Recently I learned that my book The Emotional Logic of Capitalism has been awarded the Transdisciplinary Humanities Book Award, sponsored by the Humanities Research Institute at Arizona State University. The award is given each year to “a non-fiction work that exemplifies transdisciplinary, socially engaged humanities-based scholarship.” The list of previous awardees show the wide range of work considered to fall under this heading, and I am grateful to the Institute’s Director Sally Kitch and the Board for selecting my book. I’m looking forward to visiting the Institute in the fall.

Of course recognition of one’s work is always nice, but there is something particularly gratifying about receiving this award. One reason would be that I did not in fact realize that the book had been nominated (many thanks to my wonderful Stanford editor Emily-Jane Cohen!). More to the point, going down the path that eventually led to the writing of this book has not been free of occasional professional uncertainty. Having been trained as a meat-and-potatoes political economist, and having done most of my early work on the question of power in American finance, The Emotional Logic of Capitalism is a more theoretical work that draws on perspectives and fields that are not usually brought to bear on questions of money and finance – semiotics, psychoanalyis, pragmatism, religious history, among others. Contemporary academia does not always take kindly to interdisciplinary work, so the recognition bestowed on the book by this award is gratefully received.

So what led me to write the book, and why did I feel it was necessary to venture deeply into social theory to make sense of questions of money and finance? Let’s go back for a moment to the financial crisis of 2007-08. Progressively minded commentators immediately took this event as announcing the end of neoliberal capitalism, and they loudly declared an imminent return to Keynesian intervention and public regulation. Such arguments are closely associated with the revival of Polanyi’s work, which sees capitalist history as driven by alternating movements of market disembedding (when the speculative and individualizing logic of the market spirals out of control) and re-embedding, (when society regroups and resubordinates markets to the public good). In the book I take this “double movement” model as emblematic of a highly influential but problematic way of thinking about economic and financial life.

The idea of the double movement has turned out to be a poor guide to the development of capitalism since the financial crisis: instead of a break with the politics of financial expansion, what we got was a neoliberalism recharged. My book is essentially an extended reflection on the deeper – psychological and emotional – sources of resilience that capital can tap into and that have eluded the tendency to understand it in terms of the Polanyian image of market disembedding. To this end, it recovers the moral and theological origins of the concept of “economy,” arguing that our relationship to money is regulated by a complex infrastructure of affectively charged (inter)subjective investments. In this way, the book develops an understanding of economy that is critical but takes seriously the idea that money and markets have self-organizing and self-regulating properties.

The second part of the book traces how, over the course of the twentieth century, progressive thought gradually lost sight of the emotional and theological content of economy. It argues that the turn to a disembedding narrative should be understood as the way progressive thinkers have sought to come to terms with the disappointments of democratic capitalism. To lament the speculative and individualizing character of the market always seems like a promising move in the moment – it offers a way to make a critical point that is relatable and so offers a particular kind of rhetorical traction. But over time it has resulted in a critique that is moralistic and increasingly unable to engage the complex, subterranean ways and often not fully conscious ways in which people are invested in (neoliberal) capitalism.

The book can be read as a way of doing political economy that is different from where it is currently heading in its leading journals – which is characterized by a definite and growing scepticism about the value of theory. That sentiment is no doubt understandable, as one of political economy’s main concerns has always been the “reality-blindness” of the formal models that mainstream economists build. But not doing theory is doing theory by default, and the current sway of the Polanyian model seems to me to be a result of a reluctance to revisit thorny but fundamental conceptual issues.

For interested readers, elsewhere on PPE I have elaborated these points with more specific reference to the question of austerity politics, and this discussion by my colleague Fiona Allon provides an excellent account of the book’s key conceptual moves. The book’s introduction can be read here.

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By giving a small number of relatively well-off Australians a tax cut the Treasurer has undermined revenue and helped contribute to inequality, as detailed in this post that originally appeared on New Matilda.

For someone who piously bemoans an “us versus them” mentality in political culture, Treasurer Scott Morrison certainly drove a deep wedge into the social fabric with one of the centrepieces of his budget. There are four thresholds in the personal income tax system; Morrison chose to increase one of them, supposedly to offset the insidious effects of “bracket creep.” The third threshold will be raised from $80,000 to $87,000.

