Stumbling and Mumbling

Author: chris dillow   |   Latest post: Tue, 29 Sep 2020, 4:14 PM


Avoidable unemployment

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We Marxists are often accused of being ideologues. This is silly. Everybody has an ideology, in the sense of a set of preconceptions about how the world works. The difference between we Marxists and others is that we are sufficiently self-aware to know this. By contrast, some of the most dangerous ideologies are those which their believers take for granted despite being wrong. This, I suspect, helps explain what is otherwise a paradox.

The paradox is that most voters approve of the government's handling of the coronavirus crisis despite the fact that Universal Credit claims show that unemployment is soaring, especially perhaps among freelancers: the ONS expects (pdf) it to rise by two million, to over 10 per cent of the workforce.

This rise, though, is largely preventable. In principle, the government could protect jobs and income via tax rebates or debt interest or rent holidays. Of course, the lockdown means that output and incomes must fall. But in principle, all of this fall could be borne by the public finances, leaving firms and individuals cocooned.

Now, there is a case against doing this, as Giles Wilkes has shown. Protecting firms in this manner would mean bailing out firms that would have gone bust anyway: many retailers and restaurants were failing before Covid-19 struck.

Giles has a point. Economic growth requires creative destruction: one reason (of many) for our stagnant productivity since the financial crisis has been that zombie firms have blocked the growth of more efficient ones, as weeds prevent desirable plants from growing.

What's true in normal times, however, is not necessarily true in crises. Right now, the best-run restaurants and non-essential retailers are seeing exactly the same collapse in demand as the worst ones. What determines their survival chances is not so much their efficiency as their balance sheets: cash-rich firms have better survival chances than indebted ones. But the correlation between efficiency and balance sheet strength might not be high: a firm can have high debt because it has been badly managed, but it could also be because it is a well-run outfit that had sensible expansion plans. Letting market forces work now would not, therefore, necessarily see the survival of the fittest.

What's more, we need creative destruction in normal times so that the resources released by failing firms can go to more efficient ones. But this won't happen when even efficient firms are locked down. So there's no economic benefit from letting firms fail now. There is however a massive psychological cost. Even in the best of times, unemployment (pdf) is a huge source of misery. To force people out of work when they have no immediate hope of finding another job would be an act of cruelty.

For these reasons, I think firms should be supported now. The time to let creative destruction rip is when aggregate demand has recovered. Giles is right to say this will require a huge and difficult pivot. But it should be tomorrow's problem, not today's.

Whatever its merits, though, Giles' argument, however, does not explain why the public are so accepting of soaring unemployment: voters don't really support a free market economy, and certainly not the chill winds of creative destruction.

Instead, I suspect this tolerance reflects an often-implicit ideology, which rests upon two related errors. One, which I've described earlier is that people often conflate costs with what are in fact transfers. Journalists speak of the "cost" of the Job Retention Scheme when what they really mean is the size of the transfer. In fact, it is wrong to speak even of this as a "cost" to the Exchequer. It's plausible that preserving jobs today will permit a stronger expansion in future - for example, by preserving valuable matching capital; maintaining capacity thereby reducing the inflation constraint on growth; or by mitigating scarring effects upon animal spirits. If so, the Exchequer will gain future tax revenue.

This error is especially nasty when combined with another one - the tendency to think of the government finances as being like a household's. Because we as consumers cannot afford some things, we infer that governments cannot afford them either, and so consider it impossibly expensive for the government to fully cocoon the economy.

Of course, as sensible economists have pointed out for ages, this is plain wrong. We can print money to buy increased government debt. The only constraint on government borrowing is inflation. And you don't fight inflation tomorrow by destroying economic capacity today.

As I say, the cost error and the government-as-household error are often only implicit in most voters' minds. But they have been reinforced down the years every time an interviewer asks "where will the money come from?" and confuses costs with transfers. Lukacs

For many, ideology, like culture, is "everything you don't notice" - and, therefore, what you don't question. Every economist knows that the government-as-household metaphor is gibbering imbecility, but it has been implicit and unquestioned in the media and in voters' minds.

This leads to a version of what Georg Lukacs called reification. Although the economy is a set of relationships between people and therefore something which we should be able to control, people come to see it as an external force which governs us because they under-estimate (often unconsciously) the amount that governments can do. As Lukacs put it:

A relation between people takes on the character of a thing and thus acquires a 'phantom objectivity', an autonomy that seems so strictly rational and all-embracing as to conceal every trace of its fundamental nature: the relation between people.

Rising unemployment is thus seen as a natural disaster rather than what it is - a man-made catastrophe. And so the government escapes blame.

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