of neoliberal economics of which both the Tories and the Republicans have adopted in its most fundamental form; their arguments also tie into the perspective of reduction of the central government budgets along the lines demanded by the IMF and the introduction of austerity measures to ensure these results. Except, and this is a big exception, neither of these governments have been forced to do so by the IMF.
Given that these statements are not only historically inaccurate, but bordering on the patently absurd, it never ceases to amaze me that challenge from the mainstream media is not forthcoming. Even more so, during the debate, President Obama did not respond to the absurd statement by Romney; in fact, he also raised budget deficit reduction which essentially means cutting state employment and social services. The Labour Party does not disagree with the Tories; they only say that austerity must be done more slowly and Ed Balls (the shadow Chancellor of the Exchequer) has said at the Labour Party conference that, if elected, they had no intension of reversing the austerity measures forced upon the British populace by the Con-Dem government. Essentially, all of the mainstream parties are singing the same tune; honestly, different tonalities of the same argument do not change the fact that the underlying tune is the same.
To someone that is living in the real world, in other words, someone that actually heard about the New Deal, that knows the role of government in ensuring economic growth during the post-war period in Europe, who knows damn well that state (or public) sector workers exist and that the government’s purchase of goods and services from the private sector and investment in the private sector help to ensure economic growth it makes me wonder if they think that we are extremely stupid.
I. Can Government create Employment?
John Harvey, a post-Keynesian economist has written an excellent piece in, of all places, Forbes Magazine which raise some of the points that I will raise here, but I will actually go a bit beyond what he has said and try to address exactly what is underlying the arguments of mainstream politicians and what is lying beneath the bizarre arguments that we are hearing these days.
Harvey correct asserts that those who claim that government cannot create employment are re-defining the meaning of the word “jobs” to suit their own private profit margins:
“But, those who say that the government cannot create employment are adding another element to the definition. To them, a job is any routine activity for which we earn income paid by an entity required to earn a profit. There is no compelling reason for this addendum and it arbitrarily excludes people like James Galbraith, who is an economist just like me, but at the University of Texas, and Jeffrey Halstead, Chief of Police in Fort Worth, Texas. By the qualified definition, they don’t have “jobs” because their income is derived from tax revenue and not private-sector sales. Ditto every single fireman, public school teacher, Marine, sailor, airman, soldier, national park ranger, defense industry employee, NASA scientist, social worker, librarian, etc., etc. None of them has a job.
Why would someone embrace such a questionable characterization? Because their true goal isn’t to generate a scientific understanding of the manner in which the macroeconomy operates, but to make a moral statement. Specifically, their contention is that only those routine activities financed by profit are truly of value. Everything the government does is unnecessary because if people really wanted it, they would have bought it in the private sector: that which is useful is profitable. Furthermore, they say, were it not for my taxes, those in the public sector would not have a job. Firemen earn a salary only because some of mine was taken away (under threat of imprisonment) (http://www.forbes.com/sites/johntharvey/2012/10/22/government-creates-jobs/).”
John Harvey makes some excellent points. This is the reason that I have cited his article. However, I would say that he is doing those advocating this perspective quite a favour in terms of saying that the view that the government cannot creates employment is a moral one. I would demur; instead, I would argue that this is an ideological position with little, or no, link to reality, much less morality. They are outright liars, not moralists. I would argue that the resurgence of this argument is not based on the idea that only things produced for profits are things of value, they know that fire services are of value; but rather that these things should be produced and provided on the basis of profitability; that is, they should be produced under the control of the private sector. In other words, why should something be produced and provided if they cannot make a profit on it?!
In fact, looking at history quite easily disproves this position; this argument is a dangerous fantasy with the lives of the majority in the advanced capitalist world at stake. Reprivatisation arguments are central planks in the neoliberal agenda and after being forced on people in the capitalist periphery and emergent economies (see, e.g., Chile and Argentina), these are now being forced on the majority in the advanced capitalist world. For example, a cursory examination of the situation before generalised nationalised fire services existed in the UK, where insurance companies provided fire services turned out to be not only too expensive but incapable of providing provision; in fact it was the insurance companies themselves that asked for national funding and provision of fire services and this was in the height of free-market ideological arguments in the nineteenth century (London Fire Brigade). Yet, if you look at right-wing arguments in the US and in the UK, there is an attempt to privatise fire services; already in the UK, parts of an holistic service are being forced to be contracted out to private companies to “cut costs” in the face of government cutbacks.
