Tag: Economics

Categories
Uncategorised

High Income

For most of modern history, cannabis has primarily been produced in lower income countries for consumption in Europe and North America. Its provenance has shaped the way we speak about it: ‘kush’ stems from the Hindu Kush mountain range in South Asia, ‘reefer’ may refer to the Rif mountains in Morocco, while strains like ‘Malawi gold’ and ‘Panama red’ directly advertise their origins. In recent years, the wave of cannabis legalization has raised hopes of redressing this imbalance. Following higher income countries like the US, Canada and Germany, traditional production countries such as Malawi, Mexico, Colombia and Morocco have begun to update their cannabis laws: aiming to give legal producers a fair cut for their crops, so that profits no longer flow to organised crime via illegal exports and sales. However, it seems increasingly likely that as the cannabis market legalizes and formalizes, it will reproduce many of the same symptoms as its forerunner, with traditional producers again finding profits located elsewhere – this time primarily with formal firms in high income countries. Understanding these problems means interrogating the reciprocal process by which policy makes markets and markets make policy.

While legalization has taken different shapes across higher income countries, it has typically had a common feature: it has not created structures for the import of recreational cannabis. In itself this is unsurprising: the protocols for such a paradigm shift are non-existent, and policymakers want to be seen as moving cautiously and ensuring a maximum of quality control. Yet the absence of such structures has amounted to an infant-industry protection or import-substitution policy for new domestic producers, whose international competition is still limited to the illegal market. As a result, domestic production in richer countries has increased rapidly. The market has been flooded with new entrants who have established monopolies at home while investing in production capacity abroad. At first sight they seem to be a diverse bunch, ranging from tobacco companies to celebrities. But they share the ability to set up highly capitalized businesses and navigate a deeply unstable legal environment.  

Diverse models of legalization are simultaneously emerging in many low- and middle-income countries. Some, like Mexico, remain sceptical of larger commercial actors and focus on small-scale production for personal consumption. Others are gravitating towards a framework that favours highly capitalized investors, akin to that of North America. In Lesotho, cannabis farming licenses cost more than a quarter million dollars and have only been granted to five producers so far. Yet for most small producing countries, the legalization of domestic recreational consumption has either lagged or been explicitly precluded, while markets for medicinal use have not reached the scale of those in the US, Canada or Germany. Consequently, conditions for producers in lower income countries remain unfavourable. Given the set-up of their domestic market, the main pathways to growth bring them into direct competition with producers in more affluent states.

These are not the only factors that increasingly make large capital reserves a requirement for cannabis production. For decades, new strains developed predominantly in consumer countries like the US or Canada have entered traditional producer countries. They bring some immediate benefits for farmers, promising higher yields and higher THC contents, both of which are increasingly necessary to compete on the market. But they also commonly require significantly more resources – water in particular – which presents a challenge for small-scale traditional producers in comparatively dry areas, such as the Rif mountains. This threatens to generate another iniquitous dynamic – already seen in various agro-processing industries like cocoa and coffee – in which poorer countries do not benefit from the profits of expanding legal cannabis markets yet bear the brunt of their environmental impact.

Of course, the recreational cannabis trade is still in its infancy. It is unclear how many countries will legalize its use in the coming years, what kind of cannabis products will be offered to consumers, and how the illegal market will function alongside the legal one. But beneath this flux, structures of accumulation and advantage are crystallizing. They suggest that, by the time formal international trade structures are fully developed, most of the profits from growing cannabis will be concentrated in countries which were previously peripheral to production and central to consumption. Within just a few years, cannabis will likely follow the same trajectory of many agricultural products associated with low- and middle-income countries, whereby surplus is hoarded in processing, financing, and retail centres far away from where they are grown. It may also replicate the current distribution of profit in illegal value chains, where most of the retail price for cannabis bought on the street in high-income countries goes to smuggling and distribution networks rather than producers.

Of the ten largest cannabis companies in North America, four have already made inroads into South America. Among them is Canopy Growth, a major Canada-based firm, which has also established subsidiaries in Australia, Europe and Africa. While such investment is generally welcomed by the governments of low-income countries, concerned with promoting new industries and increasing tax revenue, its impact – including on the public finances – will be determined by how it is regulated. And so far, there are no guarantees that it will be positive, especially given the lobbying efforts of these emerging corporations. (Here the tobacco industry offers an instructive parallel.)

This scenario of increasing inequality is not inevitable. Legalization models that facilitate smaller-scale production, from the non-profit markets established in Malta to the reparations for historically oppressed farmers in Mexico, offer an alternative approach. Cannabis taxation in traditional producer countries could likewise become a valuable policy tool. But it is vital to note that if cannabis policymaking continues to develop in an ad hoc and spontaneous manner, it will not yield a great developmental dividend. Indeed, it may simply reproduce the unevenness of illegal markets under lawful management.

Read on: Harriet Friedmann, ‘Farming Futures’, NLR 138.

Categories
Uncategorised

Goodbye Erdoğan?

Since 2019, Turkish economic policy has been characterized by Erdoğan’s repeated U-turns. Initially, his regime adopted a programme based on low interest rates and credit expansion, breaking with neoliberal orthodoxy in order to consolidate political support among small and medium-sized enterprises (SMEs). This led to the devaluation of the Lira, high rates of inflation, a mounting current account deficit and external debt, thanks to Turkey’s high dependence on imports. In an attempt to counterbalance these effects, the government pivoted to a traditional neoliberal programme: high interest rates to attract foreign capital and stabilize the value of the TL, along with credit contraction to fight inflation and indebtedness. Yet, because such policies imperil the AKP’s electoral base, the party has continually reverted to a more heterodox approach – a back-and-forth oscillation that Ümit Akcay has analyzed in these pages.

As long as the Turkish economy was integrated into the transatlantic neoliberal order, there appeared to be no alternative to Erdoğan’s zigzagging. The strategic imperative to keep SMEs afloat by means of expansionary economic policies was irreconcilable with the country’s position in the world market. However, more recently, this oscillatory movement seems to have been abandoned in favour of a firm commitment to economic heterodoxy. Since spring 2021, the interest rates of the Central Bank (TCMB) have been pushed down to the extent that real interest rates are now far into negative territory (approaching minus 80% at their nadir). Conventional Lira deposits, held by the vast majority of the population, are yielding massive losses. Meanwhile, commercial and consumer credit has been massively expanded.

As expected, these measures allowed Turkey to attain high growth figures in 2021 – but at the cost of a massive devaluation of the Lira and skyrocketing inflation. High growth concealed a massive slump in living standards for the majority of the population, whose incomes did not keep pace with inflation despite compensatory measures such as hikes in the minimum wage, price controls and tax reductions. This dynamic led to an economic standstill towards the end of 2021, as businesses were unable to make sound price calculations and lost out on commercial contracts denominated in foreign exchange. A full-scale economic catastrophe was only narrowly avoided when Erdoğan announced what was essentially a state guarantee for foreign exchange-hedged deposits on 20 December 2021.

Shortly after that, the TCMB rolled out a so-called ‘liraization strategy’ which involved de facto foreign exchange control mechanisms: restricting access to TCMB loans for companies with high amounts of foreign exchange, banning the use of foreign exchange in domestic transactions, and creating incentives for banks to switch to TL deposits. This aimed to boost private sector demand for TL and keep devaluation at bay. But because there were no deep structural changes in the Turkish economy, all the ills of this heterodox approach – devaluation, high inflation, a high current account deficit – returned or persisted. This time, though, they were accompanied by rising interest and debt.

This gave rise to an even more fatal policy paradox. Over the course of 2022, Turkey began to experiment with a series of ‘macro-prudential measures’ to contain the crisis, such as de facto capital controls – economic penalties for banks that gave out loans with interest rates above 30% – to boost low-cost lending in TL to the private sector. However, as devaluation decelerated due to the liraization strategy, the inflation rate remained above the devaluation rate, because of the delayed effect of devaluation on inflation and the inflationary pressures emanating from the world economy. This, in turn, led to the effective appreciation of the TL.

In other words, Erdoğan’s policies ended up achieving the exact opposite of what they intended. Rather than deflating the price of export goods, they managed to raise it. Similarly, lower interest rates were accompanied by a massive deceleration of lending by private banks, which saw their profit margins shrink and scrambled to offset the effects of government policy. This was only offset by another rise in public lending in autumn 2022.

The Turkish economy therefore remains caught between a rock and a hard place. The AKP is reluctant to impose neoliberal remedies yet unable to formulate a viable alternative. With presidential and parliamentary elections scheduled for summer 2023 at the latest, the government’s hegemonic crisis is becoming more apparent. In this conjuncture, three distinct pathways have opened up: a mixture of improvisatory economic policies and authoritarian consolidation, favoured by the government; a full-scale neoliberal restoration, favoured by sections of capital and the main opposition; and a programme of popular-democratic reform, favoured by the left.

Implicit in Erdoğan’s new policy approach was an ‘import-substitution industrialization’ strategy, in which the high costs of imports, combined with the low cost of financing investments and cost advantages due to devaluation and low interest rates, would foster industrial investment – giving Turkey a way out of its overreliance on the world market. Yet this ambition was never likely to be realized, since its success depended on a state-led planning and/or investment strategy that was always sorely lacking. It would thus be more accurate to characterize Turkey’s recent heterodox turn as yet another attempt at crisis management rather than a transition to a new regime of accumulation. Its purpose was to protect large sections of the population, especially those who work in SMEs, from the effects of economic freefall – buying time for the AKP until the next general election.

A return to orthodox neoliberal economic policy would entail much higher political costs than an approach that tries to mitigate the effects of the crisis on SMEs and domestic consumption by simply muddling through. The AKP’s current political strategy is to position itself as the only lifeline for struggling small businesses while ramping up repression against potential threats to its hegemony. But this is not a foolproof method. For instance, high-performing SMEs that feel they can withstand the competitive pressures of an orthodox monetary policy may choose to ally with capitalists calling for an expansion of Turkey’s role in the global economy. Indeed, the factions of capital that are closest to the AKP – mostly export-oriented with lower import-dependency – have already begun to criticize the government for its botched currency devaluation.

So far, there has not been a decisive break between the leading factions of capital and the Erdoğan regime; most sectors are still returning high profits (banks have seen a whopping fivefold increase), thanks partly to wage suppression caused by inflation. But the country’s leading business association, the Turkish Industry and Business Association (TÜSIAD), is becoming increasingly vocal in its demand to reimpose neoliberal policies, with the ultimate aim of increasing Turkey’s centrality in international production chains. It also advocates a shift away from AKP authoritarianism towards a model with more civil liberties and constitutional balances, so as to curtail what it sees as the socially destabilizing effects of the current system.

As the AKP’s interests have steadily diverged from those of big capital, the struggle between the regime and its political rivals has also come to a head. Polls show that the public mood had turned against the governing party, with its victory in the next election far from guaranteed. This has prompted the opposition bloc, led by the Republican People’s Party (CHP), to go on the offensive. More often than not, this means trying to outflank Erdoğan and his allies on Turkish nationalism and chauvinism. The opposition, should it come to power, has promised the persecution and repatriation of Syrian refugees along with a full-scale war on the PKK. Its would-be Economy Minister, Ali Babacan, has vowed to continue outlawing strikes. And the bloc has remained firmly against any form of popular mobilization. As CHP leader Kemal Kılıçdaroğlu asserted, ‘Active opposition is one thing, taking to the streets is another…We have only one wish, that our people should remain as calm as possible, at least until elections come.’

The opposition’s goal is to re-establish the neoliberal regime on an expanded scale, purged of its current hyper-presidential structure yet incorporating some of the authoritarian and nationalist ideological elements associated with the AKP and its predecessors, while continuing to demobilize and depoliticize the population. This will be the trade-off for any small degree of democratic reform.

Can such a vision, uninspiring as it is, succeed in galvanizing the electorate to kick out the incumbent? Polls suggest a high level of disaffection with the government, but also scepticism concerning the opposition. Erdoğan, despite his various missteps, has been adept at maintaining the identitarian connection between his party and its base – which, combined with his short-term populist and redistributionary programme (including subsidies for household bills, further wage increases, social housing and state-led credit programmes for SMEs), may be enough to keep him in power. The most recent polls show an uptick for the AKP following the announcement of such measures.

No matter who wins the next election, though, there remains an alternative for Turkey beyond authoritarian consolidation and neoliberal restoration. It lies in new outfits such as the Labour and Freedom Alliance (Emek ve Özgürlük İttifakı), a coalition of pro-Kurdish and leftist parties which aims to unify these dissident forces. For them, the only route out of national crisis is a coherent, democratically-accountable economic strategy that fundamentally alters the Turkish model in favour of the popular classes, along with far-reaching political reform. Their attempts to organize in an increasingly repressive climate will be an uphill battle, but unless it is fought, the prospect of democratizing Turkey will vanish entirely.

Read on: Cihan Tuğal, ‘Turkey at the Crossroads?’, NLR 127

Categories
Uncategorised

Rearguard Battle

The award of the Nobel Prize in Economic Sciences to Ben Bernanke last month unleashed a wave of indignation among those who view the former chair of the Federal Reserve as the epitome of unoriginal establishment thinking. Bernanke received the prize for work demonstrating that bank runs were possible and that they could impact real economic activity. Both of those things had been perfectly obvious since at least the 1930s. But the Keynesian models that the economics profession built during the post-war era were unable to account for such events, having no real explanation for the volatile dynamics of debt and finance.

