Sunday 17 November 2019

Brendan Keenan: Left and Right in new accord as neo-liberalism under fire

Bernie Sanders
Bernie Sanders
Brendan Keenan

Brendan Keenan

THERE can be no doubt that something is going on, as the candidates of the great parties of France are eliminated in the presidential election and enthusiastic young crowds turn out for the extreme left candidate Jean-Luc Mélechon, who misses out in the vote by less than2pc .

Revolutions of one kind or another may be de rigeur in France. But what to make of the success of the ultra-leftie - by American standards - Bernie Sanders? Or the election of Jeremy Corbyn (twice) as leader of Britain's Labour party?

"Populism" really will not do as a description of whatever is going on. More and more, the evidence points to this being about the economy and the failures of economic policy. Even the anti-immigration strain, while partly xenophobic and racist, is also about jobs and incomes.

Another bit of evidence came last week in a new book analysing the three Irish elections of 2002-11. It reinforced previous behavioural analysis which found that people fear losses more than they value gains. According to contributors to the book, electorates punish governments more when the economy goes wrong than they reward them when things improve.

Voters are still nursing the losses from the Great Recession and incumbents are still feeling their wrath. Under this pressure, the economic policy consensus, now approaching its 50th anniversary, is breaking down.

Under an admittedly extreme version of that consensus, a large swathe of economic punditry said such a thing as the Great Recession could not happen. When the impossible did happen, theories such as rational behaviour and perfectly-efficient markets came under attack from within the profession.

Critics of the profession have said that when it comes to economics, unlike "hard" sciences, if the evidence does not support the theory, the theory survives and the evidence is discarded.

The recession was too severe for that to be a tolerable response this time. As the tsunami recedes, leaving the wreckage behind, the critics are going further; questioning the sacred cows of political economy which have grazed unmolested since the oil crisis of the 1970s.

The questioning comes from both the crowds outside and the professors and analysts inside the universities, central banks and investment houses. There is the making of a remarkable new consensus, where the policies of Mr Mélechon and Mr Corbyn are often largely indistinguishable from those of President Trump, Marine Le Pen or UKIP, and they are joined by mainstream economists and market participants.

One striking example came in a recent paper, 'The Deep Causes of Secular Stagnation and the Rise of Populism', from analysts at London and Boston investment fund GMO. This firm, co-founded by the contrarian UK investor Jeremy Grantham as the splendidly-named Grantham, Mayo, Van Otterlow & Co, has often been in a minority position, particularly in correctly predicting the market crashes of 2001 and 2007.

The patchy, volatile recovery presented different problems of analysis and the firm changed chief executives last year after disappointing results but this report is still well outside even the emerging new consensus.

It does, however, provide ammunition for emerging new politics. Its authors, James Montier & Philip Pilkington, members of the firm's asset allocation team, see the world economy as gripped by "secular stagnation" after the sustained growth of 1950-70 became debt-fuelled growth until 2007 and, with credit exhausted, now has no structural drivers.

The report comes down firmly on policy mistakes, arguing that most of those advocated by economists over the past decades are not only wrong, but positively harmful. The authors even use the left's favourite word, "neo-liberalism", to describe the combination of free trade, free movement of capital and de-regulated labour markets, which they regard as a cause, rather than a cure, of current ills.

Defending what seems like a strange alliance, they say their job is to tell investors how they see the economic landscape and, if that puts them on the same ground as trade unions and socialist parties, that is just how things are at present.

The great error, as they see it, was the identification of the inflation of the 1970s as driven by excessive wage demands and restrictions on competition, leading to the abandonment of the policies aimed at providing full employment which had applied since the 1950s.

They argue that the inflation was caused instead by the purely external shock of a quadrupling of oil prices. Not only was there no need to switch to the policy of targeting inflation, rather than growth and employment, the report makes the point that many of the supposed anchors of policy are actually unobservable. As another economist, Paul de Grauwe of the London School of Economics puts it, one knows their value was after the event, which is not much use for policymaking.

It is also hard to argue with the report's critique of estimates of productivity - another complex variable which is often applied simplistically to analyse economic performance. There are many reasons why it may go up or down, and many occasions when one might not want it to increase.

It is easier to argue with the GMO analysts' view of labour markets, and many will. Pushed to it, most economists would accept the point that, insofar as it is a market, the relationship between the cost of labour and employment is difficult to quantify.

But they would recoil at the report's ideas that full employment might be pursued by the government giving some kind of job to everyone who did not one and paying them a basic income. Private employers would be prepared to offer a higher income in good times.

There is a job guarantee scheme on the statute book in the USA, inspired by economist Hyman Minsky, but it has never been put into practice.

Then there is trade. Again, the report agrees with the populists, arguing that free trade will continue to hollow out the richer economies if not countered with specific policy, including import substitution. While it might not side with Donald Trump in choosing steel as a priority for protection, it cannot escape the parallels with his ideas.

"It's awkward when the wrong person says the right things," admits Mr Montier. "He will probably end up benefiting the 1pc who have done so well out of neo-liberalism, but not everything he says is stupid."

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