Other thresholds don’t change. Taxpayers making over $80,000 will thus get a small saving ($6 per week at most). Those who make less, get nothing.

It’s not the most expensive tax cut in the budget. It will cost an estimated $800 million in the first year – barely half the $1.5 billion lost annually by cancelling the deficit repair levy on incomes over $180,000, and far less than the ultimate cost of Morrison’s company tax cuts. But it is the most transparent and easy to understand of all the budget’s tax measures. And it will spark the most gossip around the water-cooler. Who makes over $80,000 per year, anyway? And who makes less? It’s hard to imagine a more “us versus them” tax policy.

The Treasurer’s own rhetoric reinforces this schism: he says it will “reward hard working Australians,” encourage them to work overtime, take more shifts, and accept a promotion. The clear implication is that people making less than $80,000 are not interested in working more hours or taking promotions. Indeed, they aren’t even “hard working” in the Treasurer’s terms, and hence don’t merit protection from “creeping” taxes.

The Treasurer tried, but failed, to define the measure as one that benefits “average” wage-earners. Mean annual earnings for a full-time worker employed year-round are indeed near $80,000. But this does not remotely describe the typical Australian. First off, the mathematical “average” is skewed upward by super-high incomes at the top of the income ladder; the median full-time wage (received by the full-time worker in the exact middle of the distribution) is $10,000 lower than the average, and well below the threshold. Likewise, women (even those employed full-time year-round) earn $10,000 less than the mathematical mean.

Federal Treasurer Scott Morrison delivering his first budget, in 2016.

But the bigger problem is that a shrinking share of Australians have full-time permanent jobs to start with. Part-time work now accounts for almost one in three jobs – the highest on record.  And labour hire, temporary contract, and other forms of precarious work are increasingly the norm. Very few of those workers earn anywhere near $80,000. At most about one in four Australian workers (and perhaps 15 per cent of all tax-filers) will get the full $6 per week saving.

The whole concept of “bracket creep” is itself as misleading as Morrison’s maths. He says taxpayers are “pushed” into higher tax brackets by rising incomes, constituting a punitive and underhanded tax grab. But this description merits some careful second thought.

There are two different reasons why a worker’s income might rise. One is pure inflation, experienced across all wages and prices. In that case, nothing “real” changes, and a higher tax rate might seem unfair (although we should remember that the cost of many government programs also grows with inflation, and someone has to pay for that).

Alternatively, it might be changes in a worker’s real income that qualify them for the next bracket. If they worked more hours or took a promotion (as the Treasurer urges), then their real income rises, and so does their tax. That’s not bracket creep, and there’s nothing “underhanded” about it. In fact, that is the whole point of a personal income tax system in which tax rates depend on income.

Moral panic over bracket creep is all the more ironic given the unprecedented stagnation in Australian wages, reflecting sustained weakness in the job market. Average weekly earnings in the private sector are growing at their slowest pace in history: under 1 per cent per year (slower than inflation). The budget itself acknowledged this is badly hurting Commonwealth revenues. With wages going nowhere fast, this is hardly the time in history to make a mountain out of a bracket creep molehill.

If the government truly wanted to prevent inflation from distorting taxes, it could simply index all parameters in the tax code to consumer prices (as other countries, like the U.S. and Canada, have done). Then all thresholds, not just the one cherry-picked by Morrison, would rise 1.3 per cent this year, the same as year-over-year inflation. But that would depoliticise the whole process, hardly acceptable in a year when every single clause of the budget is focused on getting the government re-elected. So Morrison picked one politically-potent threshold, lifted it seven times faster than inflation, and left everyone else to get “creeped.”

Previous ad-hoc increases to thresholds have lifted them far faster than inflation. In fact, with this latest increase, the third tax threshold will have risen twice as much as inflation since 2003. Combined with rate reductions also targeted at top brackets during that time, government revenues have been undermined badly, and the upward redistribution of after-tax income has been exacerbated.