This aporia became more obvious when the era of ‘fiscal dominance’ came to an end and financial instability made a comeback from the second half of the 1960s, challenging the Keynesian paradigm and lending credibility to rival strands of thought. Rational expectations theorists underscored the inherent futility of government attempts to interfere with the inner workings of the market, while Milton Friedman’s monetarism fostered the notion that Keynesian inflationism was responsible for the corruption of America’s monetary standard.

Bernanke and other New Keynesians didn’t buy the idea that the problems of the present could be solved by returning to a pure free market. Yet the shallowness of their take on the problem of capitalism’s instability was evident in the subsequent evolution of Bernanke’s work into a framework for inflation targeting and monetary fine-tuning that looked with suspicion on any attempts to manage stock markets or asset prices. In 2004, while serving on the board of governors of the Federal Reserve, he brought the notion of ‘the Great Moderation’ into mainstream circulation, expressing his conviction that through rule-driven fine-tuning, the Federal Reserve would be able to ensure stable, non-inflationary growth. Above all, Bernanke maintained the illusion that, with the right minds at the helm of the economy, money could be the thing of neoclassical fantasy – neutral, stable, unobtrusive. As his memoir makes clear, this fully neoliberalized Keynesianism comfortably survived Bernanke’s own involvement in the enormous rescue operations that followed the near-collapse of the American financial system in 2007-08.

Alan Blinder’s A Monetary and Fiscal History of the United States, 1961-2021, was published in the US in the same week the Nobel Prize was announced. Following a doctorate at MIT with Robert Solow, Blinder has enjoyed a long and distinguished career in Princeton’s economics department, his alma mater. In the mid-1980s he was instrumental in recruiting Bernanke to Princeton based on the work that would eventually earn him the Nobel. But although Blinder and Bernanke share an intellectual agenda and are apparently good friends to this day, their political orientations are different. Bernanke is a Republican – or at least he was, until he realized how uncivil they can be – and he would not claim the Keynesian label as more than a purely technical description of his conceptual framework, which in any case he sees as largely compatible with the insights of New Classical and monetarist economics.

Blinder, by contrast, is a committed liberal (a self-proclaimed ‘centre-left Democrat’, as he says in the book’s introduction). During an extended hiatus from the academy in the nineties, he served as a member of Clinton’s Council of Economic Advisers, followed by a stint as Vice Chair of the Federal Reserve Board, in which capacity he objected to Alan Greenspan’s eagerness to combat inflation by raising interest rates and inducing higher levels of unemployment. His oeuvre, which stretches from the 1970s to the present, is a sustained attempt to resist the neoliberal dilution of Keynesianism. It aims to preserve both the spirit of its original post-war iteration and its practical relevance as a policy manual, defending deficit spending and fiscal stimulus as means to stabilize the economy and bring it as close to full employment as possible.

Blinder’s new book offers a synthetic account of sixty years of economic policymaking in the US, spanning roughly the period of his own career, and picks up exactly where Friedman and Anna Schwartz left off in their influential 1963 work A Monetary History of the United States, 1867–1960 (Blinder maintains his text ‘is in no sense a sequel’ despite the ‘intentional homage’ of his title). It begins with ‘the New Economics’ enshrined in the Kennedy-Johnson tax cut passed in 1964, which he describes as ‘a watershed event’ – ‘the first deliberate and avowedly Keynesian fiscal policy action ever undertaken by the US government’ – and continues through the rise of monetarism, the Volcker disinflation of the 1980s, the rise of central bank independence during the booming 1990s (‘an important and almost worldwide revolution’ in monetary policy), responses to the 2007-08 financial crisis, and ‘Trumponomics’, before and after the pandemic.

Central to Blinder’s old-fashioned Keynesian project is the famous ‘Phillips curve’, which depicts an inverse relationship between inflation and unemployment. That curve occupied a pivotal but paradoxical place in post-war Keynesian thought. On the one hand, it formalized an unfortunate existential condition: the inevitable trade-off between the need to ensure stable money and the wish to make sure that everyone who wants a decent job has one. On the other hand, it was within this trade-off that Keynesians always identified a certain political agency: we may not like the fact that the trade-off exists, but we do have a choice about how to strike the balance – there is always something policymakers can do.

This was the prized possession of post-war Keynesianism that monetarists and rational expectations theorists sought to undermine. Friedman drew the Phillips curve as a straight vertical line, indicating that there is a non-negotiable, natural rate of unemployment and that attempts to interfere with it will inevitably backfire. Notwithstanding his attempts to ‘relegate my personal political views to second or third fiddle’, the clear purpose of Blinder’s book is to rescue the logic of the Phillips curve from the clutches of neoliberal reaction. For him, ‘being a Keynesian sometimes means worrying more about unemployment than about inflation’ – caring more about the welfare of those who need to sell their labour than the income streams of the rentier. That’s a nice sentiment, but what does it amount to?

Writing with such a defensive and pre-committed intellectual agenda can make it difficult to put one’s finger on the pulse of history. Yet some of Blinder’s previous writings have nonetheless been useful. His 2001 book The Fabulous Decade, co-written with Janet Yellen, presents a lucid though not particularly critical account of the 1990s boom. His study of the 2007-08 financial crisis, After the Music Stopped (2013), ranks among the more helpful mainstream perspectives. And compared to the opportunistic provocations of Larry Summers and other nominal Keynesians, Blinder’s op-ed interventions in the Wall Street Journal are always balanced and level-headed. But his new book makes clear how little intellectual substance there is to back up his normative investments.

*

Blinder’s most conspicuous lacuna is the same as Bernanke’s: an understanding of financial instability as an active force in the making of history. In their world, banks are institutions that take deposits and channel them into longer-term loans – neutral intermediators that work to even out financial flows that might otherwise not be well-matched, a prime example of the market solving its own problems. This ignores the possibility that the creation of money and credit might be tied up with uncertainty and volatility in a way that is systemic rather than accidental. It occludes the fact that financial institutions produce volatility in the course of their normal operations. Instability – loss of liquidity, non-payment, outright failure – is endemic, not exceptional.

Without an understanding of finance as a real force, the drama of the 1970s is impossible to comprehend. Until the early 1960s, financial institutions worked in ways that were still somewhat explicable from the view of banks as ‘channellers’. This reflected the relative stability of the post-war order and the low interest rates guaranteed by the Federal Reserve’s subordination to the Treasury’s debt-financing needs. But as the post-war economy matured and the Kennedy and Johnson administrations bet on maintaining economic growth through tax cuts, demand for credit grew. Banks were unable to take advantage of these lending opportunities because of the interest rate ceilings put in place during the New Deal. In this context, banks discovered that their business was not in fact dependent on receiving deposits. They could make loans first, and then go into the market and ‘buy money’ – that is, borrow the deposit liabilities they needed to satisfy regulatory requirements.

‘Liability management’ flipped the script, making it almost impossible for the Fed to control inflation. Every time the central bank tried to tighten, it provoked another wave of ‘disintermediation’ – banks repudiating the ‘channelling’ model and actively finding deposit liabilities. Policy responses to contain inflationary pressures slowed down growth and pushed up unemployment, particularly among people of colour and other minorities who were less likely to enjoy the protection of powerful unions. But these measures did little to check inflation, rendering Keynesian models increasingly useless.

None of these crucial developments is on Blinder’s radar. Instead, his aim is to prove that Keynesianism should have emerged from the 1970s intact. In its attempt to defend the validity of the Phillips curve, his account of the decade becomes a search for external events on which to pin the misery – escalating wars, oil shocks, and poorly timed or implemented policies. The reasoning seems to be that if only we could acknowledge the reality of supply shocks, the problem of unrelenting inflationary pressures would dissolve, and we would establish the needlessness of Volcker’s intervention.

But the Volcker shock did happen, and Blinder has only a tenuous grasp of how it worked. At one point, he recalls asking Volcker how he thought the Fed had conquered inflation: ‘by causing bankruptcies’. Some people might take that as a striking data point that you could do something with – but not Blinder. He is interested in it only insofar as it appears to refute monetarist claims about how inflation was defeated. Nor is Blinder convinced that monetary policy made a significant contribution to the Great Moderation, the prolonged period of steady growth and low inflation that the US experienced from the mid-1980s, which he instead considers ‘mainly a long streak of good luck’. Could all the bankruptcies have had something to do with it?

Beneath the superficial narrative of non-inflationary growth is a story of scarce liquidity here and abundant liquidity there, volatile asset prices, bankruptcies, bailouts for some and austerity for others. Yet, as A Monetary History of the United States shows, none of this is explicable from a New Keynesian perspective. When Volcker’s Federal Reserve abruptly stopped accommodating inflationary dynamics, the result was predictable: financial strain and failure. How this would play out was never going to be left to the impersonal judgement of ‘the market’. The savings and loans crisis of the 1980s and 90s confirmed that systemically important financial institutions would not be allowed to go under, and demonstrated the extent to which the American public at large had become embroiled in the gyrations of high finance and dependent on bailouts.

*

When Blinder turns to the Clinton administration, he seems confused as to why an economic team that consisted predominantly of Keynesians was so reluctant to rehabilitate his preferred brand of Keynesianism by pushing for active fiscal policy and demand stimulus. No love seems to have been lost between Blinder and Robert Rubin (chair of Clinton’s National Economic Council and later Secretary of the Treasury), who is described as a former ‘prince of Wall Street’ and representative of ‘bond market vigilantes’. In Blinder’s telling, Treasury Secretary Lloyd Bentsen was schmoozing with Greenspan who was coordinating his policies with Clinton – and soon enough, the ‘profoundly anti-Keynesian’ idea that deficit reduction was the key to economic growth and job creation had gained a firm foothold in the administration. At this point, more traditional Keynesians like Blinder were pushed out of Clinton’s inner circle.

For someone who experienced the Democrats’ neoliberal groupthink up close during the Clinton administration, however, Blinder is remarkably credulous about Obama’s presidency. The latter is credited for attempting to restart Keynesian demand stimulus, before this project was supposedly railroaded by Republican sabotage and Tea Party populism. Of course, the reality is somewhat different. Clinton had at least been genuinely upset about the ways ‘a bunch of f-ing bond traders’ upended his plans for a Third Way alternative to supply-side economics. But it’s not clear that Obama’s mind was ever in a similar space. The economists he hired were both intuitively comfortable giving Wall Street what it wanted and instinctively opposed to alleviating financial pressures on ordinary people. Right from the start, their interventions were geared not to boosting demand or employment, but to pegging asset values and keeping financial firms afloat. In the administration’s view, the former was bound to be inflationary; the latter was pure, non-negotiable necessity.

Clinton was able to ride the roaring 90s, but no similar wave came to Obama’s rescue. Instead, the Obama administrations reinforced the Great Recession by combining the institutionalization of an elaborate bailout state with prolonged fiscal austerity. This is disappointing to Blinder, but he does not view it as the upshot of any conscious political programme. For him, ‘quantitative easing’ was simply the result of technocrats doing their jobs under trying circumstances. He laments the inability of the Obama government to understand that demand stimulus is the solution to economic stagnation. And he is even more regretful that Democrats are so often devoted to fiscal rectitude while Republicans have no compunction about cutting taxes for the wealthy. But his account of the failure of a more old-fashioned, social-democratic version of Keynesianism to carry the day is soaked in studied ignorance and wilful obfuscation. Ultimately, Blinder cannot accept the possibility that opposition to his favourite kind of Keynesianism was powered by a more or less coherent political agenda – that is, by neoliberal reason.

In recent months, Blinder has maintained a tortuously balanced perspective on the post-pandemic return of inflation: from ‘Don’t worry too much about the inflation surge’ to ‘The Fed should raise interest rates, but gently’ to ‘Inflation isn’t transitory, but it isn’t permanent either’ (all titles of his Wall Street Journal columns). Bernanke, meanwhile, felt that the Fed should have gone in sooner and harder – echoing the calls by Larry Summers and Jason Furman to increase unemployment and raise interest rates. Blinder’s reluctance to jump on the hawkish bandwagon is admirable. Yet, by the logic of his own beloved Phillips curve, what the Summers and Furmans of this world are advocating makes perfect sense: the way to reduce inflation is by increasing unemployment.

Bernanke’s trajectory suggests that when Keynesian concerns with economic instability are embraced by establishment interests and thinkers, they are likely to be used ‘to give life to rentiers rather than to abet their euthanasia’, as Hyman Minsky put it. That is the essence of the fully neoliberalized Keynesianism that Blinder fails to reckon with. It entails a commitment to stabilization as the overriding imperative of economic policymaking, which, rather than being constrained by traditional, social-democratic interpretations of Keynes, instead flexibly adapts his ideas to the requirements of an asset-driven economic system.