Another example that I have written about previously is water privatisation, not only are costs not reduced, but access to water is limited to those that can afford to pay for it; so something that people require in order to survive is now no longer available to them due to privatisation, some forced by the IMF and World Bank, others done in the erroneous attempt to cut costs (http://www.dailykos.com/story/2011/08/28/1011343/-Anti-Capitalist-Meet-up-Water-Privatisation); we are seeing resocialistion of water services in France and in other countries to regain control of water away from firms as it is an essential component of survival for human beings.
The problem with private provision of services is that it is your ability to pay is what is important not the quality of the service; profitability considerations means cost cutting and that does not necessarily provide quality and guaranteed service. This is why a number of things became public goods rather than be left to markets to provide. The insistence of reprivatisation of services is not based on whether historically these can provide the most effective service; it is done so that they can literally find a new area of capitalist investment which they think has a guaranteed market. However, rather than acknowledge an obvious point that not everyone can afford to get these services if they have to purchase them directly rather than paying for them through taxation and subsidising those that cannot pay, we are seeing an argument that is based on an assumption which has been proven to be erroneous, that if something is produced there will be demand to sustain it.
In fact, this is a revival of an old argument whose demonstrable failure is what I would say is what exactly led to Great Depression and to the subsequent creation of the social welfare state and public sector back in the 1930s in the US and in the post-war period in the UK. I want to stress that the only reason that I think that this earlier argument was defeated was not due to the Great Depression on its own, but arises from the existence of a strong left and powerful union movement which led the Capitalist class to try and ameliorate the crises that are a normal part of the capitalist economic system not only to protect their own interests, but also to remove some of the threats of the left and a strong union movement.
Essentially, the argument endorsed by the right-wing of the mainstreams in the US, UK and EU is based upon a perspective that refuses to acknowledge that the private sector cannot create sufficient levels of employment to ensure that their own products are capable of being sold in the market at a price which ensures that they can earn a profit upon them. In the absence of the ability to earn a profit, these goods will not be produced. Moreover, in the absence of incomes to pay for these things, production and provision will simply not exist.
The laws of motion of the capitalist economic system in which profitability (or expected profitability) determine the techniques of production in use (how much labour, how much and what type of machinery are used to produce output), how much output (goods and services) are produced and what type of goods and services are produced are essentially what produce economic crises. That is, crises derive from the system itself, and are not an aberration, but are a normal part of the system.
What Keynesian economic policies did was not to eliminate crises, but rather to ameliorate them; that is why people began talking about recessions rather than economic crises. But in the absence of coherent regulation and attempts to stimulate and cool down the economy when needed (as advocated by Keynes) what we are seeing is prolonged crises and smaller and shorter recoveries. Moreover, recoveries (if you have not noticed) make no dent in the substantial amount of structural unemployment that now characterises advanced capitalist economies.
II. What is causing structural unemployment?
The answer is the laws of motion of the capitalist economic system itself. Competition exists between and within industries, where money capital (and technology which is privately owned, and sometimes when appropriate to production physical capital itself) is moved between industries in search of the highest profits. The introduction of machinery in the attempt to increase productivity occurs so as to ensure that workers’ wages are produced more quickly and hence that the surplus value is greater in production are what leads to several interrelated phenomena. The reasons underlying colonialism and then imperialism was part of this process, these enabled getting hold of raw materials and cheap labour. In some cases, like the cotton textile industry, the goods could even be sold back to colonies thereby providing part of the market for the goods themselves.
Now, globalisation means that competition occurs on a world level. Lack of restrictions on capital mobility in search of profits has led to outsourcing of industries to the capitalist periphery and emergent economies where labour costs and raw materials are cheaper. The fact that you can produce something for pennies in these countries and sell them for hundreds of times more means that multinational corporations (MNCs) need to lay out far less and will make a far greater profit if the goods are sold (even if they are sold for far less than they expected, they will still be making a far greater profit than if they are produced in a country with higher costs of production). The only advantage (and this is rapidly declining) that the advanced capitalist world has is in technology (and that is the reason that the Chinese are insisting on technology transfer when they allow for foreign direct investment and MNCs into the country).
