There was an interesting article in the Financial Times on Monday (June 26, 2017) – Why US big business is listening to Bernie Sanders – which, despite the somewhat misleading and over-the-top headline, tells us a little of the way the full neo-liberal attack on workers is in regression. Not, I might add because of any philosophical or moral consideration. But, rather, the top-end-of-town is starting to work out that their headlong race-to-the-bottom approach over the last three decades is not actually in their best interests. The top-end-of-town is not that bright. More brutish than bright and it takes some time for them to work out what we have known all along. Globalisation mixed with neo-liberalism is poison. Globalisation mixed with social democracy is progress.
The FT article essentially recounts an interview between the journalist and the outgoing head of US multinational General Electric.
The main points of interest are:
First, that Bernie Sanders’ (described as a “leftwing populist”) strategy to use a “grassroots approach to connect with workers” is the way to go.
Second, “The financial crisis of 2008, its continued economic aftermath, and the political populism that followed has changed the paradigm for global business in profound ways.”
How? “‘you need more than just consumption’ to drive forward the economy of rich nations such as the US or those in Europe.”
The era of attacking public services, workers’ rights and their capacity to share in productivity growth and buying off the resistance that one might expect as a result with increasing mass consumption possibilities facilitated by increased access to credit (as real wages growth stagnates) has not delivered.
The GE CEO said:
Globalisation can’t be just about outsourcing and low wages …
We have been making this point for some decades and finally the corporates are realising the credit-binge, flat wages approach with outsourcing, privatisation and increased financialisation does not bring stable economic growth.
It brings increasing inequality, financial instability, degraded productive sectors and public infrastructure.
It is not the increased globalisation of supply chains that is at fault. Rather, it is the neo-liberal policy overlay that has been the cause of the problems.
For example, if governments had have enforced fair trade rules then the capacity of multinational firms to exploit ‘cheaper’ labour would have been reduced.
Further, if governments had not allowed the financial sector to spiral out of control, then the access to credit would have been more limited and this would have forced firms to realise earlier that they have to allow real wage rises in proportion with productivity growth to ensure that domestic demand could absorb production.
Please read my blogs – The mass consumption era and the rise of neo-liberalism and The Left confuses globalisation with neo-liberalism and gets lost – for more discussion on this point.
The GE CEO now claims that:
The best way to share the benefits of globalisation … is to copy the Germans, and in particular the “Mittelstand” companies’ model of vertically integrated manufacturing ecosystems, often anchored by a large group and surrounded by smaller ones that support it. In this model, highly skilled (and highly paid) workers create high-value goods for export.
However, the German industrial model and export-bias are not a sustainable model for world development.
Please read my blog – Germany is not a model for Europe – it fails abroad and at home – for more discussion on this point.
Export-led growth strategies typically require other nations running extended current account deficits. It sufficient diversification and specialisation occurred then more nations could exploit an export-led approach.
But what typically happens is that a few nations become dominant across a wide range of products/services and then rely on the rest of the world importing from them.
Where the “Mittelstand” companies provide a model is in their regard for the value of their workforces and the way in which vocational training is embedded in the hiring and production process.
But we knew about the benefits of pursuing a so-called ‘high-wage economy’ in the C19th.
For example, John Atkinson Hobson (born 1858) was a British economist who sought to integrate liberal social ideas with democratic socialist principles.
In his 1909 book – The Industrial System – (published by Longmans, Green and Co), which analysed the distribution of earned and unearned income, , he developed the argument that “the unproductive surplus” which (p.viii):
… includes the whole of the economic rent of land, and such payments made to capital, ability, or labour, in the shape of high interests, profits, salaries, or wages, as do not tend to evoke a fuller or a better productivity of these factors … is the principal source not merely of waste but of economic malady. For it represents the encroachment of a stronger factor upon a fund which is needed, partly for increasing the efficiency of other factors, labour in particular, partly as social income to be expended in enlarging and improving public life. This unproductive surplus, moreover, as ‘unearned income’ acts upon its recipients as a premium on idleness and inefficiency spent capriciously on luxuries, it imparts irregularity of employment to the trades which furnish these; saved excessively, it upsets the right balance between the volume of production and consumption in the industrial system.
A modern way of saying the same thing is that the real wages of productive labour have to grow in proportion with productivity and profits should be reinvested to enhance productivity growth.
Otherwise there is a mismatch between production and consumption, which, in the neo-liberal period, was temporarily pushed aside by the massive growth in credit.
However, that ‘solution’ has proven to be unsustainable.
Chapter XIX of Hobson’s book is entitled “The Human Interpretation of Industry” where he makes the case that focusing on the working experience is as important to society as the utility derived from consuming the goods and services arising from that work.
He argued that an objective view of “industry” – counting costs, machines, etc – misses the point that
He also eschewed what he called the “‘heroic’ view of industry” which eulogised the “entrepreneur” (P.305):
… treating him as the sole repository of a will and intellect which uses labour and capital, as it uses natural resources, as mere instruments for its creative energy to work with.