In the present context, however, it is becoming increasingly difficult to divert people’s attention from the sprawling infrastructure of the bailout state, which provides the owners of capital with a wide range of subsidies just so they don’t get worried, start selling, provoke each other into panic and destabilize the system. As the US and other countries try to give this asset economy a new lease of life by escalating the repression of wages, political difficulties are bound to intensify, opening up prospects for progressive change. For all its wholesome intentions, Blinder’s narrative of the past few decades obscures the society-wide blackmail of the bailout state and legitimates the impoverished policymaking discourse that has allowed it to survive. Not quite the courageous rearguard battle he takes himself to be fighting.

Read on: Cédric Durand, ‘In the Crisis Cockpit’, NLR 116/117

Categories
Uncategorised

Vectors of Inflation

Federal Reserve chair Jerome Powell’s recent speech at the Jackson Hole conference, delivered to an audience of central bankers from around the world, was a highly anticipated event. He arrived there a chastened man, having previously claimed that US inflation was a transitory phenomenon while implementing the lax monetary policies that many blamed for its recent surge. Could he now pull off a ‘soft landing’, bringing inflation back down from its forty-year high of 9.1% to the desired 2%, without causing a recession?  

Central banks have various tools at their disposal for managing inflation: higher rates, quantitative tightening (i.e. selling assets to reduce liquidity in the system) and managing expectations about future monetary policy through ‘forward guidance’. Powell began raising the policy rate in March, taking it from the pandemic-era low of 0.25% to 3.25% by the time he arrived at Jackson Hole in late August, through a series of incremental rises. Yet these increases still left the headline rate well below inflation, making real rates negative. Meanwhile, the debate over monetary policy heated up. Inflation hawk Larry Summers accused Powell of underestimating the problem and doing too little too late. Another hawk, Henry Kaufman, advised him to shock the markets – to ‘hit them in the face’ as Paul Volcker had done in 1980, by hiking interest rates to 20%.

By inducing a deep and prolonged recession, Volcker’s move had elicited a backlash from progressive economists, with Robert Solow likenening it to ‘burning down the house to roast the pig’. Today, the prospect of a similar hike has prompted renewed criticism of the monetarist perspective which views inflation as the result of an increase in the money supply relative to output. For inflation doves, such as former Clinton Labor Secretary Robert Reich, the current period of inflation was not caused by the fiscal and monetary stimuli of the pandemic, unprecedented though they were. Nor is it the result of a wage-price spiral – since the uptick in union activity remains relatively modest in historical terms. Doves claim that inflation is rather the outcome of factors beyond the Federal Reserve’s ken: food and fuel price rises sparked by the war in Ukraine, plus ongoing price-gouging by large corporations. Hence, it cannot be solved by raising interest rates; it requires solutions such as those set out in Jamaal Bowman’s Emergency Price Stabilization Act: monitoring and regulating consumer prices, alongside measures to safeguard the supply of essential goods and services.

The hawks are certainly wrong to see inflation as a purely monetary issue. Indeed, very little of the pandemic-related stimulus, fiscal or monetary, made it into the pockets of ordinary people. When it did, it largely went towards debt repayments and had a limited impact on demand. Yet the doves are also wrong to identify war-induced food and fuel prices as a major contributor. In the US, the August 2022 inflation rate of 8.3% may have been boosted by these factors; but the core inflation figure of 6.3% – far higher than the European average – reflected a structural malady. The real culprit here is the diminution of US productive capacity, caused by four decades of neoliberal policies – disinvestment, deregulation, outsourcing – which have rendered the economy extremely vulnerable to supply chain disruption, and prevented supply-side measures to bring prices down.

That diminution is the flip-side of the ceaseless growth in financial activity since the early 1980s. This process is usually termed ‘financialization’, although the plural ‘financializations’ would be more accurate, since each historic expansion of the financial sector has involved different structures, practices, regulatory regimes and assets. In recent decades, financialization has come to rest on asset bubbles sustained by lax monetary policy. This has created the conditions for today’s rising prices, while inhibiting the only sort of anti-inflationary policy of which the current system is capable. Yet this crucial dynamic is overlooked by economists across the political spectrum.    

Prima facie, hawks and doves pull at opposite ends of the ‘dual mandate’ that the Federal Reserve acquired in 1977, when the Humphrey-Hawkins Act added high employment levels to its original price stability mandate. Some progressive economists now point to Alan Greenspan’s tenure in the 1990s as ‘an instructive model of what a full employment economy can look like’, implying that the Federal Reserve’s current leadership can and should revert to this paradigm. Yet the full employment mandate – a last gasp of Keynesianism in an increasingly hostile political environment – was never taken seriously. Indeed, Volcker proceeded to violate it almost immediately with his historic rate hikes. Since then, the Federal Reserve has consistently curbed both employment and wages, although this has often been obscured by the statistical inflation of employment figures (for example, counting the partially employed while ignoring declining labour force participation).

Greenspan made the dramatic decision to increase interest rates despite inflation running at a modest level. To justify this step, he cited Milton Friedman’s complaint that the Federal Reserve always raised interest rates too late, and insisted instead on getting ‘ahead of the game’, pre-empting inflation rather than responding to it. Greenspan thus extinguished the nascent manufacturing revival which, as Robert Brenner writes, held out the possibility of a ‘break beyond stagnation’. When Greenspan eventually decided to loosen monetary policy, it was not to support the expansion of production and employment, but to inflate asset bubbles, starting with the so-called ‘Greenspan put’: an injection of liquidity into the financial system in response to the stock market crash of 1987. This policy (which was continued by Greenspan’s successors, such that it became known as the ‘Federal Reserve put’) generated speculative bonanzas for the rapidly deregulating financial sector and provided generous liquidity after each inevitable crash. It was rightly criticised for creating systemic moral hazard by inducing financial institutions to increase their risk exposure.  

In the 2000s, asset bubbles grew by new orders of magnitude and loose monetary policy became a permanent strategy rather than an episodic fix. Yet, because not much of this money flowed into productive investment or translated into rising demand, its inflationary effect was negligible. Moreover, other secular trends kept inflation low: workers were too insecure to fight for wage increases, even amid relatively high employment; manufacturing supply chains extended to producers in lower-wage locations; immigration cheapened services; and income deflation in the Third World suppressed global demand and commodity prices. Dollar overvaluation was also deeply intertwined with the Federal Reserve’s bubbles. By diverting investible funds from productive to financial investment, these bubbles – the market stocks of the 1990s, housing and credit of the 2000s, the ‘everything bubble’ of the 2010s – attracted enough foreign funds to dollar denominated assets to counter the downward pressure of US current account deficits on the dollar. This, too, helped to subdue inflation.

Since Greenspan lowered interest rates to deal with the 2000 dot-com crash, they have never returned to their 1990s peak. Meanwhile, quantitative easing – effectively Federal Reserve asset purchases – has become a systemic imperative to keep both asset markets and the dollar high. With fiscal policy largely missing in action (aside from tax cuts for the rich), this monetary policy created a highly peculiar political economy. Thanks to declining industry, low investment and fiscal austerity, the consumption of a narrowing well-to-do layer, facilitated by the ‘wealth effects’ of asset bubbles, came to act as the country’s primary economic motor. As a result, anaemic growth and extreme inequality is all that contemporary US capitalism can manage.

In this context, Powell’s priority is to avoid Volckeresque rate rises on the wing of slight rate increases and the prayer of forward guidance. Why? Because hawkish rate hikes – the only effective weapon against inflation from a monetary policy perspective – would burst the asset bubbles on which the American financial sector and ultra-rich depend. Back in the late 1970s, Volcker did not have to worry about this risk; but in the early 2020s, Powell very much does. Policy interest rates of 5% triggered the collapse of the housing and credit bubbles in 2007; the current 3.25% rate has hit real estate and venture capital, while stocks have suffered the worst streak of quarterly losses since 2008. Given the fragile makeup of the US economy, rate hikes constitute a real risk, which means that the Federal Reserve has become largely impotent. No wonder it is described in the pages of the FT as ‘the least credible Fed in the markets’ estimation since the 1970s’.

The markets’ lack of confidence reflects a structural dilemma. If Powell increases rates to required levels, the US can expect a recession that will make that of the 1980s seem like a boom. But if, as I believe is more likely, he refuses to do so, the US can expect chronic inflation whose origins lie in the productive debility of the US economy, recently exacerbated by supply chain disruption, trade and technology wars with China, and self-destructive sanctions on Russia. The Federal Reserve faces a fork in the road: one where both paths will damage working-class incomes and wellbeing.

In this sense, both hawks and doves miss the elephant in the room: financializations backed by easy money. The dynamics of financialization contribute to inflation by raising the value of housing and commodities while allowing the rich to maintain their spending at inflated prices. While doves rightly emphasize the need to expand production to ease inflation, they fail to appreciate the scale of state intervention this would entail. For four long decades, neoliberal policies have entrenched the Long Downturn, reversing Janos Kornai’s old adage that socialism is a supply-constrained system while capitalism is a demand-constrained one. Making contemporary US capitalism productive again would involve not only reversing the logic of financialization; it would require a state-led programme to lift supply constraints, which is almost unthinkable within the parameters of the present system.

Read on: Wolfgang Streeck, ‘The Crises of Democratic Capitalism’, NLR 71.

Categories
Uncategorised

Sound Money?

On 6 September Liz Truss was appointed Prime Minister of the United Kingdom, after a Conservative leadership contest notable for its near-total lack of reference to the social calamity known as the cost-of-living crisis. While the ruling party spent the summer decrying ‘woke culture’ and praising the trickle-down theory, Keir Starmer’s Labour found a new spring in its step, calling for a windfall tax on energy firms and opening up a poll lead that could point towards the steps of Downing Street. Meanwhile, a wave of strikes and protests – centred on consumer prices and real wages – has given a shot in the arm to a radical left still emerging from the post-Corbyn doldrums. Don’t Pay UK, canvassing support for the mass non-payment of energy bills in the wake of a 56% April increase and an 80% hike scheduled for October, has amassed a pledge list of almost 200,000 refuseniks.

During this period, the cap on maximum domestic energy changes by Ofgem – toothless regulator of the privatized energy system – became the object of increasing discontent. This was not the intention of Theresa May’s government when it introduced the energy cap in 2018, in an attempt to allay pressure from Jeremy Corbyn’s Labour (the proposal for a cap itself dating as far back as Ed Miliband’s leadership). Yet as wholesale natural gas prices spiked across Eurasia over 2021, then skyrocketed following Russia’s invasion of Ukraine, Ofgem continued to raise its price ceiling to unprecedented heights, bound by legislation to guarantee a 1.9% profit to retailers. This brought with it the prospect of nationwide strikes plus mass civil disobedience. So, on the second day of Truss’s tenure, the government pledged a not-quite freeze on bills (the typical bill will go up £600 rather than £1,600) for the politically significant period of two years, up until the last possible date of the next general election. This was the largest single economic intervention in Britain’s peacetime history, dwarfing the eventual cost of the Covid furlough scheme.

There is an obvious precedent for Truss’s handout. When Thatcher became PM in May 1979 she immediately accepted the recommendation of the Clegg Commission, established by Callaghan after the Winter of Discontent, for an average public-sector pay rise of 25% – approximately double the rate of inflation. This elicited a backlash from the new breed of hardline monetarists, but Thatcher recognized that securing industrial peace was more important than appeasing them. As The Economist reported at the time, she entered office with a clear intention to buy off stronger sections of organized labour while confronting and defeating weaker ones. The 1977 Ridley Plan described this as the ‘salami’ approach – ‘one thin slice at a time but by the end the lot is gone.’ In the short term, wrote Ridley, the government would have no choice but to ‘pay up’ to those unions ‘that have the nation by the jugular vein.’

It seems that today’s Tories – even (or perhaps especially) their most committed ideologues – are once again prepared to ‘pay up’ if it allows them to win a class fight. And let’s not delude ourselves: Chancellor Kwasi Kwarteng’s mini-Budget, announced this morning, shows that a class fight is underway. His so-called ‘fiscal event’ was the most dramatically regressive announcement by any government for some time – giving a £4,500 tax cut to the richest 500,000 people in the country while further tightening Britain’s miserly benefits system. This smash-and-grab raid on behalf of the very wealthiest must be set in the context of recent global upsets: the shifting international balance of power, trade wars, Covid-19, the Russian invasion of Ukraine and worsening ecological crises. With growth rendered uncertain by such turbulence, but profits still demanded, working-class and middle-class living standards are on the line. We are entering an era of zero-sum capitalism, even more cut-throat than that of the early eighties.  

In this conjuncture, the old rules of Ukanian state management – according to which the Treasury’s books should be balanced and the free market should come first – appear to have been rewritten. The Tories of the Cameron-Osborne era are gone; in their place, we have austerity-sceptic Johnson followed by deficit-sceptic Truss. The former Chancellor Rishi Sunak has seen his drab bean-counting rejected by the Tory membership, while Truss is set to embark on a £150bn-plus borrowing bonanza. Reversing the NICs rise, cutting green levies on domestic energy bills and reversing Sunak’s planned Corporation Tax hike were the priorities she enumerated during the leadership campaign, the total cost of which could easily reach £30bn. These aren’t the Tories of old: neither Thatcher’s homilies on household budgets nor their repetition by Cameron and Osborne get a look in.