So let’s go through some of the dynamics of the system in order to understand what is happening due to the internal laws of motion of the system:
1) Introduction of machinery means that less workers are needed relatively to produce the same level of product, that is what productivity means; but the problem is not only one of relatively less workers being needed as whole sectors of production have been destroyed leading to structural unemployment, that is an absolute increase in unemployment in these countries.
2) Introduction of machinery or cheapening of costs of production (e.g., using cheaper raw materials obtained from overseas, or goods produced overseas that are cheaper to produce than in the advanced capitalist world due to both cheaper raw materials and labour costs) in the sectors that produce workers consumption goods, means that the production and reproduction of workers subsistence (the socially determined commodities that workers consume) is lowered; this lowers the value of the wage goods meaning that more time will be spent on goods that go towards the surplus product.
3) Introduction of machinery leads to increased unemployment; unemployment then weakens the bargaining power of workers. The deliberate destruction of the industrial and manufacturing sectors in the advanced capitalist world not only led to increased unemployment, it also destroyed the power of trade unions concentrated in those sectors. In fact, before the sectors themselves were weakened so badly, right to work laws led foreign automobile companies to open factories not in traditional regions but in states in the US where they did not have to deal with the demands of unions.
4) The decrease in wages due to the decline of union power and structural unemployment has led to a break-down in job protections and conditions of work. More and more, part-time and temporary low-paid work has replaced well-paying and secure jobs for life. To avoid, payment of benefits and social security (national insurance), employers have shifted towards sub-contracting jobs which places workers in greater precariousness as contracts are mostly temporary and you have no job protection. General attacks on the social welfare state have undermined the abilities of the poor and working poor to maintain their income. The attempt to stimulate demand by enabling access to easy but expensive credit has blown up in their face; witness the sub-prime crisis and personal bankruptcy as borrowers cannot pay back what they purchased.
5) While increasing the amount of surplus produced, they have seemed to have forgotten an incredibly important point. That in order for profits to exist, someone must buy their product. In the absence of demand backed by income, these potential profits only remain potential and we have what is called a realisation crisis following a point of over-accumulation (the crash in 2008); guess what, Marx was correct in Volume I of Capital.
Structural unemployment is a normal part and parcel of the system and derives from its internal laws of motion. It can be combatted, but it won’t be done if wages are continually eroded in the advanced capitalist world. Not only can we no longer survive on the low wages on offer in the capitalist periphery and emergent economies (which have been deliberately kept low), but also this would eliminate the demand for goods and services that the private sector and capitalists need to enable economic growth. The only thing that may actually keep the system going (and to increase profits in the real economy rather than the financial sectors) would be if China and other emergent economies actually increase wage incomes in their countries. In that case, essentially the workers in the advanced capitalist world become a lot more redundant to the needs of international capital.
Rather than destroy the state sector, what is needed instead as a first step is direct government jobs creation. That is, the government itself needs to hire people at all levels. It also needs to create new sectors for them to work; the creation of a green transport industry and green manufacturing would be an excellent place to start. However, since construction is primarily a male occupation, increasing money spent on education, social services government provision of health care, nurseries (crèches) which are all traditional areas of women’s work would offer women a far better choice than the low-paid part-time and temporary work to which they are being relegated. However, no mainstream politician is advocating the only known and proven thing to get the system out of the crisis, they are all parroting the line of reduce state expenditure, cut public sector employment and cut social services and benefits.
III. The Role of Government and Economic Growth
It may be asked what does the above have to do with this argument advanced by politicians which denies that the government can create jobs and/or economic growth. The answer is quite a lot.
For all the babble about the importance of the private sector, the reality is that the government provides many things that help enable economic growth and profitability for the private sector. From government purchases from the private sector (think about how much the military industrial complex make from various government orders for its products and services); this alone eliminates uncertainty in terms of profitability and provides demand for their goods and hence leads to growth and rising employment in the private sector). Government spending and investment in housing, research and development, road building, etc. winds up in the pockets of the private sector. In fact, your tax dollars and government borrowing has been sustaining the private sector for quite some time and in fact in the post-war period it has enabled economic growth.
