C-19, QE and the Great Pivot

Forty years of neo-liberalism have produced a distorted economic landscape: forget the bedtime story about neo-liberals ‘rolling back’ the state. They co-opt the state at the service of a class war aimed at destroying the bargaining power of the working class. If you succeed – and the evidence of ‘success’ is all around us – then you drive down labour’s share of the productive surplus and real wages leading to chronic and extensive inequality. The flip side is the distortion of the corporate sector. The question is whether state response to the current coronavirus crisis can help to remove these distortions and lead us to a sustainable, mass consumption, full employment capitalism of the kind described here and here. (1)

Wherein lies the distortion? If a corporation has played the game intelligently, and well, then it has successfully exploited the state and the public sector. Perhaps it stole ‘borrowed’ patents from the public stock, or sought public subsidies for its innovation, but when the time came to pay the fair share on the return it reneged by jurisdiction shopping to cut the tax bill. If a corporation required any manufacturing capacity, that was outsourced overseas as were its ‘just in time’ supply chains. Focused on the religious mantra of shareholder value, all nonessential corporate functions were outsourced. (The halo effect of being a non-productive worker in a corporation was reduced.) This is the world not of superstar employees – although many of the employees of such firms like to think of themselves as the LeBron James of their employment niche – but of superstar firms. These firms, large-scale multinationals adept at tax evasion, have massive profitability and could fund any innovation they chose through their retained earnings. They do not, then, need external financing from the financial sector: what they do, instead, is become financial market players in their own right. (Apple’s joint issuance of a credit card with Goldman Sachs is the way of the future for this class of firms.)

This leaves the service sector. Some services, such as financial, legal and accounting services, are so closely imbricated with the successful corporate sector that it shares its (happy) fate. However, the vast majority of employment is located in a broader service sector that, unlike capital intensive production, cannot be outsourced (although it can in some cases be automated). Here we have firms where margins are very tight, profits are negligible and pay is very low. Many workers in this sector receive state benefits in work as a result of their low pay and/or precariousness of employment. (Or they may, in the UK, rely on private charity in the form of food banks.) For these sectors of the economy, the financial sector is an irrelevance. And here’s the rub: the Fordist-Keynesian model of production relied on Henry Ford paying his workers enough to buy a car. The lumpy profile of the fissured economy drives a structural deficit in consumption: wages are too low to support consumption (even when supplemented by private debt).

Suspended across these two sectors is the small and medium enterprise sector: too small to be of interest to lenders to the major corporation (whose monopolistic position gives them what every banker wants: the ability to be a price maker, not taker, in their markets to guarantee the flow of returns). A more stable and employment friendly capitalism – or successor to capitalism – working towards a full employment and mass consumption economy would have to be re-built from here.

The C-19 pandemic has seen the installation of many different kinds of emergency plumbing to see state support channelled through to firms, wages, and consumption. The ultimate origin of that support is the central bank: the Bank of England in the UK, the Federal Reserve in the USA. Both banks know that the major corporates are playing what Mark Blyth has called a “moral hazard extortion game” against the central banks with, as he also notes, the rider that “they [the central banks] are aware of it, they just don’t know how to get out of it”.

As Bill Blain has argued, the total disconnect between asset prices and the real economy cannot go on for ever. No amount of financial engineering can conceal the impact of C-19 on supply chains, manufacturing and sales in the medium term. As the weaker of the major corporates slide towards insolvency with downgraded credit ratings on the way we know exactly how they are going to respond: by firing people. As we know from Bill Lazonick’s work, we live in an economy with such perverse incentives that a firm laying off staff is welcomed by the market by an increase in its share price. Cue the Great Depression of 2021–22….

This is where, amongst the plethora of progressive solutions emerging in response to C-19 including Robert Hockett‘s suggestion of a people’s QE via a digital dollar/pound, state bailouts receiving, in return, a Golden Share of corporate stock for governments (as endorsed by the FT), part of a managed shift to greater economic democracy and worker ownership or profit sharing – there is a connection be forged between QE and the Small and Medium Enterprise (SME) sector. In contrast to the mega-corporates, this sector can be an employment buffer, particularly when workers participate in decision making. They can be a bridge between the QE agenda, the central banks’ capacity to extract themselves from the “moral hazard extortion game” and the community wealth building initiative. The long term process of rebuilding after the pandemic will keep some of the emergency plumbing permanently in place to engineer a structural reform to our current, inequality generating, fragile and crisis prone economies.

The community wealth building agenda arose from the ruins of extractive capitalism when localities such as Cleveland in the USA and Preston in the UK had economically to regenerate in their own terms. The key was to keep both production and consumption local with local government playing a key enabling role. One way to integrate all these different approaches is to give Central Bank QE the aim of supporting the SME sector in particular via wage support and providing much needed capitalisation with a retained stake in these enterprises. Taken in aggregate, this stake holding should be used to leverage employee ownership and a Citizens’ Sovereign Wealth Fund during the post-C19 recovery that will not return us all to the secular stagnation of the failed “recovery that wasn’t” from the global financial crisis of 2007–8. In the UK context, and to a certain extent in the USA, a community wealth building strategy based on SMEs could also contribute towards a regional re-balancing of wealth (and power) to geographical locales beyond London and the South-East or America’s coastal megacities.

Central bank reaction to this crisis has been swifter and more focused: perhaps one can hope it will also lay the foundation for a more resilient economic future as the pandemic tails off and we return to a new ‘new normal’ that replaces the old new normal. The C-19 pandemic will pass: the opportunity it presents for a more just, sustainable and inclusive capitalism ought not to be allowed to pass along with it.

(1) E-mail me for an offprint of the latter…