With that in mind, it is worth considering the Spectator’s fascinating survey of ‘Trussonomics’, based on interviews with her three leading economist supporters, for hints as to where the Tory right are headed. In it, Truss’s backers – who prefer to be known as ‘Trusketeers’, alas – outline a programme that deviates significantly from the traditional Conservative prospectus. Julian Jessop, former chief economist at the Institute of Economic Affairs, now asserts that the austerity of the 2010s was a mistake: ‘When the facts change, I change my mind…Ten years ago, I would have been much more conventional in my thinking that you need to get the budget deficit down as quickly as possible. But it’s clear that isn’t working.’ Patrick Minford, an early supporter of Thatcher, is currently reprising that role but flipped 180 degrees as he lays into the Treasury’s obsession with book-balancing: ‘We have policies in place which are raising taxation, that damaged growth in order to satisfy short-run borrowing constraints put forward by the Treasury.’

As for the monetarism Minford once expounded, with its insistence on a strict separation between the monetary authorities and the government as well as mechanical targets for monetary growth, Gerard Lyons, tipped as a member of Truss’s as-yet-unveiled Council of Economic Advisors, says he wants to ‘re-examine’ the Bank of England’s remit ‘to make sure it is fit for purpose’. Elsewhere, Kwarteng pays lip-service to the idea of central bank independence whilst simultaneously pledging that ‘fiscal and monetary policy must be coordinated’ – the passive voice happily disguising who, exactly, should be making the coordination happen. Put all this together, and the family resemblance is not so much to Thatcherism, with its rhetorical commitments to ‘sound money’ and balanced books, but to Reagonomics, with the US deficit under President Reagan ballooning to unprecedented levels thanks to tax cuts for the rich and vast increases in military spending. (Truss has promised to increase UK military spending to 3% of GDP by 2030, at an estimated cost of £157bn.)

Of course, these solutions are presented as short-term ones: a necessary yet temporary detour from the true path of deregulation and ‘sound money’. Minford has suggested that a 7% interest rate might ultimately be more appropriate for the British economy, while Jessop has suggested relaxing restrictions on financial services, ‘gene editing’ and data protection. But all this is for somewhere down the line. For now, the Trusketeers anticipate significant state intervention and large deficits, in part to provide a political cover for their long-term plans.

Will any of this work? Most economists would say no. The FT’s Martin Wolf claims it is a ‘fantasy’ to believe corporate tax cuts and deregulation will deliver improved growth, while Jonathan Portes asserts that deficit spending will stoke inflation. But here we might pause. With inflation largely driven by external factors – Putin’s invasion, environmental collapse, supply issues linked to the pandemic – conventional economic models of why prices rise, focusing on excessive demand, are falling short. Those still using them to talk up the inflationary risks of increased government deficits are likely to be proved quite wrong. It is therefore worth attempting a level-headed assessment of Truss’s economic prospectus – identifying its strengths and weaknesses, in the terms it has set itself – beyond the standard neoclassical framework.

The most pressing challenge for the British economy is currently the soaring price of essentials goods, causing households to spend less on desirable things like pubs, restaurants and local shops and more on undesirable things like fossil fuel companies – which means that government support, of the kind promised by Truss, will be necessary to sustain demand. Contra her detractors, this is unlikely to have much meaningful inflationary effect. If the government borrows money to cut domestic energy bills, the Institute of Public Policy Research estimates that 3.9% would be taken off the ONS’s calculation for the headline rate of inflation – a win-win, making life easier for households and reducing pressure on the Bank of England to further increase interest rates.

Other things being equal – the economist’s get-out clause – Truss’s plan to massively increase government borrowing will also have some impact on growth, if only because it’s hard to borrow and spend over £150bn without making something happen. Whether this is useful in the long-term is a different question: handing £30bn more to corporations, already squatting on a £950bn hoard in their bank accounts and showing no great inclination to invest, is hardly an effective use of the tax system. Then again, if corporations don’t actually spend their unexpected windfall in Britain, it is less likely to feed into inflationary pressures here.

So, when it comes to propping up demand, limiting inflation and stimulating immediate growth, Trussonomics won’t be as abortive as orthodox economists predict. And she needs only two years, at most, to prove something like competence before facing a general election. Yet there may be other fronts on which her domestic plan could falter. For one thing, the international situation today is more uncertain than in the 1970s, and Britain’s global position is far weaker. The UK retains immense privileges as a developed economy with deep, liquid capital markets and venerable institutions. But it is also undergoing a radical shift, via Brexit, in its relations with the rest of the world at a time of acute social stress. This will inevitably unsettle the Conservative’s traditional support base in big capital and finance, while the decrease in the value of the pound, presently hitting an almost forty-year nadir against the dollar, indicates the possibility of funding problems ahead.

This is compounded by Britain’s reliance on imported energy and food supplies. In the last true currency crisis face by a Conservative government – Black Wednesday in 1992 – Britain ran a small deficit on its energy consumption, soon to disappear as gas production peaked in 2000, and was 70% self-sufficient in food. Today, it imports roughly half its natural gas, and 45% of its food. The Black Wednesday crisis erupted because the government was unable to defend the value of the pound against the deutschmark inside the Exchange Rate Mechanism, a precursor to the euro. Today, Britain is out of the EU and the pound floats freely, but the currency crisis could be even more fundamental, if we are forced to pay higher sums for basic goods in a declining currency. Even if Truss – borrowing from the playbook of Anthony Barber, Chancellor under Heath in 1970 – manages to engineer a short-lived growth spurt at the beginning of her tenure, this will prove difficult to sustain. Indeed, it may have already evaporated by the time she is forced to face Starmer at the polls.

Truss also harbours unrealistic hopes of unlocking growth through a post-EU shake-up of employment laws, threatening the removal of rights on working time and, in a familiar trope, invoking the spectre of trade union militancy. But while the recent uptick in union membership and activity is to be welcomed, strikes in Britain remain rare, with the number of annual walkouts still close to the all-time lows of the last decade. Further restrictions on union organizing will not miraculously translate into improved productivity. Nor are there many remaining costs in Britain’s perilously neoliberal labour markets that could be removed without pushing further and deeper into living standards. If Truss wants to press ahead with such reforms, she will likely have to sweeten the pill or buy off discontent with further temporary handouts – which may draw opposition from the backbenches.  

But where Trussonomics is perhaps most likely to fall apart due to domestic factors is in failing to overcome the resistance of the Treasury. Rumours that the new energy plan would involve forcing ten-year loans onto households indicate the lingering presence of Treasury Brain (harking back to the equally daft forced loan scheme which Sunak cooked up for domestic energy bills last spring). That this misstep was avoided suggests someone, somewhere in government is prepared to put political strategy over Sunak-style bean-counting. Yet the fact that this supposed ‘price freeze’ doesn’t entirely freeze prices, seemingly in deference to vestigial accountancy concerns, also evinces the zombie-like persistence of the latter.

As a result, the policy’s political efficacy has been blunted, opening up a gap which Labour could easily exploit. And this is to say nothing of the evident hypocrisy of making £40bn of liquidity support available to energy companies whilst promising only six months of support to every other business, large or small. Kwarteng’s peremptory sacking of Tom Scholar, Permanent Secretary at the Treasury, having been Second Permanent Treasury as austerity was implemented in the early 2010s, was greeted with howls of outrage from the liberal end of the media. But it reveals the new administration’s determination to press ahead with its programme against concerted opposition. The new Chancellor knows that realizing major deficits and mighty tax cuts means overriding Treasury recalcitrance.

It was always a mistake to think of austerity as a programme that swivel-eyed true-believers were determined to force upon the rest of us. This may have applied to a small number of Thatcherite diehards baying for shrunken states and flat taxes. But, by and large, austerity was promoted, designed and delivered by a cadre of ideologically adaptable Sensible People like Scholar, poring over spreadsheets at the Treasury and the Institute for Fiscal Studies. They were the ones who inflicted a miserable lost decade on the country. Now, the current crop of Tories may have few compunctions about cutting spending when the time comes; but they know better than to insist on it as a strategic priority. The class battles ahead demand a more considered approach. And should Truss’s plan fall short, as prices spiral upwards, growth disintegrates and the capital markets turn sour, there are many forces waiting to move: from the Don’t Payers to the striking workers, to those in her own party sharpening their knives for the next leadership contest.

Read on: Tom Hazeldine, ‘Transformatrix’, NLR 131.

Categories
Uncategorised

Same As It Ever Was?

Evgeny Morozov’s ‘Critique of Techno-Feudal Reason’ in the latest NLR takes aim at the growing list of thinkers who have seen homologies between feudalism and current tendencies in the capitalist system – prolonged stagnation, upward redistribution by political means, a digital sector in which a few ‘barons’ benefit from a mass of users ‘tied’ to their algorithmic domains, and the growth of a service sector or sector of servants. Among those accused of ‘feudal-speak’ are Yanis Varoufakis, Mariana Mazzucato, Robert Kuttner, Michael Hudson and myself. Morozov dismisses feudal analogies as meme-hungry intellectual attention-seeking, a failure to understand digital capitalism, rather than insights into the possibility that it might be turning into something no longer aptly described as capitalist. Is he right?

In defining what makes capitalism capitalism, Morozov contrasts the conceptualizations of Marxists like Robert Brenner with those of world-systems theorist Immanuel Wallerstein. As he notes, Marxists generally conceive the process of surplus extraction under feudalism as ‘expropriation’, driven by extra-economic coercive or political means: lords expropriate produce from peasants over whom they exercise sovereign political and juridical power. Capitalism, by contrast, relies on ‘exploitation’ – surplus extraction by purely economic means: deprived of the means of subsistence, nominally free workers are obliged to sell their labour power for a wage in order to survive in a cash economy. For Wallerstein, by contrast, capitalism also centrally involves processes of expropriation from the periphery by the core. Morozov pinpoints this continuing role of ‘extra-economic coercion’ as the key difference between the two.

Morozov takes Wallerstein’s side, arguing that ‘dispossession and expropriation have been constitutive of accumulation throughout history’. But this dissolution of the difference between feudalism and capitalism, in favour of eternal expropriation, fails to attend to changes in the forms of exploitation. It naturalizes capitalism – in a way effectively criticized by Ellen Meiksins Wood in The Origin of Capitalism (2017) – and abandons any effort to recognize and specify systemic change. Besides, as Marx, Lenin and Luxemburg all emphasized, extra-economic coercion isn’t simply replaced by exploitation, but accompanies it; capital comes to overlay, incorporate and rely on previous social forms. Marx understood that the compulsion of labour is not unique to capitalism. Pre-capitalist economic formations also compelled labour to produce a surplus, expropriated by the master or the lord. But capitalism changes the form of this compulsion: what was a direct and personal form of domination becomes impersonal, mediated by market forces – the economic separated from the political.

In the Grundrisse, Marx posits an originary unity: in the ancient communal form, the producers are a community of proprietors, who take for granted that the earth is there for them to labour on in order to live. They reproduce themselves and their community through processes that are both productive and destructive. Increases in population mean wilderness needs to be cleared and land cultivated. The need for land propels conquest and colonization. The rise of towns, of artisanal labour and property in the instruments of labour bring about a loosening, a separation, in the community. The community starts to appear not as a naturally and spontaneously given relation to labour, but as itself a product of labour.

Capitalism presupposes that the whole has dissolved into parts. The proprietor of the land no longer works it, and those who work the land no longer own it. Craftworkers likewise stop owning the instruments of labour. The tools employ them instead. Everything that was present in the originary unity is still there, but in a different form. Under this new order, the separated conditions of production come together through the mediation of the market. Contrary to Morozov’s presumption of a continuous linear history, the Grundrisse illuminates the processes by which continuous reproduction can generate fundamental change.

Is there evidence of such a change in the elements that constitute contemporary capitalism? An examination of Uber – the ride-sharing app and the company – helps to bring the problem into focus. First, the labour relation. Are Uber’s drivers independent contractors or employees? On the one hand, the company describes its service as providing a tool for people to access ‘flexible earning opportunities’, getting extra cash by driving in their spare time. The drivers are ‘earners’, independent contractors who use the Uber app to gain access to ride-seekers. Uber connects them to the market and collects a fee for the service. On the other hand, court rulings and workers’ organizations argue that Uber drivers are employees. In February 2021, a London employment court rejected Uber’s claim that its drivers were independent contractors, observing that Uber controlled their working conditions and remuneration. Drivers have no say in negotiating their contracts. Uber controls the information they receive and monitors their passenger rates, penalizing them if they don’t conform to its standards.

For some commentators, Uber exemplifies ‘algorithmic management’, a digitally turbocharged Taylorism. For others, it is ‘a modern version of the company town’, or an ‘on-demand’ servant provider, funded by billions in venture capital. In After the Gig (2020), the economic sociologist Juliet Schor describes the new online labour platforms as recreating a servant economy. At first glance, these interpretations seem to contradict each other: are platforms like Uber manifestations of unbridled capitalism or of a new feudal servitude? For proponents of ‘employee’ status, it is better for drivers to be workers, with legally regulated conditions of employment won by decades of working-class struggle. Defenders of the ‘independent contractor’ designation – including many drivers – don’t see employee status as particularly liberating. Gig workers often say they value their freedom to set their own schedules, even if they loathe the way the platforms manipulate the apps. Likewise, from Uber’s side, the ostensible capitalist doesn’t want to invest in means of production and purchase labour power.