In short, the politics of Morrison’s over/under game are hard to understand. He will deliver a tiny benefit to less than one in four employed workers, and barely one in seven tax-filers. Most Australians won’t get a cent. But the economics are even worse. His divisive and false anti-tax narrative undermines the long-run stability of the government’s revenue base, damages public services, and reinforces inequality.

***

This post was originally posted on New Matilda (11 May 2016).

The post Bracket Creep Is A Phoney Menace appeared first on Progress in Political Economy (PPE).

My book starts from the observation that the Margaret Thatcher and John Major governments sought to systematically constrain organised labour. Thatcher’s mentor and close ally Keith Joseph published a pamphlet in February 1979 entitled Solving the Union Problem is The Key to Britain’s Recovery. Once Thatcher had become Prime Minister, what followed was the stepwise tightening of trade union law, the careful preparation for a confrontation with the organisation spearheading militant trade unionism in Britain at the time, the National Union of Mineworkers (NUM), and an economic and monetary policy accelerating the decline of British industry.

The 1984–5 Miners’ Strike, the key instance of the confrontation between the government and the unions, was the longest mass strike in British history. It cost approximately £28bn. But this is just one of many fiercely fought industrial disputes in the Thatcherite era in which the government had a stake – either because they took place in the public sector, or because political decisions and legal changes had paved the way for employer attacks. The labour scholar John Kelly provides an apt description of the situation under which unions operated in the Thatcherite era.

Unions were unable to stem a flood of closures and redundancies, they failed to prevent real wages falling in the depths of the recession, they could not prevent changes in working practices and they suffered a number of spectacular strike defeats: railways 1982, mining 1985, printing 1986, TV-AM 1987, teachers 1987, P & O ferries 1989.

Taking seriously the substantial changes in labour relations, I arrive at the key observation of my book: I contend that Thatcherism’s success and novelty, indeed its unity as a political project, lie in the fact that Thatcher and her associates profoundly shifted class relations in Britain in favour of capital and profoundly restructured the institutions underpinning class domination in the country. My key theoretical intervention is to propose that in the first instance, capitalist class domination consists in the extraction of surplus labour in the process of production. It follows that political leaders will always intervene in the sphere of production in some way.

In line with my emphasis on production, my book contains a case study analysing four policy papers on labour relations commissioned by the Conservative leadership during the Callaghan era. Among them is the ‘Final Report of the Nationalised Industries Policy Group’ in the Conservative Party, which is only mentioned in passing in much of the literature on Thatcherism. This report, written in 1977 by Nicolas Ridley, an ally of Thatcher, laid out how a future Conservative government would deal with the nationalised industries. The annex to the report contains a detailed plan aimed at smashing militant trade unionism, which shows that leading circles in the Conservative Party were already preparing for a direct confrontation with organised labour before there was a Thatcher government. As my chapter on British class politics between 1979 and 1984 demonstrates, the Thatcher governments stuck to this course and followed the recommendations of the report closely. In a nutshell, my analysis is concerned with establishing the articulation between direct attacks of the Thatcher governments on militant workers and Thatcherite economic policy in a broader sense, not just with the effects of their economic policy on class relations.

My key analytical distinction reflects this concern. In my view, there are two modes of ‘top-down’ politics under capitalist conditions:

• class politics, that is, political activities aimed directly at securing the extraction of surplus value; and
• economic order politics, that is, interventions primarily aimed at establishing and securing the preconditions for economic growth, which affect class domination only indirectly.

Against this backdrop, I contend that Thatcher and her associates implemented both a new class political arrangement and a new economic-political order. The class political arrangement combined a repressive approach to labour relations with the attempt to divide the working class by co-opting certain fractions. The economic-political order centred on the notion of the ‘free market’. Thatcherite interventions aimed at inducing growth through market liberalisation, which was achieved partly with the help of authoritarian modes of decision-making. As a result, the British economy was exposed, to a much stronger degree than before, to competition in the world market. The class political arrangement and the economic-political order were fully compatible with each other. I thus speak of an overarching neoliberal regime.

