Wednesday, 4 January 2012

Stiglitz and Job Creation

Nat O'Connor: Joseph Stiglitz has an interesting three-page article in Vanity Fair where he reassesses the causes of, and therefore necessary solutions to, the current "Long Slump" in the USA, comparing it with the Great Depression.

In addition to the massive damage caused by the banking system and financial speculation, there were social and technological changes underpinning the Great Depression and (Stiglitz argues) similar changes in employment patterns underpin the current Long Slump.

Before the Great Depression, one in five Americans worked on a farm. Today, it is one in fifty. Before the Great Depression took hold, agriculture in the USA was already in difficulty. Technological improvements in machines, seeds, etc had lead to much higher production. While this might seem good for one farmer, when all farmers have higher production, prices fall due to the surplus supply. Part of the long-term solution, Stiglitz argues, was the painful move of many Americans away from farming to working in manufacturing. The main driver of this was World War 2, which led to massive Government spending on war industry, which laid the basis for a massive shift towards industrial production post-war. Combined with the GI Bill, which gave veterns access to university education, the nature of employment was transformed.

Obviously, Ireland had a quite different history of development. Movement away from the land was slower and we have maintained small farms, whereas the US has moved to large-scale industrial agriculture. Alhough Ireland had some earlier industrialisation (Lemass/Whitaker), only in the 1980s and 1990s did Ireland see employment rise in newer industries like IT, pharmaceuticals, etc. Nevertheless, Ireland experienced the same technological shifts in agriculture that have resulted in far less people working in farming now than was the case in the 1930s. Unlike the USA, mass emigration out of Ireland disguises the extent to which there was an exodus from the land to other areas of employment.

Stiglitz then goes on to argue that similar improvements in production (largely) combined with global competition from low wage countries (but perhaps to a lesser extent) mean that machinisation is now dominant in US manufacturing, rather than mass employment. Hence, there is a need to shift the expectations (and skills) of a great number of people from industry to services.

Sitlitz has two conclusions about how to bring about the transformation from manufacturing to service industries. His second conclusion is that banking reform is still necessary and that little has been done to date in the USA. We need to put much more regulation on the banking system to ensure that it serves society and lends money to the job creating small and medium enterprises in the real economy. (This point seems equally relevant to the Irish case.)

His first conclusion is more challenging. Stiglitz argues that the only way to resolve the crisis in jobs is for the State to engage in a massive programme of productive investment; preferably without another war. We know what the long-term drivers of economic development are: education, technological innovation and infrastructure. The State needs to borrow to invest heavily in these - reversing decades of declining investment - in order to do no less than transform employment patterns.

It's a big challenge to the failed strategy of austerity, which has seen cutbacks and job losses combined with an unreformed banking sector that continues to pay bonuses and engage in financial speculation, with public money.

It is obviously more difficult for the State to engage in major productive investment in Ireland because of the difficulty in borrowing money. Nevertheless, there needs to be much more discussion of the development path we are on. What is the future for jobs in Ireland? We know we can't go back to 12 per cent of the work force employed in construction. Half of that level would be a long-term norm. So just where are the jobs going to come from in 2016 and 2021? Even if resources for investment are limited, we still need to focus on education, technological development and the hundreds of different supports needed to retrain workers and build the capacity of Ireland's businesses to create jobs. And it seems likely that the State needs to lead the way towards increasing productive investment in every way it can.


Paul Hunt said...

There is huge scope for efficient financing of efficient investment in the infrastructure and utility sectors which would reduce final prices, increase real disposable incomes and free up resources for efficient labour market policies. But nobody wants to know.

Instead we've got this grubby little deal on the part-privatisation of an integrated ESB which will allow it to carry on gouging consumers (and pre-empts any disruption in the supply of 'gravy' for its workers that Brendan Ogle highlighted - and might even add some more) while Labour will swallow this in exchange for, at least some of, the proceeds being spent on its pet projects and whizzo schemes.

And there will probably be less interest in the fact that Labour in the UK is rediscovering the liberal core of the social democratic settlement that the great post-war government began to implement:

In the same way that Keynes provided the liberal core of the national and international economic policies subsequently implemented, Beveridge provided the liberal core of its social insurance and welfare policies.