The Grundrisse’s account of the separation that capitalism presupposes provides a way to resolve this inverted binary of servitude and ‘freedom’. Marx describes the mass of living labour thrown onto the market as ‘free in a double sense, free from the old relations of clientship, bondage, and servitude, and secondly free of all belongings and possessions, and of every objective, material form of being, free of all property’. From this perspective, it makes sense to think of Uber drivers as ‘free’ contractors – not because of what they gain in flexibility, but because of what they lose: they are ‘freed’ from workers’ rights to guaranteed hours, paid leave, healthcare benefits and so forth.

They are also ‘freed’, in a sense, from their property. In his discussion of transport in Theories of Surplus Value, Marx notes that ‘the relation between buyer and seller of this service has nothing to do with the relation of the productive labourer to capital’. The buyer of the ride service is not employing the driver in order to accumulate capital by putting them to work. The instrument of labour, the car, ostensibly belongs to the driver – just as the pre-capitalist craftsman owned his tools.

And yet something in the driver’s relationship to their car changes: from being an item of consumption – something purchased out of their own ‘consumption fund’, wages they had received for their labour – the car becomes a means for capital accumulation by another, Uber. Instead of Uber paying for and maintaining a fleet of cars, the company puts the drivers’ cars to use, in effect getting cars to employ their owners. Because they are rated by riders, many drivers feel pressured to keep their cars extra clean and pleasant smelling. The car’s purpose now is less personal enjoyment than generation of income. It stands apart from its owner, as an independent value. The car becomes capital.

The debt many Uber drivers accrue in order to acquire a car signals this change in form. Traditional cab drivers could shift to other jobs if they were unhappy, but Uber’s drivers are often locked into vehicle financial obligations that make it much harder to leave. Debt tethers them to the platform. At the same time, the burden of car maintenance is turned into a cost of production, which drivers have to assume. Drivers have to drive in order to pay for repairs and to keep up their car payments – which means earning for Uber as well as themselves. Drivers’ double freedom – from employee status, from leisured car ownership – ushers in a double dependence: dependence on the market and on Uber, for access to it. Uber inserts itself between driver and rider: they cannot meet without it.

Uber’s insertion of itself as an intermediary between buyer and seller superficially resembles Marx’s discussion of how the intervention of merchants transforms independent spinners and weavers into dependent workers. But Uber differs from the merchant: Uber isn’t buying labour power. Riders are.   

*

Morozov’s critique of techno-feudalism insists that our digital overlords are not ‘lazy rentiers’. With Google as his primary example, he sees them as innovators pouring money into research and development, engaging in the production of new commodities such as search results. But the drive to maximize profits can prevent the reinvestment of surpluses in production, directing them towards destruction instead. Capitalism’s own laws can undermine capitalism and generate something worse. Thus, for example, Uber undercuts and disrupts the urban-transport sector, driving down pay and making it impossible for cab drivers to earn a living wage. Airbnb has similarly led to declines in hotel revenue and employee layoffs. DoorDash is undercutting the restaurant sector through its unlicensed, uninspected kitchens which reproduce the menus of actual restaurants for delivery. 

Platform work carries out this sort of destruction wherever it takes hold. As Alexis Madrigal writes, companies like Uber, Lyft, Grubhub, Doordash, and Instacart have ‘wired those in local industries – handymen, house cleaners, dog walkers, dry cleaners – into the tech- and capital-rich global economy. These people are now submitting to a new middleman, who they know controls the customer relationship and will eventually have to take a big cut.’ Whereas before these workers’ earnings were their own, now an intermediary extracts a fee, a rent based on control over access to the market.

The process of separation that fragmented the pre-capitalist originary unity continues as middlemen, platforms, intermediaries insert themselves into exchange relations, disrupt markets and destroy sectors. Insertion, the creation of new dependencies based on monopoly power, doesn’t come cheap. Market domination costs billions, raised through venture capital and private equity, accumulations of wealth that multiply through destructive rather than productive investment. Uber’s strategy – deploying enormous amounts of capital to incentivize drivers and subsidize riders until the company has established itself in a city and can start upping fees – is not unique. Tactics of ‘blitzscaling’ or ‘lightning growth’ are practically gospel in Silicon Valley. According to Reid Hoffman, co-founder of LinkedIn and author of Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies (2018), the process involves ‘purposefully and intentionally doing things that don’t make sense according to traditional business thinking.’

WeWork is another example of blitzscaling, this time in the office-rental sector. Armed with billions of investment capital from SoftBank’s Vision Fund, WeWork attempted to dominate markets by using hoards of cash to destroy or purchase competitors, paying out huge incentives to early renters, and so on. What makes blitzscaling appear feasible is the enormous amount of venture capital seeking outsized gains, especially the kind that can accrue from a successful IPO. Billions are funneled into a company that can destroy all potential competitors, rather than having to compete with them directly through efficiency improvements. Once competitors are eliminated, and regulations circumvented, the victor can increase the squeeze on workers and customers alike. The laws of motion here are not capital’s imperatives of market competition and profit maximization. Capital becomes a weapon of conquest and destruction.

Neoliberalism turns into neofeudalism because it effects a change in social-property relations by destroying state ‘fetters’ or constraints on markets – employee safety nets, corporate taxation, social-welfare provisions. The enormous stores of wealth that accumulate in the hands of the few exert a political and economic power that protects the holders of capital while intensifying the immiseration of almost everyone else. Wealth-holders seeking high returns rely on hedge funds, private equity, venture-capital funds and the like to sniff out high-risk, high-reward pursuits of the kind favoured by Silicon Valley – destructive platforms that insert themselves into exchange relations, rather than production. Manufacturing these days isn’t likely to generate super-profits; platforms that can make themselves indispensable to market access and extract fees in novel ways are more promising.

The increases in precarity and anxiety under neoliberalism, as well as broader patterns associated with privatization, austerity and the decline of the organized working class, have created a base of consumers grateful for price breaks and a supply of labour looking for work. Dependent on the market for access to our means of subsistence, we become dependent on the platform for access to the market. If we are to work, the platform gets its cut. If we are to consume, the platform gets its cut as well.

As it produces new social-property relations, new intermediaries and new laws of motion, the ongoing process of separation is not a ‘going back’ to historical feudalism, as Morozov would have it, but a reflexization, such that capitalist processes long directed outward – through colonialism and imperialism – turn in upon themselves. With advances in production seemingly at a dead end, capital is hoarded and wielded as weapon of destruction – its wielders new lords, the rest of us dependent, proletarianized servants and serfs. If feudalism was characterized by relations of personal dependence, then neofeudalism is characterized by abstract, algorithmic dependence on the platforms that mediate our lives.

What of the role of the state, which Morozov describes as weak to non-existent under the ‘parcellized sovereignty’ of the European feudal era, but ‘constitutive’ for Silicon Valley? Logically, of course, state involvement in the consolidation of an economic sector tells us nothing about its strength or weakness; it could just as well be the tool of special interests. But Morozov misrepresents the discussion of parcellized sovereignty in contemporary debates about feudalism and neofeudalization.

The key processes here are fragmentation and extra-economic expropriation. Just as feudal lords both exploited peasants and held juridical authority over them, so today economic actors exercise political power on the basis of the terms and conditions they set. Private commercial interests are displacing public law through confidentiality agreements, non-compete rules, compulsory arbitration and the dismantling of public-regulatory agencies, creating a fragmented form of ‘legally sanctioned private jurisprudence’. With the privatized parcellation of sovereignty, political authority and economic power blend together. Law doesn’t apply to billionaires powerful enough to evade it. Corporations like Apple, Amazon, Microsoft, Facebook and Alphabet are treated by governments like sovereign states. Immensely concentrated wealth has its own constituent power, determining the rules it will follow – or not.

The counter-revolution of neoliberalism has been a process of privatization, fragmentation and separation, in the name of a hyper-individualized freedom that resembles the ‘dot-like isolation’ of the Grundrisse’s ‘free’ worker. Today’s proletarians are caught up in a new kind of serfdom, dependent on networks and practices through which rents are extracted at every turn. When production is insufficiently profitable for accumulation, holders of capital seek returns elsewhere. In the process, they further the dynamic of separation and induce new dependencies, which require a new name. Neofeudalism speaks to that.

Read on: Evgeny Morozov, ‘Critique of Techno-Feudal Reason’, NLR 133/134.

Categories
Uncategorised

Allies and Interests

The bonfire of so many illusions. Rishi Sunak, the UK Chancellor, star of his own soft-focus Instagram series, known as ‘Dishy Rishi’ during the country’s strange first summer of Covid, when 12 million found themselves on the government payroll and a decade of debt-reduction paranoia was suspended overnight; Sunak, former hedge funder, married to the daughter of India’s sixth richest tech billionaire, wearer of sliders (£95), brand-rep for luxury coffee mugs (£180), lover of ‘fiction’ (‘all my favourite books are fiction’), famously depicted by the BBC sporting a Superman costume; a man whose ascent from backbench MP to second highest office in the land was as rapid as it was mysteriously scandal-free – a strange state of affairs in a government where financial impropriety appears to be a condition of entry; Sunak, whose Spring Statement to address Britain’s cost-of-living crisis was delivered on Wednesday, declared that ‘this day is an achievement we can all celebrate’, even as his own statisticians warned of the greatest decline in living standards since records began; whose cunning wheeze for income tax cuts in 2024 and fuel duty cuts ‘for the first time in 16 years’ was intended to elicit fawning front pages, but proved that even the supine British media have their limits, with critical write-ups on his mini-budget in the Times, FT, Sun, Daily Express and Daily Mail.

Below: fuel prices in Britain since mid-2004. Sunak’s 5p cut is enough to wipe out about a week’s worth of price rises. This cost the government £5bn. Pause for cheers.

The average household will be down around £1,000 after the various measures in the Spring Statement have been implemented. The Office for Budget Responsibility, charged with producing the official forecasts, let it be known they expect an £830 increase in average energy bills in six months’ time – this, on top of the nearly £700 increase now due on 1 April. For those not working, Sunak refused to increase the planned lift in benefits payments and the state pension from 3.1% – matching inflation last year – meaning a dramatic real-terms cut to both. Meanwhile, a £20bn tax windfall was parked, with appalling cynicism, so that it could act as the Conservative Party election war-chest come 2023. The Resolution Foundation predicts that 1.3m people, 500,000 of them children, will be plunged into absolute poverty by then. In Sunak’s Britain, the worse off you are, the worse off you will become.

It’s not that we should expect better from the Conservative Party. It’s that their viciousness usually shows more evidence of planning. Thatcher had a consistent strategy to break the trade unions; Osborne intended to drive benefits claimants into penury. This clear-sightedness has historically reflected the party’s entanglement with the major arms of the state, big business and the media, which it has maintained alongside an extraordinary degree of political-ideological flexibility. This was always its greatest strength; a capacity to oversee national economic reinvention – twice in the last century, in the 1930s and the 1980s – far exceeding Labour, who managed the same trick precisely never. (Attlee accepted the National Government’s settlement; Blair accepted Thatcherism; Wilson, who made attempts to restructure the economy, was crushed on both occasions.)

As Lord Palmerston said of British diplomacy, ‘We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual’. The same applies to the Tories’ domestic political programme. In Britain’s semi-democracy (unelected head of state; unelected second chamber; official opposition tolerated within limits), the Conservatives have generally reconciled a close focus on their interests with an adaptable approach to their allies. Johnson performed this trick in 2019, moving with extraordinary speed to ditch the party’s liberal, pro-EU wing and recast it as an anti-austerity, pro-Brexit champion of the national interest, as filtered through the so-called ‘Red Wall’. This process has produced some peculiarities. Sunak identifies as a low-tax Thatcherite Conservative; yet as Chancellor he has been forced to accommodate both the demands of the Covid conjuncture and the deep unpopularity of austerity, not least amongst those swing voters in deindustrialized regions. Since he took office, increased state investment – in railways, scientific research, renewable subsidies – has formed a stark contrast with Osborne’s cutbacks, whilst spending on public services has, after a decade of reduction, been increased across the board.

This partly demonstrates the impact of Jeremy Corbyn’s time as Labour leader, in shifting the balance of public opinion back towards spending. But it also reflects the shift in elite opinion in the developed world towards supporting government intervention in the economy, the better to compete with China. The Biden administration explicitly framed the sadly deflated balloon of its spending plans as an anti-China programme, meeting the ‘peer competitor’ directly through a strong domestic economy. The European Union is looking to weaken its once-sacrosanct neoliberal commitments to State Aid and a ‘level playing field’. Even its ordoliberal revulsion at shared liabilities is being eroded, most recently in proposals for EU-wide ‘energy and security’ bonds issued by the Commission.