To quote John Harvey:
“That leaves investment and government spending as the real engines of growth […]. They are the forces that drive the business cycle rather than follow it. Businesses and the government together determine whether or not we are in rapid expansion or the depths of depression. This chart illustrates the point:
[…] Note that this means that if there were no government sector, then the job of driving economic activity would be left to investment alone. This is similar to the situation we faced before WWII, when the government was tiny compared to the rest of the economy. The problem is, firms can build new capacity (i.e., invest) relatively quickly so that, ironically, at the very moment we have our greatest ability to produce goods and services, investment falls, layoffs occur, and we slip into recession. This is an absolutely critical point (http://www.forbes.com/sites/johntharvey/2011/04/29/why-the-private-sector-needs-the-government-to-spend-money/).”
What Harvey is demonstrating is the role of Government in creating economic growth. He argues that consumer spending follows the state of the economy, rising as the economy grows and falling as it declines. There are two things that drive economic growth, but in a recession, private investment is insufficient; it is government spending and investment that drive economic growth.
But let’s talk how government does drive economic growth. We know that this is due to government spending. But what else the government spending provides? It provides income to state workers which will buy the goods and services of the private sector. Unemployment insurance and pensions and social services (think of food stamps, welfare payments, and disability benefits) also ensure that those that would not have income due to unemployment actually can purchase goods and services. Quite obviously, those are for the most part produced by, yes, the private sector as we live in a capitalist economy.
So, given the situation, the last thing that we want to do when we are in an economic crisis in the advanced capitalist world is to cut the state sector, cut benefits and reduce wages. All you are doing in this situation is creating more unemployment and throwing people into poverty.
“In fact, Matthew Weaver of The Guardian reported, that one in five British workers are being paid less than a living wage, that is 4.82 million workers are not earning enough to survive on. This is because the designated minimum wage (£6.19/hour) is not a living wage (£8.30 in London, £7.20 in the rest of the country) and the Tories are opposing raising the wage due to fears of affecting employment.
“The study, launched in advance of next week’s Living Wage Week, found that Northern Ireland has the highest proportion of people earning below the living wage (24%), followed by Wales at 23%. The lowest proportion of sub-living wage earners are in London and the south-east, both at 16%. It found that at least 70% of cleaners, kitchen staff and waiters and waitresses were paid less than the living wage (http://www.guardian.co.uk/society/2012/oct/29/five-million-britons-living-wage?INTCMP=SRCH).”
If you want to see what happens when these policies are implemented in earnest, take a look at Greece and Spain and you are witnessing the deliberate creation of an economic depression in these countries.
“Eurostat figures show that 25.75m people in the whole European Union were unemployed in September 2012 – an increase of 169,000 people on the previous month. Compared with September 2011, unemployment has risen by 2.145m.
Spain and Greece recorded the highest unemployment rates at 25.8% and 25.1% respectively (http://www.guardian.co.uk/news/datablog/2012/oct/31/europe-unemployment-rate-by-country-eurozone).”
In terms of the general state of the economies of Spain and Greece:
“So Spain’s economy has contracted by another 0.3% for the third quarter, whilst inflation in the country continues to rise and demand continues to slump. You could be forgiven for thinking that there is no way out of this hell-hole for Spain: the contraction now means that the country has been in its ‘double-dip’ recession for five consecutive quarters, and unemployment is now running at a fresh high of 25.1%. To add insult to injury, the Spanish government thinks that the economy will shrink a total of 1.5% this year, and another 0.5% in 2013 (http://www.managementtoday.co.uk/news/1157114/Spanish-recession-deepens-Greece-riskier-investment-Syria/).”
“The [latest Greek] draft budget for 2013, which provides for measures of 9.2 billion euros, an economic contraction of 4.5 percent and a primary surplus of 0.5 percent (http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_30/10/2012_468024, my clarification).”
The message is on the wall for the UK irrespective of the blip provided by the Olympics; circuses without bread do not make for economic growth and they also make for very unhappy populations as we see in Greece and Spain.