Hobson argued that workers exercise “ability” and “the delicate act of invention, or in some fine calculation of the play of forces in a market, or in a single critical act of organising judgment, carries us into the most intricate region of psychology, for we have to trace the consequences of this determinant act of ‘ ability ‘ in innumerable changes which it brings about in the wills and minds of the multitudes of owners of labour-power and capital that co-operate with its owner.”
This is, of course, in direct contradistinction the hero view that Ayn Rand developed in Atlas Shrugged and is a recurring theme that the wealth generators are the bosses.
So while consumption is important to our well-being, so is work and the ability to exercise our capacities and receive adequate rewards.
The Financial Times article also notes that investment in one area (region, sector, firm) generates multiplier effects:
… for every dollar of economic value they create, the community itself earns another $1.50. That’s why even though technology has decreased the overall number of manufacturing jobs in the US, the positions that exist may still end up supporting a large amount of high-quality economic activity.
The idea of the expenditure multiplier were core macroeconomics before the neo-liberals came along. They sought to play down the idea because they wanted to mount a case that government spending was wasteful and eroded national income.
This was the crowding out thesis whereby a $1 of extra public spending would generate an increase in GDP of less than a $1 and the more extreme versions of the thesis predicted that national income (GDP) would actually fall (negative multiplier).
The argument was always false and the GFC has demonstrated that. Remember the infamous IMF mistake which underpinned the Greek bailout and related austerity program?
The IMF adopted the mainstream position of multipliers less than 1. So cutting goverment spending would lead to an increase in total GDP. In 2012 they were forced to admit they had made a grave error and the multipliers were more like 1.6 – which explains why the Greek economy collapsed.
Every net government euro taken out by austerity led to a further 60 euro cents of private spending falling off.
Please read my blog – Spending multipliers – for more discussion on this point.
The point is there are strong regional multipliers arising from regional industrial strategies that emphasise strong investment, high real wages growth and localised procurement.
The GE CEO also admitted that he has learned that the best resource available to a firm desiring to become a high productivity operation, is the “the talent pool, which tends to be a function of the quality of the local educational system.”
The race-to-the-bottom approach which includes hacking into public educational investment at all levels undermines “the most important thing” that the GE CEO believes influences the success of his business.
The Financial Times article concludes that:
The lesson here is that public goods matter. Business doesn’t operate in a laissez-faire vacuum. Policy choices have an impact, and economic value flows to communities (or countries) that invest in things such as education and training.
And these very ‘public goods’ have been at the forefront of the attack by neo-liberals.
As the Financial Times article said:
… the most valuable, advice for future corporate leaders is to spend more time in factories and less in Davos. As he has put it, “somehow, ‘global thinkers’ have grown increasingly distant from the needs at ground level. We made globalisation its own political party. The ‘party’ saw globalisation as theory, rather than understanding the impact on normal people, or the critical investments needed to build competitiveness. We rationalised outsourcing as merely good business,” ignoring the larger economic impact on communities, and “hid behind” trade deals that were better for companies than workers …
The picture is clear.
China is demonstrating the problems of the neo-liberal approach.
The low-wage development has exhausted the coastal areas, which provided lower transport costs (access to ports). Workers are unable to live in the industrial cities along the coast.
Further, the growth engine will have to move inland to the hinterland. But then the transport cost advantage declines and the demands for higher real wages bring the low-wage model to an end.
This is why the Chinese government is intent on pursuing a domestic growth strategy through increased education and innovation.
Chasing the low-wage dream in China has also led to industrial wastelands in the previous core economies, such as the US. The companies are now learning that the benefits of that approach are finite.
Suppressed income growth reduces the growth in consumption expenditure. Without strong growth in investment, productivity slumps.
Taken together, domestic demand stalls and sales become reliant on export markets that are unable to support the sort of growth the companies enjoyed in the golden years after the Second World War.
I constructed this table (using AMECO macroeconomic data). It shows the evolution in the share of public and private investment in GDP (the “investment ratio”) from 1960 to the current day.
As you can see, there has been, typically, a sharp decline in of both public and private investment shares over the decades, accelerating during the neo-liberal era.
And in more recent years, consumption hasn’t picked up the slack and as a result, the neo-liberal era has delivered lower growth rates on average than the full employment era that preceded it.
The message from the GE CEO is exactly that.
1. Firms have to return to investing in productive infrastructure rather than put their profits into the unproductive financial markets.
2. Public investment in education, training is crucial.
3. Public investment in physical infrastructure ‘crowds in’ private investment rather than the opposite.
4. The work experience is an important goal as much as the provision of high quality consumption goods and services.
5. Chasing low-wage nations to expand profits – via outsourcing etc – is a myopic strategy. It is better to develop home-grown talent that provides a virtuous cycle of spending, incomes and real benefits.
But the Modern Monetary Theory (MMT) gang have only been saying this for 30 years or more.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.