In Britain, this shifting consensus has seen the Tory government nationalize a ‘strategic’ steel producer, some railways and one gas supplier (with plans to nationalize another currently in the pipeline). In the guise of a ‘Future Fund’, the Treasury has taken equity stakes in more than 150 small businesses across the country, from ‘vegan food makers’ to ‘trendy cinemas’. The national lockdown merely accelerated this statist tendency. Even if one excludes additional Covid spending, the government is now set to spend more as a share of GDP than the average level under Tony Blair.

This has been a managed, intentional process. The Spring Statement, however, had a somewhat different character, representing a kind of gormless political narcissism with Sunak as its avatar. Here, it seems, the forever-war of the Tory Party’s internal factions has come to dominate its political direction – eclipsing whatever traces of an industrial strategy were discernible in Johnson’s ‘levelling-up’ agenda. Like all those at the top of the party, the Chancellor’s imperatives are self-interested: to increase the strength of his Thatcherite cadre relative to Tory dirigistas, and thereby propel himself to Number 10. Yet the result of everyone behaving self-interestedly – through a mixture of factionalism and careerism – is to create kind of random walk with drift, in which different political specks jostle for advantage, but where the overall direction is set by forces beyond their control.

We are now entering a historical moment for which Tory policymaking – despite its past triumphs – is entirely unprepared. What the pandemic heralded, unavoidably and permanently, was the end of that long period of low costs and environmental stability that, in the last four decades, undergirded neoliberal growth. Combined with the apparent breakdown of the old, dollar-centred international monetary system, fragmenting into different regional blocs, the stage is set for not only high inflation but wider price and economic instability sine die.

On this question, as on so many others, Milton Friedman was completely and disastrously wrong: inflation is not a monetary phenomenon. Far better to say, with Jonathan Nitzen, that ‘inflation is always and everywhere a phenomenon of structural change’. It is what happens when the world changes, and money changes with it. The preceding centuries of price and monetary history bear this out: transformations from one inflation regime to another matter far more than the periods between those paradigm shifts. And neither the Tory Party, nor the Bank of England – forlornly pulling on a lever marked ‘interest rates’, knowing full well it will do nothing – is remotely equipped to deal with this realignment. For that would mean moving into the truly taboo regions of price control and wage-setting. From there, one could easily envision a direct challenge to the presumed right of capital to make whatever profit it can.

Since this is a line that no Tory politician will cross, government policy inevitably degenerates into a series of emergency announcements: placing sticking-plasters on a secular crisis without so much as attempting to resolve it. Within this framework, different prime ministerial contenders – Sunak, Truss, Hunt – can argue over the most effective half-measures, and pander to their blocs within the party, but none can present a hegemonic project equivalent to Thatcher’s. Of course, to many ordinary Britons, it is clear that when the most lucrative industries in the country are gas and electricity distribution, there should be a zero-tolerance approach to profiteering. If official politics can’t deliver that, unofficial politics must step in. How long before a British gilets jaunes appears?

Read on: Susan Watkins, ‘Britain’s Decade of Crisis’, NLR 121.

Categories
Uncategorised

Cold Peace

Petrov’s Flu (2021), the latest film by Kirill Serebrennikov, opens with a depiction of a crowded commuter bus in Russia. The atmosphere is febrile, almost violent. In the grip of a fever, the protagonist suffers a coughing fit and moves to the back of the vehicle. Following closely behind him, another passenger shouts, ‘We used to get free vouchers for a sanatorium every year. It was good for the people. Gorby sold us out, Yeltsin pissed it away, then Berezovsky got rid of him, appointed these guys, and now what?’ He concludes that ‘All those currently clinging to power should be shot’. At this point, the protagonist steps off the bus and enters a daydream in which he joins a firing squad that executes a group of oligarchs.

‘These guys’ refers to Putin and his clique, while ‘now what?’ is a question that weighs heavily on the country they’ve created. What kind of society is contemporary Russia, and where is it headed? What are the dynamics of its political economy? Why did they spark a devastating conflict with its closely entwined neighbour? For three decades, cold peace reigned in the region, with Russia and the rest of Europe swimming together in the icy waters of neoliberal globalization. In 2022, following the invasion of Ukraine and the West’s economic and financial sanctions, we have entered a new era, in which the delusions that animated the country’s market transition have become impossible to sustain.

Of course, the fantasy of post-Soviet development has never matched the reality. In 2014, Branko Milanović drew up a balance sheet of transitions to capitalism, which concluded that ‘Only three or at most five or six countries could be said to be on the road to becoming a part of the rich and (relatively) stable capitalist world. Many are falling behind, and some are so far behind that for several decades they cannot aspire to go back to where they were when the wall fell’. Despite promises of democracy and prosperity, most people in the former Soviet Union got neither. Because of its geographical size and politico-cultural centrality, Russia was the gordian knot of this historical process, which constitutes the vital background to the Ukraine crisis. For beyond the military tropism of ‘Great Power’ approaches, domestic economic factors are at least as essential to map the coordinates of the present situation and explain the headlong rush of the Russian leadership into war.

Period I: 1991–1998

Russia’s aggression is part of a desperate and tragically miscalculated attempt to face up to what Trotsky called ‘the whip of external necessity’: that is, the obligation to compete with other states to preserve a degree of political autonomy. It was this same whip that led the Chinese leadership to embrace a controlled economic liberalization in the early eighties, fuelling forty years of mostly successful integration into the global economy while allowing the regime to rebuild and consolidate its legitimacy. In Russia, however, the whip broke the state itself after the Cold War ended.

As Janine Wedel documents in her indispensable Collision and Collusion: The Strange Case of Western Aid to Eastern Europe (2000), the demise of the Soviet Union resulted in a profound weakening of the country’s domestic elite. During the first years of the transition, the state’s autonomy was minimized to the point that policymaking was effectively delegated to US advisers led by Jeffrey Sachs, who oversaw a small group of Russian reformers including Yegor Gaidar – the prime minister that launched the country’s decisive price liberalization – and Anatoli Chubais, the privatization tzar and onetime Putin ally. Their shock therapy reforms caused industrial involution and soaring poverty rates, inflicting a national humiliation and imprinting a deep suspicion of the West on Russia’s cultural psyche. Given this traumatic experience, the most popular motto in Russia remains ‘the nineties: never again’.

Vladimir Putin built his regime on this motto. A simple look at the evolution of GDP per capita tells us why. The early years of transition were marked by a severe depression that culminated in the financial crash of august 1998. Far from the total collapse described by Anders Åslund in Foreign Affairs, though, this moment in fact contained the seeds of a revival. The rouble lost four fifths of its nominal dollar value; but as soon as 1999, when Putin rose to power on the back of another war in Chechnya, the economy had begun to recover.

Before the crash, the macroeconomic prescriptions of the Washington Consensus had created an intractable depression, as anti-inflationary policies and an obtuse defence of the exchange rate deprived the economy of the necessary means of monetary circulation. Skyrocketing interest rates and an end to reliable wage payments by the state resulted in the generalization of barter (accounting for more than 50% of inter-company exchange in 1998), endemic wage arrears and the exodus of industrial firms from the domestic market. In remote places, the use of money had almost completely disappeared from everyday life. In the summer of 1997, I spent a couple days in the small village of Chernorud, on the western shore of Lake Baikal. The villagers harvested pine nuts and used them to pay for bus fare to the nearby island of Olkhon, as well as accommodation and dried fish, with one full glass of nuts representing a unit of account. The social, health and crime situation was dire. A widespread sense of despair was reflected in the high mortality rate.

Period II: 1999–2008

Compared to this economic catastrophe, the early Putin era was a feast. From 1999 to the 2008 the main macroeconomic indicators were impressive. Barter rapidly retreated and GDP grew at an average annual rate of 7%. Having nearly halved between 1991 and 1998, it fully recovered its 1991 level by 2007 – something Ukraine never achieved. Investment rebounded along with real wages, showing annual increases of 10% or more. At first sight, a Russian economic miracle seemed plausible.

This enviable economic performance was made possible by rising commodity prices, yet this was not the only factor. In addition, Russian industry benefitted from the stimulating effects of rouble devaluation in 2008. The loss of value made locally manufactured goods more competitive, facilitating import substitution. Since industrial enterprises were completely disconnected from the financial sector, they did not suffer from the 1998 crash. Moreover, thanks to the legacy of Soviet corporatist integration, major firms generally preferred to delay wage payments in the nineties rather than lay off their workforce. As a result, they were able to rapidly increase production to accompany the reflation of the economy. The capacity utilization rate increased from about 50% before 1998 to nearly 70% two years later. This, in turn, contributed to productivity growth, creating a virtuous circle.

Another factor was the government’s willingness to take advantage of export windfalls to revitalize state intervention in the economy. The years 2004 and 2005 marked a clear shift in this regard. Privatization was still on the agenda, yet it continued at a much slower pace. Ideologically, the current flowed in the opposite direction, with a greater emphasis on public ownership. A presidential decree of 4 August 2004 established a list of 1,064 enterprises that could not be privatized and named a number of joint stock companies in which the state’s share could not be reduced. State activity was expanded through a pragmatic combination of administrative reforms and market mechanisms. Putin’s most important target was the energy sector, in which he aimed to reassert state control of prices and eliminate potential rivals such as the liberal oil tycoon Mikhail Khodorkovsky. Meanwhile, a combination of new policy instruments and incentives for Russian overseas investment created enterprises that could compete in areas such as metallurgy, aeronautics, automobiles, nanotechnology, nuclear power and of course military equipment. The stated objective was to use funds generated by the export of natural resources to modernize and diversify a largely obsolete industrial base, so as to preserve the autonomy of the Russian economy.

Period III: 2008–2022

One could glimpse a developmental vision in this attempt to restructure Russia’s productive assets. However, strategic mistakes in managing the country’s insertion into global markets, along with strained relations between its political leadership and capitalist class, prevented a proper articulation of this social settlement. The symptoms of this failure became apparent with the 2008 financial crisis and the agonized growth over the following decade. They were first evident in the ongoing reliance on commodity exports – mostly hydrocarbons, but also basic metal products and more recently cereals. Externally, this increasing specialization left the economy susceptible to the fluctuations of global markets. Internally, it meant that policymaking came to revolve around the distribution of an (often squeezed) surplus from these industries.    

Russia’s developmental failure could also be seen in its high levels of financialization. As early as 2006, its capital account was fully liberalized. That measure, along with entry to the WTO in 2012, indicated a double allegiance: first, to the process of US-led globalization, whose keystone was the free circulation of capital; second, to the domestic economic elite, whose lavish lifestyle and frequent clashes with the regime required them to stash their fortunes and businesses abroad. Putin encouraged this outflow of domestic capital, even as he simultaneously adopted macroeconomic policies designed to bring foreign investment into Russia. The resultant internationalization of the economy, combined with its dependence on commodity exports, explains why it was gravely affected by the global financial crisis, suffering a 7.8% contraction in 2009. To cope with this instability, the authorities opted for a costly accumulation of low-return reserves – which meant that, despite its positive net international investment position, Russia lost between 3% and 4% of its GDP through financial payments to the rest of the world during the 2010s.

Hence, in the decade preceding the invasion of Ukraine, the Russian economy was characterized by chronic stagnation, an extremely unequal distribution of wealth, and relative economic decline compared to China and the capitalist core. Granted, there have been other, more positive developments. As a consequence of the sanctions and counter-sanctions adopted after the annexation of Crimea, some sectors such as agriculture and food processing benefitted from an import substitution dynamic. In parallel, a vibrant tech sector enabled the development of a digital ecosystem with an impressive international reach. But this was not enough to counterbalance the structural weakness of the economy. In 2018, mass demonstrations against neoliberal pension reforms forced the government into a partial climbdown. They also revealed the increasing fragility of Putin’s regime, which is unable to deliver on its promises of economic modernization and adequate welfare policies. For as long as this trend continues to undermine his legitimacy, the president’s reliance on nationalist revanchism – and its military expressions – will become all the more intense.

Facing economic hardship and political isolation after its adventure in Ukraine, the prospects for Russia are bleak. Unless it can secure a rapid victory, the government will falter as ordinary Russians feel the economic costs of war. It will likely respond by ramping up repression. For now, the opposition is fragmented, and sections of the left, including the Communist Party, have rallied round the flag – which means that in the short-term Putin will have no trouble putting down dissent. But beyond that, the regime is imperiled on multiple fronts.

Businesses are terrified by the losses they will incur, and Russia’s financial journalists are openly sounding the alarm. Of course, it is not easy to predict the outcome of sanctions – yet to be fully implemented – on the fortunes of individual oligarchs. One must note that the Russian Central Bank deftly stabilized the ruble after it lost one third of its value immediately after the invasion. But, for Russian capitalists, the danger is real. Two examples illustrate the challenges they will face. First is the case of Alexei Mordashov – the richest man in Russia according to Forbes – who was recently added to the EU’s sanctions blacklist for his alleged ties to the Kremlin. Following this decision, Severstal, the steel giant he owns, halted all supplies to Europe, which used to make up about a third of the company’s total sales: roughly 2.5 million tons of steel a year. The firm must now look for other markets in Asia, but with less favorable conditions which will damage its profitability. Such cascading effects on oligarchs’ businesses will have implications for the economy as a whole.