The fact that these realities are being ignored by politicians is truly disconcerting. On November 1st, it was reported that in the UK, both manufacturing and construction industries are shrinking. In fact, manufacturing has declined for the 6th month in a row; the only thing that grew is consumer spending (http://www.bbc.co.uk/news/business-20167643). That is proof that the small economic growth we saw in the last quarter (which the Tories are claiming is due to their economic policies) is the result of the Olympics and that we can expect the UK, once again, to fall into recession. Moreover, the stress on export-led growth (another plank of neoliberal economics) for manufacturing means that the sector is far more dependent upon conditions in the world economy and hence since world recovery is not happening, export-led sectors are simply not going to grow.
“I was discussing this situation in the UK with Karl Petrick who is an economic historian and he said the following:
“I’m pretty sure that was part of their party programme. The sad thing is that anyone who is paying attention can already see the effects of an austerity budget in the UK, but that has never even registered in the news on this side of the pond. Either that or we are in some sort of odd one-upmanship: You call that a recession? I’ll show you A RECESSION!!!! The situation would be funny, if it was not so dire!”
It does not benefit the private sector either as the loss of income all around means that there are less people now able to buy what they produce. Since the private sector does not see that the possibility for investment as a great idea now due to the fact that there is not sufficient demand for their goods, they will not create new jobs. Waiting for the private sector to invest, even with all the tax breaks that various governments are giving to the corporations and to the wealthiest, is quite simply put, like waiting for climate change to fix itself, in other words, it is just not happening. In fact, the stock markets are the investment of choice, short term speculative investment is what is happening, not investment which creates jobs.
This leaves no choice but for the state sector to once again engage in direct government jobs creation … without that there is no way to combat structural employment. Moreover, given that we need far less labour (due to high productivity), the far more sensible option is also to decrease weekly working hours, but maintain income. That is, raise income of working people, not decrease it which is what we are seeing throughout the advanced capitalist world.
The re-privatisation of public goods (and it is reprivatisation as many of these services were provided privately before the existence of the state sector) represents a coup for capitalists. From reprivatisation of electrics, water, road services, they are now trying to get their hands on provision of health care in the UK, care homes, nurseries, fire services, education, and police services. The problem is that there was a reason for these public goods to be nationalised in the first place, private provision is always based first and foremost on profitability which means that if you cannot afford to purchase these things, then you will no longer be able to access them. With incomes falling all over the advanced capitalist world, that means that many of these things will no longer be part of workers’ consumption bundles. Moreover, since many of these things cannot be purchased, they will once again fall onto women as part of their household labour for which they receive no recompense.
The erosion of workers standards of living in the advanced capitalist world is part of a wage squeeze trying to raise profits in a period of low profitability caused by the crisis. In periods of economic growth, wages can be allowed above social subsistence; that is what we saw in the post war period. High productivity and economic growth meant that the surplus product could be shared between workers and capitalists. Over time, the social subsistence level rose. What we are seeing now is the erosion of the social subsistence wage; they are pushing it down (so it is above physical subsistence and reproduction of the working class and they are pushing it downwards). What we are seeing is the combination of normal decreases in the value of labour power (e.g., bringing cheap goods in from overseas that are consumed by the working class) combined with a deliberate lowering of social subsistence wages, the breakdown of “jobs for life” and the rising number of people employed part-time, temporarily and as sub-contracted workers.
The problem with wage squeezes is that essentially it means that fewer and fewer working people and the high number of unemployed people (facing benefit cuts) can afford to buy things and this means that capitalists have no reason to increase production, employment, that is, to create economic growth.
What this means is that cutting the deficit, continuing cuts to the public sector, job cuts, and benefit cuts are exactly the wrong policies to deal with an economic crisis. All they do is deepen the crisis and provide no basis for recovery. Quantitative easing (increasing the money supply) has not stimulated investment which creates jobs, rather the money is being put into the financial markets for short-term speculative investment, which given the lack of regulation only increases the possibility of another financial crisis. But it is not financial crises which are the serious problem for the capitalist system at this point; rising income and wealth inequality will lead to a crisis in the real economy. With the politicians unable and unwilling to deal with the fact that capitalism is an inherently crisis-ridden system and in the absence of determination to ameliorate the problems caused by the system, the majority will be facing continued impoverisation. This represents not only a failure of capitalism which we know is incapable of providing for all, but a failure of bourgeois democracy as there is no mainstream political party that will actually stand up for the majority; all pretence that democracy applies to all is being rapidly eroded in the absence of a political party that actually speaks for and is answerable to the majority.