But, of course, unlike England, genuine liberalism mever secured any traction in Ireland. It is much easier to rant about neo-liberalism which is only tenuously related, has secured only minimal political traction and has been purloined totally as a convenient cover by the Neocons and their fellow-travellers.

Nat O`Connor said...

Thanks for the link to the article re Beveridge. It's very interesting. But I think it is important to be more specific about why one might term Keynes or Berveridge's ideas the "liberal core" of economic and social policy respectively.

The (very useful) online Stanford Encyclopedia of Philosophy identifies Keynes as part of "What has come to be known as 'new', 'revisionist', 'welfare state', or perhaps best, 'social justice', liberalism". (See section 2.2)

This form of liberalism is not necessarily what is widely understood by political liberalism in Europe. It challenges the preminance given to private property and markets, and has a much more significant role for the state: "the new liberalism arose in the late nineteenth and early twentieth centuries, a period in which the ability of a free market to sustain what Lord Beveridge (1944: 96) called a ‘prosperous equilibrium’ was being questioned. Believing that a private property based market tended to be unstable, or could, as Keynes argued (1973 [1936]), get stuck in an equilibrium with high unemployment, new liberals came to doubt that it was an adequate foundation for a stable, free society. Here the second factor comes into play: just as the new liberals were losing faith in the market, their faith in government as a means of supervising economic life was increasing. This was partly due to the experiences of the First World War, in which government attempts at economic planning seemed to succeed" (ibid)

Paul Hunt said...

@Nat O'Connor,

I'm sure we could debate at great length precise definitions of liberalism and I certainly take your Stanford-prompted point about the evolution of liberalism from the brutalism of Trevalyan during the Irish Famine to the civilised take of a Keynes or a Beveridge. But the key challenge is finding workable and sensible boundaries between markets based on property rights and the state.

Since the beginning of the inevitable reaction during the '70s to the widespread state economic participation and financial repression of the post-war social democratic settlement, liberalism has found itself pushing the boundaries towards markets. The fact that this shift has been hijacked and abused - with economically devastating results - by the Neocons does not invalidate the attempt to move these boundaries in a manner that will secure broad-based popular consent.

And such democratic consent is the sine qua non for the type of governance I think we would both like to see.

However, I would also be interested in your take on this grubby ESB deal and whether or not the possibility of securing some funding of the investments you desire justifies its grubbiness.

Paddy M said...

@Paul Hunt:

The fact that this shift has been hijacked and abused - with economically devastating results - by the Neocons does not invalidate the attempt to move these boundaries in a manner that will secure broad-based popular consent.

I've been reading your postings for quite a while here and on other sites and it seems to me that you have a determination to mislabel what neoconservatism and neoliberalism actually are.

The group generally referred to as neoconservatives seem not to be particularly market fundamentalist ( or even especially focussed on economic issues.

The term neoliberal, on the other hand, is generally understood to refer to the ideology behind the Washington Consensus.

While you might prefer, like Humpty Dumpty, for "words [to] mean what [you] say they do", I think it's reasonable for the rest of the world to be allowed to use the commonly-accepted political vocabulary rather than have to pander to your particular sensitivities.

Paul Hunt said...

@Paddy M,

Fair comment - and thank you for taking the time to engage. I agree I am trying, obviously unsuccessfully, to move beyond the accepted labels and to demonstrate, in actual fact, how economic and political power has been secured, exercised and abused to the detriment of citizens everywhere.

Globally, it is the Neocons who secured power and influence in the inevitable reaction from the mid '70s to the obvious failures of the post-war social democratic settlement. Reagan wasn't a neo-liberal. He and Bush Snr spent and spent to advance the interests of the US (as they perceived them) and to advance the interests of big US business (and left an enormous fiscal deficit and government debt for Clinton to clear up). Thatcher wasn't a neo-liberal. She used up the North Sea bounty to destroy existing economic relationships to make Britain safe for rapacious capitalists and, like Reagan, to advance Britain's interests (as she perceived them) abroad. Bush Jnr. was captured totally by the Neocons - and Blair, because he lacked any principle (under than a political gift to secure power), succumbed to the Neocons. And this virus spread in various ways theoughout many of the advanced economies.