Second, restrictions on imports pose serious difficulties for sectors such as automobile production and air transport. A ‘technological vacuum’ could open up, given the retreat of business software companies such as SAP and Oracle from the Russian market. Their products are used by Russia’s major corporations – Gazprom, Lukoil, the State Atomic Energy Corporation, Russian Railways – and will be costly to replace with homegrown substitutes. Attempting to limit the impact of this shortfall, the authorities have legalized the use of pirate software, extended tax exemptions for tech companies and announced that tech workers will be freed from military obligations; but these measures are no more than a temporary stop-gap. The critical importance of software and data infrastructure for the Russian economy highlights the danger of monopolized information systems dominated by a handful of Western companies, whose withdrawal can prove catastrophic.  

In sum, there is no doubt that the war in Ukraine will be deleterious for many Russian businesses, testing the loyalty of the ruling class to the regime. But the consent of the broader population is also at risk. As socioeconomic conditions further deteriorate for the general population, the motto that served Putin so well against his liberal opposition (‘the nineties: never again’) may soon backfire on the Kremlin. The mixture of widespread immiseration and nationalist frustration is political nitroglycerin. Its explosion would spare neither Putin’s oligarchic regime, nor the economic model on which it rests.  

Read on: Michael Burawoy & Pavel Krotov, ‘The Economic Basis of Russia’s Political Crisis’, NLR I/198.

Categories
Uncategorised

The Shipping Forecast

In recent times, economists have come to play a central role in Irish public life, for reasons that are easy to decipher. Over the past generation, the Republic of Ireland has been a developmental shapeshifter, from ‘the poorest of the rich’ (as the Economist dubbed it in 1988) to poster child for neoliberalism, from the epitome of Eurozone dysfunction to the Troika’s star pupil. For those who take the whole island as their reference point, Northern Ireland’s shift from the cutting edge of global manufacturing to its current status as an impoverished peripheral zone of the United Kingdom should be further stimulus for thought about the wealth of nations and classes.

Unfortunately, the dominant paradigm in which Irish economists have tended to function is the one that holds sway in the more populous states of the Anglosphere. The gatekeepers of neoliberal orthodoxy in Ireland sometimes adopt the persona of a maverick outsider railing against the status quo, but their prescriptions invariably tend to reinforce the social hierarchy: one such figure, Colm McCarthy, has been called in twice by governments to compose a supposedly objective rationale for dramatic public spending cuts, first in the 1980s, then after the crash of 2008. Neo-Keynesian perspectives are rare enough in the profession. Terrence McDonough’s successful career as an avowed Marxist in an Irish economics department, before his untimely death in September last year, was as surprising and impressive as the neglect of his writings by the Irish media was predictable.

McDonough was born in California in 1952, but as their surname might suggest, his family could trace its origins back to his adopted country: his great-great grandfather had left Roscommon in 1847, the bleakest year of the Great Famine, and settled as a farmer in Wisconsin. McDonough himself paid a brief visit to Ireland in 1974 for a semester as a student, where he first encountered his future wife, Marian. They reunited when he came back for a second trip sixteen years later, after he had received his economics PhD, and McDonough settled down for an academic career in Ireland, teaching first at Dublin City University and then at the National University of Ireland, Galway until his death.

As an obituary notice by Catherine Wylie in the Irish News affectionately observed, McDonough ‘comfortably fell into the category of the absent-minded professor, having once gone to see Riverdance wearing his bedroom slippers.’ According to Wylie, McDonough’s political engagement, stoked up by the civil rights and anti-war movements in the US, had already begun when he was a school student: ‘So enthusiastic was he that his school was unhappy with his activities and he was asked to leave after his junior year.’ During his time in Ireland, he regularly assisted trade unions and left-wing campaign groups with his expertise. After his death, Vicky Donnelly of the One World Centre in Galway recalled that she took to calling him ‘the Shipping Forecast’ in the midst of the financial crisis, because he would invariably deliver talks with the most alarming economic news and predictions in a calm and reassuring voice.

In his scholarly work, McDonough touched upon the social conditions that had obliged his ancestors to leave the island. In 2005, he edited a volume with the title Was Ireland A Colony? – the need for a question mark spoke volumes about the tenor of academic debate on such questions, after the revisionist challenge to Irish nationalism congealed into an orthodoxy of its own. Three years later, he co-authored a superb essay with Eamonn Slater for Irish Historical Studies about Marx’s view of nineteenth-century Ireland.

This was a subject about which one might expect everything worthwhile to have long since been said, given the volume of commentary it has attracted, but McDonough and Slater showed that there were still new seams to be mined. Their article concentrated on an 1867 talk on Ireland that Marx had delivered to the Educational Association of German Workers in London, shortly after the abortive Fenian uprising. It tracked the successive stages of English and British rule over the neighbouring island and the mutations it had undergone. The authors stressed that Marx did not rely on a strictly economic understanding of colonial domination:

Marx’s account of Irish history in the report indicates that there cannot be a general theory of colonialism, with a single ‘prime mover,’ because colonialism depends on the conjunction of the forces operating in the political regime with those in the local economy and civil society . . . what Marx provided in the report was a theoretical framework that allows scholars to go beyond the relatively narrow economic analysis of Marxian dependency theory: one that instead sees colonialism as a complex social process operating at differing levels within the social formation as these levels interact with each other in complex ways.

This was the kind of ‘revisionism’ that Irish historiography needs, not the self-conscious iconoclasm that suggests the culpability of British politicians for mass starvation in the 1840s is a nationalist shibboleth. The fact that Ireland diverged so sharply from its immediate neighbours and remained an underdeveloped country by any measure well into the twentieth century is also a vital part of its economic trajectory, which the high growth rates and GDP levels of recent decades have not consigned to irrelevance. One feature of neoliberal ideology in the Irish context is a brusque insistence that we must look at the country through the same lens as any developed capitalist state, even though the very term ‘Celtic Tiger’ implies that it has more in common with South Korea or Taiwan than with Germany or California.

In the wider field of Marxist economic thought, McDonough aligned himself with the Social Structure of Accumulation (SSA) school, co-editing with Michael Reich and David Kotz an important 2010 volume, Contemporary Capitalism and Its Crises, that sought to apply its theoretical insights, and contributing an essay of his own on the SSA framework. But for left activists in Ireland, McDonough’s greatest impact came through a series of articles that followed the crash of 2008. To give a flavour of his perspective on the contemporary Irish economy, I’ll focus here on two articles that span the years between the financial crisis and the Covid-19 pandemic.

In ‘The Irish Crash in Global Context,’ published in 2010, McDonough analysed the meltdown of the Celtic Tiger economy, depicting it as ‘simultaneously a manifestation of the global crisis of neoliberal capitalism and an expression of its own local dynamics’. His essay showed that it was perfectly possible to take account of national specificities without broadening the category of neoliberalism to the point that it became unhelpfully vague:

There is no necessity for the local institutions to directly reflect the global characteristics of neoliberalism. Indeed, one of the advantages for business of the global neoliberal order is the opportunity to fragment the firm’s production process, locating each part in the most favourable area for profitability. This strategy depends not only on the location’s integration into global neoliberalism but also on the existence of differences between locations.

In most respects, McDonough argued, the Irish economy during the boom years was a neat fit for generic definitions of neoliberalism. Its trade policy had been outwardly oriented since the late 1950s, with the active pursuit of foreign direct investment a long-established priority of government. Its regulation of business was ‘light-touch’ and ‘principles-based’:

Functions were divided, with the Central Bank evaluating threats to the banking system and the Financial Regulator dealing with individual firms. Central Bank evaluations were frequently ignored by the regulator, which concentrated on consumer issues rather than prudential matters such as capital adequacy or the soundness of loans.

In the Irish case, McDonough noted, this permissive framework blended ‘a peculiarly Irish anti-authoritarian populism with an ideologically neoliberal approach to regulatory matters’. The Irish state’s diminutive tax take – 31.2% of GDP in 2007, barely ahead of Latvia, Lithuania, Romania, and Slovakia at the bottom of the EU’s league table – offered further evidence of domestic conformity to neoliberal doxa.

The main exception to the rule appeared to be the involvement of the trade union movement in a corporatist structure known as ‘social partnership,’ which centre-left intellectuals had frequently celebrated as an alternative to Anglo-American union-bashing policies. However, McDonough stressed that the fruits of corporatism for the Irish unions had been ‘distinctly mixed’: union density continued to fall, from 62% in 1980 to just 31% in 2007, and the national agreements traded wage moderation by workers at a time of virtually full employment for cuts to personal taxation that further weakened the state’s fiscal capacity.

Ireland also conformed to the international norm in its embrace of financialization, and it was the ready availability of credit that enabled Irish banks and property developers to inflate one of the most spectacular asset-price bubbles in the years leading up to the crash. McDonough’s conclusion brought together the domestic and international factors behind a calamitous downturn. The Fianna Fáil–Green Party coalition was ‘both right and wrong in holding the international crisis responsible for our current economic woes’. The sub-prime meltdown was certainly the immediate cause of Ireland’s malaise, but the same factors that generated that meltdown had long since been at work in the Irish system:

Global neoliberalism may have been initially imported from abroad, but successive governments created an indigenous variety that deserved a guaranteed Irish label. Where the Irish crisis differed from the international crisis was in its particular low-tax regime and in the triumvirate of developers, bankers, and politicians that created our home-grown financial and fiscal crisis. Ireland’s golden circle cannot opt out of responsibility for this crisis: where they changed the global model, they, in the end, only intensified the local crisis.

Ten years later, McDonough looked at the fate of the Irish economy since the great crash. For international observers, the outcome of the 2020 general election must have been baffling: despite all the talk about Ireland’s miraculous recovery, its voters had made Sinn Féin the largest party on the strength of a left-wing economic platform, while downgrading the two centre-right parties that had superintended the much-vaunted ‘Celtic Comeback’. As McDonough explained, this carefully constructed image, so valuable for the dominant players in the Eurozone, had obfuscated the reality of Ireland’s economic performance.

He quoted Enda Kenny’s insufferable admonition to the Syriza leader Alexis Tsipras – ‘here’s a lesson from one small country that you can take some reflection on in terms of building your own economy for the future’ – before explaining what Kenny’s tame submission to Troika diktats had actually meant for his country’s citizens:

In 2015, the number of people employed was 10% below its pre-crisis peak. The official unemployment rate was 9.7%, but many people were mistakenly excluded from the labour force and hence not considered to be unemployed. Large numbers of part-time workers were unsuccessfully seeking full-time work. Adding these people to the ranks of the unemployed would have more than doubled the official figure. Factoring in those who had emigrated to other countries in search of work would increase the figure by another 3–4%. Most of these people were in their early twenties.

In the same year, the official figures for GDP growth purported to show an expansion of 26.3%, which ‘merely underlined the extent to which Irish statistics were deeply distorted by the globalization of Ireland’s economy and, more particularly, by transnational corporate tax-minimization strategies’. 2015 had been unusually replete with corporate chicanery:

AerCap, the world’s largest independent aircraft-leasing company, moved its entire €35 billion fleet of aircraft to Ireland for tax purposes. Of course, this happened entirely on paper. The planes stayed where they always were. Two major companies conducted corporate tax ‘inversions.’ This is where a large US company moves its headquarters operations to a much smaller Irish subsidiary, so that the Irish company now ‘owns’ its bigger parent, allowing the parent to pay the Irish tax rate on profits. Apple also had a big role in this story. It took advantage of a newly created tax scam, called the ‘Green Jersey’ because the island tax haven of Jersey was also involved. It involved transferring internal intangible property assets to Ireland and writing off the ‘cost’ against the Irish taxes, driving the already low Irish tax rate towards zero. Apple jumped at the chance in 2015, shifting billions in assets and pumping up Ireland’s measured GDP.

Similar if less spectacular gambits were clearly at work in other years, when the GDP statistics looked to be more plausible.

This meant that the employment rate was the only reliable benchmark for Ireland’s economic health. It wasn’t until 2018 that Irish employment numbers finally matched their 2008 levels: ‘A ten-year recovery period is nothing to write home about. Historically, most recessions are well over after two years.’ The austerity programmes of the previous decade, first homegrown then carefully adumbrated by the Troika, cut government spending by 13% between 2008 and 2014. They made the Irish recession longer and deeper than it would otherwise have been.

For McDonough, there was nothing mysterious about the Sinn Féin surge. One needed only to look at the experience of Ireland’s younger generation: unemployment for those under thirty-five was higher in 2019 than it had been in 2006, even though labour-force participation rates from this age bracket had fallen substantially. Those who did have jobs were almost twice as likely to be in part-time employment as their 2006 counterparts. Average weekly wages had risen by less than 8% in real terms since the crash, even though average rents were 36% higher (44% in the capital Dublin).

Now, as McDonough noted, Irish youth were ‘experiencing their second once-in-a-lifetime recession in the space of ten years’, with younger workers bearing a disproportionate brunt of pandemic-related unemployment, not to mention a severe housing crisis. Against that backdrop, it is no surprise that Sinn Féin’s vote has increased further since the 2020 election, from 24.5% to an average polling score of 31.6% in 2021 – five points higher than the party’s closest competitor, Fine Gael.