The analytical value-added of these distinctions may not be immediately apparent. It lies in elucidating the uneven temporality of political developments during the Thatcherite era and beyond. Whereas the New Labour governments broke with the Thatcherite class political arrangement, they broadly retained the economic-political order established by their predecessors. Correspondingly, the terms Thatcherism and Blairism should be reserved for the respective class political arrangements. A key finding of my analysis is that the continuities and discontinuities of neoliberalism can be accounted for by distinguishing between class politics and economic order politics.

I propose to further elucidate this by taking up some of the terminology developed by the state theorist Nicos Poulantzas. Accordingly, I describe Thatcherism and Blairism as offensive and consolidating steps of the capitalist class in class struggle. In other words, Thatcherism reasserted capitalist class domination by orchestrating a successful offensive against the working class, and Blairism managed to protect this advance. At this point, two further findings of my analysis come into sight: The failure of organised labour to successfully counter the Thatcherite onslaught is a result of its inability to understand the offensive nature of Thatcherism; and the long erosion of Thatcherism in the 1990s reflects the political inability of Thatcher et al. to make the transition from an offensive to a consolidating step in class struggle.

The post The Thatcherite Offensive appeared first on Progress in Political Economy (PPE).

In the lead-up to today’s pre-election Commonwealth budget, much has been written about the need to quickly eliminate the government’s deficit, and reduce its accumulated debt.  The standard shibboleths are invoked liberally: government must face hard truths and learn to live within its means; government must balance its budget (just like households do); debt-raters will punish us for our profligacy; and more. Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services. And with Australians heading to the polls, the tough-love imagery serves another function: instilling fear that a change in government, at such a fragile time, would threaten the “stability” of Australia’s economy.

However, this well-worn line of rhetoric will fit uncomfortably for the Coalition government, given its indecisive and contradictory approach to fiscal policy while in office.  The deficit has gotten bigger, not smaller, on their watch, despite the destructive and unnecessary cutbacks in public services imposed in their first budget.  Their response to Australia’s fiscal and economic problems has consisted mostly of floating one half-formed trial balloon after another (from raising the GST to transferring income tax powers to the states to cutting corporate taxes), with no systematic analysis or framework.  And their ideological desire to invoke a phony debt “crisis” as an excuse for ratcheting down spending will conflict with another, more immediate priority: throwing around new money (or at least announcements of new money), especially in marginal electorates, in hopes of buying their way back into office.

In short, the politics of debt and deficits will be both intense and complicated in the coming weeks.  To help innoculate Australians against this hysteria, here are six important facts about public debt, what it is – and what it isn’t.

1. Australia’s public debt is relatively small

Despite annual deficits incurred since the GFC, Australia’s accumulated government debt is still small by international standards.  Debt can be measured on a gross or net basis; gross debt counts total outstanding borrowing, while net debt deducts the value of financial assets which the government also possesses.  Gross debt for all levels of government equaled 44% of Australian GDP at the end of 2015 (according to the OECD).  That was the 5th lowest indebtedness of any of the 34 OECD countries (see table below), equal to about one-third the average level experienced across the OECD.  Moreover, despite recent deficits, the growth of debt in Australia was considerably slower than in most other OECD countries.  Of course, having low debt in and of itself does not justify increasing it.  But given the universal fiscal challenges that have faced industrial countries since the GFC, Australia’s debt challenge is both unsurprising and relatively mild.

Australia’s Debt in International Context:

 General Government (all levels) Gross Financial Liabilities (%GDP)

2015
10-yr. Change

Australia
44.2%
+22.4 pts

U.S.
110.6%
+43.7 pts

Japan
229.2%
+59.7 pts

France
120.1%
+38.3 pts

Germany
78.5%
+8.1 pts

Italy
160.7%
+41.8 pts

U.K.
116.4%
+60.3 pts

Canada
94.8%
+19.0 pts

OECD Average
115.2%
+36.3 pts

Source: Author’s calculations from OECD Economic Outlook #98, Nov.2015.