The advocates of neo-liberalism, the economists who provided some intellectual foundation and the institutions that advanced it (under what became known as the Washington Consensus) were, and are, simply 'useful idiots' for the Neocons.

When corruption is being investigated people say 'follow the money'. When an economic and financial calamity occurs (as we have now in spades), I say follow the power and the money. Don't be fooled by the labels or the banners.

In fact genuine neo-liberals have as much reason, if not more, to be furious with the Neocons as the progressive-left have. But they are far less averse to the Neocons' movement in the boundaries of the state to provide corporate welfare than they are to the desire of the progressive-left to move the boundaries back to where they were during the post-war social democratic settlement. And, in some respects, the neo-liberal message, that has been purloined by the Neocons and their fellow-travellers) appeals to large numbers of voters with aspirations to better themselves and their families - some call them the 'strivers'. In socio-economic terms these were the C2s in the UK and the 'blue-collar' workers in the US that Thatcher and Reagan, resp., pulled across from the Labour and Democratic camps. The Left has lost these voters as well in Europe and they are the constituency which must be won back if the centre-left is to secure a popular plurality to govern again.

There is no going back. We are compelled to move forward and to re-apply social democratic principles in this new era. The Left in Europe has not learned this. One form of insanity is doing something to achieve a desired outcome, discovering that the action hasn't the desired effect and then doing the same thing over and over again in the hope of achieving the desired outcome.

The labels are grand and they provide opportunity for some enjoyable semantics. The challenge is to persuade enough voters to consent to awarding the power to govern.

Nat O`Connor said...

@Paul Hunt
When it comes to ESB, or any of the commercial semi-states, I'm in favour of taking a long-term view of the asset and its strategic importance to society, the economy and the environment.

That may sound vague, but we'll be publishing a paper soon on state assets which will put a bit more flesh on what this might mean. For example, I am interested in the 'triple bottom line' approach, used by the UK think tank NEF among others.

To take the example of ESB, what this means to me is that we need to have a national conversation on energy: as a basic necessity for modern life; as a human right perhaps; as a technical issue in terms of engineering; as a resource issue in terms of what fuels we are reliant on (and the geo-politics of this e.g. Russian gas or Saudi oil); and as a major factor in our CO2 emissions.

Having put some shape on these issues through this higher level national discussion, the question is then how can we optimise the production of energy.

I'm not an expert in this field, but my understanding (off the cuff) is that currently we have one large national near-monopoly (ESB), but with growing competition from another semi-state (Bord Gais) and one significant private company (Airtricity). There is some diversity in generation, but the national grid (EirGrid) is a full monopoly.

At this point, the debate you are focusing on between 'state' and 'market' comes in. We need to both optimise state involvement and optimise the operation of the overall market; these are not mutually exclusive tasks. The state's role could be optimised in many ways, for example by clarifying what roles the Government will take in setting clear objectives for ESB, Bord Gais and EirGrid. The operation of the market could be optimised by regulation that is clearly guided by the goals of serving society's energy needs, ensuring the economy has affordable energy and ensuring the environmental costs of energy production are reduced through increased development of alternatives, renewables, energy use reduction projects, etc.

The Government has chosen to sell a minority share in ESB. It remains to be seen who will buy it, and whether this will be accompanied by a more strategic level discussion on Ireland's energy security.

Paul Hunt said...

@Nat O'Connor,

Thank you. Yes, this all sounds wonderful, but vague. Perhaps, it's best to wait for your forthcoming paper.

But I fear, with this minimalist grubby decision on the part-privastisation of the ESB, that the ship has sailed. There has been no real debate in the lead-up to this decision - a debate, for example, where positions are advanced, there is adversarial disputation in an open and transparent manner and a decision is reached that balances inevitably conflicting narrow sectional economic interests in the public interest.

The intent of government - and this government is no expection - is to close down public debate that might compel it to justify or modify its proposals in the public interest. Decisions are made behind closed doors by ministers, their senior officials and advisers and influenced by who knows what narrow sectional economic interests. The resulting decision is promulgated as a fait accompli, the spin machine is cranked up, key media players are fed the line, TDs are given their 'talking points' and the Oireachtas, when it comes to enacting or sanctioning the decision, is simply rolled over. We'll have the usual roaring and shouting after the event, but it won't make a blind bit of difference.