McDonough brusquely dismissed the emphasis of conservative politicians and journalists on Sinn Féin’s historic ties to the IRA as an implicit repudiation of the Good Friday Agreement (GFA):

They claim that party decisions are more heavily influenced by a cadre of veteran republican activists in Belfast than by its elected politicians in the South. This charge is controversial, but in any case, it ignores the fact that the goal of the GFA was precisely to bring these political forces into the electoral arena. Sinn Féin’s internal dynamics are hardly democratic, but this does not distinguish it from any other Irish party.

From his perspective, the real question was whether Sinn Féin would live up to the hopes invested in it by those who wanted a new economic model:

After the next election, Sinn Féin will likely have the option of coalescing with the rest of the Left, although the fragmented character of these forces will make the construction of such a government challenging. The party’s other option may be an alliance with a diminished and chastened Fianna Fáil. This may appeal as a more respectable choice to those who prioritize the goal of a united Ireland over the broader left agenda. This choice, if it comes about, will decide the fate of the Irish left for another generation.

With centre-right hegemony at the ballot box no longer guaranteed, the period leading up to the next general election will no doubt see the prize-fighters of Ireland’s ruling class produce article after article and report after report, purporting to show that the state simply cannot afford Sinn Féin’s modest reform programme, let alone more radical measures. It’s a tremendous pity that we won’t have McDonough with us to cut through this rhetorical fog.

Read on: Daniel Finn, ‘Ireland on the turn?’, NLR 67.

Categories
Uncategorised

Rentier Brazil

Although Brazil’s tumbling capital market triggered the suspension of numerous initial public offerings (IPOs) planned over the course of 2021, it did not discourage all investors. The logistics start-up Favela Brasil XPress, based in the country’s largest favela, Paraisópolis, went public last November with the expectation of raising R$1.3 million in six months and the ultimate aim to rival Amazon. In the poor communities where some 14 million people live, many of which are effectively controlled by drug traffickers, e-commerce deliveries do not always arrive. By filling this gap, Favela Brasil XPress intends to bring big business to the favelas, where it will become a stand-in for the vitiated state.

Even if Favela Brasil XPress does not succeed (as seems likely given the precipitous rise of interest rates), similar finance initiatives will continue to sweep the country. Brazil’s Landless Workers’ Movement – once a radical campaign for land reform – has recently begun to mirror the activities of agribusiness giants, issuing five-year fixed income securities to invest in organic food production. Two factors explain the prevalence of such ventures. First, they offer basic provisions which can no longer be expected from the public sector. After the 2016 parliamentary coup that removed President Dilma Rousseff from office, a raft of neoliberal reforms were implemented, the most damaging of which was the adoption of a constitutional cap on public spending – now locked in place until 2036. With austerity legally enshrined, new forms of private provision have become crucial to meet people’s essential needs. 

Second, such initiatives are connected to a widespread shift to mass-based financialization, fomented by state actions over the past two decades. By now the effects of this process are plain to see. Through fuelling aggregate demand, expanded access to credit promised to create an inclusive mass consumer society. Yet the credit boom came with serious drawbacks. Brazil’s household debt-to-income ratio rose from 18% in 2004 to 60% by late 2021, while total wages never surpassed 45% of GDP in the same period. By the end of 2021, household indebtedness affected 74% of Brazilian families and defaults followed suit, hitting 64 million adults. Rather than a step toward asset ownership, debt has become a means of survival. With the unemployment rate hovering at around 12.5%, wages relatively stagnant, interest rates rising and millions of Brazilians living in poverty, household debt is unlikely to to contract.

Low-income shareholders have flocked to the stock market in the hope of making short-term equity gains. Since 2003, their number has risen from 85,500 to over 4 million. The stakeholder mentality has seeped into society at large: a sure sign that the redemocratization of Brazil has broken with the welfare society envisioned by the 1988 Constitution. As such, the most urgent question facing the country is this: if elected in November 2022, will Lula da Silva’s Workers’ Party (PT) challenge the hegemony of big finance and rescue the economy from rentierism?

To answer, we must first understand how and why this sea change occurred. In the 1980s, when inflation rates started to skyrocket, the banking and finance sector in Brazil developed institutional mechanisms for monetary adjustment, offering inflation-protected gains derived from the public debt. Only firms and the very wealthy, who were the bulk of bank account holders at the time, benefited from such measures. This led to growing autonomy for the financial sector, which came to contest the centrality of the state in crafting macroeconomic policy, while encouraging rentier activity among non-financial firms and high-income households. The mounting influence of the banking and financial sector then shaped the commercial and financial liberalization of the 1990s. Under the Brazilian Social Democracy Party (PSDB), Brazil was integrated into global financial markets, and domestic industry was devastated.

With the Real Plan in 1994, which succeeded in bringing about monetary stabilization, the dynamic of financial accumulation shifted axis. Inflation-protected gains were replaced by high-interest income and other forms of financial income, derived from a new monetary regime that set the lending prime rate (Selic) at stratospheric heights – acting as an anchor to control inflation. The rush to buy Brazilian treasury bonds linked to the public internal debt signalled the opening of a new avenue for financial accumulation, still concentrated among the wealthiest. Profits indexed to Selic consolidated a coalition of rentier and financial interests at the helm of the Brazilian state. In parallel, a wide-array of institutional regulations were laid out for a new stage of capital-market expansion and consolidation.

The electoral victory of the Workers’ Party in 2002 changed the game. On the one hand, it preserved the inflation-targeting regime put in place by the previous government, effectively concentrating wealth. It also passed new regulations to incentivize financial investments and made no attempt to implement a tax reform to curb inequality. On the other, it granted access to credit on an unprecedented scale, promoting a massive process of financial inclusion through the creation of millions of simplified bank accounts (no fees attached) and special loans (some of them underwritten by the State). By failing in the provision of public goods and services, it also paved the way for their recommodification by finance.

Lula’s presidency therefore saw the first great expansion of financial markets in democratic Brazil. He succeeded in turning the public pay-as-you-go civil servants’ pension system into a hybrid scheme with individual private accounts. He also took steps to guarantee creditworthiness for those with no credit records and stimulated the 2004-2008 stock market boom, which attracted huge foreign investments, catalyzing a record number of IPOs. Lula engaged in dialogue with the finance sector and preserved the institutional neoliberal framework established by his predecessor. He did not check Brazil’s integration into global financial markets, nor the autonomy of its Central Bank. At no point, not even after Lula’s reelection with a huge popular mandate in 2006, did the PT government attempt to consistently tax financial wealth, or place a witholding tax on dividends. The counterpart to the implementation of the anti-poverty Bolsa Familia programme, which reached 14 million families with only 0.5% of GDP, was a primary surplus policy that further undermined public provision, allowing the financial takeover of social policy.

The financialization of social policy has been particularly evident in the education and healthcare sectors. The PT’s investment in the Student Financing Fund (FIES) provoked an IPO race that led to a wave of mergers and acquisitions, spawning educational conglomerates among the largest worldwide, whose share prices rose in tandem with the FIES’s expansion of credit. Millions of students were plunged into debt. At the same time, under Rousseff, the healthcare sector was opened to foreign capital, overriding a constitutional norm. Brazil’s public health system became increasingly dependent on private providers – international corporations and investment funds – whose power to dictate regulations grew rapidly. By 2020, the revenues of private healthcare plans that cover only the 25% of the population with the ability to pay were estimated at R$229 billion – almost twice as much the overall budget that allocated to the Ministry of Health in 2022, responsible for caring for the other 75%, or 165 million Brazilians. Most worrying is the fact that even the public sector is trapped in financialized strategies: states and municipalities now invest part of the Public Health Fund in secondary markets to increase revenues, at their own risk, to finance activities that used to be entirely funded through the tax system.

Non-financial firms also increased the share of financial profits in their balance sheets, while the Brazilian National Development Bank (BNDES), responsible for providing subsidized loans for the corporate sector, experienced a downgrade starting in 2014. While financial assets have witnessed an extraordinary surge in value, the investment rate has continued to drop sharply (falling to 14% of GDP in 2021) and the amount of productive assets has stagnated. But with the Selic base rate on the rise yet again, fixed by an independent Central Bank, no one doubts that the public debt can regain its prominence as a driver of the Brazilian financialization, this time in tandem with the rebound of the stock markets.

Financialization accelerated in the wake of the 2015-2016 recession. The Temer government (2016-2018), which took over from Rousseff, passed labour reforms that wiped out an array of employment rights. They stressed the primacy of negotiated settlements over labour regulations, abolished wage parity, enabled greater outsourcing and approved 12-hour uninterrupted workshifts. This caused the informal sector to grow, along with extreme poverty. Bolsa Familia cash transfers were disconnected from rising demand to comply with the new constitutional cap on federal expenditures. Aiming to dismantle state capacity, Temer also undertook major administrative reforms to shrink the number of available careers within the public sector from 300 to around 30, and pushed through pay cuts of up to 25%.

Yet if top-down expropriation depends on a mixture of coercion and consent, the Temer government could no longer elicit the latter. Although he preserved widespread access to credit, popular support was eroded by a deepening economic crisis, high unemployment rates and, above all, coruption allegations. His reforms were met by large protests and a general strike. As his approval ratings plummeted to 3%, Temer lost the political capital necessary to steer the transition towards autocratic neoliberal rule. It was this setback that Bolsonaro sought to rectify by turning radical conservatism (anti-communism, sexism and racism) into the dominant expression of discontent. In so doing, he discharged financial capital from culpability for deteriorating conditions and blamed a series of false culprits: leftists, feminists, migrants, indigenous people.

During his first year in office, Bolsonaro approved a controversial pension reform that raised the retirement age for women and the number of qualifying years of contribution. As the average value of pension benefits from the pay-as-you-go scheme decreased, and the survivor’s allowance was cut by nearly half, the future of the public pension system became increasingly uncertain, causing its deligitimation and increasing the attractiveness of the funded-capitalized pension regime. Bolsonaro also gutted public spending in a number of areas – health, science, social security, the environment. Recently, he approved a new law that modernizes the legal framework for the foreign exchange market and international capitals. An old demand from the financial sector, this controversial law should, among other things, facilitate the dollarization and internationalization of the Brazilian elite’s portfolios, which are currently allocated to assets denominated in national currency.

When Covid-19 arrived in Brazil, however, Bolsonaro’s presidency entered a downward spiral. As well as mishandling the public health crisis, his adoption of a War Budget marked a volte face in his programme to dismantle the public sphere. An Emergency Aid Programme raised the social safety net and provided adequate coverage to 67 million recipients, while cash transfers and furlough schemes kept low-income households afloat, despite the continued underfunding of the healthcare sector.

While such policies reduced the default rate and arrears of families indebted to big finance, they also boosted a new cycle of household indebtedness. Households cut down on balances that were in default while increasing their overall credit load, along with the average payment terms for credit portfolios. This deepened their dependence on financial markets: new loans were taken out, to be paid off over longer timelines. The cycle of financial accumulation expanded, both through a decrease in delinquencies and an uptick in credit supply. Yet, crucially, this new sequence of debt restructuring – suspension, renegotiation and expansion – did not occur within a solid institutional framework, set by the Brazilian state, to regulate the levels and mechanisms of financial expropriation. The process was rather led by the banks, who succeeded in maintaining stratospheric interest rates from previous contracts despite the falling prime rate (2% in December 2020).

The Covid outbreak has therefore had complex implications for the Brazilian political landscape. In one sense, it discredited Bolsonarismo by foregrounding the values that it sought to relegate – science, state management, social provision – and undermining the precepts of its radical conservatism. Opinion polls now forecast Bolsonaro’s defeat in the election this October. Yet, at the same time, the economic problems that Covid has consolidated are likely to destabilize an incoming PT administration. For no matter how much autonomy financial capital is granted, it will be unable to generate an economic rebound without a strong state apparatus – which must be rebuilt after years of gradual erosion.

Will the PT recognize that its previous policies produced an unustainable model rooted in financial expropriation, and take an alternative course? Or will they prove unwilling to challenge the extant economic setup? The former could be done by rescuing policies that were dismissed in by previous PT administrations: promoting the deconcentration of the banking system; breaking with the Central Bank’s autonomy; expanding the supply of public services, at a quantity and quality necessary to remove the sphere of social reproduction from the grasp of the financial sector; passing a progressive tax reform capable of effectively confronting inequality in Brazil, starting with a tax on dividends and financial income.

In recent years, the damaging consequences of financialization have been highlighted by Brazilian social movements. Last September, the Homeless Workers’ Movement occupied the São Paulo Stock Exchange, protesting the concentration of wealth amid rising hunger and poverty. Will they be listened to? That remains to be seen. However, the positions of Fundação Perseu Abramo, the Workers’ Party think tank, indicate that credit will still play a large role in their blueprint for society. The PT may once again attempt to combine anti-poverty programmes, at one end, with more credit at the other, to compensate for insufficient wages and social policies. As such, the Workers’ Party suggests that the progressive values brought to the fore by the pandemic are not in contradiction with the continuous expansion of financial markets, products and logics. If financial expropriation remains the engine for developing this peripheral capitalist economy, its already intolerable levels of inequality may be set to worsen.

Read on: Mario Sergio Conti, ‘Pandemonium in Brazil’, NLR 122.