2. A government debt is matched by an asset

Australians aren’t “poorer” because their government accumulates a debt.  Any rise in government debt is mirrored by an increase in some offsetting asset.  This is true in both accounting terms, and in real economic terms.  For example, government typically issues a bond (or some other financial instrument) to finance a deficit.  But that bond also constitutes an asset in the investment portfolio of whoever lent the government money.  Most Australian government debt is owned by Australians.  In fact, investors increasingly appreciate the opportunity to invest in government bonds, because they are safer than other assets at a time of financial uncertainty.  (That investor interest is one reason interest rates on government debt are so low.)  So government debt translates into someone else’s wealth – usually someone in Australia.

This match between liabilities and assets is also visible in concrete economic terms – especially when new debt is issued to construct a real, long-lasting capital asset (like a road, a transit system, a school, or a hospital).  In this case, the matching asset is owned by government itself, and so its own net worth won’t change much at all: it takes on a new debt, but also has a new asset.  For budgetary purposes, the government must account for the gradual wear-and-tear of that asset (called depreciation), which appears as a cost item on the budget.  But it hasn’t “lost” the money it raised through the new debt: it invested it, and that investment carries both financial and social value.

3. Other sectors of society borrow much more than government

Tired rhetoric about how governments need to act “more like households” is especially ironic, given that households are by far the most indebted sector in Australian society.  Household net debts equal close to 125% of GDP – or around 4 times the net debt of government (all levels), according to data from the Bank for International Settlements.  It is factually wrong to claim that “households balance their budgets,” and therefore governments must do the same.  Households borrow regularly – and thanks to overinflated housing prices and stagnant wages, that borrowing is growing rapidly.  The same is true of business: net debts of non-financial corporations are more than twice the net debt of government (see chart).

In fact, it is quite rational for households and businesses to borrow, when needed to fund purchase of long-run productive assets (like a house or a car for consumers, or a factory or new technology for a business).  Business leaders know that rational, prudent borrowing will enhance the profitability of a corporation.  Indeed, any CEO who said paying off all company debt was the top priority of the firm would be chased from office by directors and shareholders (who would understand the pledge was irrational and superstitious).  Following exactly the same logic, government debt can be rational and productive – especially (but not only) when it is associated with the acquisition of long-run productive assets (like infrastructure).  Close to two-thirds of the Commonwealth government’s 2015/16 deficit (projected to be $36 billion) is associated with capital spending, including $11 billion in capital transfers to lower levels of government and $12 billion in net investment in Commonwealth non-financial assets.  Contrary to the rhetoric, Australians do largely cover the cost of current public services with their current tax payments.  Government borrowing is primarily required to fund capital spending.

4. Interest rates are low, and falling

The cost of public borrowing has fallen dramatically as a result of the decline in Australian and global interest rates since the GFC (see chart).  Indeed, the two factors are connected: large government deficits resulted primarily from underlying economic weakness (this is true in Australia, like elsewhere in the industrialized world), which in turn brought about low interest rates (via both central banks and private financial markets).  These very low interest rates mean that the cost-benefit decision associated with any new government borrowing has been fundamentally altered, in favour of borrowing.

Current interest rates are likely to stay low for many years to come, given the continuing failure of the global economy to regain consistent momentum, the slowdown in China, and other factors.  (In fact, it is possible that the Reserve Bank of Australia may soon cut its interest rate further, below its current record-low 2% level, due to weak growth and signs of deflation here in Australia.)  Ten-year Commonwealth bonds can presently be floated to private investors for little more than 2% interest (close to zero in real after-inflation terms).  If government can borrow for what is effectively zero interest, and put that money to work in the real economy doing useful things (including both infrastructure and public services), then it is irrational to let old-fashioned balanced-budget mythology stand in the way.

Even if current interest rates do not fall any further, the average effective interest rate paid on overall public debt will continue to fall for years to come.  The current average effective rate paid on Commonwealth debt (about 3.5% last year) reflects the weighted average paid on all maturities of debt.  As past debts come due, they are refinanced at now-much-lower interest rates (those prevailing on new issues of bonds).  That will pull down the average weighted interest rate for several years into the future – even if the rate on new issues stabilizes or increases somewhat.  Consider that new ten-year bonds can be issued for less than half the interest rate paid a decade ago.  The refinancing of those bonds will generate enormous future interest savings for government (equivalent to home-owners who re-mortgage their homes to benefit from the decline in household lending rates).