This is what is happening in this case and, indeed, the Government is intent of whittling down the programme of structural reforms, set out as a support condition by the Troika, to the point of nothingness. This ESB decision is simply the most egregious example.

I fear you are being naive in the extreme if you think this is the prologue to "a national conversation on energy", or a "higher level national discussion", or a "more strategic level discussion on Ireland's energy security".

So far as the Government is concerned it's 'box ticked, next question, please'. It never ceases to amaze me when some many people, with obvious intelligence and capability, put in so much effort in vain and fail to grasp how the game is being played even as it unfolds before their eyes.

There may be issues in relation to the other semi-states and the water industry. But these are being covered by this NewERA beast, that, as a non-statutory body, is being hidden behind the walls of the NTMA and no public scrutiny is possible. There is absolutely no reason to believe that any decisions on NewERA will not be handled in exactly the same way as this grubby decision on the ESB.

Time to wake up and smell the coffee?

Nat O`Connor said...

The focus on the bigger strategic issues (like energy security and what people need and want in terms of electricity supply) is essential to opening up any public debate on what the Government's strategy on energy (or lack thereof). It is only in this context that people will see the importance of energy prices and sustainability and therefore question how well the Government is regulating the market and optimising its ownership of ESB, Bord Gais and EirGrid.

You refer to the part-privatisation of ESB as a "grubby decision". You don't elaborate on this, but I think you are implying that the Government has taken the path of least resistence by chosing to raise money from part-selling ESB in a way that limits the new minority stakeholder's ability to influence how ESB is run. (And you've made clear in previous posts that you are dissatisfied with electricity prices, wages paid at ESB, etc.)

I don't think that this decision is necessarily a prelude to the more comprehensive energy strategy review that I would like to see. But it should be. And - whatever the faults of ESB - the part-privatisation decision leaves open more options than a full privatisation or other drastic action, which would have been taken in the absence of a long-term energy strategy for Ireland. From that point of view, it may have been the least worst option - as well as being a political compromise within the Government coalition.

And of course, it is not just about energy, which brings us back to the topic of this post. By minimising change to ESB, we preserve its commitment and ability to raise and invest considerable sums in energy infrastructure over the coming years - at a time when productive investment is at an all-time low. Likewise, it continues to employ people all around the country, who contribute to aggregate demand.

But rather than get into a further row about whether or not the decision was "grubby", can I invite you instead to send us in a guest blog post over the coming weeks, outlining a couple of your ideas on the "huge scope for efficient financing of efficient investment in the infrastructure and utility sectors which would reduce final prices, increase real disposable incomes and free up resources for efficient labour market policies."

Paul Hunt said...


Many thanks for the invitation to submit material along the lines you indicate for a guest post. This is something on which I am engaging in another context; there may be some economies of scope.

And, though it may be difficult for some readers here to accept, I do modify my views and opinions - and even discard some - in response to exchanges here and elsewhere. Valuable common ground and progress may be achieved only via open, adversarial disputation based on facts, evidence and analysis.

One problem, though, is that the economy is so small that it is very difficult to avoid naming names and, with the stringency of the libel laws, this has a chilling effect on freedom of expression. I have frequently been asked to produce the evidence, but have refrained lest I attract the attention of m'learned friends. In addition many people, by virtue of their occupations, are constrained from speaking out. Furthermore, there is an entire 'industry' of advcoates, analysts, researchers, lawyers, accountants, 'tame' consultants and PR operatives who are employed to advance and protect the positions of narrow sectional economic interests. And they seem to have infinite time and resources to 'queer the pitch' in the interests of their paymasters.

But, all that aside, I value engagement here. Although Labour in the UK hackneyed the phrase to such an extent that it now attracts contempt and ribald comment, my primary focus is on reconciling 'economic efficiency' with 'social justice'. I remain convinced that this objective is shared here - though some of the positions adopted and utterances made might encourage doubt.

I will be in touch.