This is why the economic burden of public debt servicing is not growing, even though the debt is.  Government budget projections forecast debt service remaining at between 0.9 and 1.0% of GDP for the next 5 years, with the effect of rising debt offset by falling interest rates.  And those government projections likely overestimate true interest costs (partly for political reasons).  For example, the December 2015 MYEFO update assumes a significant increase in interest rates in the coming year (its near-term interest rate assumption was 0.3 points higher than the assumption used in last year’s budget); ongoing global and domestic economic weakness makes that highly unlikely.

5. The debt/GDP ratio is a more meaningful fiscal constraint than a balanced budget

Fear-mongers think that by talking about public debt in “big numbers,” the fright value of their dire forecasts can be magnified accordingly.  But all macroeconomic aggregates are measured in big numbers.  And what’s more important than the absolute size of debt, is the government’s capacity to service that debt.  That, in turn, depends on the flow of government revenues, which in turn is driven primarily by overall economic growth.  That’s why economists prefer to evaluate public debt relative to GDP (called the “debt ratio”).  Even this ratio can overstate the real burden of debt, in times (like now) when interest rates are low and falling.

Avoiding a lasting, uncontrolled rise in the debt/GDP ratio is a more meaningful fiscal constraint on government, than trying to balance a budget in any particular year.  Economists do not agree on a maximum “acceptable” limit for that ratio.  But most agree it cannot rise forever.  (Some economists argue that there is no limit on a government’s ability to issue sovereign debt denominated in its own currency, and the recent experience of countries like Japan – whose debt ratio is five times Australia’s – is consistent with that view.)

At any rate, Australia is far away from any feasible “ceiling” on public debt relative to GDP.  And remember, like any ratio, the debt/GDP ratio has both a numerator and denominator: growing the denominator is as effective as shrinking the numerator, if the goal is reducing the value of the combined ratio.  In this regard, the stagnation in Australia’s nominal GDP in recent years has been more damaging to the trajectory of the debt ratio, as has the addition of debt through continued deficits.  The government’s policy focus should be on expanding economic activity (and the jobs and incomes that go with it), rather than suppressing the deficit with austerity measures (which have the unintended consequence of undermining growth and hence the economy’s ability to service a given amount of debt).

6. The government can incur moderate deficits every year, yet still stabilize its debt burden

A related and under-appreciated countervailing argument is to note that government can run a medium-sized deficit on an ongoing basis, and yet experience no increase in the debt/GDP ratio at all – so long as the economy is progressing at a normal pace.  A deficit adds to the numerator of the ratio, while economic growth expands the denominator.  So long as both are expanding at roughly the same rate, the ratio will not be changed.  (Our reference to economic expansion envisions more jobs and incomes across the economy, including in the public sector, and with due attention to the need for environmental sustainability.)  This basic arithmetic provides government with an additional degree of maneuverability in financing essential services and investments, without unduly increasing the debt ratio.

A simple numerical example helps to illustrate the point in Australia’s context.  A healthy economy should be expanding by at least 5-6 percent per year in nominal terms: divided roughly equally between inflation (given the RBA’s 2-3 percent inflation target) and greater output of real goods and services (driven by both population and productivity).  The Commonwealth’s current net debt ratio is slightly below 20 percent of GDP.  With a healthy economic expansion, the government could incur an annual deficit of 1-1.25 percent of GDP (or close to $20 billion per year) but still stabilize the debt ratio below that 20 percent benchmark.  And there is nothing magical about a 20% debt ratio; if Australians were willing to tolerate a larger steady-state debt ratio, then the size of this annual permissible deficit would be correspondingly higher.  All this merely reinforces the need for government to focus on supporting job-creation and incomes, not balancing its budget – and confirms that ample fiscal space is indeed available for the Commonwealth to fund public services and infrastructure spending (with the fringe benefit of reinforcing strong job creation that should be their top priority).

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